Misconduct in acting in face of duty and associate’s interest conflict

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.)

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