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Ethics: In-house challenges

Ethics: In-house challenges

By Michael Dolan

Conflict of Interest Ethics Practice & Procedure 

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In-house lawyers face some interesting ethical challenges as their client is usually their employer.

Snapshot
  • In-house counsel are lawyers first and their paramount ethical duty is to the court and the administration of justice.
  • Ethical challenges for in-house lawyers can arise very quickly in the course of their daily legal practice.  
  • This article examines several of these ethical challenges through the prism of real-life in-house examples.

High Court of Australia Chief Justice Susan Kiefel wrote: “Lawyers may generally be said to be necessary to the working of the law in all its respects. But it is only the ethical lawyer who is essential to a system of justice”.1

Lawyers must be ethical in the practice of their profession at all times and be mindful always that their paramount duty is to the court and the administration of justice which, on occasions, may conflict with their other ethical duties, including those owed to clients and third parties. 

In this respect, in-house lawyers in their role as legal advisers to corporations, government departments or other bodies or organisations are no different from other lawyers. However, because the client of in-house lawyers is usually their employer, some unique ethical challenges can arise. 

This article touches on some of those challenges by discussing four typical ethics scenarios that can arise for any in-house lawyer, often with very little warning.

Conflict of interest with a twist – company v personal interests

You are employed as general counsel to a company and are instructed by your employer’s People and Culture director to provide legal advice concerning a major corporate restructure following a merger between your company and another larger company. Part of your advice will need to address the legal issues surrounding proposed redundancies caused by the merger including the issue of redundancy salary and benefit packages. 

You are provided with a detailed redundancy management plan as part of your instructions. When you are studying this document, it becomes apparent to you that your role as general counsel is probably going to be one of those to be made redundant since the other company already has a small in-house legal team headed by a more senior and experienced lawyer than you. 

What are the ethical issues arising for you and how should you address them?

Identifying the conflict quickly and managing it ethically

Since the employer of an in-house lawyer is their client, whenever the personal interests of an in-house lawyer do not accord with those of their employer, there is potential for conflict of interest to occur. 

Like all lawyers, those practising in-house have an ethical duty to their employer client to avoid conflicts of interest. When faced with an unavoidable conflict of interest, in-house lawyers must be conscious of the conflict throughout their dealings, declare it openly, clarify the capacity in which they are acting, and cease acting should the conflict become unmanageable. In-house lawyers must, above all else, comply with their professional conduct rules.

Rule 12.1 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 provides that “a solicitor must not act for a client where there is a conflict between the duty to serve the best interests of a client and the interests of the solicitor”.2

In the scenario described above, your ethical obligation is to inform your employer client immediately of the potential conflict of interest, since you are being asked to provide legal advice regarding an employment matter which, in part, involves your own personal interests. Once disclosure is made, it then becomes a matter for your employer as to whether it instructs another lawyer internally to provide the legal advice or briefs the task to an external law firm.

The perennial problem of opinion shopping

You are an in-house lawyer for a radio broadcasting station. Your employer holds a licence to operate – the terms of which require it to report any material breach of its licence to the regulator within 14 days. Your opinion was sought in such a matter and you advised your employer that there had been a material licence breach that should be reported. Your employer was dissatisfied with your advice and sought other external legal advice, which disagreed with your opinion and concluded that no reportable licence breach had taken place. On perusing the external legal advice, and your management’s written instructions on which it was based, you formed the clear view that your employer’s instructions overstated its case and were inaccurate and misleading. 

What is your ethical position and how should you manage the situation? 

In-house counsel owes ethical duties to the company not its individual officers

As an in-house lawyer your ethical duties are owed to the company and not to its individual officers. Initially, you may wish to speak with the external lawyer who provided the legal advice and discuss the issue. Such action may assist resolution of the problem when the external lawyer realises that the legal advice provided was based on inaccurate or incomplete instructions and so inform the company. 

If that does not resolve the issue, you would have an ethical duty to the company to raise the matter with the board for its consideration and decision. A failure by you to alert the board to your concerns about the matter could result in the company breaching its regulatory licence obligations. 

Between a rock and a hard place

You are a young lawyer who applied for and obtained a position as in-house counsel for a company in Australia owned by offshore interests. During the interview, you were reassured to know that your employer is happy for you to brief external solicitors whenever you feel you might need to do so. Your employer has become involved in Supreme Court of Victoria commercial litigation and you are its solicitor on the record. An overbearing managing director and the board chair have instructed you to do things in the litigation which you know are breaches of the Civil Procedure Act 2010 (Vic) by your client. You are not an experienced litigator and your client ignores your advice and instructs you not to seek any external legal advice. 

What is your ethical position? What do you do in that situation? 

