Discussion Paper on the Conflict of Interest Rules
Time for Change? Needlessly complex, muddled and illogical?
Background
The present revision of the Practice Rules by the Law Society of Scotland (LSS) aims to rationalise the different Rules so they have common definitions and are in a coherent and simplified form. It prompted the Scottish Law Agents Society to look at the conflict of interest rules introduced in 1986. In the intervening period practice has greatly changed.
A Straightforward Principle
Rule 3 of the Solicitors (Scotland) Practice Rules 1986 (the Conflict of Interest Rules) gives a statement of clear principle that:-
“A Solicitor shall not act for two or more parties whose interests conflict”.
That is clear and understood. It is in terms similar to the RICS Guidance for Members and Firms that they should “avoid conflict of interest”.
Complex Exceptions
However exceptions are allowed which are quite extensive and wide ranging. Indeed I would argue that they drive a coach and horses through the general principle.
An observation I would make from my own practise of the law is that the effect of these exceptions is that Solicitors are being trained to think in terms of “Can I get my case to fit into one of the exceptions and if not can I obtain a waiver?” rather than “How can I comply with Rule 3”. I do not think we are doing ourselves or our clients any favour in allowing solicitors to act for both parties.
The principle is designed to give the spirit of the law that a Solicitor will not act in a conflict situation and is encouraging him to avoid a conflict of interest. The Exceptions seem designed to allow Solicitor to do the opposite and act for both parties and encourages the practice of Solicitors viewing the principle as something that can and should be got round.
Frequently Solicitors use the Exceptions in the genuine belief that they are assisting the client to save money. However when things go wrong there is a tendency for the clients jointly represented and the complaints system to treat breach as a very serious matter. It is of course serious but there is little appreciation by those handling complaints that the current Rules might actually be responsible for encouraging that culture by the Exceptions.
Are the Exceptions justified? Let us examine each of the Exceptions in turn.
a) Associated Bodies Exception
“The parties are associated companies, public authorities, public bodies, or government departments or agencies;”
For practitioners the main Exception in practice is associated companies in a group. Frequently the Directors are common to both companies. The interests of the group are not necessarily the same as those of a subsidiary company which is say being asked to convey property to another group company or to give Security for that other company. They may be but they may not be. What would be wrong with one of the companies instructing a Solicitor to act for them and having that Solicitor write to the other company confirming that what they are being asked to sign is a legal document and suggesting that the other company take independent legal advice. The other company then has the choice of taking its own independent legal advice but is not being in any way offered advice by the Solicitor acting for the other Company. Is that not more in line with the general principle and safer for solicitors?
b) Connected Persons Exception
“The parties are connected with the other within the meaning of Section 839 of the Income and Corporation Taxes Act 1988;”
This is related to a) above and c) below.
c) The Family Exception
“The parties are related by blood, adoption or marriage or civil partnership one to the other, or the purchaser, tenant, assignee or borrower is so related to an established client”
I suspect that this is an exception that most practitioners would prefer to be retained probably because when families decide to do something they can normally agree this amongst themselves and then simply wish the matter carried out by a single Solicitor to save expense. I have a lot of sympathy for this view. However having analysed the matter I believe that I am now more in favour of removing this Exception. Here are some of the reasons:-
1 Families can be close but they can also often be or become dysfunctional or subject to infighting or war. Why are families treated differently? A single Solicitor acting for the family or a part of the family that is agreed on a course of action can be a breeding ground for complaints especially after the event if they fall out.
2 The Smith –v- Bank of Scotland case and related cases have all arisen after the 1986 Conflict of Interest Rules. These cases demonstrate the effect of actual and possible influence. In fact the cases seem to make clear that influence is more likely in family cases than in others. It is very easy for a family member to say that they were pressurised into signing a Guarantee. That is particularly the case with husband and wife and perhaps also for son/daughter and father/mother. The judgements in these cases make clear that such a family member needs to be warned of the legal effect of the document that they are signing and require to be advised to take separate legal advice. I would also just point out at this stage that the Courts seem to approve that it is the advice of the right to seek separate legal advice that is important and not whether advice is actually taken. The 1986 Practice Rules have not been revised since these cases.
3 Society has moved on. Exception (c) does not include cohabiting couples.
There is guidance regarding cohabiting couples published by LSS on their website under the heading “Cohabiting couples. Pre-nuptial, cohabitation and separation agreements – conflict of interest (October 2006).”
This followed the Civil Partnership Act and the Family Law (Scotland) Act 2006.
Example of inconsistency.
A Solicitor is say acting for his sister (S) and her co-habiting partner (P) and S has had a child with P. The transaction is one where P conveys to S half of his house and is able to use S’s income to obtain a loan to be secured over the property to fund an extension, which loan P could not have obtained on his own as he had no job.
It appears technically to be in breach of the rules for a single solicitor to act for both. However the Guidance is at odds with the Rules. The Guidance above is in effect to treat co-habiting partners in the same way as husband and wife or partners. The example I have given is as close to family as you can get without falling in its current definition.
The muddle of this can be corrected either by abolishing the whole category of family exception or extending it. I favour the former but if that is not agreed I would wish or settle for the latter.
I think that in all cases it is best that a Solicitor has to choose which client he is going to act for and inform the other of their right to separate legal advice and warning that there are legal consequences of what they are being asked to sign.
d) Established Clients Exception
“Both parties are established clients or the prospective purchaser, tenant, assignee or borrower is an established client.”
