Time for a fresh look at conflict of interest
The Scottish Law Agents Society (SLAS) has placed two motions on the agenda of the Law Society of Scotland (LSS) AGM on 25 March 2011. One of these concerns conflict of interest. The revised text, agreed with the LSS, is as follows:
"The members of the Law Society of Scotland in General Meeting
"(1) find that it is essential in the public interest in having access to an independent legal profession and the provision of independent legal advice and representation that (a) solicitors should not provide such advice or representation to two or more persons where there is a significant potential conflict of interest; (b) circumstances have changed significantly since the promulgation of the 1986 Rules which allowed certain exceptions to rule 5 of the Solicitors (Scotland) Practice Rules ('the 1986 Rules'); and
"(2) call upon the Council of the Law Society of Scotland to examine the said exceptions and decide whether or not all or any of the said exceptions remain appropriate now and if not to pursue changes to the 1986 Rules."
A straightforward principle
Rule 3 of the Solicitors (Scotland) Practice Rules 1986 ("the Conflict of Interest Rules") provides that:
“A Solicitor shall not act for two or more parties whose interests conflict”.
Rule 5 of the Rules goes on to make further provisions for conveyancing, prohibiting the same firm from acting for seller and purchaser; landlord and tenant; or lender and borrower; but with certain exceptions.
The exceptions which are allowed are extensive and wide ranging. Indeed I would argue that they drive a coach and horses through the general principle.
An observed effect of these exceptions is that solicitors are being trained to think in terms of “Can I get my case to fit into one of the exceptions, and if not can I obtain a waiver?”, rather than “How can I comply with rule 3?”
The exceptions seem designed to encourage the practice of solicitors viewing the principle as something that can and should be got round.
The exceptions
(a) Associated bodies exception
For practitioners, the main exception in practice is associated companies in a group.
What is wrong with choosing one party for whom to act? Thus one company can instruct a solicitor to act for them and the solicitor can write to the other company confirming that what they are being asked to sign is a legal document and can suggest that the other company take independent legal advice. The other company then has the choice of taking its own independent legal advice but is not being in any way offered advice by the solicitor acting for the first company.
Is that not more in line with the general principle and safer for solicitors?
(b) Connected persons exception
Related to (a) above and (c) below.
(c) The family exception
Possibly an exception that most practitioners would prefer to be retained.
While I have sympathy for this view I am now more in favour of removing this exception. Here are some of the reasons:
1. Families can be close, but they can also be or become dysfunctional or subject to infighting or war. Why are families treated differently? A single solicitor acting for the family or a part of the family that is agreed on a course of action can be a breeding ground for complaints after the event if they fall out.
2. Smith v Bank of Scotland and related cases, all post 1986, demonstrate the effect of actual and possible influence. The cases seem to suggest that influence is more likely in family cases than in others. It is very easy for a family member to say that they were pressurised into signing a guarantee. That is particularly the case with husband and wife.
These cases make clear that such a family member needs to be warned of the legal effect of the document and requires to be advised to take separate legal advice. The courts seem to approve that it is the advice of the right to seek separate legal advice that is important, and not whether advice is actually taken.
3. Society has moved on. Exception (c) does not include cohabiting couples.
There is guidance regarding cohabiting couples published by LSS on their website under the heading “Cohabiting couples. Pre-nuptial, cohabitation and separation agreements – conflict of interest (October 2006).”
This followed the Civil Partnership Act and the Family Law (Scotland) Act 2006.
See an example of the inconsistency with the 1986 Rules in the full discussion paper.
(d) Established clients exception
I do not understand why this exception exists. It seems indefensible.
Perhaps the justification is that both clients have used a firm before and both are happy with that firm, and so do not wish to go elsewhere for legal advice. There may be a difficulty for the solicitor in choosing one client as opposed to another. It may be embarrassing for a solicitor to choose when both may have been established clients for a very long time.
Nothing seems more damaging to a firm than a problem or issue arising or being perceived to arise and one or both parties do not think you have protected them. At that time you may need to stop acting for both, or choose one and offend the other.
(e) Advice desert exception
In certain locations it may be difficult for clients to instruct a separate local solicitor.
The internet has happened since 1986. The whereabouts of a solicitor are simply not as important as previously. Advice can be sought from outwith the vicinity by use of email, and if a face-to-face meeting is required it can be by Skype or webcam.
(f) Borrower/Lender Exception
An important part of this exception is the reference to the prior agreement of the parties on the terms of the loan and that the security is in effect “execution only”. Thus if one solicitor acts for the buyer who is also a borrower, and for the lender, then there is no duplication of work or of expense.
Lenders’ requirements in 1986 were quite different from current requirements. Requirements have been heaped on to the borrower/lender solicitor (BLS), and it appears commonplace to expect utmost good faith from the BLS and knowledge by the BLS must be passed on to the lender if it would affect the decision to lend.
The BLS has a duty of confidentiality to the borrower and is being put under a duty to the lender that requires disclosure. If a separate solicitor is acting for the lender he/she will only know what the lender has told him/her, and will report anything untoward that comes up during the transaction, but will not know the confidential information of the borrower and be under a duty to disclose it.
The practical effect of this is to erode client confidentiality or put the BLS in a conflict of interest situation with regard to that issue requiring him/her to cease acting.
A reason for retaining the exception is that the BLS can do everything necessary to meet the date of entry and control things much better than if he/she has to run everything he/she has decided past a separate lender solicitor. An effect may be a slowing of conclusion of missives while a solicitor for a borrower wants to know that the lender’s solicitors will accept the title or other related issue position.
Another reason for retaining the exception may be that if abolished, it will increase expense. However I make the following comments:
- A borrower need not be represented. He/she can decline separate representation.
- A borrower may choose to instruct someone to act on his/her behalf. Consumer choice.
- The paperwork is weighted in the lender’s favour but the lender will not amend its pro forma styles. Is there any point in a separate solicitor acting?
- If all solicitors cannot act for both borrower and lender there is a level playing field.
- Any increase in fees is likely to be modest. It is possible that a lender faced with the new rules may decide to pay for its own representation, or offer a payment towards fees, or add them to the loan. I question why lenders expect the borrower to pay for this anyway?
- Acting for both parties is not allowed in all but de minimis cases re commercial loans. There is no reason why that should not apply to domestic loans.