New Zealand Law Society - “Cautionary tale” – Tribunal raises concern around lack of understanding of conflicts of interest rules

“Cautionary tale” – Tribunal raises concern around lack of understanding of conflicts of interest rules

Failing to recognise and appropriately manage conflicts while acting for two clients has led to a $15,000 fine and censure for Auckland lawyer Lizandra Bailey. The Tribunal noted its concern that dealing with conflicts was a risk area for the profession.  

In this particular case, Ms Bailey acted for both sides in relation to a franchising agreement. She initially failed to obtain informed consent to act and then continued to act where there was a more than negligible risk of the interests of her two clients conflicting. A conflict did emerge, but Ms Bailey continued to act and even sought to intervene in related proceedings to the benefit of one client. As a result of these errors, Ms Bailey accepted a charge of negligence or incompetence in her professional capacity.

The Tribunal began its decision by setting out the rules in relation to conflict of interest. It noted that rule 6.1 (and its subrules 6.1.1 to 6.1.3) of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 are “too easily overlooked or misunderstood”. It noted:

[3] The rules can be misunderstood because they are not a blanket prohibition against acting for more than one client in a matter. This can be interpreted as permission to act. But permission should not be taken as encouragement, and that permission is restricted to limited circumstances.  The rules permit acting for more than one client in a matter only where the risk (that the lawyer may be unable to discharge the obligations owed to one or more of the client) is negligible, and where the informed consent of all parties is obtained.  The threshold above which the prohibition in rule 6.1 applies is “a more than negligible risk”.  That threshold is very low.  In most cases where there is a risk of conflict, the lawyer must not act for more than 1 client on a matter.

[emphasis from the Tribunal decision and footnotes have been omitted]

In terms of the background, Ms Bailey was an experienced lawyer dealing with franchising agreements. She was a partner at a law firm. Her major client (A) entered into franchise agreements, which were reviewed periodically. A sometimes suggested to Ms Bailey also act for the other party on the review and often she ended up acting for both sides. In 2014-2015, she acted for A in relation to a lease renewal and rent review with one of its franchisees (B). At A’s suggestion, she acted for B on this matter. Ms Bailey failed to obtain the informed consent of B before she could act for them, which the Tribunal found would include disclosing that she had a long professional relationship with A, why there was no more than a negligible risk of conflict, what would happen if conflict arose and ensuring that B understood these matters.

An actual conflict did not arise until April 2018 when A sought to vary the franchise agreement. Acting for A, Ms Bailey sent B the deed of variation, along with a recommendation that they seek independent advice. However, she understood that they did not want to seek independent advice so she also attached a waiver. B signed the waiver and Ms Bailey continued to act for both parties. The waiver fell well short of what was required in terms of informed consent, but even proper informed consent would not have allowed Ms Bailey to continue acting given there was a more than negligible risk that she could discharge her obligations to both clients. She should have informed A and B that she was conflicted and terminated both retainers. If she proposed to continue acting for A, then a multiple stage process would need to be carried out pursuant to r 6.1.3.

In April 2019, Ms Bailey again acted for both A and B in a dispute with a third party. She sought consent from both parties but she did not address matters necessary to obtain informed consent.  

In September 2020, A purported to terminate the franchise agreement with B, which led to B filing High Court proceedings. B referred to a phone call with Ms Bailey as part of an interim injunction application. Ms Bailey’s firm acted as solicitor on the record for A in the proceedings. The Tribunal noted that where a partner in the firm was conflicted (as Ms Bailey was), the firm should not have been involved in the proceedings.Ms Bailey compounded the issue by seeking to appear as second counsel for A at the hearing and filing an affidavit which disputed evidence given by B. The Tribunal noted that she was bound by confidentiality and could not volunteer evidence in breach of that duty. The Tribunal did acknowledge that Ms Bailey (who was not experienced in litigation matters) sought advice from the firm on this and they supported her providing an affidavit. The Tribunal considered this was a mitigating factor. Ms Bailey continued to remain involved in the proceedings and asked for all correspondence to be copied to her. She represented A at a mediation and sought to attend a settlement conference.

In assessing the gravity, the Tribunal found that Ms Bailey’s error was failing to appreciate the risk caused by the conflict and handle it in accordance with her duties under the rules, but also letting it drag on for so long. It noted that B was “justifiably aggrieved to find their former lawyer lined up against them in important litigation”. Her conduct was significantly aggravated by the duration of her failure to recognise where her duty lay. The Tribunal considered the breach was grave and went to the heart of the lawyer-client relationship, but it was isolated case, even if drawn out. It noted that Ms Bailey had a “well-earned reputation for competence” but had a blind spot in relation to rules 6.1 to 6.3. 

The Tribunal noted that it was concerned that recognising conflicts and managing them was a risk area for the profession and wanted to make an example of this case for the better guidance of lawyers and the safety of their clients.

The Tribunal did not consider that it needed to be undeservedly harsh to Ms Bailey. She had no previous disciplinary history and her conduct was not undertaken for improper personal gain. She had eventually acknowledged her wrongdoing in respect of the matter. The Tribunal noted that it had considered the prospect of a short term of suspension, but then imposed the maximum fine of $15,000 “as a mark of gravity of the matter”.