Guidance Related to Rule B2.1: Conflict of Interest Generally

A. Conflict of Interest Generally

It is a well established principle that solicitors should not act for clients where there is a conflict of interest between them. This is codified in rule B2.1.2 which states that "You shall not act for two or more parties whose interests conflict." That statement is entirely unqualified and is the guiding principle which governs the rest of rule B2.1. Conflict of interest is amplified in rule B1.7 which states that:

"1.7.1 You must not act for two or more clients in matters where there is a conflict of interest between the clients or for any client where there is a conflict between the interest of the client and your interest or that of your practice unit.

1.7.2 Even where there is only a potential conflict of interest you must exercise caution. Where the potential for conflict is significant, you must not act for both parties without the full knowledge and express consent of the clients."

The rules do not contain a definition of conflict of interest. It has been said that it is hard to define but you know it when you see it. Unfortunately some only seem to see it long after it has appeared and when it is too late. There are three elements that need to be considered. First, if you would give different advice to different clients about the same matter there is a conflict of interest between them. It does not matter that the clients may be agreed about what they wish to do. Second, if your actings on behalf of one client would have an adverse impact on a matter you are dealing with for another client, there is a conflict, even if on the face of it the matters are unrelated. Third, if you are unable to disclose relevant information to one client because of a duty of confidentiality to another client there is a conflict of interest. This also means that if you cannot act for one of them you cannot breach confidentiality in telling them about that.

Conflict of interest is not a matter for the judgment of the client - it is a matter for your judgment. Only you have the breadth of experience, training and knowledge to fully advise a client where his interest lies. Jane Ryder in her book Professional Conduct for Scottish Solicitors states, "Where facts are disclosed to a solicitor on behalf of one client which may be prejudicial if disclosed to another client without the authority of the first, there is almost certainly a conflict of interest. ................... the critical test is whether the solicitor can adequately discharge all duties to his or her respective clients equally?" (Pages 61 and 62).

The Discipline Tribunal have expressed concern in their Annual Reports about continuing failure to recognise a conflict of interest and follow the appropriate rules.

This obligation extends to all outsourced providers of your services.  Specifically they should be required to have systems in place to ensure that they comply with Rule 1.71. and 1.7.2.

Rule B1.7 is based on the CCBE Code of Conduct for European Lawyers The latter states (at 3.2) that "A lawyer may not advise, represent or act on behalf of two or more clients in the same matter if there is a conflict, or a significant risk of a conflict, between the interests of those clients. A lawyer must cease to act for both or all of the clients concerned when a conflict of interest arises between those clients and also whenever there is a risk of a breach of confidence or where the lawyer's independence may be impaired. A lawyer must also refrain from acting for a new client if there is a risk of breach of a confidence entrusted to the lawyer by a former client or if the knowledge which the lawyer possesses of the affairs of the former client would give an undue advantage to the new client".

Many foreign jurisdictions prohibit lawyers acting for two parties to a matter even where there is only a potential conflict of interest, unless the clients consent to it. Such consent has to be informed consent which means explaining to the clients the implications of the common representation and the advantages and risks involved. Rule B1.7 deals with this in Scotland. Caution must be exercised and where the potential conflict is significant, informed consent of all clients affected must be obtained. The question of informed consent is considered in some detail in some American states. For example, in Massachusetts they take the view that "when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the clients consent. When more than one client is involved, the question of conflict must be resolved as to each client. Moreover there may be circumstances where it is impossible to make the disclosure necessary to obtain consent". These considerations are equally relevant to Scotland.

This brings us to the conflict between confidentiality and disclosure.

These two fundamental principles underpin the practice of a solicitor. The privilege of confidentiality is recognised by the Courts as being essential to provide a basis of trust between solicitor and client to ensure that the advice given by a solicitor to a client is based on a full disclosure of the facts. Apart from exceptional circumstances clients can expect that what they disclose to their solicitor will not be passed on to anyone without their knowledge and consent. At the same time solicitors are charged with the equally important duty to clients to act in their best interests which requires solicitors to disclose to their client all and any relevant information within the solicitor's knowledge to enable the client to make an informed decision on the matter in hand.

