Ethics - Conflicts of Interest (6) Flashcards
What are the types of conflicts of interest?
There are two situations where a conflict of interests may arise:
(a) a conflict between the client’s interests and the solicitor’s interests (an ‘own interest conflict’); or
(b) a conflict between two or more clients (a ‘conflict of interest’).
A solicitor can never act where there is a conflict between the solicitor’s own interests and the interests of a current client.
There are limited circumstances in which a solicitor can act where there is a conflict between two or more current clients.
Even in these circumstances, however, the overriding consideration will be the best interests of each of the clients concerned, and in particular whether the solicitor is satisfied that it is reasonable to act for all or both the clients.
These rules are repeated in the SRA Code of Conduct for Firms. This would, for example, prevent one solicitor within the firm acting for a client whose interests are in conflict with those of the client of another solicitor within the same firm.
What comprises the conflict of interest between clients consideration?
For the purposes of the Code of Conduct, a conflict of interest means ‘a situation where the solicitor’s or firm’s separate duties to act in the best interests of two or more clients conflict’.
A solicitor or firm must not act in relation to a matter or particular aspect of it if there is a conflict of interest or a significant risk of such a conflict in relation to that matter or aspect of it, unless:
(a) the clients have a substantially common interest in relation to the matter or the aspect of it, as appropriate; or
(b) the clients are competing for the same objective.
Does the conflict of interest consideration only apply to current clients?
A conflict of interest may arise only between two or more current clients.
Where a client’s retainer has been terminated the solicitor no longer owes a duty to act in that client’s best interests, and so a conflict of interest cannot arise concerning the affairs of a former client.
However, the solicitor must still bear in mind the duty of confidentiality owed to former clients.
A solicitor should decline to act at the outset in order to ensure that a conflict of interest does not arise in the first place, rather than start to act and risk a conflict arising at a later date.
However, a situation may arise where a solicitor has agreed to act for two clients when, at the beginning of the transaction, there was genuinely no actual conflict or any significant risk of a conflict apparent on the facts, but a conflict then arises during the retainer.
In these circumstances, the solicitor cannot continue to act for both clients. Whether the solicitor is able to continue for act for one client will depend on the solicitor being able to maintain client confidentiality.
‘The same matter or a particular aspect of it’ :
It is easy to see how a conflict of interest might arise when advising two clients about the same matter.
Acting for clients whose interests are in direct conflict, for example claimant and defendant in litigation, will almost inevitably result in a conflict of interest, making it impossible to act for both parties.
Likewise, acting for two or more clients where the solicitor may need to negotiate on matters of substance on their behalf, for example negotiating on price between a seller and a purchaser, is also likely to result in a conflict of interest as separate duties will be owed to each client to act in their best interests and those duties conflict or there is a significant risk that they will do so.
Whilst these are examples of situations in which there would normally be a clear conflict of interest preventing the solicitor from acting, it is for the solicitor to decide whether or not a conflict in fact arises in the particular circumstances of the case.
A conflict of interest can also arise concerning a particular aspect of a matter rather than the matter as a whole. For example, a solicitor could not act to sell a new house for one client whilst also acting for another client who is alleging that a part of the house has been built on his land.
Where the only conflict between the parties is their wider business interests then this will not create any conflict of interest issues.
Is it possible for a solicitor to act where a conflict of interest exists or there is a significant risk that a conflict may exist?
Where a conflict of interest exists, or where there is a significant risk that a conflict may exist, a solicitor may still act for both parties in defined circumstances and with the informed consent of both parties.
‘The substantially common interest exception’
This is a situation where there is a clear common purpose between the clients and a strong consensus as to how it is to be achieved.
An example of when this exception might be used is where a solicitor is instructed by a group of people who want to set up a company. Whilst those providing instructions may not necessarily agree on every aspect involved in setting up a new business venture, so long as they have agreed upon the key, fundamental matters (such as funding, shareholdings, management structure and roles etc), it is likely that a clear common purpose and a strong consensus as to how this will be achieved can be said to exist and so enable the solicitor to act for the group in setting up the company.
However, if differences were to arise within the group during the course of the matter which could be seen as undermining the common purpose and strong consensus, the solicitor is likely to come to the conclusion that the exception no longer applies and so would have to cease to act for the group as a conflict of interest has arisen.
