Conflict of interest: the questions still come

The Professional Practice department receives a substantial number of enquiries regarding conflict of interest matters, and an exploration of some of the rules reveals some interesting facts.

The basic rule on conflict of interest appears in two separate places:

Rule B1.7, which states:

“1.7.1 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.

“1.7.2 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.”

Rule B2.1, which states at B2.1.2:

“2.1.2 You shall not act for two or more parties whose interests conflict.”

On the assumption that any “party” whom you “act for” is a “client”, effectively rule B2.1.2 restates the first part of rule B1.7.1.

There is a school of thought that no further rule on this subject is required, and that each individual case should be considered on its own circumstances, but rule B2.1.4 expressly sets out specific criteria in relation to conveyancing work:

“2.1.4 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.”

Applications

From these rules, certain significant points emerge in relation to acting for both parties in certain conveyancing transactions, including the following:

(1) In terms of rule B2.1.4(b) it is possible to act for both parties where they are “connected”, and the definition of “connected” is: “parties are connected if at least one of them is a body corporate and one is controlled by the other or both are controlled by the same third person”. The definition of “control” is set out in s 416 of the Income and Corporation Taxes Act 1988 (www.legislation.gov.uk/ukpga/1988/1/section/416/enacted), which inter alia states that possession or entitlement to the greater part of the share capital or voting power of a company shall constitute “control” of that company. Presumably the same or similar criteria would apply to a body corporate other than a company. Therefore, if an individual or collection of individuals or any organisation or body corporate has “control” of another body corporate, then the same solicitor can act for both of them in a transaction referred to in rule B2.1.4.

(2) In terms of rule B2.1.4(c), not only is it possible to act for both parties in a conveyancing transaction if they are related by blood, marriage, etc; it is also possible to act for both parties if the purchaser, tenant, assignee or borrower is related by blood, marriage, etc to any established (existing) client of the firm even if that established (existing) client of the firm has nothing whatsoever to do with the transaction.

(3) In terms of rule B2.1.4(d), not only is it possible to act for both parties if they are both established (existing) clients of the firm but it is also possible to act for both parties where just the purchaser, tenant, assignee or borrower is an established (existing) client of the firm.

(4) It is important to remember that these exemptions from the general rule in B2.1.4 do not apply if the seller or landlord of residential property is a builder or developer. Commercial property does not have this restriction, although it should be borne in mind that to be advising both landlord and tenant on important aspects of a lease is very likely to be a conflict of interest.

(5) Even if rule B2.1.4 does “permit” acting for both parties in a transaction, emphasis should be placed on the words “where no dispute arises or might reasonably be expected to arise between the parties”. A re-reading of the article “I can act, but should I?” by Stella McCraw (Journal, December 2014, 48) is of benefit in this respect.

(6) In particular, any transaction between parties related by blood, marriage etc, and which includes a significant element of gift, should be considered carefully. For example, if a mother is going to gift her entire house to her daughter, and there are other children who are not benefiting in any way by the transaction, it may be prudent for the mother and daughter to be separately represented in order to lessen the possibility of the transaction being challenged (or the solicitor being complained about) by one of the other children at some present or future date.

(7) If acting for both parties is not permitted by rule B2.1.4, it is possible to apply for a waiver, but this is only granted in exceptional circumstances. Further information on the policies and the appropriate procedure can be found on the Society’s website at www.lawscot.org.uk/rules-and-guidance/section-b/rule-b2-conflict-of-interest/advice-and-information/b21-applying-for-waiver/