The nature of these two duties is such that, apart from exceptional circumstances such as the future commission of a crime neither can take precedence over the other. It follows therefore that if a solicitor has information which would be relevant to a client but which he requires to keep confidential in the interests of another client, there is a conflict of interest between those clients. That applies to all solicitors within the practice unit unless there are formal Chinese Walls as described in the reported case Bolkiah v KPMG [1999] 2 WLR 215 - see also Guidance on Confidentiality.

Turning now to some specific situations in which actual or potential conflict of interest arises:

Conflict of Interest in Civil Court Matters

1. Matrimonial

It is trite to say that you should not sue your own client, but the question of conflict in court matters goes further than that. In matrimonial cases (including civil partnership and co-habiting couples) the same firm of solicitors should not act for both parties in negotiating a separation agreement - or even in preparing a document that reflects the parties' own agreement. The parties have separate interests and the same practice unit should not act for both of them. If one of them refuses to get separate independent advice, they cannot be forced to do so but you should ensure that you only act for one.

You would be entitled to deal with the other as an unrepresented party - in which case you must (in terms of rule B2.1.7), advise the unrepresented party in writing when sending a document for signature that such signature would have legal consequences and they should seek independent legal advice before signing. It is also prudent to say in terms that you are not acting for or advising that party on the matter. You should not spell out what the consequences might be as that would be giving advice. If the unrepresented party does not obtain separate advice and signs and returns the document to you, you would be entitled to treat it as delivered on behalf of your client and to deal with it accordingly. (Inglis v Inglis 1999 SLT 59).

In 1998 the Discipline Tribunal found a solicitor guilty of professional misconduct for failing to comply with the then equivalent of rule B2.1.7 and said that whatever pressures might be put upon the solicitor "where professional obligations arise it is not sufficient for a solicitor merely to follow the instructions of his client."

In many separations the jointly owned home will require to be sold. The Professional Practice Committee first issued a Guideline about this in 1994. The current version states that unless the parties have agreed in writing how the sale proceeds will be distributed (either as part of a wider agreement or as a separate standalone agreement) neither of the solicitors firms acting for the individuals should act in the sale. A separate firm should be instructed. In a reported case (Dawson v. R. Gordon Marshall & Co. 1996 GWD 1243 issue of 21st June) Lord Osborne held that by not accounting to the husband for his share of the proceeds in accordance with the title, the solicitors had acted improperly. In that case the solicitors in fact had retained the balance of the proceeds and were in a position to implement the court's decree but they also required to meet the expenses of a defended proof in the Court of Session.

If the parties have reached written agreement dealing with the free proceeds, and that means an agreement signed by the parties themselves, the solicitor acting for one of the parties in the matrimonial affairs may act in the sale but must account to both parties in accordance with the signed agreement. He cannot accept unilateral instructions from one of them to alter that. That would be a conflict situation requiring him to immediately withdraw from acting. The mirror image is that if you are consulted by a couple in connection with the sale of their jointly owned property and at that time or subsequently you discover that they are either separated or in the process of splitting up you would be entitled to accept the instructions to act in the sale, but you would require to advise each of them to seek separate independent advice in relation to their personal position. Unless and until a written agreement dealing with the free proceeds is intimated to you at the time or before the sale settles you require to account to the parties in accordance with the title. You cannot under any circumstances accept unilateral instructions to do otherwise. If both parties wish some other division that needs to be confirmed by both in writing. It is not something which the practice unit acting in the sale can give any advice about.

If the property is not in joint names there is a clear conflict of interest between each of the couple and you could not act for both of them at any stage.

2. Other Civil Court Cases

The real questions are whether there is an actual conflict of interest - or a significant potential conflict - and whether you have confidential information which would be of benefit to the other party. You also need to have regard to other people in the practice unit who may be dealing with a different matter. As an example, a question arose some years ago in a large city firm where the Court department acting in an action for payment lodged an inhibition against the defender company, but the Conveyancing department were acting for that company in a totally unrelated transaction. It is important to have a system which will disclose any matter in which the firm are acting - or have acted - for the party with whom your client is in dispute.

3. Criminal Matters - Acting for co-accused

The Code of Conduct for Criminal Work (which continues unaffected by rule B1) states in Article 2, "You shall not accept instructions from more than one accused in the same matter." There is always a potential for conflict between co-accused. For example if one pleads guilty he becomes a compellable witness against the other. Witnesses do not always come up to precognition. A solicitor who accepts instructions and subsequently has to abandon one of the clients is placed in a compromised position not only by virtue of having potentially breached the practice rules but also by virtue of being likely to possess confidential information relating to the client for whom he has had to cease acting. Unlike the rules the Code is a statement of best practice and there may be particular circumstances where you can act for co-accused but you need to consider the specific facts and exercise your professional judgment and also obtain the clients' informed consent. Rule C4.4 prohibits solicitor advocates from acting for more than one accused person "save in the most exceptional circumstances".

