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Conflicts of interest: Recognising and Avoiding

Feature Articles

Cite as: April 2014 88 (04) LIJ, p.50

Avoiding a conflict of interest is an ethical obligation, a breach of which can lead to serious disciplinary consequences or to a lawyer being restrained from acting.

By David Morgan

Conflict of interest is rarely fun for lawyers. Occasionally, when an opponent appears to have a conflict, it can be used to your advantage, but by and large a conflict of interest is bad news. It is bad for business – instructions have to be refused or, worse still, an existing matter must be given up. It is bad for clients, who may be denied their lawyer of choice. And even the general process of conflict searches and management is time-consuming and costly. All of this means it is well worth bearing in mind that there can be effective ways of managing a conflict of interest. But first, is there a conflict at all?

Is there a conflict of interest?

The obligation on all lawyers to avoid a conflict of interest has a number of sources. The first is general fiduciary law, lawyer-client being one of the well-established categories of fiduciary relationship. Relevantly, the fiduciary relationship obliges a lawyer to act at all times in the client’s best interests and always to prefer the client’s interest over his or her own.

Then there is the obligation in rules 4 and 8-11 of the Professional Conduct and Practice Rules 2005 (Rules) to avoid conflict of interest. The Rules are “legal profession rules” as defined in s1.2.1(1) of the Legal Profession Act 2004 and as such are binding on all Australian legal practitioners.1 A breach of the rules may constitute professional misconduct or unsatisfactory professional conduct,2 leading ultimately to disciplinary sanctions.3

As well as leading to disciplinary action, a conflict of interest may result in a practitioner being restrained from acting in a particular matter, litigious or otherwise. There are a number of grounds on which courts can restrain a practitioner from acting in appropriate circumstances.

The Rules are largely replicated in the proposed Australian Solicitors Conduct Rules (ASCR)4 which helpfully identifies three classes of conflicts:

  • Rule 10: conflicts between a current client and a former client;
  • Rule 11: conflicts between two or more current clients; and
  • Rule 12: conflicts with a lawyer’s own interest.

Rule 10 is primarily concerned with confidential information. Even after a retainer has ended, a lawyer has an ongoing obligation to maintain the confidentiality of information received as part of that retainer. If the duty to act in the best interests of a subsequent client would involve divulging that confidential information, the lawyer has a conflict of interest. In Victoria (but not elsewhere in Australia), the decision in Spincode Pty Ltd v Look Software Pty Ltd5 may mean that there is a duty of loyalty owed to former clients that requires more than just the protection of confidential information, but there is some doubt about what this means in practice. It should be remembered that “confidential information” in this context is not just information obtained by a lawyer that is directly relevant to a particular piece of work. It may also include commercially sensitive information that would be of interest to a business competitor. Even a duty to disclose “getting to know you” information about a former client – such as, for example, the circumstances in which an insurer will agree to settle a personal injuries claim – may give rise to a conflict.6

Rule 11 also concerns confidential information. Where the duty to one existing client would require the disclosure of confidential information of a second existing client, there is a conflict of interest. But conflicts can arise in other circumstances as well, most notably where the interests of two clients do not align. Often, lawyers act for two people who appear to have identical interests – for example, vendor and purchaser in a straightforward sale of land, or co-plaintiffs in litigation. Problems arise when, as circumstances develop, their interests diverge. The vendor may want to delay settlement of the sale; one co-plaintiff may be keen to accept the defendant’s settlement offer that is dependent on acceptance by the other co-plaintiff who wants to fight on. A divergence of interest may not be fatal in all cases, but it could mean the lawyer will have to cease acting for both clients.

Rule 12 mainly concerns transactions involving a lawyer, such as lending money to a client or where a lawyer may stand to benefit personally, such as where a lawyer is a beneficiary under a will. It also includes certain statutory prohibitions. A more detailed exposition of this category can be found in the text books.7

A second opinion?

Experience tells us that lawyers are usually the worst judge of whether they have a conflict of interest. The cases are full of examples of lawyers who honestly saw nothing wrong in a situation that to an outside observer clearly involved a conflict.

Although it doesn’t make the law reports, there is no reason to doubt that the opposite also occurs: the over-cautious lawyer who turns down instructions because of a perceived conflict of interest that is in fact not present.

A second opinion will often be an unaffordable luxury, but where the option exists it may be worth taking. A colleague within the same organisation, or better still a fellow practitioner from outside, will bring an objectivity that the lawyer facing the potential conflict of interest does not have. In more complicated situations and where time permits, an opinion of counsel or a ruling from the LIV Ethics Committee can be sought.

Could a conflict arise?

