New Zealand Law Society - Failing to appropriately address conflict of interest leads to unsatisfactory conduct finding

Failing to appropriately address conflict of interest leads to unsatisfactory conduct finding

The Otago Standards Committee (the Committee) found two lawyers (Mr L and Mr P), who are partners at an unincorporated law firm (the firm), guilty of unsatisfactory conduct for their failure to appropriately address conflict of interest between two clients. The Committee noted the lawyers’ conduct appeared to have resulted from an unfortunate failure of communications between them and potentially the firm’s conflict management systems.

The conduct at issue related to the sale of land in a trust. The firm initially acted, through a responsible partner (who was not the subject of any complaint), for a trust, on an unsuccessful attempt to sell the land. Thereafter, the firm acted, through Mr L as responsible partner, for Company K who was a proposed purchaser of the land. It was agreed between the trust, Company K and the firm that the complainant would be represented by another firm in relation to that intended transaction. The firm then ceased to act for Company K as well as the trust and began acting, through Mr P as responsible partner, for Company C on a challenge to a resource consent the complainant had obtained to enable the sale of its land to Company K.

The complainant was a trustee of the trust and he complained that the firm had found itself in a position of conflict in relation to different clients’ interests and failed to deal with it appropriately.

In determining liability, there were two conflict of interest issues for the Committee to consider.

The first issue related to interests between the complainant and Company C. Referring to rule 6 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (RCCC) on conflict of interest and the preface to the RCCC, the Committee noted that, “Rule 6 does not address the ethical distinctions between conflict of interest in litigation matters and commercial matters respectively and is not an exhaustive statement of the applicable principles in either case.”

The Committee noted that although the conflict of interest principles applicable to commercial matters are less stringent than those applicable to litigation matters, they are still wider than the minimum standard prescribed in rule 6. The effect of rules 6, 6.1.1 and 6.1.2 is that there must be a common transaction or “matter” between the two clients for rule 6 to come into play. The Committee was satisfied that no common “matter” arose between the complainant and Company C as clients of the firm. The firm was not acting for the complainant in respect of the negotiations over the proposed sale of the land to Company K. It was instead acting for Company K. The firm was also not acting for the complainant in respect of any of the legal seps the complainant needed to take, including obtaining the resource consent, for the proposed sale to proceed.

For the purposes of rule 6, the matter that came to be at issue between the complainant and Company C was not one in respect of which the firm had ever been instructed. The Committee therefore found that, the firm did not act for the trust or Company C on any matter in circumstances where it was not able to discharge its obligations to both and, more generally, that the firm did not act inappropriately in a conflict of interest situation.

The second conflict of interest issue for the Committee to determine related to interests between Company K and Company C. The Committee considered that there was a common "matter" between the two companies and that the firm, through Mr L, identified its conflict in respect of the matter no later than 23 June 2015, as demonstrated in L’s correspondence in which he terminated the retainer with Company K. The Committee considered that the firm was at that point obliged (in order to comply with rule 6.1.2 RCCC) to inform both companies of the fact that the firm would no longer be able to discharge the obligations owed to each of them, and terminate both retainers. The firm could then continue acting for Company C only after advising both parties of the nature of the conflict of interest, requesting that both parties take independent advice and obtaining Company K’s informed consent to the firm continuing to act for Company C.

Mr L and Mr P argued that although the firm had acted continuously for Company C since 2009, the firm had not in June 2015 received a specific instruction from Company C to contest the subdivision resource application made by the complainant. In rejecting this argument, the Committee said that:

“The hiatus between the identification of the conflict of interest and the subsequent receipt of the instruction to advance the interests of [Company C] in respect of the matter did not absolve the firm from its professional obligation in the circumstances, which was to decline the instruction from [Company C] in respect of that matter.”

The Committee determined that the firm breached rule 6.1 of the RCCC by continuing to act for Company C on its challenge to the complainant’s resource consent. In the Committee’s view, it was not open to a firm to identify a conflict between the interests of two clients in respect of a matter, "drop" one client and subsequently act for the other client in respect of the same matter without obtaining informed consent from the “dropped” client.

In determining the penalty for the unsatisfactory conduct, the Committee was conscious that the breaches apparently arose from an unfortunate failure of communications between partners and potentially a failure of the systems that the firm's terms of engagement said it had in place to identify and deal appropriately with conflicts of interest. For that reason, the Committee considered the unsatisfactory conduct to be at the low end of the spectrum, and specifically that no fine was warranted. It found that Mr L and Mr P shared responsibility for the breaches although Mr L carried a greater share of the responsibility (despite Mr L initially acting appropriately in Company K’s interests).

For these reasons, the Committee ordered that ordered that Mr L be reprimanded and ordered Mr L and Mr P separately to pay costs of $1,500 to the New Zealand Law Society Te Kāhui Ture o Aotearoa.