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Bar Journal - September 1, 2003

Attorneys' Use of Independent Contractors: Examination of Title is a Delegable Duty

By:
 

INTRODUCTION

In Lawyers Title Insurance Corp. v. David M. Groff, Esq. the New Hampshire Supreme Court (Brock, C.J.) held that the duty to examine title in a real estate transaction is a delegable duty.1  The Court further held that an attorney who delegates this duty to an independent contractor is not vicariously liable for the contractor's negligent failure to find and disclose a construction mortgage on the property.

As a case of first impression, Lawyer's Title establishes the precedent that lawyers cannot be held vicariously liable for the actions of their independent contractors if their agreement with the client allows for delegation of the duty and public policy favors delegability.  The case raises more questions than it answers, however.  This article addresses the Court's first treatment of the delegability of lawyers' duties and then some of the questions it raises, both for the allocation of risk in title examinations and for attorney responsibility for work done by independent contractors. These questions involve professional responsibility, agency law, and contractual allocation of risk.

BACKGROUND

The facts of the case are straightforward and undisputed.  In 1991, the plaintiff, Lawyers Title, and the defendant, David M. Groff, Esq., entered into an agency agreement for issuing title insurance policies.  The defendant agreed to "[r]eceive and process applications for title insurance in a timely, prudent, and ethical manner with due regard to recognized title insurance underwriting practices and in accordance with the . . . instructions of [the plaintiff]."2  Neither party was to delegate any contractual duties without the prior written consent of the other.3  Whenever the defendant issued a report or certificate that was based on an abstract of title (if required by the plaintiff), the defendant could not issue a commitment or policy based on that abstract unless the plaintiff had approved "the person, firm, or corporation which prepared such abstract."4 

In November 1998, the defendant, acting as attorney and settlement agent for a lender, retained a title abstractor as an independent contractor.  Relying on an abstract in which the contractor had negligently failed to note a construction mortgage, he issued title insurance policies to the lender and the buyers.  Because of this mistake the construction mortgage was not discharged at closing.  The defendant disbursed over $128,000 to the seller.  When the mortgagee threatened to foreclose on the mortgage, Lawyers Title was forced to pay more than $152,000 to obtain an assignment of the mortgage and to discharge it. 

The title company secured partial recovery from the seller but then sued the defendant to recover $72,340.81, plus costs and attorney's fees in an action for breach of contract and negligence.  On the negligence claims, the Superior Court (Conboy, J.) found that the defendant was not negligent in his decision to use an independent abstractor, in his selection of an independent abstractor, or in his review of the abstractor's work.  Following a bench trial, however, the court found the defendant vicariously liable for the negligent title search. 

On the breach of contract claim, the court found no breach of the clause requiring approval of abstractors, and this ruling was not appealed. However, the trial court found the defendant did breach the agreement by issuing a title policy that did not except a prior recorded mortgage.  This, the court said, "was contrary to recognized title underwriting standards and was not prudent."5   The New Hampshire Supreme Court reversed both the negligence and contract rulings.6 

In reaching its decision, the New Hampshire Supreme Court first considered the law of agency and independent contractors relating to the negligence claims.  An employer is not usually liable for the negligence of an independent contractor, although there are three exceptions to the general rule.7  Those exceptions are: negligence in choosing, instructing, or supervising the contractor; employing the contractor for work that is inherently dangerous; and situations where the employer has a nondelegable duty.8  Here, the New Hampshire Supreme Court held that the duty to examine title was not nondelegable and therefore not governed by that exception to the rule against vicarious liability.

