Scottish Paralegal Annual Conference Thursday 18th April, 2013 Ethics and Conflict of Interest
Good Morning Ladies and Gentlemen,
It is a great pleasure to be invited here to speak to you on the subject of legal ethics and in
particular the question of conflict of interest. Conflict of interest is of course something that is not
restricted to the legal profession but arises in all walks of life including personal relationships but
does have a special significance as far as the legal profession is concerned.
What is a Conflict of Interest
There are rules laid down by the Law Society in relation to conflict of interest but these rules do
not define what is a conflict of interest. “Perhaps a more straightforward answers is that if the
ordinary solicitor acting with ordinary care would give different advice to different clients about
the same matter there is a conflict of interest between them.
That appears to be fairly
straightforward and easy to understand. If the lawyer is acting for two persons in relation to a
matter and is presented with a dilemma as to the advice which he should give to both parties there
is a conflict of interest. The dilemma of a Solicitor in conflict of interest is like the heterosexual
male who wakes up in the morning in bed and finds on his right hand side a gorgeous female and
on his left hand side a gay man. His dilemma is which one should he turn his back on.
Why is it important
As a Paralegal you may all think well it’s really nothing to do with you. Surely the lawyer will
notice that there is a conflict of interest. It is quite correct that the lawyer should notice the
conflict of interest but there are a number of reasons why he or she may not. The obvious reasons
are that they may be too busy or they are dealing with too many things or that different people are
dealing with different parts of a single transaction and it is missed that there is a conflict of
interest. It can be that the matter starts out with there being no conflict of interest and a conflict of
interest arises in the course of the transaction or matter that is being dealt with and it is not
recognised at all. What might help to prevent that happening is if you; the Paralegal is watching
for potential conflicts of interest.
An easy to understand example of conflict of interest is where you are instructed in connection
with a conveyancing transaction acting for both the purchaser and the lender. In the course of the
transaction in relation to the property you may discover information about which the purchaser is
not concerned but which the lender would be concerned about if they knew about it and might
affect the attitude of the lender to proceeding with the loan.
What do you do in these
circumstances? Perhaps you should have warned the client that if something arises in the course
of the transaction, you would have to disclose this to the lender.
If you have acted for a husband and wife over the years doing various bits and pieces of work for
them and then one of them comes in to see you about a divorce could there be a conflict of
interest?
In my experience and looking at other solicitors files lawyers acting in a conflict of interest
situation happens much more often than it should and I think on some occasions it might not have
happened and could have been stopped at a much earlier stage had someone in the office, in other
words you, had pointed out to the solicitor the dangers arising from the situation that was
developing. That is not to say that it is your responsibility to point these things out but things can
slip through the net and it’s important that you are there as the second line of defence.
What can the consequences of a conflict of interest be?
Well in terms of the rules acting in a conflict of interest situation can found a complaint before the
Discipline Tribunal for professional misconduct, and it is possible that a claim for inadequate
professional service could be made. So far as professional misconduct is concerned your boss
could get struck off, fined and will definitely have the expenses of the Tribunal awarded against
him. The expenses of a straightforward case would be about £5,000. So you will see that if your
boss goes to the Discipline Tribunal he or she could lose their practising certificate, you could lose
your job or at least your job maybe much more insecure as a result of him or her being punished.
If there is a complaint of inadequate professional service to the Scottish Legal Complaints
Commission, they can award compensation up to £20,000. It is in everybody’s interest in the legal
office to avoid conflicts of interest.
How does the Law Society find out about Conflicts of Interest?
There are two ways usually firstly the client complains because they are dissatisfied with the
outcome. The complaint may not be about a conflict of interest but some unrelated matter and the
Law Society while investigating that may find something else which would excite their interest.
As some of you will know what happens when there is a complaint is that the Law Society of
Scotland gets hold of your file, looks at it and will consider whether there are other matters beyond
the complaint which has been made and which require investigation. For example, I had a
complaint about delay and the Law Society after they had looked at my file came back and asked
the question in relation to 2 letters which I had written to the client and asked “Do you think they
are misleading?” I did not answer that question but asked them to say what they thought was
misleading and why they thought it was misleading and if they did that I would answer their
question. I am still waiting for a reply. The point of what I am saying is that your file is central to
whether the Law Society will think that there is a conflict of interest or not and the contents of the
file are something that you can certainly have an influence on. So you can have an influence on
whether the Law Society pursue a conflict of interest. The other way that a conflict of interest is
found out about is when the Law Society Auditors come out to do their periodic inspections. They
obviously check the Accounts, Money Laundering and also, as you will be aware, look at files.