Conflict of Interest in Conveyancing

Conflict in conveyancing transactions is dealt with in rules B2.1.4 to 2.1.6. Rule  B2.1.4 is without prejudice to the generality of rule B2.1.2 (see above) and has the effect - reading short - that the same individual solicitor or practice unit shall not at any stage (see below) act for both seller and purchaser, landlord and tenant, or assignor and assignee in a lease of heritable property for value, provided that where no dispute arises or might reasonably be expected to arise, and the seller of residential property is not a builder or developer, the rule shall not apply in certain particular situations. It is worth bearing in mind that when something goes wrong and a complaint is made to the Society or a claim is made under the Master Policy, the circumstances will be looked at with the benefit of hindsight. With hindsight it is clear that the disputes that regularly arise in conveyancing transactions are all disputes which could reasonably have been foreseen, such as difficulties with the title; unauthorised alterations; or problems with the purchaser's funding. If a dispute does arise in the middle of a transaction where the same individual or practice unit is acting for both sides, the party acting must take immediate steps to cease acting for at least one of the parties and advise them that they should consult an independent solicitor. It is almost always a mistake to attempt to resolve matters and you are generally digging a deeper hole for yourself if you try to do so. It must always be remembered that the rules are there not only for the protection of clients but also for your protection.

The exceptions to the general prohibition in rule  B2.1.4 are - again reading short - (a) associated companies or public bodies; (b) connected parties; (c) parties related by blood, adoption marriage or civil partnership; (d) established clients; and (e) where there is no other solicitor in the vicinity whom the client could reasonably be expected to consult.

Categories (a) and (b) of the exemptions do not cause any difficulties but "associated companies" means companies in the same group structure, not merely ones which have some or all of the directors and/or shareholders in common. Category (c) - parties related by blood etc - is not restricted to any particular degree of relationship but it is unwise to stray beyond the forbidden degrees of marriage/civil partnership.

The most commonly used exemption is the established client - category (d). An established client is defined as "a person for whom you have or your practice unit has acted on at least one previous occasion". The Professional Practice Committee is of the view that this does not mean that you require to have ceased acting in the previous matter - it can be a continuing matter. It must however be a matter in respect of which you have opened a file with something that the client could be charged for even if he has not in fact been charged for it or may never be charged for it.

Category (e) - no other solicitor in the vicinity - has been interpreted by the Committee as restricted to isolated rural and island communities. It is not applicable anywhere in central Scotland. The matter was raised in connection with a small Highland town which had one full time and one part time solicitors' practice. The Committee decided that this exemption was not available even in that situation, where the nearest other town with a firm of solicitors was nine miles away.

In every case where you are acting for both parties by virtue of categories (c), (d) or (e) of rule B2.1.4, rule B2.1.4 requires that both parties be advised by you at the earliest practicable opportunity that you have been requested to act for them and that if a dispute arises they or one of them will require to consult an independent solicitor. You must confirm this advice in writing "as soon as may be practicable thereafter". This does not mean when the offer has been submitted or is about to be submitted. It means when you are first instructed by the purchaser in respect of a property you are selling or in which you know you are to be instructed by the seller if the sale is being dealt with by an external estate agent. Advising both clients that you are acting for both is clearly necessary to obtain informed consent.

These letters - formerly known as Rule 5 (2) letters - are mandatory and even if you are entitled to act and there is no conflict of interest, failure to send out such a letter is a breach of the rule. Although you may think that that will not matter if there is no actual difficulty, when the Society's Financial Compliance Inspectors carry out a routine inspection of your practice unit they will ask for files where the firm has acted for both buyer and seller and report back to the Society where no such letters appear in the file. That may lead by itself to a complaint of professional misconduct. Indeed in its Annual Report for 1998 the Discipline Tribunal highlighted a case where they found a solicitor guilty of misconduct for not complying with this rule. The Tribunal said "it does not mitigate the gravity of any breach that none of the clients involved had been prejudiced or were dissatisfied with the solicitor's conduct of the transaction".