NONDELEGABLE DUTIES PREVIOUSLY RECOGNIZED IN NEW HAMPSHIRE

The New Hampshire Supreme Court does recognize some duties as nondelegable,9 although this issue of whether there are any nondelegable duties that lawyers owe their clients was a case of first impression in New Hampshire.10  The nondelegable duties that the New Hampshire Supreme Court has recognized are an employer's duty to maintain a safe workplace11 and the duty of a business owner to maintain safe premises.12

In Rounds v. Standex Intl., the court held that the employer's duty to maintain a safe workplace could not be delegated.13  Rounds was injured at work while operating a textile-rolling machine and brought a products liability action against the manufacturer's successor.  After the New Hampshire Supreme Court invalidated a statute that barred actions against co-employees for non-intentional torts, Rounds amended his writ to add claims against four supervisory employees.  The new defendants moved to dismiss the claims for failure to state a cause of action.  The trial court granted the motion finding that the duty to maintain a safe workplace is nondelegable and that none of the defendants was Rounds' employer and thus owed him no duty.  Rounds appealed, but the New Hampshire Supreme Court affirmed because "the employer's duty [to maintain a safe workplace] is nondelegable in that the employer cannot escape liability for breach ... by purporting to delegate to another the duty itself."14 

Neither can a business owner delegate the duty to maintain safe premises for its invitees.  In 1998 the New Hampshire Supreme Court adopted the business owner exception to the vicarious liability rule in Valenti v. Net Properties Mgt.15 In Valenti, the plaintiff broke her hip when she slipped and fell at the entryway to the Bedford Mall.  An independent contractor had designed the mall's entryway for the defendant.  Another independent contractor had been hired to maintain the entryway and floors.  At trial the plaintiff alleged that the defendant was vicariously liable for the negligence of the independent contractors.  After a verdict for the defendant the plaintiff argued on appeal that the trial court erred by instructing the jury that a business landowner may delegate its duty to maintain the safety of its premises.  In reversing the trial court, the New Hampshire Supreme Court expressly adopted section 425 of the Restatement (Second) of Torts, which subjects business premises owners to vicarious liability "for physical harm caused by the contractor's negligent failure to maintain the land ... in a reasonably safe condition." 

Before Lawyer's Title ,New Hampshire had adopted only these two duties as nondelegable, neither involving the attorney-client relationship.

ATTORNEYS' NONDELEGABLE DUTIES RECOGNIZED IN OTHER JURISDICTIONS

Courts in other jurisdictions have held that lawyers do owe certain nondelegable duties to clients, often arising out of various codes of professional responsibility.16  These nondelegable duties include the service of process,17 the duty to reasonably inquire into the facts and the law before signing a pleading,18 fiduciary responsibility for client trust accounts,19 the duty to preserve client funds,20 and general duties required by the rules of professional conduct.21

Service of Process

The Court of Appeals of New York decided in 1993 that an attorney has a nondelegable duty to exercise care in the service of process.22  In Kleeman v. Rheingold, the plaintiff came to defendant's office with a potential medical malpractice claim just five days before the statute of limitations would expire.  The defendant prepared a summons and the complaint and delivered them to a process service agency, one the defendant regularly used, and instructed that the service be made "immediately."  The trial court found that the agency, and not the defendant, chose the licensed process server who would serve the papers and directed how service would be made.  The papers were served within the statutory period, but the process server had given them to the secretary rather than to the doctor himself.  By the time this issue was resolved the statute of limitations had run and Kleeman had lost her cause of action against the doctor. 

In the ensuing malpractice action the trial court granted summary judgment for defendants, concluding that the process server was an independent contractor and the defendant had no control over the way process was served.  After a divided Appellate Division affirmed, the Court of Appeals modified by denying the defendant's summary judgment motion.  It held that as attorneys for the plaintiff, the defendants had a nondelegable duty to her and could not evade that duty by employing the services of an independent contractor process server. 