These files are not picked out at random. There are particular files that always excite their interest.
Files of conveyancing transactions where you have acted for both parties are such files. They can
tell from looking at the audit trail in the Cash Room whether or not this has occurred and it is
important, at that point, that the file either demonstrates that there is no conflict of interest, and
that if you have acted in a matter for two parties where you are permitted to act for two parties that
you have complied with the rules relating to that and, again, this is something that the solicitor for
one reason or another may be a little careless about it and where you, as the Paralegal, can make
sure it is absolutely ok. That is not to say that it is not the solicitor’s responsibility but it is
certainly something that you can help with.
Where do you find out about Conflict of Interest Rules
There is a book by Paterson and Ritchie entitled Law Practice and Conduct Law for Solicitors
which was initially published in 2006 and re-printed in 2008. It is now a little bit out of date but
that is the textbook that is being used by students in the diploma course when they have been
studying it. There is a long section on conflict of interest but I would suggest to you that it is
pretty academic in the way it approaches things and goes on about the law of agency, professional
ethics and the Law Society rules. Notwithstanding that the law of agency does have a bearing on
this and there are common law rules regarding professional ethics which have a bearing on this the
best source so far as your concerned of practical assistance is the Law Society of Scotland Practice
Rules 2011. These can be found in Volume I of the Parliament House Book probably more
conveniently from your point of view on The Law Society’s website. I got my secretary to google
“Law Society of Scotland Practice Rules”. In Section B(1) of these rules there are various
standards of conduct laid down. These include trust and personal integrity, independence and
acting in the best interest of your client. At 1.7 what it says is “You must not act for two or more
clients in matters where there is a conflict of interest between the clients or for any client where
there is a conflict between the interest of the client and your interest or that of your practice unit”.
You will see here that conflict of interest can arise not only if you are acting for two clients but a
conflict between your interest and that of the client. My impression is that the Disciplinery
Tribunal will be much harder on someone if there has been a conflict of interest between the
interests of the solicitor and the client rather than acting in a conflict of interest situation for two
clients although I think the Discipline Tribunal would treat them both very seriously. Rule 7 goes
on in the second paragraph and says “Even where there is only a potential conflict of interest you
must exercise caution. Where the potential for conflict is significant you must not act for both
parties without the full knowledge and express consent of the clients”. That takes things a little
further in the respect that not only must you not act in a conflict of interest situation but where “the
potential for conflict is significant” you must not act for both parties without the full knowledge
and express consent of the client. In other words you will have to explain to the client before you
proceed that whilst there is no conflict at the present time there is a potential for a conflict to arise,
what the consequences of a conflict arising might be and you have to be satisfied they are still
happy to proceed. In such circumstances however it would probably be prudent not to act for both
parties.
In Section B(2) of the Rules this section is exclusively devoted to Conflict of Interest and in 2.1.2
it states “You should not act for two or more parties whose interest conflict” and the subsequent
parts of this rule then go on to certain exceptions where you can act for both parties. 2.1.3 deals
with the situation where the solicitor concerned is employed by a company or public authority in
certain circumstances the solicitor can act for more than one party provided that no dispute arises
or appears likely to arise between the parties if, and only if, the parties are associated company’s,
authorities etc. or the parties are connected. Similarly at 2.1.4 there is an exception which allows a
solution to act for two parties in a conveyancing transaction in certain circumstances. The text of
clause 2.1.4 is as follows :-
Without prejudice to the generality of rule 2.1.2, a regulated person, or two or more regulated
persons practising either as manager or employee in the same practice unit or in the employment
of the same employer shall not, at any stage, act for both seller and purchaser in the sale or
purchase or conveyance of heritable property, or for both landlord and tenant, or assignor and
assignee in a lease of heritable property for value or for lender and borrower in a loan to be
secured over heritable property; provided, however, that where no dispute arises or might
reasonably be expected to arise between the parties and that, other than in the case of exception (a)
hereto, the seller or landlord of residential property is not a builder or developer, this rule shall not
apply if:
(a) the parties are associated companies, public authorities, public bodies, or
government departments or agencies;
(b) the parties are connected;
(c) the parties are related by blood, adoption or marriage or civil partnership, one to
the other, or the purchaser, tenant, assignee or borrower is so related to an
established client; or
(d) both parties are established clients or the prospective purchaser, tenant, assignee
or borrower is an established client; or
(e) there is no other regulated person in the vicinity whom the client could
reasonably be expected to consult; or
(f) in the case of a loan to be secured over heritable property, the terms of the loan
have been agreed between the parties before the regulated person has been
instructed to act for the lender, and the granting of the security is only to give
effect to such agreement.