"At any stage"

As mentioned above, rule B2.1.4 prohibits you from acting "at any stage". This is interpreted strictly. For example

(1) Acting as an estate agent only is acting at a stage for the seller even if all offers are to be submitted to a different firm of solicitors. You would not be entitled to act or give any advice to a prospective purchaser who does not fall within one of the exemptions, but note later comments on the potential availability of waivers in certain circumstances.

(2) Giving advice about a mortgage or finance for a property is acting at a stage. Again you would only be able to give such advice to a prospective purchaser who is an established client or in respect of whom one of the other exemptions is available. This means you have to be careful about what you say in your property particulars if you are selling the property. If you market your mortgage advice service in your property particulars you must include a notice that you may not be able to act for the recipient.

Builders and Developers

Of course you cannot give any advice to a purchaser at all if you are acting for a seller of residential property who is a builder or developer. Firstly, a Housing Association is a developer. Secondly, a person who is by trade a builder or developer selling in the course of his business houses or plots which are part of a larger development is clearly a developer, but such a person selling a site or house as a single unit and not part of a larger development has also been treated by the Discipline Tribunal as a developer. For example a builder selling a house which has been bought as a trade-in would still be a builder for the purposes of rule B2.1.4.

Thirdly, a person who is not by trade a builder or developer but is selling individual plots or houses which are part of a larger development has the temporary status of a developer (e.g. a farmer selling residential plots in a field).

However a person who is not by trade a builder or developer but is selling a single plot or site is not regarded as a developer. A solicitor acting for such a seller who is consulted by the purchaser would be entitled to act for the purchaser if he falls within one of the exemptions to the rule. That is again always provided there is no actual conflict of interest between the parties and no dispute is reasonably likely to arise - which will remain a matter for the judgment of the solicitor - and provided informed consent is obtained. In such transactions there could well be conflicting interests e.g. rights of access; other servitudes; maintenance of private roadway; etc. The safest way to avoid such difficulties is to decline to accept instructions in the first place.

Conflict of Interest in relation to Loans

1. General

Rule B2.1.4 also deals with acting for lender and borrower. In terms of rule B2.1.4 (f) the terms of the loan must have been agreed between the parties before you are instructed by the lender and the granting of the security must only be to give effect to such agreement. You must always remember that the lender is also a client. The lender/borrower rule is still subject to the question of an actual conflict of interest or a dispute which may reasonably be likely to arise. Difficulties have arisen in a number of cases which have been reported - mainly in relation to commercial securities, but the lessons are also relevant to domestic security transactions. There are some extremely valuable articles by Professor Robert Rennie in the Journal of April 1994 (the lenders need to know); February 1995 (the expanding duty of care) and October 1995 (certificates of title). There was also a useful item in the Caveat column in the Journal of February 1995 at Page 71.

2. Commercial securities

In relation to commercial securities there is a specific Practice Guideline advising that banks would normally instruct their own solicitors except in what they regarded as de minimis cases (now below £250,000). The Guideline gives a number of examples where there is a greater scope for conflict of interest in commercial transactions.

3. Home secured for business loan

Another area of difficulty in relation to loans is where the jointly owned home is to be put up as security for a business loan to only one of the owners. There is a clear conflict of interest between the owners and you should not act for both of them. Not only must you make it clear that you are not acting for the owner who is not getting the benefit of the loan, when sending the standard security for signature by that person you must accompany it with a letter in terms of rule B2.1.7 as stated earlier (see Matrimonial). In the case of Smith v the Bank of Scotland (1997 SLT 1061) the House of Lords decided that the lender has a duty to advise such a joint owner to seek independent advice. This will only focus attention back on the solicitor acting for the lender. In Forsyth v Royal Bank of Scotland (2000 SLT 1295) Lord Macfadyen decided that the lenders had a valid security where the same solicitors acted for lender, borrower and guarantor. While this is all very well for the lender, it leaves the solicitor open to a claim and/or complaint from the guarantor.
The matter was further considered by the English Courts in Royal Bank of Scotland v. Etridge and Zwebner v. Mortgage Corporation Ltd. in relation to the duties owed to a spouse who is asked to put up her share of the matrimonial home as security. (See Article by Alistair Sim in Journal of March 1999 at Page 40 also on www.lawscot.org.uk)

4. House purchase funded by relative

A further specific area in relation to loans to be wary of is the house purchase (e.g. by an entitled tenant) which is being funded by other members of the family. There are clearly different interests to be protected in these situations. The entitled tenant is entitled to the discount as a statutory right. He or she may also be entitled to security of tenure. The person putting up the money is entitled to have that investment protected or at least to get advice about that. Should this be by Standard Security? What about interest and terms of repayment? It is essential to recognise that these interests may not have been addressed by the parties themselves, and you need to make sure that these matters are fully understood by the parties and that there is no dispute between them about what is to happen before you can act.

