Does an Attorney Have a Duty to Disclose to Opposing Counsel a Material Error in a Contract?
Does an attorney have a duty to disclose to opposing counsel a material error in contract language or a material change made by the attorney in the contract language? This was the issue decided by the State Bar of California Standing Committee on Professional Responsibility and Conduct in Formal Opinion no. 2013-189.
In the case considered by the Committee, a purchase contract subject to a covenant not to compete was negotiated between attorneys. Buyer’s attorney inadvertently changed the consideration due for the covenant from $1,000,000 to $1, rendering the covenant ineffective in favor of the Seller. The issue was whether the Seller’s attorney had a duty to notify opposing counsel of the material error.
In determining if an attorney has a duty to alert opposing counsel of material errors, the Committee noted that attorneys are “held to a high standard, and may be subject to general obligations of professionalism.” The California Supreme Court has held that attorneys have an “obligation not only to protect [their] client’s interests but also to respect the legitimate interests of fellow members of the bar….” (Kirsch v. Duryea (1978) 21 Cal.3d 303, 309.) Furthermore, the Committee has previously held that attorneys should treat opposing counsel with candor and fairness. However, any duty of professionalism to opposing counsel is secondary to the duties owed by attorneys to their own clients, and there exists no general duty to protect interests of nonclients, as this would damage the attorney-client relationship. (Fox v. Pollack (1986) 181 Cal.App.3d 954, 961.)
In further analyzing an attorney’s duty of professionalism to opposing counsel, the Committee noted that attorneys do not have any obligation to correct the mistakes of opposing counsel. There is no liability for conscious nondisclosure absent a duty of disclosure. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 342, 346.) The Committee previously held that there is no duty to correct erroneous assumptions of opposing counsel. (See ABA Formal Opn. No. 94-387.)
However, it is unlawful for an attorney to commit any act of moral turpitude or dishonesty and such acts could be cause for disbarment or suspension. (Bus. & Prof. Code § 6106.) Likewise, it is inappropriate for an attorney to engage in deceit or active concealment, or make a false statement of a material fact to a nonclient. (Bus. & Prof. Code § 6128(a).) In analyzing these rules, the conclusion is reached that an attorney may have an obligation to inform opposing counsel of a material error if and to the extent that failure to do so would constitute fraud, a material misstatement, or engaging in misleading or deceitful conduct.
In the case considered by the Committee, it was found that the Seller’s attorney had no duty to notify opposing counsel of the material error in contract terms. Seller’s Attorney engaged in no conduct or activity that induced the error, nor had there been any agreement on the purchase price of the covenant. Because the Seller’s Attorney had not engaged in deceit, active concealment, or fraud, it was found that the attorney had no duty to disclose the error. However, if Seller’s attorney took any action to actively conceal the mistake, a duty to disclose would then exist.
It is important for attorneys to understand their duties not only to clients, but nonclients and opposing counsel as well. Despite an attorney’s duty of professionalism and candor to opposing counsel, where an attorney has engaged in no conduct to induce a material error by opposing counsel, the attorney has no obligation to alert the opposing counsel of the error. However, where an attorney has deceitfully made a material change to contract language or actively concealed a mistake, the failure of the attorney to alert opposing counsel of the change would be a violation of his ethical obligations.
This blog was posted on the Jampol Zimet LLP’s Insurance Defense Blog on July 23. Click here to read the original post.