Even if there is no conflict when instructions are taken, it is worth looking forward to the unfolding of the matter. To some extent this is impossible, since lawyering is an unpredictable business, but experience can be a good guide to the sorts of issues that are likely to arise, the ways interests may diverge and the sort of information that may become relevant.

Many of the steps discussed below could usefully be implemented before a conflict arises, since a conflict foreseen is more easily mitigated or managed than one that takes a lawyer by surprise. If there is the prospect of a conflict arising that cannot be managed, a difficult decision may have to be made. Is it better to take on the work knowing that if the conflict eventuates the lawyer may have to cease acting? Or is it better to refuse the work from the outset and avoid an upset client later on?

Informed consent

As noted, one of the main areas where conflicts arise is with confidential information. A lawyer’s duty is to use a client’s confidential information only in the interests and at the direction of that client. This means that a client can consent to the use of its confidential information by another or subsequent client.

Consent, however, must be informed, meaning not just that a client or former client is aware that its information may be divulged to another (or that another client’s information cannot be disclosed to it), but also what the consequences, both negative and positive, are likely to be.8 A former client who knows his or her confidential information is to be used by another client, but does not appreciate that this may expose him or her to a subsequent claim, cannot be said to have given informed consent.

Effective information barriers

If the conflict only arises because of a need to disclose confidential information of one client to another client, it may be possible to use an effective information barrier (sometimes called a Chinese wall), although this is probably only feasible in medium and large firms. The Law Society of New South Wales has issued Information Barrier Guidelines9 which give useful practical guidance to the use of an effective information barrier. To be effective, a barrier must ensure that there is no real and sensible possibility of misuse of a client’s confidential information.10 In practice this will mean:

  • physical segregation of personnel, often in different offices;
  • undertakings not to communicate the confidential information;
  • education programs, that should be in place before the barrier is erected;
  • strict procedures for contact between personnel on either side of the barrier;
  • compliance monitoring; and
  • disciplinary sanction.

Although information barriers are usually used where there is a conflict between existing clients, they can also be used to screen those who have knowledge of a former client’s confidential information from those who are working for an existing client.

In Australia, proposed information barriers have failed where they were set up too late11, were ad hoc,12 or were inadvertently breached.13 But especially in recent years, there are more examples of information barriers that have been upheld by the courts. It may be fair to say that the initial judicial distaste for information barriers exhibited in cases such as D & J Constructions Pty Ltd v Head14 and Mallesons Stephen Jaques v KPMG Peat Marwick,15 has dissipated. This may in itself be linked to the increasing use of information barriers elsewhere in the law and industry, such as the insider trading defence in s1043G of the Corporations Act 2001 (Cth).16

Outsourcing part of the matter

Sometimes two clients have interests that are mostly aligned but diverge on one issue. For example, two business partners instruct a lawyer to draw up various contracts to establish their business and are in general agreement about their business but disagree on whether to use a corporate or trust structure. The lawyer cannot advise them both since their interests diverge. A solution may be for both partners to take advice from separate new lawyers, limited to the question of the form of their business structure. Once this “separate question” is resolved one way or the other, the first lawyer can continue to act for both of them.

This sort of solution is likely to be as attractive to the clients as it is to the lawyer, particularly in complex matters, because it should limit the expenses of both partners briefing new lawyers to take over the whole matter from scratch.

Restraining a lawyer from acting

There are two circumstances in which a person may seek to restrain a lawyer from acting. The first is in litigation, where a party may try to restrain its opponent’s lawyers.17 There are tactical and ethical considerations here. The overarching obligations in the Civil Procedure Act 2010 would require any application to be brought at the earliest opportunity. Tactically, the question is whether you are better off with the devil you know. Are the benefits of successfully obtaining an injunction worth the delays while new lawyers are briefed? Will the new lawyers be less cooperative and less likely to encourage settlement? The second circumstance is in non-litigious matters and will in practice arise mostly in furtherance of the protection of confidential information.

In Victoria, there are three bases for a court restraining a lawyer from continuing to act in a particular matter: to prevent the misuse of confidential information; to prevent a breach of the lawyer’s ongoing duty of loyalty to the client; and as part of the court’s supervisory jurisdiction over its own officers.18 The second basis has not been accepted elsewhere in Australia.19

A court will restrain a lawyer from acting where a reasonable observer would think there is a real and not merely theoretical risk of confidential information of one client being used by the lawyer to advance the interests of another client to the detriment of the interests of the first.20 In practice, this test will make it almost impossible to act if a lawyer personally has confidential information concerning a former client that is relevant to an existing client. Even where the lawyer gives evidence that the information cannot be recalled, the risk has been held to remain.21 In order to act for the second client, there would either have to be no detriment to the first client, or an effective information barrier that screens those people who possessed the confidential information of the first client from those who are to work for the second. An application to disqualify in these circumstances is often the point at which the efficacy of a proposed or extant information barrier is tested.

