This article covers the top four potential conflict scenarios we see when practitioners act for multiple parties and their consequences.
During the COVID-19 pandemic lockdowns we have noticed an increase in the number of enquiries from practitioners about acting for multiple parties with different interests in transactions. The additional difficulties in doing business seem to be causing clients to place pressure on lawyers to “help out” so that transactions are not held up.
As lawyers, we have an innate desire to help clients solve their problems, but even in difficult times it is important to remain mindful of ethical and legal obligations in addressing conflicts of interest.
A fundamental obligation of a solicitor or a law practice is to avoid conflicts between the duties to two or more current clients. Whilst rule 11 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 provides that a solicitor or law practice may act for two or more parties in the same matter if both clients give their informed consent, this is a very difficult standard to satisfy. Rather than attempting to serve two masters, the much better option is to act for only one and ensure the other is referred to another firm.
The scenarios below demonstrate the difficulty in acting in the best interests of each client where their interests conflict or may potentially conflict.
The top four potential conflict scenarios we see, where firms are unable to discharge their duties to act in the best interests of each client, is where they are acting for:
- multiple guarantors
- both borrower and lender
- both vendor and purchaser in conveyancing transactions
- multiple parties in intra-family property transfers.
In the first scenario, practitioners may be asked to provide a solicitor’s certificate for married couple guarantors of a business, where one spouse is a director of the company receiving the benefit of the guarantee, and the other spouse is not involved in the company but owns property in their sole name which will be used as security for the loan. The parties’ interests here are not completely aligned. The spouse with the assets needs to receive robust, independent advice about the risks, which is likely to be against the interests of the director-spouse who wants the loan to go ahead.
Another scenario is acting for both borrower and lender. The practitioner may be informed of an unfavorable valuation of the security property, or that the borrower is in financial difficulty, which they should disclose to the other client to meet their duty of loyalty and disclosure to that client, but can’t because of a duty of confidentiality owed to the first client.
The next scenario is where practitioners act for both vendor and purchaser of property. Conflict can arise in many ways here, placing the solicitor or law practice in a position where it cannot act in the best interests of each client. Examples include:
- the purchaser client cannot obtain finance and wants an extension of the subject to finance clause, but the vendor client has another buyer ready to proceed and wants to get out of the contract
- the purchaser tries to avoid the contract based on no finance approval having been obtained, and the vendor wants to argue the purchaser has not used best endeavours to obtain finance
- an issue has not been disclosed in the section 32 statement that would have entitled the purchaser to rescind the contract
- there is an argument about the interpretation of a special condition or what is a fixture or fitting.
Similar issues arise with practitioners acting for both parties in intra-family transfers of assets. A typical example is where parents or grandparents want to gift real estate, or proceeds of the sale of their real estate, to younger family members on the basis that the older person can live with the family member for the rest of their lives. When a practitioner is first consulted by the family, they get along well and have rarely turned their minds to the arrangement not working out as planned. The parties’ interests are not the same, and the practitioner will be unable to simultaneously act in the best interests of each family member and provide unconflicted advice on risks of the transaction to the asset owner.
LPLC’s claims show that practitioners who act for multiple parties are often caught unexpectedly by conflicts during the retainer, which can sometimes be difficult to anticipate, particularly where the parties appear to be in heated agreement and ask the practitioner to just document the transaction. The damage can be done before you are able to stop acting and there can be significant stress for clients in sending them away to new lawyers just as a critical issue is developing.
In each of these scenarios, LPLC recommends that practitioners only act for one party or interest.
Practitioners acting in a conflict can be exposed to allegations they have breached the professional conduct rules and duties at common law and in equity, as well as allegations that they preferred the interests of one client over another. The consequences can be serious and include:
- a practitioner or firm being restrained from acting in a particular matter
- professional negligence claims (and the imposition of a double excess under the insurance policy)
- personal cost orders
- professional misconduct complaints and disciplinary action
- substantial legal fee write-offs and refunds
- potential reputational damage.
Acting for multiple parties in a matter with the potential for diverging interests is entering treacherous terrain and will expose you to material ethical and liability risks which cannot always be cured by consent. The risks are increased when acting for both sides in a transaction and in the financial uncertainty brought about by the COVID pandemic where parties may look to different avenues to avoid a contract, or to try and find blame with their lawyer if they don’t achieve their desired outcome.
In all the circumstances described above, LPLC recommends practitioners do not act for parties on both sides of a transaction, or otherwise for multiple parties in a single matter where there is the potential for client interests to diverge.
For further information on this topic, please refer to our suggested resources below.