Conflicts of interest: “If it feels wrong, it probably is wrong”
1. What are conflicts of interest?
The Solicitors Regulation Authority’s (SRA)Code of Conduct provides that a solicitor cannot act in a matter where he/she has a conflict of interest or a significant risk of a conflict of interest subject to certain exceptions. This rule also applies to parts of a matter or aspects of a matter.
A “client conflict of interest” arises where there is a conflict between the solicitor’s separate duties to act in the best interests of two or more current or intended clients in relation to the same matter or related matters. In plain terms, this means that the interests of “opposing parties”, such as Landlord & Tenant and Buyer & Seller differ.
A second type of conflict is “an own interest conflict”.
The difference between a client conflict of interest and an” own” conflict of interest is that the conflict exists between the solicitor and his/her client (ie “own interest conflict”) and not between clients (i.e. “client conflict of interest”). For example, when the prospective client is related to the solicitor.
It is true that opposing parties generally share a common interest to purchase or lease a property. For instance in a business purchase or commercial property transaction the buyer and lessee want to use the property for their own requirements while the seller and lessor are more focused on the investment returns. However, their respective interests in some aspects of the transaction usually varies.
Thus, it is likely that negotiation will need to be undertaken over matters of substance, which may reveal an actual conflict of interest or a significant risk of a conflict, moreso when considering the imbalance of power between the parties with the landlord and the seller having a stronger position than the tenant and the buyer.
By way of example, the landlord wants to rent the property at the highest marketable price while the tenant wants the exact opposite. Further, the landlord may be reluctant to offer the client wider powers of alteration of the property as this may result in the devaluation of his property. These examples demonstrate the wide scope of negotiation that may be required.
Other examples of cases that can give rise to a conflict of interest or a significant conflict of interest indirectly, include where a solicitor is asked by two clients to assist them in agreeing a business contract or where a solicitor is asked to act for an investor and the investment scheme in which they will investing or for a client who is leasing or selling an asset to another client.
These areas of friction show why it is difficult for solicitors to act for two parties with different interests in a transaction. Acting for such parties will certainly not be in the best interest of their clients.
2. What does the “best interest of the client” mean?
The best interest of clients means that solicitors must not allow their independence to be compromised and must act in the best interests of their client whilst balancing it against their other professional obligations and upholding the rule of law. This also means that a solicitor must act with honesty and integrity towards their client, the solicitor on the other side and other third parties. Hence, solicitors do not face any restriction in acting for their client(s) while remaining within the legal boundaries.
Solicitors must ensure that acting for their client does not lead them to cross the line into professional misconduct. The best interest’s duty and associated obligations are designed to ensure that clients receive advice that meets their objectives, legal situation and needs.
In contrast, conflicts of interest may result in solicitors having a respective duty to opposite parties that cannot reasonably be carried out as fulfilling the best interest of one party may result in acting to the disadvantage of the other party.
3. Two exceptions to the rule on Conflict of Interest (Code of Conduct para. 6.2)
The Code of Conduct allows two exceptions to the ban on acting for more than one client where there is a conflict of interest or a significant risk of a conflict of interest.
These exceptions are subject to the solicitor still being able to act in all the clients’ best interests and would arise in the following circumstances:
Exception 1 - Where the clients have a substantially common interest in relation to the matter or aspects of the matter as appropriate; or
Exception 2 – Where the clients are competing for the same objective.
The “substantially common interest” test must satisfy the following two limbs: there must be a common purpose between the clients and there must be a strong consensus.
In a commercial context, as mentioned above, the common purpose between the tenant & the landlord and the buyer and the seller is readily satisfied. However, it is rare for the parties to have reached a strong consensus as some negotiation will still generally be required.
In addition, for a solicitor to rely on either one or both of these exceptions, three conditions must be satisfied:
the opposing parties must provide their informed consent to the solicitor’s acting,
effective safeguards may be necessary to be put in place to protect the clients’ confidential information and
it must be reasonable for the solicitor to act for all the clients (Code of Conduct para 6.2(a)(i)-(iii)).
Even if a strong consensus were to exist, solicitors have the discretion to decide that in all the circumstances of the case, it would not be reasonable to act for opposing clients. Solicitors must remain mindful that if they were to go ahead with representing opposing parties and a conflict were to arise, they may face professional misconduct.
4. How to avoid the emergence of a conflict of interest
Where a solicitor takes the view that acting for opposite parties may not be in their clients’ best interest to do so, the solicitor must disclose this to the parties and request that one of them should be represented by a suitable alternative solicitor.
The ideal situation would be for a solicitor to decline acting for one of the opposite parties at the stage where there is an intention to act but no representation has taken place. This approach avoids the inconvenience and stress of needing to find another solicitor after the two parties have instructed the same solicitor.
This will also ensure that the solicitor is complying with the SRA’s Code of Conduct and acting with integrity (Principle 5) and in the best interest of each client (Principle 7).
A failure to abide by the Code of Conduct may result in regulatory action against the solicitor.
In the general interest of clients and solicitors, it is best practice for solicitors to be transparent from the outset on the risk and consequences of a conflict of interest.
The Code of Conduct rules are strict and warn solicitors that care should be taken to avoid any conflict of interest. As a result, most firms will and should adopt a cautious approach to being instructed by opposite parties in the same or a related transaction.
5. Is it ever possible for a firm to act on behalf of opposite parties?
Yes, it is possible for a firm to act on behalf of opposite parties in the same transaction or a related transaction.
Some of the factors that a firm should consider when considering whether to act for two or more parties in the same or a related transaction include:
The knowledge and bargaining clout of the clients. Is one client in a weak position or vulnerable for any reason e.g., one party is facing financial problems which may pressurize them to reach an agreement that may not be in their best interests.
The extent to which the parties will need to negotiate to reach agreement. How serious are the issues that remain to be resolved? The more serious the issues the less likely it is reasonable for the solicitor to act for the parties.
The specific benefits that would accrue to the parties if one solicitor were to act for both parties (e.g., the cost, convenience and speed).
Is there a risk that confidential data may be inappropriately transmitted from one party to the other?
Restricting the retainer: Another option would be for the firm concerned to restrict their retainer by only acting for and or advising the clients on those aspects of the transaction where a conflict of interest is unlikely to arise eg where two clients in a Business Purchase instruct a solicitor to carry out due diligence in relation to the business on the understanding that all due diligence information obtained will be shared with the two clients. However if the two clients subsequently decide to compete with each other to buy the business one party or both parties will need to instruct another lawyer to act for him/them.
Another example would be where two parties have agreed to settle a dispute over payment of a debt and they approach a solicitor to draft an agreement setting out what was agreed. In this case the parties are not asking the solicitor to advise them on the merits of the agreement they have reached.
How can Pure Business Law help?
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