5. Ranking Agreements

There is a conflict of interest between lenders in relation to a Ranking Agreement and you should not act for more than one lender even in de minimis cases.

Consideration should also be given to whether there is a conflict of interest between lender and borrower in relation to a Ranking Agreement. Whether there is will depend on the particular circumstances of each case, and if you are instructed to act for both the borrower and one of the lenders you should exercise your own professional judgment about that. As stated in rule B1.7.2, informed consent of the clients must be obtained if there is a significant potential for conflict of interest.

6. Your own security

Finally, in relation to loans - and not strictly speaking conflict of interest - the Society gets a considerable number of enquiries from solicitors about their own purchase and sale. The matter is governed by rule B6.21 (Accounts etc rules). That rule means that the practice unit cannot act for the lender in the creation, variation or discharge of a Standard Security where the borrower is a manager, the spouse of a manager, or a company or a partnership in which either of them have an interest. The definition of loan is wide enough to include a guarantee or a loan to children, parents or others. In relation to discharges there is an exception where the borrower's obligations under the Standard Security have been fully implemented before a discharge is obtained from the lender. That means where the loan has been repaid in the natural course or out of funds not deriving from the sale of the property. For further guidance see Guidance related to Rule B6 (the Accounts Rules).

Conflict of Interest in relation to Commercial Matters

In a small jurisdiction like Scotland where there is a relatively small number of firms dealing with major commercial clients it is not uncommon for a practice unit to be instructed by two or more different clients seeking to bid for the same project. There is clearly a significant potential conflict of interest between such clients and an obligation to keep matters confidential which may give rise to tension with the duty of disclosure. This has not been the subject of previous specific guidance from the Society but now comes within rule B1.7.2. If clients give informed consent to information barriers - or Chinese Walls as they were described in the Bolkiah case- and those barriers are properly put in place, the firm may act for different clients competing with each other for the same project if bids are to be submitted at a closing date. However, if one client wishes to make a pre-emptive bid that would be an actual conflict of interest. The Society accept that clients in business - particularly substantial clients - are better able to give informed consent in such circumstances than ordinary members of the public. (See also separate Guidance on Confidentiality where the Bolkiah case is considered in more detail).

Waivers

The Council have the power to grant a waiver and the Society's Professional Practice department receives several waiver requests every week. Waivers are quite regularly granted in respect of rule B2.1.4 but not for rules B2.1.2, B2.1.5, or B2.1.7. For more information on the circumstances where waivers are granted see Journal of September 2002 Pg 47. It should be noted that rule B1 may not be waived and that rule must be complied with at all times.

As detailed above the Professional Practice Committee has always been of the view that acting for the seller as an estate agent only is acting "at any stage", even if all offers are to be submitted to a different firm of solicitors.  However, where solicitors are only providing estate agency services to a builder/developer in respect of properties being sold at a fixed price with a standard missive which will be submitted to and negotiated with a different firm of solicitors, it may be appropriate for a waiver to be granted to allow the firm which supplied those estate agency services to act for an established client who wishes to purchase one of the properties, provided that the solicitors seeking the waiver have satisfied themselves that there is no actual conflict of interest between the parties and no advice on the value or price will be sought by the developer from the solicitor acting as estate agent. Requests for such waivers should be submitted to the Society's Professional Practice department. It is stressed that this does not constitute any change to Rule B2.1.

Getting it wrong

As stated above, if it goes wrong it will all be looked at with the benefit of hindsight. A breach of the conflict of interest rules will lead to a double deductible (double excess) as well as a potential finding of professional misconduct.

Although in many situations the clients will want it all done as cheaply as possible, that is their problem.

The golden rule in this, as in all other professional practice matters, is never to convert your client's problem into your own professional problem. If you are faced with a finding of professional misconduct and/or an expensive insurance claim, it could be the most costly fee you have ever earned.

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