The court’s inherent jurisdiction to supervise its officers is well-established, and may extend to restraining a practitioner even where there is no danger of the misuse of confidential information.22 This is particularly so in Victoria, where the duty of loyalty to a former client has been held to survive the termination of the retainer.23 An injunction will lie where a reasonably informed member of the public would conclude that a practitioner should be prevented from acting so as to protect the due administration of justice.24 Circumstances in which a lawyer has been restrained as part of the court’s supervisory jurisdiction include: where counsel for one party had previously prosecuted the other party in a criminal proceeding;25 where a lawyer was likely to give evidence of disputed matters;26 and where a firm merged with another firm that had acted for the other party.27 The categories are, of course, not closed.

An application to restrain a lawyer from acting is likely to require considerable work to be successful. Detailed evidence should be led on the nature of any confidential information and those who had dealings with it, or the other facts and matters that are said to give rise to the need to restrain a lawyer. Applicants should be prepared for significant cross-examination of lawyers. Resisting an application may involve similarly detailed evidence about information barriers or why confidential information is not relevant to an existing matter. Despite the difficulties, such applications are far from uncommon, doubtless because of the very real importance of protecting confidential information from misuse by an opponent or third party, and because of the tactical advantages it can give in hard-fought litigation.

Conclusion

Conflicts of interest require forethought; the fundamental principles should always be kept in mind. When this is done, conflicts are manageable and missteps less likely; ethical dilemmas can be avoided and applications for injunctions more effectively brought or defended.



DAVID MORGAN is a barrister practising primarily in commercial and public law, including solicitors’ disciplinary matters.

1. Legal Profession Act 2004 s3.2.17.

2. Note 1 above, s4.4.4(a).

3. Note 1 above, ss4.4.17–4.4.19.

4. Rules 10–12. The ASCR have been developed by the Law Council of Australia and its constituent bodies (which include the Law Institute of Victoria and the Victorian Bar) with the aim of achieving a single, uniform set of solicitors’ conduct rules for all Australian solicitors. They have not yet been adopted in Victoria. A copy is available on the Law Council’s website: www.lawcouncil.asn.au.

5. [2001] 4 VR 501; cf the authorities referred to in Cleveland Investments Global Limited v Evans [2010] NSWSC 567 at [38]-[50].

6. Yunghanns v Elfic Ltd (unreported, 3 July 1998, Supreme Court of Victoria, Gillard J).

7. See, eg, Dal Pont, Lawyers’ Professional Responsibility (5th edn, 2012) Ch 6; Ross, Ethics in Law (5th edn, 2010) [12.46]–[12.50].

8. Clark Boyce v Mouat [1993] 3 NZLR 641 at 646 (PC).

9. Law Society of New South Wales, Information Barrier Guidelines (16 March 2006) www.lawsociety.com.au/idc/groups/public/documents/internetcostguidebook/008728.pdf.

10. Mallesons Stephen Jaques v KPMG Peat Marwick (1990) 4 WAR 357.

11. See, eg, Newman v Phillips Fox (1999) 21 WAR 309.

12. Note 11 above.

13. See, eg, Asia Pacific Telecommunications Limited v Optus Networks Pty Limited [2007] NSWSC 350.

14. (1987) 9 NSWLR 118.

15. (1990) 4 WAR 357.

16. See Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35.

17. The practical and tactical considerations relevant to both sides of a proposed application to restrain lawyers are discussed in detail in Connock, ‘Restraining Lawyers from Acting in the Face of a Conflict: Discussion and Advice in Australia’ (1995) 12 Australian Bar Review 244 at 271–7.

18. Spincode Pty Ltd v Look Software Pty Ltd (2001] 4 VR 501.

19. Ismail-Zai v Western Australia (2007) 34 WAR 379 at [20]-[25]; Cleveland Investments Global Ltd v Evans [2010] NSWSC 567 at [38]-[50].

20. Carindale Country Club Estate Pty Ltd v Astill (1993) 115 ALR 112 at 118.

21. Sent v John Fairfax Publications Pty Ltd [2002] VSC 429.

22. See the cases referred to in Kallinicos v Hunt (2005) 64 NSWLR 561 at 571–583.

23. Spincode Pty Ltd v Look Software Pty Ltd [2001] 4 VR 501.

24. Kallinicos v Hunt (2005) 64 NSWLR 561 at 582; Spincode Pty Ltd v Look Software Pty Ltd [2001] 4 VR 501.

25. Grimwade v Meagher [1995] 1 VR 446.

26. Bowen v Stott [2004] WASC 94.

27. Newman v Phillips Fox (1999) 21 WAR 309.

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