**‘The competing for the same objective (or ‘commercial’) exception’ **
Clients will be ‘competing for the same objective’ in a situation in which two or more clients are competing for an ‘objective’ which, if attained by one client, will make that ‘objective’ unattainable to the other client or clients. The term ‘objective’ is further defined as an asset, contract or business opportunity which two or more clients are seeking to acquire or recover through liquidation (or some other form of insolvency process) or by means of an auction or tender process or a bid or offer, but not a public takeover.
This exception is likely, therefore, to be used for corporate clients only. For example, it would enable one firm to act for two companies bidding to take over a third company, despite the fact that the obligations to act in the best interests of the clients would conflict (both want to be successful in their bid to acquire the company, and any step taken by the firm to try to make this happen for one client would be detrimental to the interests of the other client).
What conditions does a solicitor need to comply with to be able to act for two or more clients under the exceptions?
(a) all the clients have given informed consent, given or evidenced in writing, to the solicitor acting;
(b) where appropriate, effective safeguards are put in place to protect the clients’ confidential information; and
(c) the solicitor is satisfied it is reasonable to act for all the clients.
Informed consent:
A client simply agreeing to the solicitor acting will not be enough. The consent must be ‘informed’, meaning that the client must appreciate the issues and risks involved (having had these explained by the solicitor, where appropriate) and make a decision based on those risks. Informed consent may be easier to obtain from sophisticated users of legal services, such as large companies with in- house legal departments to advise them on the risks involved of being represented under one of the exceptions.
Confidential information :
Where a solicitor does decide to act by taking advantage of one of the above exceptions, it may be that confidential information is held for one client which is material to the other client(s). Where this is the case, effective safeguards must be put in place to protect the confidential information. It may be difficult for an individual solicitor to achieve this, but a firm may be able to do so in order to enable separate solicitors within the same firm to act.
Reasonable to act :
When considering whether to use one of the above exceptions it must also be reasonable for the solicitor to act for all the clients. The solicitor should consider – both at the outset and throughout the duration of the retainer – whether one client is at risk of prejudice if not represented separately (ie by another firm) from the other client(s). This will particularly be the case where one client is vulnerable, the clients cannot be represented even- handedly or where the parties do not have equal bargaining power.
What is an own interest conflict?
Paragraph 6.1 provides that a solicitor must not act where there is an ‘own interest’ conflict, or a significant risk of an ‘own interest’ conflict. This refers to any situation where a solicitor’s duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with the solicitor’s own interests in relation to that or a related matter (SRA Glossary).
For example, a solicitor could not act for a client suing a company where the solicitor was a major shareholder in that company. The solicitor would be obliged to act in the best interests of the client and take steps to try to ensure that the client was successful in suing the company.
In taking those steps the solicitor would be acting to the detriment of the company. If the client was successful, the company would have to pay the client damages and so its share price might drop.
This would be detrimental to the company’s shareholders – including the solicitor.
There are no exceptions to Paragraph 6.1. So, for example, the solicitor cannot act even though the client consents to the solicitor acting.
SRA Guidance: Conflict of Interests includes the following examples of situations in which a solicitor’s interest might conflict with that of a client:
(a) A financial interest of yours or someone close to you. For example, a client asks you to carry out due diligence on a company which you or your spouse/ partner own shares in.
(b) A personal or business relationship of yours. For example, where you are asked to advise on a claim against a relative of yours, a friend or someone with whom you are involved with in a common financial enterprise.
(c) Your role as an employee. For example, a client asks for advice in relation to a dispute involving your employer or a fellow employee.
(d) Your own conduct (as a firm or an individual). For example, the wrong advice has been given to the client or the wrong action taken on their behalf. One situation which could give rise to an own interest in conflict is where a solicitor is asked to draft a will in which the client wishes to make a gift of significant value to the solicitor or a member of the solicitor’s family, or an employee of the solicitor’s business or their family.
‘Significant’ in this context includes a gift which is either significant in itself or in relation to the size of the estate. In its Guidance: Drafting and Preparation of Wills the SRA makes it clear that each case must be judged on its merits, but usually the effect of Paragraph 6.1 will be to prevent the solicitor acting unless the client agrees to take independent legal advice on making the gift (see also 4.3.3).