In relation to clause 2.1.4 rule 2.1.5 imposes certain requirements if you are going to act for 2
parties that the solicitor at the earliest practical opportunity shall advise the parties that they have
been instructed to act for both parties and that if a dispute arises they or one of them will require to
consult an independent solicitor. This must be confirmed in writing. This is just the situation that
the Law Society Auditors will have a look at and it is important therefore that the files look
absolutely ok and that even if the solicitor has forgotten about it that clause 2.1.5 is something that
you should remind him about to make sure it is done. Rule 2.1.6 says that if you have submitted
an offer for a party you will be presumed to be acting for that party. The rule 2.1.7 makes it clear
that if you are writing to another party who is not represented by a lawyer with a formal document
to be signed you must advise them that the signature of the document may have certain legal
consequences and that they should seek independent legal advice before signature. Clause 2.2
relates to the drafting of Wills and basically says that a solicitor should not draw a Will in which a
legacy is left to him or her. If the client wants to do that that client should be sent to another
solicitor to prepare the Will.
Successive Conflicts of Interest
Normally conflicts of interest arise when there are two parties to a current transaction or matter but
it is possible for there to be a conflict of interest when one has acted for a client a long time ago
then one receives instructions from someone else to go against that former client.
This is
sometimes known as a successive conflict. It may at first seem strange that there could be a
conflict here. The reason why a conflict could arise is because if someone has been a client of
yours and the relationship has been terminated the lawyer is still under an obligation to preserve
confidentiality. In this successive conflict situation you are pursuing a client who has presumably
communicated confidential information to you in the past and which they are entitled to expect
that you do not disclose to the party who has instructed you to pursue the matter against your
former client. There have been cases where people have raised actions against solicitors seeking
to prevent them from acting for a new client with a contrary interest against a former client and in
these circumstances if they want to stop them according to English cases the onus is on the former
client who is seeking to prevent the solicitor from acting for another client to establish (a) that the
solicitor was in possession of information which is confidential to him or her and the disclosure of
which he or she has not consented and (b) that the information is or may be relevant to the new
matter in which the interest of the other client is or may be adverse to his own.
This particular situation can affect any legal firm but it is a big problem for the large commercial
firm. Why it is a problem for them is that there is a rule to the effect that if one partner acted for a
former client all the other partners are deemed to have the same knowledge as the other partner.
Why this is such a difficulty for large commercial firms is that they may have offices in Aberdeen,
Edinburgh, Glasgow, London, New York and it is a bit of a stretch to suggest that just because
somebody in Glasgow has acted for a party the knowledge of that partner and his staff is imputed
to the rest of them. There is no recent case in relation to this but the suggestion is in the Paterson
& Ritchie book that the Courts and Discipline Tribunal would follow the opinion stated by a Judge
in England which was to the effect that “There is no cause to impute or attribute the knowledge of
one partner to his fellow partner whether a particular individual is in possession of confidential
information is a question of fact which must be proved or inferred from the circumstances of the
case”. Having said that that is a situation certainly something where a Paralegal who has a fair
knowledge of all the work that has been done in the office could draw to the attention of a partner
the potential existence of a conflict.
Avoiding or Alleviating Conflict of Interest
There are various suggestions given in the books and cases and whilst these may work I think in
most cases it is difficult to ensure that these are full proof. Suggested ways of avoiding acting in a
conflict of interest situation include the suggestion that you could obtain a waiver from your client.
The difficulty with that is whether or not the client really understood and had the requisite
knowledge and information to allow them to make an informed decision as to whether to grant the
waiver. In fact they probably would require independent legal advice with regard to granting the
waiver so personally I think that that is a non-starter. If you think you need a waiver you must be
in a conflict of interest.
Another way to avoid conflict of interest is to reach agreement where there would otherwise be a
conflict of interest the most obvious example in relation to this and many of you will be aware of
this is where a husband and wife have separated and they intend to sell the matrimonial home. If
the solicitor is to act for a couple in these circumstances in relation to the conveyancing there has
to be an agreement between them agreeing that the solicitor should deal with the matter stating
how he should deal with the proceeds of sale and I am sure those of you who have been involved
in domestic coveyancing will have come across this situation.
What you can do to avoid a conflict arising?