Most important to the Kleeman court's holding was New York's "extensive and comprehensive Code of Professional Responsibility that governs the obligations of attorneys to their clients[.]"23  The Code prohibits lawyers from "seek[ing], by contract or other means, to limit prospectively the lawyer's individual liability to a client for malpractice."24  The court stated that the average client and the public could reasonably perceive that everything connected with the implementation of a lawsuit, including service of process, would be done by the attorney or someone under his direction.  Furthermore, even if the client was aware that process servers were used and that they were independent contractors, the client would not understand the legal significance of the attorney's immunity from liability.  This immunity from liability would be "contrary to sound public policy."25 

Client Funds

New Jersey has found nondelegable duties relating to client funds.26 In Matter of Stransky, the New Jersey Supreme Court suspended Attorney Stransky because he had turned over his bookkeeping functions to his wife, who then misappropriated over $32,000 from the trust account for her own use.  Because he trusted his wife, Stransky failed to supervise his attorney (and personal) accounts and the misappropriations continued over several years.  The Office of Attorney Ethics (OAE) was finally informed when Stransky overdrew his trust account.  It was a year later, however, that Stransky learned of the misappropriations and his own temporary suspension from the Bar.  Because his wife handled all the mail and telephone calls, she was able to keep her misappropriations and the notices of OAE proceedings from Stransky for a full year.  In recommending a one-year suspension, the court found that Stransky "was completely irresponsible in the management of his attorney accounts and totally abdicated his fiduciary responsibilities to his clients for at least an entire year."27  These fiduciary duties were nondelegable.

REASONING IN LAWYERS TITLE V. GROFF

At trial, the court ruled that the duty to examine title was nondelegable both because the agency agreement contained a nondelegation provision and because the court found that the duty was essential to the representation of the lender.  The New Hampshire Supreme Court reversed, concluding that the agency agreement expressly contemplated delegation and that the duty to examine title was not so essential to the representation that it became nondelegable. 

The New Hampshire Supreme Court addressed the nondelegation provision first.  The trial court found that the defendant could not delegate his contractual duty of "a careful title search" because the no "right, interest, or duty" arising under the agreement was delegable without the prior written consent of the other party.28  In reversing, the New Hampshire Supreme Court held that the contract specifically contemplated delegation of title searches and the defendant had only to exercise "due care and diligence" when he obtained reports that others prepared.  The parties, had they intended that the defendant not delegate these tasks, could have provided for that in the agreement.  The agreement also provided only for the defendant's liability for his own acts and omissions and not those of others.  Again, the agreement could have easily provided otherwise if that was the intent of the parties.

As for the duty to examine title being an essential element of the representation, the Court reversed the trial court on policy grounds.  Citing New York's decision in Kleeman, the Court stated that policy considerations would determine whether to categorize a duty as nondelegable.  If the duty were classified as nondelegable, it would create an "unrealistic and undue liability channel not only with respect to the relationship of attorneys to [title abstractors] but, by analogous extension, also to many other relationships in which attorneys retain specialists and experts in the discharge of their professional obligations to clients."29  The Court emphasized that this nondelegability does not allow the attorney to escape liability simply by hiring an independent contractor to examine the title.  The attorney would still be liable for his own negligence in hiring, supervising, or training the abstractor.  Similarly the attorney could be liable for his own negligence in reviewing the abstractor's report or in rendering an opinion based on the report.

New Hampshire's Code of Professional Conduct is apparently no obstacle to an otherwise proper contract limiting liability for negligent performance of delegable duties. Rule 5.3, "Responsibilities Regarding Nonlawyer Assistants," while evidently intended to cover independent contractors30 is directed only to assuring that the nonlawyers comply with ethical requirements such as confidentiality. It would apply in a Stransky situation, but not in Lawyer's Title. Rule 1.8(h) prohibits an attorney from making an agreement "prospectively limiting the lawyer's liability to a client for malpractice. . . ."31  In Lawyers Title, the defendant did make an agreement that "prospectively limited his liability," but it was for the actions of others, not the lawyer's, and for an abstracting error, not malpractice.  Because the agency agreement permitted the defendant to delegate the duty to abstract the title to an independent contractor, the defendant was not liable for the abstractor's error.  In fact, the New Hampshire Supreme Court allowed the delegation to avoid the slippery slope of "open[ing] up an unrealistic and undue liability channel"32 that might extend to the other specialists and experts that an attorney retains to assist in the representation of clients. 