In-house lawyers’ paramount ethical obligations are to the court and administration of justice  

This is a difficult position in which to find yourself because, as an in-house lawyer, you cannot just “cease to act” for your client on the basis of “just cause” as you might in private practice. However, you have a paramount duty to the court including civil procedure overarching obligations which attach to you personally. The pressure on you appears to be coming from the top of the company, ie, the board chair and the managing director. You would have an ethical obligation to advise the board (preferably in writing) of the potential breaches of the Civil Procedure Act 2010 (Vic) and the potential adverse consequences of this for the company and its individual office holders. If it’s an area beyond your competence, you’d be obliged to brief the case out externally (and, in reality, you would probably have to give the board the ultimatum that either they pay for external solicitors to be briefed or you would resign immediately from the company and seek the leave of the court to be removed as the solicitor on the record should such leave be required).

It’s not your problem – it’s a management issue

You work as a solicitor in the legal and compliance department of a major financial institution. You were asked to advise on the legality of your employer ring-fencing into one separate group those customers whose personal financial advisers had retired, and then continuing to charge them for services no longer being provided. You investigated what was happening and advised in writing that such a course was illegal and should be stopped and rectified. You have now been advised by senior management that they will consider your advice and then take a senior management decision that will be in the best interests of your employer. 

Senior management instructs you to close your file. You suspect that nothing is going to change and that your advice will be ignored. 

What do you do?

Unethical business behaviour under close scrutiny

The importance of lawful and ethical behaviour in day-to-day business activities came into sharp relief during 2018 in the hearings and reporting of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Even experienced observers and commentators were shocked by many of the revelations that came out of the public hearings, often only after sustained cross-examination by senior counsel assisting the Royal Commission. 

What has become obvious already from that work is the need for financial and other institutions to foster and promote a culture of ethical behaviour within their organisations where the customer comes first. This approach must be endorsed and supported by boards and senior management with the early implementation of intensive staff training and salary incentives for ethical behaviour.

There is an urgent need for financial and other institutions to look inwards to their ethical obligations towards customers and shareholders and commit to honest and transparent behaviour in the future. Only by doing so will they regain the trust of the public, which has now been shown to have unravelled so badly to the detriment of Australian society. 

Lawyers working within these organisations have an important role to play in this regard because, as officers of the court, they have a fundamental commitment to ethical behaviour and are in an ideal position to lead by example and provide expert advice. Being ethical is not only about obeying the letter of the law, it is about doing the right thing when no-one is looking. 

In the scenario described above, you have advised your employer that its activity is illegal and should be stopped immediately. As a solicitor you have a paramount duty to the court and the administration of justice, and you cannot be party to any illegal activity by your employer. Since you work as a solicitor in an in-house legal department you should immediately refer the matter to your managing solicitor or general counsel and seek their professional guidance and assistance. 

Ethical lessons from the Royal Commission

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry handed its final report to the Governor-General on 1 February 2019.

The introduction to the report stated: 

“The central task of the Commission has been to inquire into, and report on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations. 

“The conduct identified and described in the Commission’s Interim Report and the further conduct identified and described in this Report includes conduct by many entities that has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned. 

“Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them.”

The report made four observations:

  • in almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain
  • entities and individuals acted in the ways they did because they could
  • consumers often dealt with a financial services entity through an intermediary
  • too often, financial services entities that broke the law were not properly held to account.

The report made 76 recommendations and these have been accepted in principle by both the federal government and the opposition.

Conclusion

What has become obvious from the work of the Royal Commission and its reports is that it is imperative that all organisations foster and promote a culture of ethical behaviour, one that is characterised by appropriate board and senior management support and endorsement and the implementation of intensive staff training and incentives for such good behaviour. 

There is an urgent need for institutions across the public and private sectors to look inwards to their ethical obligations towards customers, stakeholders and shareholders and commit to honest and transparent behaviour in the future.

Early last year, the Association of Corporate Counsel Australia described the relevance and high value of ethical in-house lawyers to their employer in this way: 

“Corporate culture is widely acknowledged as adding value to companies, both in terms of improving financial performance and in creating an atmosphere that encourages ethical behaviour. Corporate culture is not a topic typically linked to a company’s general counsel and legal department, but the failure to draw that link may prove short-sighted on the part of the board. Given the importance of the general counsel in matters of ethics, compliance, corporate governance, and risk and reputation management, the general counsel should be a key ally and partner in establishing a corporate culture that supports corporate performance without compromising ethical behaviour, and legal and regulatory compliance”.4 


Michael Dolan is special counsel in the LIV Ethics, Wellbeing and Practice Support department. He had assistance from Polly Lowing, Cement Australia corporate counsel, and Virna Trout, FLSmidth Manager Legal-ASEC.

*An earlier version of this article was published in the Autumn 2019 issue of Australian Corporate Lawyer.

  1. High Court of Australia Chief Justice Susan Kiefel AC, Ethics and the Profession of the Lawyer, 26 March 2010, www.hcourt.gov.au/assets/publications/speeches/current-justices/kiefelj/kiefelj-2010-03-26.pdf.
  2. Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, www.legislation.nsw.gov.au/regulations/2015-244.pdf.
  3. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, https://financialservices.royalcommission.gov.au/Pages/default.aspx.
  4. Veta T Richardson, CEO, Association of General Counsel, The General Counsel as a Corporate Culture Influencer (white paper).

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