And, by way of update to my post “Finally, some scholarship on Australian lawyers’ conflict of duties”, here is a long article on conflicts of duties in America, “I’m All Verklempt!” by Kendall M. Gray et. al., including a long analysis of the Yanks’ position on Chinese walls. The relationship between establishing a conflict of duties and the entitlement to compensation of one of the people to whom the conflicting duties is owed is a bit complicated in Australia. It certainly does not follow that every breach of fiduciary duty gives rise to a right to money in the victim from the lawyer. But in Texas, there is a principle of fee forfeiture which applies in cases of clear and serious breaches of fiduciary duty, a remedy born in Burrow v. Arce 997 S.W.2d 229 (Tex. 1999). Where an attorney was found to have grossly overcharged, fee forfeiture was imposed so that the attorney lost all his fees rather than just those which exceeded a reasonable fee: In re Allied Physicians Group, P.A., No. 397-31267-BJH-11, Civ. A.3:04-CV-0765-G, 2004 WL 2965001, at *5 (N.D. Tex. Dec. 15, 2004) (unpublished), aff’d, 166 F. App’x 745 (5th Cir. 2006).

Mr Gray’s style cannot be described as stuffy, and exemplifies what is good about Texas, namely plain talking:

‘Rarely does one recognize a fork in the road where the devil sits on one shoulder and an angel on the other, while one is completely verklempt about whether to do the “right thing” or sell one’s soul.

For example, I daresay that not a single participant in any accounting scandal went to the 9:30 team meeting and suddenly suggested:

You know what, fellas? These reporting standards are really pretty restrictive and kinda vague. If we just blow through some stop signs and rubber stamp some deals, our consulting group can make a boat load of money. Are you with me?

Real life is not like that. What ends as a disaster seldom begins with warning bells. On
the contrary, it “feels right” and can easily be rationalized, often until close to the end. At that point, one watches the evening news and sees [onself portrayed as] the “Spawn of Satan.”’

• the concept of the independence of the bar;
• the regulatory regime for barristers;
• duties to the court;
• duties to the client;
• conflicts;
• fees;
• direct access;
• etiquette;
• special duties in criminal cases; and
• common grounds of ethical complaint or negligence.

It also contains the full text of the Bar’s Constitution, the practice rules, the parts of the Legal Profession Act, 2004 dealing with fees, a list of approved direct access bodies, and a collection of bulletins from the Bar’s Ethics Committee.

(1) (Introduction)

(a) This rule sets out provisions for dealing with conflicts of interest other than
those conflicts in relation to conveyancing, property selling or mortgage
related services which are dealt with in rule 6.

(b) This rule applies to a regulated individual and a regulated practice.

(c) Conflicts between the duty of confidence and duty of disclosure owed by an
individual or a practice to two or more clients are dealt with in rule 16E.

(2) (Duty not to act)

(a) You must not act if there is a conflict of interests (except in the limited
circumstances dealt with in paragraph (3)).

(b) There is a conflict of interests if:

(i) you owe, or your practice owes, separate duties to act in the best
interests of two or more clients in relation to the same or related
matters, and those duties conflict, or there is a significant risk that
those duties may conflict; or

(ii) your duty to act in the best interests of any client in relation to a matter
conflicts, or there is a significant risk that it may conflict, with your own
interests in relation to that or a related matter.
(c) For the purpose of paragraph (2)(b) above, a related matter will always
include any other matter which involves the same asset or liability.

(3) (Exceptions to duty not to act)
(a) You or your practice may act for two or more clients in relation to a matter in
situations of conflict or possible conflict if:

(i) the different clients have a substantially common interest in relation to
that matter or a particular aspect of it; and

(ii) all the clients have given in writing their informed consent to you or
your practice acting.

(b) Your practice may act for two or more clients in relation to a matter in
situations of conflict or possible conflict if:

(i) the clients are competing for the same asset which, if attained by one
client, will make that asset unattainable to the other client(s);

(ii) there is no other conflict, or significant risk of conflict, between the
interests of any of the clients in relation to that matter;

(iii) the clients have confirmed in writing that they want your practice to act
in the knowledge that your practice acts or may act for one or more
other clients who are competing for the same asset; and

(iv) unless the clients specifically agree, no individual solicitor acts for, or
is responsible for the supervision of, more than one of those clients.
(c) When acting in accordance with paragraphs (3)(a) or (b) above it must be
reasonable in all the circumstances for you or your practice to act for all those
clients.