The first question people would ask here is “Is there a conflict of interest here?” In my view that
is not the question that should be asked. The first question that should be asked is “Does it look as
though we are acting for 2 parties?”. If the answer is no, there is no conflict. If the answer is yes
we are acting for two parties could it look as though there is a conflict of interest?. If the answer
to that question is no I think you can be fairly sure that there is no conflict of interest. If the
answer to that first question is yes the next question is “Is there a conflict of interest?” If the
answer is yes to that you should stop acting. If the answer is no the next question you should ask
is “Is there anything we can do to make it clear that there is not a conflict of interest?”. If the
answer is no possibly you should be thinking about giving up. If the answer is yes, you should do
it because that will provide the evidence that will save your boss from trouble before a Discipline
Tribunal or your firm before the Scottish Legal Complaints Commission. What are these things
that you can do? If you are acting for two parties in relation to a single matter you should always
ask the question “Could this look as though there is a conflict of interest?” Remember too that you
might be acting for one person but they may be acting in two capacities. For example someone
could be the Executor in the estate and a beneficiary. Letters of Engagement can help in relation
to avoiding the suggestion that there is a conflict of interest. If you have written a Letter of
Engagement to a client you are making clear who you think your client is and if there is another
party involved if they have not had a Letter of Engagement from you that suggests that he or she is
not a client and further when you have asked them to sign a formal document you have written to
them asking them to sign the document, you have explained to them that you act for a particular
person not them in relation to this transaction, that the signature of the document may have certain
legal consequences so far as they are concerned and suggesting that they seek independent legal
advice before doing so I think in most cases you will be in the clear.
In the situations where you are permitted to act for more than one party you should ensure that the
file shows that you have done all the things to make sure that you can act for both parties. You
will recall that in certain circumstances in terms of Rule 2.1.4 you can act for both parties in a
domestic conveyancing transaction but there are certain things that you must do. You must make
sure that both the parties are advised at the earliest practical opportunity, that the regulated person
in this practice unit has been requested to act for both parties and that if a dispute arises both the
clients or one of them will require to consult an independent solicitor. This must be confirmed in
writing as well so make sure that these letters are on the file.
Finally when writing to persons who are not the client you should be careful in relation to letters
that are written so that they cannot be interpreted as giving advice to that person which may be
deemed to create a solicitor/client relation even though there is no Letter of Engagement and
therefore creating a conflict of interest situation. These in my view are the main things which can
be done to avoid difficulty and these are all things that Paralegals are well placed to point out to
their boss if he or she does not apprehend that there may be a problem. Examples of potential
conflict of interest :-
(a)
drawing a Partnership Agreement for a partnership of three people. Who is your client?
The interests of the partners may not coincide. I don’t think this happens very often in practice but
possibly what should be done is you should say you are acting for the partner who is giving you
instructions and write to the other partners saying that you are acting for him and suggesting to
them that once you have prepared the draft Partnership Agreement they may wish to take
independent legal advice and once they come to sign it again they should probably take
independent advice.
(b)
What about a husband and wife driving along in their car and they have a car accident
involving another car and they come into your office and say they want to make a claim against
the other driver. Why might there be a conflict of interest there? The husband who was driving
may be the person that has caused the accident or may be partially responsible for the accident and
the spouse could have a claim against the other driver but also could have claim against the
husband. That would undoubtedly be a conflict situation.
(c)
2 persons who are in partnership ask your firm to incorporate their business.
(d)
What about a husband and wife that had been clients of the firm for years and you have
done various things for them both as individuals and as a married couple. They then split up and
one of them comes in and asks to act in the divorce. Now you can do that but again there could be
difficulties over confidentiality. This is this successive conflict situation. I came across one
myself in relation to that and it was really only when we got to a very far advanced stage in the
Court action that it was pointed out to me that I had acted for the wife in connection with a
conveyancing transaction. Now I was not aware of that all I thought I had done was I had acted
for the bank in connection with a security over properties belonging to the wife and it was only
when I went back and checked that I realised that there really was a potential conflict of interest.
(e)
You are acting for a client and it becomes apparent that a mistake has been made which
means that the client probably has a claim against your firm. How could a conflict arise?
(f)
The granny, the daughter and the grand daughter wanting to buy the granny’s council
house.
In conclusion I hope that the foregoing is of some assistance to you.
Remember these questions that you have got to ask. Does this look as though there could be a
conflict of interest? If the answer is no there probably isn’t a conflict of interest. If the answer is
yes the next question you should ask is is there a conflict of interest? If the answer is yes you
should stop acting. If the answer is no the next question is have we done everything that shows
that it is not a conflict of interest and is there anything else that we can do? Even with these things
if it still looks as though somebody could think that there is a conflict of interest I think you should
stop acting.