New Zealand Law Society - Lawyers Complaints Service: Fine for acting after a conflict arose

Lawyers Complaints Service: Fine for acting after a conflict arose

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A lawyers standards committee has censured and fined a lawyer, B, $10,000 for continuing to act for more than one client in a development contract after a conflict arose. B’s conduct was at the “higher end of the scale of culpability,” the committee said when making a finding of unsatisfactory conduct.

In 2003, a Mr C and his associated corporate entities and a Mr D and his corporate entities collaborated in a joint venture to acquire blocks of land to subdivide into residential sections. B acted for the parties and the joint venture itself. B also appeared to act for the joint ventures mortgagees, the committee said.

Ownership of the land after its initial purchase was transferred to corporate entities and held as tenants in common with shares being owned 90% by Mr D’s interests and 10% owned by Mr C.

From 2005 to 2010 about 150 sections were developed and houses built on them by a company associated with Mr C (the company). By mid-2009, sales had slowed and the relationship between Mr C and Mr D had deteriorated. As a result, the company was no longer the exclusive builder of houses. However, the joint venture continued.

The original instruction to B’s firm by the parties appeared to be that on the completion of a sale, 10% of the sale price would be allocated to Mr C’s company out of which GST, tax obligations and repayment of indebtedness to a bank would be paid (thereby paying for the cost of developing the sections), with the balance paid in reduction of indebtedness to Mr D’s entitles.

Throughout the joint venture, B’s firm would request that both parties complete the necessary documentation required on the sale and on completion of the sale, the firm would report to both parties as vendors.

Procedure changed

Mr C said that the procedure changed in July 2012 on Mr D’s “unilateral” instructions. Mr C challenged those instructions in an email to B (and others) on 12 July 2012.

Mr C alleges that this change in how the sale proceeds were to be disbursed was made without his authority, contrary to his instructions and has caused him and his corporate entities significant financial difficulties.

On 20 August 2014, Mr C signed A and I forms to enable the settlement of eight sales, but the funds were dispersed on a different basis than that understood and agreed on by Mr C.

B submitted that from his firm’s perspective there was not a more than negligible risk that they would be unable to discharge the obligations owed to their clients in relation to all sales of lots.

On Mr C’s behalf, it was submitted that as soon as B had conflicting instructions from Mr C and Mr D it was apparent that B could no longer discharge obligations owed to each of the clients, as those instructions were clearly at odds with each other.

“Where an actual conflict arises in most cases the lawyer must withdraw from representing each of the parties,” the committee said.

“Rule 6.1 is expressed in mandatory terms. Where there is a real risk of actual conflict of interest that the lawyer may be unable to discharge the obligations owed to one or more of the clients, the lawyer or his firm may not act.

Most obvious risk

“The most obvious risk inherent in this joint venture was that the firm would look to protect Mr [D]’s interests (as majority shareholder and representative of some mortgagees) at the expense of Mr [C]’s interests.

“There was also a risk that [B] or his firm would overlook the need to protect Mr [C]’s interests and be more focused on merely completing sales of the individual sections without the underlying disagreements over repayment of borrowing and payment of costs relating to the development being resolved.

“A further risk was that information sensitive to one of the parties could be disclosed (whether intentionally or not) to the other parties for whom [B] acted.”

It was “clear” B was aware that the parties had fallen out, the committee said.

“The committee finds that by continuing to act for all parties from July 2012 B breached rule 6.1 in that not only was there a more than negligible risk that he may be unable to discharge the obligations he owed to all clients, but there was an actual risk which should have been obvious to him.”

While Mr C had consented to B acting for more than one client from the beginning of the venture in 2003, there was no evidence that B explained to Mr C post 12 July 2012 that he had new instructions from Mr D which gave rise to a conflict and counselled him as to its likely scope and implications.

“Informed consent at one point in a continuum does not mean that when the circumstances change and an unforeseen conflict arises, the consent continues, as the previous consent clearly cannot be an informed one,” the committee said.

Independent advice

B asserted that he believed Mr C had sought and received independent advice from another lawyer. However that lawyer told the committee that he was not providing independent advice in relation to the sale of sections.

The committee noted that B had made an assumption as to the scope of the other lawyer’s retainer that was not borne out by the evidence before the committee.

In the circumstances where B believed Mr C was receiving independent advice, it was incumbent on him to ascertain exactly what he was being asked to do still – what was going to happen to the money and how it was going to be disbursed and recorded. “And what happened to the money was contrary to Mr [C]’s instructions”.

Even if the committee had found (which it did not) that Mr C was being independently advised and had given B informed consent to continue acting, “in view of the evidence before it, the committee considers that it would not have been appropriate for [B] to continue to act for all or any one of the parties in the joint venture development.”

B had failed to protect and promote the interests of Mr C and his company, the committee said.

Although Mr C sought compensation, the committee said it was not an appropriate case to order compensation, and that a civil court was the appropriate forum to determine losses, if any, for which B or his firm may be liable.

As well as the censure and fine, the committee ordered B to pay $2,500 costs and to pay Mr C $2,500 for costs he incurred relating to the inquiry, investigation or standards committee hearing.

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