(d) If you are relying on the exceptions in paragraphs (3)(a) or (b) above, you
must:

(i) draw all the relevant issues to the attention of the clients before
agreeing to act or, where already acting, when the conflict arises or as
soon as is reasonably practicable, and in such a way that the clients
concerned can understand the issues and the risks involved; and

(ii) have a reasonable belief that the clients understand the relevant
issues; and

(iii) be reasonably satisfied that those clients are of full capacity.
(4) (Conflict when already acting)
If you act, or your practice acts for more than one client in a matter and, during the
course of the conduct of that matter, a conflict arises between the interests of two or
more of those clients, you, or your practice, may only continue to act for one of the
clients (or a group of clients between whom there is no conflict) provided that the
duty of confidentiality to the other client(s) is not put at risk.

(5) (Accepting gifts from clients)
Where a client proposes to make a lifetime gift or a gift on death to, or for the benefit
of:

(a) you;
(b) any proprietor or employee of the practice; or
(c) a family member of any of the above
and the gift is of a significant amount, in itself or having regard to the size of the
client’s estate and the reasonable expectations of the prospective beneficiaries, you
must advise the client to take independent advice about the gift, unless the client is a
member of the beneficiary’s family. If the client refuses, you must stop acting for the
client in relation to the gift.

(6) (Public office or appointment leading to conflict)
You must decline to act where you, or another proprietor or employee in your
practice, or a member of your family holds some public office or appointment as a
result of which:

(a) a conflict of interests, or a significant risk of a conflict, arises; or

(b) the public might reasonably conclude that you, or your firm, had been able to
make use of the office or appointment for the advantage of the client; or

(c) your ability to advise the client properly and impartially is inhibited.

(7) (Waivers)
Notwithstanding Rule 17 of these rules, the Council of the Law Society shall not have
power to waive any of the provisions of this rule.”

Legal Services Commissioner v JAF [2006] VCAT 581 (Cullity, Shattock, Hannebury) Acting for vendor and purchaser; conflict between duty and interest (of solicitor’s associate)

The Full Tribunal were not impressed with this solicitor who acted for the vendor and the purchaser which was a trust of which his wife was a beneficiary, but did the rule they relied on extend to prohibit acting in the face of a conflict between duty and the interest of an associate?A part-complete subdivision had been for sale for many years. The owner’s estate agent instructed the solicitor on behalf of the owner to draw a fresh s. 32 statement, the old one having become stale. That was in May, and in October, a company of which the solicitor was the secretary, and of which he and his wife were the sole directors and shareholders, purchased the property for $130,000 as trustee for a unit trust in which his wife and another (Mr Rees) held an equal interest. The solicitor acted for both the vendor company and the purchaser company.

Settlement occurred in December. On the eve of settlement, the solicitor received and read a fax from Mr Rees attaching an offer by the Director of Housing to purchase the land for $270,000 from the trust, once the trustee company became the registered proprietor. The price was conditional on the trust finishing off the subdivision which the vendor had stalled for several years (a substantial expenditure which was unfortunately not quantified in the reasons so that it is impossible for the reader to know whether the purchase resulted in (or might be expected to result in) any profit to the trust). The contract with the Director was entered into in February and it became unconditional in April.

About two weeks before settlement, the director of the original vendor client had asked the solicitor by telephone whether he was involved in the transaction. He said a trust of which his wife was a beneficiary was the purchaser. The wife had in fact signed documents in the trust’s purchase from the original vendor on behalf of the trustee company, so there was nothing hidden about the wife’s involvement. A few days after the telephone conversation, the solicitor had the director of the vendor sign a rule 10(2) form acknowledging the risks of the solicitor acting for the purchaser, and consenting to those risks. That was after the contract and before settlement.

