Trusts Essay on Fiduciary Duties

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Consider the special significance of fiduciary conflicts rules to law firms, taking account of recent cases in this area.

Introduction

The most fitting way to begin the discussion of fiduciary conflict rules and their special significance to law firms, is by quoting St Matthew, chapter 6, verse 24: “No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other.” The principles of fiduciary law are based on this exact statement. Whether such a broad principle is in fact a practical reality in the vocational realm of law firms is debatable, and will be examined throughout the essay.

Fiduciary conflict rules come into play where a fiduciary relationship exists. Such a relationship, as best described in Bristol and West Building Society v Mothew, presupposes a duty owed by someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The nature of the solicitor-client relationship certainly meets the criteria of a fiduciary relationship, but identification of such a relationship is only the beginning, next comes the question of what duties does a solicitor owe? The primary duty for any fiduciary is that they may not have any conflict between their personal interest and that of their principal. This is the ‘no conflict of interest rule’ which was clearly expressed in Aberdeen Rly v Blaikie Bros that, ‘no one, having such duties to discharge shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.’ The latter part of this statement which refers to the conflict between the interests of the principal and the fiduciary’s duty to advance the interest of another principal or third party is of great relevance to law firms. This problem arises where a law firm may have more than one client and raises the ‘duty of undivided loyalty’ principle that a solicitor owes his client.

It is imperative to understand why we need to pay special heed to conflicts of interest rules when it comes to law firms before delving into the effects and consequences the rules have on law firms. Over the past two decades there have been major changes within the legal profession that have led the issue of conflicts of interest to cause a stir. When the Companies Act came in 1967 it placed no limit on how many solicitors could form a partnership which before the Act was restricted to twenty, also with government’s keenness to promote competition within the legal profession, it permitted advertising and allowed new providers of legal services to be established . Since then firms have only continued to grow larger either internally or through mergers, being able to compete with other firms effectively having to ‘sell’ their legal services to interest consumers, and in addition to this, increasing consumer demand and changes in the commercial world have led to specialisation. Therefore, this has obviously meant that firms are at a much greater risk of being in violation of conflicts of interest rules and the impact of these transformations may put a strain on the solicitor-client relationship both ethically and practically, in trying to preserve the idea of uncompromised allegiance owed by solicitor to his client.

For the purposes of this essay the types of conflicts will be discussed according to subject matter, existing matter conflicts and former client conflicts. Analysis of the conflicts rules in relation to law firms will be done by looking at the regulatory regime in place, and then moving onto a discussion of recent case law that has arisen in relation to existing clients and former clients. Lastly, the broad policy implications of conflicts of interest will be considered to aid in realising a broader goal in the legal regime.

Regulatory Regime

The Solicitors’ Code of Conduct 2007, section 3 governs the rules relating to conflicts of interest and section 4 deals with former client conflicts in relation to confidential information and disclosure. Theses rules formulated by the Law Society, which uses an approach that prevents member from acting where a conflict arises when it comes to regulating the conduct of solicitors. They have been drafted as follows:

Section 3.01 deals with the duty not to act; it includes a definition of conflict which was not present in the previous legislative authority:

There is a conflict of interests if:

you owe, or your firm 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 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.

The regulation also considers conflict arises when already acting:

If you act, or your firm 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 firm, 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.

In addition to these two sections is one that allows for exceptions to the rules which lays down limited circumstances where one can act such as where there is a common interest and informed consent of clients subject to suitable safeguards.

Section 4 deals with former clients, under the duty of confidentiality:

You and your firm must keep the affairs of clients and former clients confidential except where disclosure is required or permitted by law or by your client or former client.

Although the principle of confidentiality although not dealt as a conflict issue per say must be read in conjunction with rule 3 as it reinforces the fact that a firm must not put confidential information obtained from a client whether it be former or current at risk by acting adverse to the interests of that client in a matter where the confidential information would be material, inherently a conflict of interest issue. The rule also allows the use of information barriers but only in very limited circumstances.

Existing Client Conflicts

Where a law firm acts for two clients with adverse interests at the same time, the fiduciary duty of loyalty owed to each makes it impossible for the firm to continue without the consent of both and is known as the ‘double employment’ addressing the issue of conflict of interest inherent in the situation. If the law firm continues to act in such circumstances without the client's consent they will automatically be in breach of fiduciary duty. Therefore, there is an absolute ban, in cases where there is an actual or potential conflict between the interests of two existing clients, when acting without the consent. Consent does not give a solicitor carte blanche to act but following Clarke Boyce v Mouat it was laid down that there is no general rule of law that does not allow a solicitor to act for both parties in a transaction where their interests might conflict, as long as there was ‘informed consent’. There are, however, some situations where even with the informed consent of both clients a law firm can run into difficulties, this is because consent only prevents the automatic breach of fiduciary duty which would otherwise arise. The law firm must be able to fulfil their obligations to each as if he were his only client, if he cannot do so, he must cease to act. 

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Where there is informed consent in a same matter conflict, whereby the law firm is instructed both for client A and client B, problems arise when the firm learns some information in the course of acting for B which would obviously be of interest to A. Typically, a borrower will instruct a solicitor and the same solicitor will act for the mortgage lender on the conveyance, this avoids an unnecessary expense in instructing a second lawyer. There is no breach of the double employment rule because both parties consent but there is nevertheless an obvious potential for conflict if ...

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