Coping with conflict

A solicitor’s duty to avoid acting in a conflict of interest situation is widely regarded as one of the most important obligations for solicitors operating in practice in the 21st century. The principle is seen as fundamental.

In Liquidation of Quantum Distribution (UK) Ltd [2012] CSOH 191, where a law firm had been acting for both the liquidator and the petitioning creditor, Lord Hodge stated that solicitors must be “sedulous in guarding against conflicts of interest”.

In the Scottish Solicitors’ Discipline Tribunal decision of McCarron (2015) the Tribunal observed that “issues of conflict of interest are fundamental to a solicitor’s practice”, and that the conduct in question (advising both a husband and wife in the drawing up of a separation agreement) was “clearly inexcusable”.

In Sandeman v Council of the Law Society of Scotland 2011 SLT 505, Lord Reed stated that the solicitor’s failure to inform the client that he was still acting for the other client in an interdict case was “difficult to reconcile with the trust and confidence which is essential to the relationship between solicitor and client”.

What is it about conflicts of interest that makes them so objectionable? The answer is quite simple.

Both loyalty and independence of judgment are essential to the effective representation of a client. In fact, they are fundamental to the health of a relationship between lawyer and client. A conflict of interest may make it impossible to exercise these essentials in dealing with the client. As well as the inevitable disciplinary consequences, it is likely that the firm will face an indemnity claim, with the client maintaining that the solicitor did not give the advice that the client was entitled to, due to this conflict of interest, and the client suffered financial loss as a result.

Areas of practice

Allegations of conflicts of interest have been known to feature in Master Policy claims arising from completely different areas of practice.

Recently, a conflict claim was pursued against a commercial law firm in relation to a sale and purchase of share capital. Separately, a conflict claim was pursued against a different firm in an executry matter. These examples underline the point that the obligation not to act in a conflict of interest applies to every aspect of legal practice.

In corporate work, where solicitors are acting for a company and for the company directors or shareholders, there might be occasions when the interests of the company conflict with the interests of the individual directors or shareholders. In commercial property transactions, there will be a conflict of interest between landlord and tenant in a commercial lease, and the same firm of solicitors should not act for both parties even if they are established clients. In employment disputes, the solicitor acting for the employer has to make it clear to the employee that he or she is not acting for both sides. All areas of practice are covered by the rules that prohibit solicitors from acting in a situation of conflict.

Identifying and avoiding conflicts

Conflict of interest situations can be difficult to identify, and can arise when least expected.

Lawyers should be aware of external factors that can increase the likelihood of conflict claims arising. These include the movement of lawyers from firm to firm, the large size of some firms, and the development of more intricate interrelationships of corporate clients. There are also internal factors that can increase the likelihood of conflicts arising, such as lack of management oversight or inadequate transaction and client vetting procedures.

In terms of how to spot a conflict of interest between clients, there are questions that solicitors can ask themselves. For example:

1. Would you give different advice to two or more clients about the same matter?
2. Would what is to be done for client A have an adverse impact on something the firm is doing for client B?
3. Does the firm’s duty of confidentiality to client A prevent it from disclosing relevant information to client B because A is unwilling to consent to disclosure?
4. Has client A, having previously agreed terms in a matter with client B, had a change of mind and wishes to depart from the agreed terms?
5. Has a dispute arisen between clients?
6. Are solicitors, having recently joined the firm, now acting on the other side of a matter?

(Note: four of these questions are taken directly from Law, Practice & Conduct for Solicitors (2nd ed), para 7.03.)

Of course, firms should also have an effective conflict checking system in place. There is now case management software available that has conflict checking services integrated within the application.

As indicated in question 3 above, it is sometimes necessary for a solicitor to consider whether they hold confidential information relating to existing or previous clients which it would be impossible to disclose to other clients that have a connection to the matter.

What to do if a conflict arises

Where a conflict of interest is identified at the outset, prior to accepting instructions, a solicitor should obviously decline to act.

However, what if the conflict only becomes clear in the middle of a matter? In these circumstances, one of the best things a solicitor can do is contact the Professional Practice team at the Law Society of Scotland immediately (t: 0131 226 8896; e: profprac@lawscot.org.uk). The team deals with these types of issues on a daily basis and is well placed to help a solicitor come to a view on whether they are indeed in a conflict situation and what to do next. Where there is a conflict, the advice is likely to be that the solicitor should take immediate steps to cease acting for at least one (and probably both) of the parties to the transaction or case. That will usually be enough to prevent the problem from escalating.

Where the solicitor does decide to withdraw from acting because of a conflict, in terms of risk management it is sensible for the solicitor to write to the departing client, advising him or her to consult an independent solicitor.

The decision on how to respond to a conflict or potential conflict is not always easy. It is not in a solicitor firm’s commercial interests to be restricted from taking on business. Solicitors have to work incredibly hard to attract and retain clients and no one wants to send clients (or potential clients) to a competitor firm. However, in relation to conflicts of interest the legal principle should override financial considerations. For any firm who might be wavering on that decision, we would urge that they also consider an assessment of the financial impact of a potential professional indemnity claim against the firm – lost billable hours in defending an action, the payment of the self-insured amount under the Master Policy and the impact on their future Master Policy premiums. These elements can all create significant costs.

While the profession is generally quite good at identifying conflicts, errors of judgment do happen and there have been instances where solicitors have either tried to justify their position in acting in a conflict or have refused to accept the existence of a conflict. Also, there is sometimes a reluctance to stop acting for a client because of a perception that to do so would be even worse than continuing in the conflict situation. However, it is always a mistake to rationalise continuing to act where there is a conflict, and solicitors can end up digging a deeper hole for themselves if they try to do so.

Case study

There are also circumstances where solicitors simply get the rules wrong, as the following case study demonstrates:

“Dear Lockton. A corporate client of the firm acquired the share capital of another client company. Both clients were fully aware that the firm was acting for both companies.

All of the shareholders and directors of both companies signed conflict letters consenting to our firm acting for both sides of the transaction.

“However, some of the former shareholders of the acquired company have now been in touch stating that the practice was in a conflict of interest as the firm was also acting for the prospective purchasers.

“The seller has indicated that they intend to raise a claim.

“Kind regards.”

Analysis

In this example, there is a clear conflict of interest in a firm acting for one client in the acquisition of share capital of another client.

The firm thought it could mitigate the risk by getting the client to consent. However, a conflict of interest is not a matter for the judgment of the client – it is a matter for the judgment of the solicitor. Where there is an actual conflict, the solicitor should not act, regardless of the views of the client.

Solicitors should ensure that they are familiar with the conflict rules and if in any doubt, should contact the Society’s Professional Practice team. Either of these things might have helped, in this example.

And finally…

Remember, where the prime cause of the claim is, or is attributable to, the fact that the insured acted in breach of the conflict of interest rules (B2.1.2 and B.2.1.5), the self-insured amount will be double the standard amount. It is certainly worth knowing the conflict rules well.