Accordingly, the vendor knew his solicitor was acting for him and for the purchaser, a trust in which his wife was a beneficiary. What he did not know was that the trustee was a company of which his solicitor was a director and shareholder, as was his wife. As the solicitor pointed out, only his wife, and not him, had a beneficial interest; the solicitor’s only role was as a director and owner of the trustee company. He had a fiduciary duty himself as a director of the trustee not to profit from the transaction, and the trustee had a fiduciary duty not to profit from the transaction either. If the vendor was happy to sell to the solicitor’s wife while the solicitor was acting for both him and the trust through which the wife was purchasing why would he care if the solicitor was a director of the trustee company as well as its solicitor?

The solicitor was charged with acting in the face of a conflict between (i) duty to the vendor and (ii) self-interest in that he failed to cease to act for the original vendor “immediately it became known to [him] that [the trustee company] was purchasing land from [the original vendor] in circumstances in which” he was a shareholder and director of the trustee company which was purchasing, and his wife had a one half interest in the trust. The charge was that he thereby breached rule 10(1A) of the conduct rules, which said that a solicitor “must … avoid conflicts of interest between [the solicitor] and a client”. Unlike subsequent versions of the rules, the prohibition did not extend to acting in the face of a conflict between duty and interest of an associate. There was an elaborate definition of “associate” which included spouses, but it was not employed in clause 10(1A) though it was often employed elsewhere in the Rules, a matter which, if considered by the Tribunal, is not recorded in its reasons.

It seems to me that the charge was misconceived. It was not a breach of the rule to fail to cease acting upon learning that his company was the purchaser; a fiduciary cannot get around the prohibition on profiting out of the fiduciary relationship by terminating the fiduciary relationship and taking the benefit. The breach of the prohibition on acting in the face of a conflict of duty and self-interest occurred, if at all, by allowing the trust to purchase the land, but the Tribunal did not find that the solicitor knew of the prospect of selling to the Director of Housing at the time of the trust’s purchase.

The solicitor was found guilty. The reasons have the following features:

• They gratuitously and irrelevantly report the Full Tribunal’s “grave suspicion” that the solicitor was at all relevant times aware of the state of Rees’ negotiations with the Director of Housing before formally finding as a matter of fact that he was not, and without identifying any evidence which gave rise to that suspicion, particularly at the critical moment of the trust contracting to purchase the property.

• There is no articulation of the duty and the interest, and whose interest, which conflicted, and the misconceived nature of the charge was glossed over (all that is said (at [34]) was “[the solicitor] said that as the trustee company itself did not have a beneficial interest in the purchase he saw no conflict of interest in acting for both parties. [The solicitor] had been engaged in practice as a solicitor for 30 years. He must have known a conflict of interest situation arose. We are not prepared to accept his evidence in denial.”).

• As a corrollary, there is no real articulation of what was wrong with what the solicitor did: Was there a breach of a vendor’s solicitor’s fiduciary duty to disclose to the vendor, between contract and settlement, that there was another buyer in the market willing to pay more than the vendor has contracted to sell for so long as that which the vendor had failed over a period of years to do was completed? Or is it said that he simply should not have acted for the purchaser where his wife had a beneficial interest in the purchase notwithstanding that the rule he was charged by reference to appeared not to prohibit such a retainer?

• The discussion swings between concepts relevant to acting in the face of a conflict of duties to multiple clients (at [39], [40], [47] to [49]) and those relevant to acting with a conflict between duty and the interest of an associate.

• There is no articulation, despite it having been raised as an issue, of how it is that the solicitor’s self-interest referred to in the rule was equated with a trust in which his wife held a half interest (especially since the solicitor was cleared of wrongdoing in saying in response to the telephone query that he was not involved in the purchase but his wife had an interest).

[Note: there are fewer findings of fact in the reasons than one might expect. Some of the facts stated as facts above are facts which were asserted in correspondence reproduced by the Tribunal in its reasons without adverse comment.]
Philip Priest QC with Simon Gillespie-Jones appeared for the solicitor, and Joe Santamaria QC appeared with Lisa Hannon for the Legal Services Commissioner. (The Commissioner took over the prosecution from the Legal Ombudsman under the new Act’s transitional provisions.)