ALLOCATING THE RISKS OF TITLE EXAMINATION

As a rule, agency law shields the principal from liability for an independent contractor's negligence.33  That can, of course, be varied by contract. So what will the effect of Lawyers Title be on agency agreements between the title insurance companies and the issuing attorneys?  Will the title insurance companies now require indemnification clauses in the agreements, in case an abstractor overlooks something?  Or will the title insurance companies prohibit delegation of these duties altogether and require consumers to pay increased costs necessarily passed on by the attorneys?  The New Hampshire Supreme Court based its holding in large part on the equal sophistication and bargaining power of the parties to the agreement and the agreement's specific language contemplating the delegation of the abstracting work.  But will attorneys agree to indemnify the title insurance company if the lawyer's independent contractor negligently overlooks a recorded encumbrance?  Someone must bear this risk, but Lawyer's Title suggests it should not be the typical consumer who would be forced to pay higher fees if the lawyer cannot delegate particular duties to a contractor. 

Much of the apparent difficulty stems from New Hampshire's common reliance on attorneys to secure abstracts, a system almost unique to New England.34 Outside New England "[a]ttorneys tend to emphasize that title search and title examination are separate functions,"35 a distinction implicit but not clearly stated in Lawyer's Title..36 In many states title insurance companies maintain their own title plants and do the abstracting in house..37 In some states abstracting is done by substantial independent businesses that are licensed, bonded, and often affiliated with title insurance companies. In such states the functions are clearly separated, with large economies of scale and low labor costs. The attorneys who write opinions do so on the basis of an abstract bought directly by the client from the abstractor, and they have no involvement at all with the work of the abstractor's employees.38 In the absence of a comparable system New Hampshire must deal with the fact that critical work is commonly performed by uninsured individuals who cannot cover the cost of mistakes that even the most capable and careful of them will sometimes make. A loss necessarily will fall on the attorney, the title insurance company, or the client. The title insurance companies are in the better position to spread the risk, but, given the way the work is typically organized in New Hampshire, the attorneys are in the better position to minimize it by selecting, training, and monitoring their abstractors. Informed clients with substantial business (lenders or developers) might accept some risk to reduce costs. The decision in Lawyer's Title simply leaves the matter to contracts among the parties rather than imposing it automatically on attorneys.

PROTECTION OF THE UNSOPHISTICATED CLIENT

Lawyers Title involved sophisticated parties to a detailed, written agency agreement, rather than an attorney and a typical lay client. What would the New Hampshire Supreme Court do in other circumstances?  When a duty is delegable, the important questions are when and how is the delegation accomplished. An uninformed client will likely be protected by the law of apparent or ostensible agency which protects those who "justifiably rely upon the care or skill of [an] apparent agent ... [from] harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such."39 This well-established principle has been increasingly used against defendant hospitals relying on independent contractors for such 'in house' functions as anesthesiology or emergency rooms,40 but it is not limited to cases of physical injury.41 Some of the cases erect a presumption of reliance if there was no reason the plaintiff should have known of the independent contractor arrangement and the apparent principal failed to give meaningful notice of it.42 This doctrine, briefly mentioned as an alternative ground for decision in Kleeman43 would likely have given adequate protection to the clients for whom the New York Court of Appeals was concerned without prohibiting all contractual risk allocation. It was this concern which led New Hampshire's Court to reject nondelegability in favor of freedom of contract. So long as attorneys are obliged by the rules of apparent agency to give meaningful notice of the true status of those who appear to work for them, there seems little threat to the unsophisticated client.