I do not understand why this exception exists. Perhaps the justification is that both clients have used a Firm before and both are happy with that Firm and so do not wish to go elsewhere for legal advice. There may a difficulty for the Solicitor in choosing one client as opposed to another. It may be embarrassing for a Solicitor to choose when both may have been established clients for a very long time. However if conflict of interest is a bad thing or a thing that might cause prejudice to one or other of the parties I cannot in principle see the logic of why this exception can be allowed to stand. I cannot think of anything more damaging to a firm than a problem or issue arising or being perceived to arise and one or both parties do not think you have protected them. At that time you may need to stop acting for both or choose one and offend the other. This exception seems indefensible.
e) Advice Desert Exception
“There is no other Solicitor in the vicinity whom the client could reasonably be expected to consult;”
I can see that in certain locations it may be difficult for clients to instruct a local Solicitor to give them independent legal advice. However the internet has happened since 1986 and the whereabouts of a Solicitor is simply not as important as it was previously. Advice can be sought from Solicitors outwith the vicinity by use of email in addition to correspondence, telephone calls and you can also meet by Skype or webcam if a face to face meeting is required.
f) Borrower/Lender Exception
“In the case of a loan to be secured over heritable property, the terms of the loan have been agreed between the parties before the Solicitor has been instructed to act for the Lender, and the granting of the Security is only to give effect to such agreement.”
An important part of this exception is the reference to the prior agreement of the parties on the terms of the loan and that the Security is in effect “execution only”. Thus if one Solicitor acts for the buyer who is also a Borrower and the Lender then there is no duplication of work nor of expense.
However the requirements of Lenders in 1986 were quite different from current requirements. Requirement after requirement has been heaped on to the Borrower/Lender Solicitor (BLS) and it appears commonplace to expect utmost good faith from the BLS and knowledge by the BLS must be passed on to the Lender if it would affect the decision to lend.
This causes issues of confidentiality to arise. The BLS has a duty of confidentiality to the Borrower and is being put under a duty to the Lender that requires disclosure. This is undesirable. If a separate Solicitor is acting for the Lender he will only know what the Lender has told him and will report anything untoward that comes up during the transaction but he will not know the confidential information of the Borrower and be under a duty to disclose it. The effect of this exception in practice is to erode client confidentiality and put the BLS in a conflict of interest situation with regard to that issue.
A good reason for retaining the exception is that the BLS can do everything necessary to meet the date of entry and control things much better than if he has to run everything he has decided passed a separate Lender Solicitor. An effect of removing the exception may be a slowing of conclusion of missives while a Solicitor for a Borrower wants to know that the Lender’s Solicitors will accept the title or other related issue position.
Another reason for retaining the Exception may be that if abolished it will increase expense. However I make the following comments:-
• A Borrower need not be represented. He can choose to decline the need of a Solicitor to advise him to save expense.
• Alternatively he may think it is important to have a Solicitor advise him and in receiving the warning may choose to instruct someone to act on his behalf. That is consumer choice and a good thing.
• The paperwork for security transactions is frequently weighted in the Lender’s favour but the Lender will not amend its pro forma styles so some would argue there is little point in a separate Solicitor acting.
• If a solicitor is not on the Lender’s Panel he is prevented from acting for both then the Lender will appoint a Solicitor from its own panel. The purchasing Solicitor will charge for the purchase (and for any correspondence dealing with the queries of the Lenders Solicitor) and the Lender’s Solicitor will charge for the loan only. The buyer (or Borrower) in theory could choose not to instruct his purchasing Solicitor to do any work on the loan and deal direct with the other Solicitor. The Lender is unlikely to accept this decision for practical reasons of having the purchasing solicitor deal with legal points.
• If all Solicitors are told that they cannot act for both Borrower and Lender then all Solicitors will be on a level playing field in what steps they are able to take with regard to such transactions. It may increase the fees as there will be 2 Solicitors involved. Such an increase is likely to be modest. It is even possible that a Lender faced with the new rules may decide to pay for its own representation or offer a payment towards them or add them to the loan. I also ask why lenders expect the Borrower to pay for this anyway? The Government can be lobbied to amend the Conveyancing and Feudal Reform (Scotland) Act 1970 to remove lenders undeserved preference that a borrower pays lenders expenses and make lenders pay for separate representation.
Commercial Borrowers and Lenders
The Rules are tighter for commercial loans. Acting for both parties is not allowed in all but de minimis cases. I suggest that there is no reason in principle why that should not apply to domestic borrowers. It seems indefensible that a distinction is drawn. Is de minimus necessary and if so at what level?
• “The Chaos Clause “
Clause 5(2) relates to exceptions (c),(d) and (e) stating that both parties shall be advised by the Solicitor at the earliest practicable opportunity that the Solicitor or his Firm has been requested to act for both parties, and that “if a dispute arises, they or one of them will require to consult an independent Solicitor or Solicitors, ...” The purpose of the Rules is to avoid a conflict of interest but the Exceptions allow Solicitors to act in a conflict of interest situation.
The wording is that you can act unless “a dispute arises”. What does that mean?
I think in practice it means “an actual conflict of interest arises”. Having set up the transaction in such a way that the Solicitor can act for both parties he is then expected to maintain the ability to see clearly that something has happened where he should decline to act for both parties. I believe that however well intentioned people are with regard to trying to save expense these efforts are misguided and the conflict of interest rules are a recipe for confusion and potential disaster to Client and Solicitor. I believe that confusion and disaster is well documented in Conduct complaints where conflict of interest cases are frequent and viewed as particularly serious. As part of my Legal Defence Union work I have defended Solicitors against conflict of interest claims. I have to say it is one of the most fraught areas and that Complaints experience tells us that the Exceptions are best avoided altogether.