An own interest conflict may occur where something has gone wrong in the client’s case or the solicitor has made a mistake. In such a situation Paragraph 7.11 requires the solicitor to be open and honest with the client. In some cases, all that will be required is for the solicitor to tell the client what has happened and then, with the client’s agreement, take the appropriate remedial action. However, there will be cases which give rise to an own interest conflict or a risk of such a conflict, for example where one of the client’s options is to bring a claim for negligence against the solicitor. In such cases, the client must be told to seek independent legal advice.
What is a limited retainer?
Where a conflict arises between two clients, either at the beginning of or during a transaction, an alternative to relying on one of the exceptions in Paragraph 6.2 may be to accept a limited retainer.
The solicitor could be retained to act only in relation to those areas where no conflict exists, with each client seeking independent advice on the conflicting areas. It is necessary to make clear the terms of the retainer, and that there are defined areas where the solicitor cannot advise.
How do solicitors dealing with property transactions treat conflicts of interests?
Dealing with property transactions, particularly in the residential sector, is one area of practice which has the potential for giving rise to a conflict of interest.
Acting for buyer and seller
Sometimes a solicitor is asked to act for both buyer and seller in a property transaction.
Typically this happens when both parties are existing clients of the solicitor’s firm on other matters or where the parties feel that, as they have already reached an agreement through the estate agent, they can save time and costs by having the same solicitor deal with the paperwork.
SRA Guidance: Conflict of Interests gives one client selling or leasing an asset to another client as an example of a situation that can give rise to a conflict of interest and states that a solicitor should not normally act for two or more clients in these circumstances. The potential for a conflict arising is obvious. For example, there may be substantial terms still to be negotiated or an adverse survey may require the purchase price to be renegotiated.
However, the SRA does not specifically prohibit a solicitor acting for both buyer and seller. It is therefore for the solicitor to decide on the individual facts of the case whether there is a conflict of interest or a significant risk of one arising. The solicitor will need to consider all the facts.
The nature of the transaction may be significant; for example, in high- value or complex transactions, there is a greater likelihood of substantial negotiations, increasing the risk of a conflict.
The nature of parties may be significant; for example, vulnerability or an inequality of bargaining power makes it more difficult to act in the best interests of both clients.
If there is a conflict of interest the solicitor is highly unlikely to come within either exception in Paragraph 6.2. Buyer and seller are not competing for the same asset and therefore do not satisfy the definition of ‘competing for the same objective’. It may be for the solicitor to determine whether buyer and seller can be said to have a substantially common interest.
There is no specific provision in the SRA Codes of Conduct, but historically the SRA’s view has been that a buyer and seller do not have a substantially common interest and recent advice from the Law Society confirms that this is the case. Although there is no ban on a solicitor acting for buyer and seller, the circumstances in which a solicitor will be able to conclude that there is no conflict of interests, or significant risk of one occurring, will be rare. However, it might be possible to act, for example, where the property is being transferred between family members or where the parties are associated companies.
Acting for joint buyers
It is common practice for one solicitor to act for joint buyers of a property. It will usually be the case that the interests of both buyers are the same and therefore no conflict arises.
However, the solicitor must assess each case on its merits and recognise those cases which are outside the norm, for example where one buyer is being forced or pressurised into the transaction by the other.
Acting for borrower and lender
Many buyers will fund the purchase price with the aid of a loan or mortgage. In a commercial property context it is common for buyer and lender to be separately represented, but in a residential transaction the buyer’s solicitor will often be asked to act for the lender as well.
Whatever the context, the solicitor will need to decide whether a conflict of interest arises.
The circumstances in which a conflict could arise include where the terms of the mortgage offer are unfair to the borrower, the buyer is unable to comply with the mortgage terms or substantial negotiation will be required.
In residential transactions, the borrower will often be borrowing from a high street bank or building society where the mortgage is offered on standard terms and conditions with no negotiation being necessary. It may be possible to conclude that no conflict of interests arises in such circumstances or, if there is, that there is a ‘substantially common interest’ in that both the borrower and the lender want a good and marketable title to the property to be acquired.