OPEN QUESTIONS FOR THE LEGAL PROFESSION

The New Hampshire Supreme Court would probably find that service of process and control of client trust funds are nondelegable duties because decisions so holding were cited favorably in Lawyer's Title.  What other duties, if any, the Court might hold to be nondelegable is uncertain, but the tone of the opinion suggests a reluctance to invoke the doctrine.

The few attorney duties held to be nondelegable in other states are activities for which reasonable clients would almost certainly expect personal responsibility absent some specific notice and agreement. Outside that core is a gray area of lawyerly activity (such as abstracting title records or financial planning) where an attorney seeking the benefits (and possible savings to the client) of delegation will risk a finding of apparent agency unless clear disclosures and agreements are made. With some contracted services, presumably those of most expert witnesses and consultants, claims of apparent agency will be implausible whether or not the attorney makes a specific disclosure. However, absent further litigation or new provisions or interpretations of the Code of Professional Conduct, there is no clear boundary. While a lay client might be held to expect the independence and separate responsibility of non-legal expert consultants and witnesses, it could be argued that it is easy to mention them and disclaim liability for their possible negligence in a retainer agreement. Not all experts supply clearly non-legal services, as the endless arguments over alleged boundaries between law and accounting demonstrate. There are also other ways around the independent contractor rule. Even with clearly non-legal experts, their selection might be imprudent. Must a lawyer inquire into their financial resources? The New Hampshire Supreme Court now tacitly mandates (for all practical purposes) malpractice insurance for lawyers by requiring disclosure to clients if the lawyer does not maintain a minimum level of insurance.44  If an attorney hires an independent contractor without insurance (or assets to pay a claim) would that constitute negligent entrustment? While such an argument was not raised in Lawyer's Title ,it is predictable , yet its logic would have the same cost implications that led the Court to reject nondelegability.

CONCLUSION

The New Hampshire Supreme Court correctly held that abstracting a title was not the attorney's nondelegable duty because the sophisticated parties in Lawyer's Title had entered into an agreement that permitted delegation (with the consent of the other party) and that did not require indemnification by the attorney-defendant.  This will presumably stimulate efforts by attorneys and insurance companies to clarify and allocate the risks of loss in title examinations. The homebuyer (the public) in Lawyer's Title was not harmed and was not a party to the lawsuit.  In a case like Kleeman, though, where an uninformed client loses her cause of action or property because of the independent contractor's negligence, the New Hampshire Supreme Court will likely invoke the apparent agency rule to uphold reasonable public expectations.

ENDNOTES

1.

148 N.H. 333, 336 (2002), (hereinafter Lawyers Title).

2.

Id. at 334. While plaintiff asserted both its own rights and, as subrogee, those of the lender, the opinion does not separately address the two relationships or whether their duties differ.

3.

Although the plaintiff alleged that the defendant had used an "unapproved" abstractor, the trial court rejected that claim and that issue was not appealed. Id. at 335-36.

4.

Id. at 335.

5.

Id. at 336.

6.

The court reversed the contract ruling because the defendant had acted prudently, ethically and in a timely manner, which was all the contract provision required.  The contract was silent on the defendant's liability for committing the plaintiff to risks of which the defendant was reasonably unaware.

7.

Restatement (Second) of Torts 409 (1965).

8.

Restatement (Second) of Torts 409 cmt. b (1965).

9.

E.g. Valenti v. Net Properties Mgt, 142 N.H. 633, 636 (1998) (adopting the business owner's exception to the vicarious liability rule); Rounds v. Standex Intl., 131 N.H. 71, 76 (1988) (holding that employer's duty to maintain a safe workplace is nondelegable). There are other cases apparently mixing the delegability doctrine with some other, such as ultrahazardous activity. See U.S. v. Ottati & Goss, Inc., 630 F. Supp. 1361, at 1409 (D.N.H. 1985) on the disposal of hazardous waste.

10.

Lawyers Title, 148 N.H. at 338.

11.

Rounds, 131 N.H. at 76.

12.

Valenti, 142 N.H. at 636.

13.

Rounds, 131 N.H. at 76.

14.

Id.

15.

Valenti, 142 N.H. at 636.

16.

E.g. Kleeman v. Rheingold, 81 N.Y.2d 270, 273, 614 N.E.2d 712, 714 (1993).

17.

Id. Contra Kersten v. Van Grack, 608 A.2d 1270 (Md.Spec.App. 1992).

18.

Cooks v. Rodenbeck, 711 So.2d 444 (La. 1998).

19.

In the Matter of Stransky, 130 N.J. 38, 44, 612 A.2d 373, 376 (1992).

20.

In the Matter of Irizarry, 141 N.J. 189, 193, 661 A.2d 275, 277 (1995).

21.

Colorado v. Katz, 2002 WL 31560646 (Colo. O.P.D.J.) (Nov. 13, 2002).

22.

Kleeman, 81 N.Y.2d at 273, 614 N.E.2d at 714.

23.

Id. at 275, 614 N.E.2d at 716.

24.

Id. at 275-276, 614 N.E.2d at 716.

25.

Id. at 276, 614 N.E.2d at 716.

26.

Stransky, 130 N.J. at 44, 612 A.2d at 376; Irizarry, 141 N.J. at 193, 661 A.2d at 277.

27.

Stransky, 130 N.J. at 44, 612 A.2d 376.

28.

Lawyers Title, 148 N.H. at 337.

29.

Id. at 339 (citation omitted).

30.

N.H. Code of Prof. Conduct 5.3, ABA Model Code Comment.

31.

N.H. Code of Prof. Conduct 1.8(h).  "A lawyer shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement, or settle a claim for such liability with an unrepresented client or former client without first advising that person in writing that independent representation is appropriate in connection therewith."

32.

Lawyers Title, 148 N.H. at 339. (citation omitted).

33.

Restatement (Second) of Agency 2 (1998).

34.

Whitman, Optimizing Land Title Assurance Systems, 42 Geo. Wash. L. Rev. 40, 47 (1973).

35.

Id. at 45, n. 21.

36.

Both the Superior and Supreme Court apply the term "title examination" to search and abstracting activity.

37.

Id. at 48.

38.

Id. at 48; Eckhardt, Abstractor's Licensing Laws, 28 Mo. L. Rev. 1 (1963).

39.

Restatement (Second) of Agency 267; also Restatement (Second) of Torts 429.

40.

E.g. Gilber v. Sycamore Municipal Hospital ,622 N.E.2d 788 (Ill. 1993), Sword v. NKC Hospitals, Inc. ,714 N.E.2d 142 (Ind. 1999), Butler v. Domin, 15 P.3d 1189 (Mont. 2000).

41.

E.g. Spencer v. Hendersen-Webb, Inc., 81 F.Supp.2d 582 (D. Md. 1999) (collection agency), see also Theos & Sons, Inc v. Mack Trucks, Inc. ,729 N.E.2d 1113 (Mass 2000) (insufficient evidence truck dealership was apparent agent).

42.

Sword v. NKC Hospitals, Inc. ,714 N.E.2d 142 (Ind. 1999).

43.

Kleeman ,at 716.

44.

N.H. Code Prof. Conduct. 1.17. "(a) A lawyer shall inform a client at the time of the client's engagement of the lawyer or at any time subsequent to the engagement of the lawyer if the lawyer does not maintain professional liability insurance in the amounts of at least one hundred thousand dollars per occurrence and three hundred thousand dollars in the aggregate or if the lawyer's professional liability insurance ceases to be in effect. The notice shall be provided to the client on a separate form set forth following this rule and shall be signed by the client. (b) A lawyer shall maintain a copy of the notice signed by the client for five years after termination of representation of the client."

The Author

Fran Whitaker, Class of 2004, Franklin Pierce Law Center, Concord, New Hampshire.

 

 

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