what is a conflict of interest?

A conflict of interest is a compromising influence that is likely to negatively affect the advice which a lawyer would otherwise give to a particular client.

A conflict of interest situation is a set of circumstances that is likely to affect adversely:


Conflicts: The lawyer's Achilles Heel

What is it about a conflict of interest that is so bad? The answer is quite simple. Loyalty and independence of judgment are essential to the effective representation of a client. In fact, they are fundamental to the health of the lawyer/client relationship. Yet a conflict of interest may make it impossible to exercise the essentials of loyalty and judgment.

Therefore, identifying and checking for a conflict of interest situation need to be routine steps in every lawyer's practice. In fact, every time you have a new client or a new matter for an existing client, you should address the issue of the existence of or potential for a conflict of interest situation.

 

how to spot a conflict

The most claims-prone conflicts arise when:

  • acting for more than one person on a single matter,
    or
  • acting for a client on a matter where the lawyer has a personal interest other than reasonable professional fees.

Acting for more than one person

It is not always readily apparent that a representation involves more than one person as a client. Some conflict situations are hidden, for example when dealing with members of a family or partners or shareholders in a business.

Appendix 1 - Checklist to Identify Conflicts Involving Multiple Interests lists questions you should be asking to help identify such a situation and whether or not it presents a conflict or potential conflict. You will also find a list of classic situations where representation of multiple parties should be avoided.

Acting when the lawyer has a personal interest

In very few instances is it safe for a lawyer to represent the interests of a client when the lawyer's own interest, financial or otherwise, is involved (other than the expectation of a reasonable fee).

Appendix 2 - Checklist to Identify Conflicts Involving Lawyer's Personal Interest lists questions you should be asking to help identify such a situation and whether it presents a conflict or potential conflict. You will also find a list of classic situations where representation of a client in the face of a personal interest should be avoided.

Other typical conflict situations

In addition to the situations listed earlier, typical conflict situations include:

  • acting for one client against another client,
    or
  • acting for one client against a former client.

Either of these scenarios is usually best identified through a conflicts checking system, be it manual or computerized. Conflict checking systems are discussed in: Checking Systems for Conflicts of Interest.

Some special cases

DECLINED REPRESENTATION

A conflict can also arise when a lawyer has declined to act for a party. It may be that after interviewing a potential client, you decide that you will not represent them. While you are deciding about your representation, you should take care that you do not receive any confidential information. Receiving confidential information can create obligations of confidentiality even if no lawyer/client relationship ultimately ensues; this in turn can prevent you from acting either for a new client or even for a current client at some point in the future.

Another problem situation occurs when someone connected with your client believes that you are acting for them too. When they later discover that you have not protected their interests, they complain.

Whichever the situation, documentation is critical. A non-engagement letter, also called a non-representation letter, should be prepared either when you decline the opportunity to act for a prospective client or when you need to clarify that you are not representing someone who may be connected to your client.

Appendix 3 - Checklist for Non-Engagement/Non-Representation Letter contains a checklist of the key information which should be included in a non-engagement or non-representation letter.

IMPUTED CONFLICTS

A conflict of interest can be imputed to you although you may not have any direct involvement in the conflict or the representation.

Appendix 4 - Checklist to Screen Imputed Conflicts provides a brief overview of imputed conflicts and the use of "screens" or "walls" to manage such conflicts.

 

why a conflict matters

The consequences of a conflict of interest situation for the lawyer can be severe and costly.

For example, acting with a conflict of interest can result in civil liability for professional malpractice as well as disciplinary action by the Law Society for breach of Rule 2.04 of the Rules of Professional Conduct.

Some very serious consequences also flow from a proven claim in contract, tort or equity, including:
  • disqualification from representation of one or more clients;
  • forfeiture of fees charged; the inability to charge for work in progress and other time invested;
  • a damage claim which may include punitive damages;
  • embarrassment, inconvenience and aggravation of defending a malpractice claim or investigation; and
  • lost time spent on defending a malpractice claim or investigation.

Some of these exposures are inevitable even if the claim is not successful.

To fully appreciate the consequences of conflict, and to understand what all of the information generated by conflicts of interest checking systems means, it is critical that lawyers are aware of the current legal standards regarding conflicts of interest.

Code of Professional Conduct

Rule 2.04(2) of the Law Society’s Rules of Professional Conduct states:

A lawyer shall not advise or represent more than one side of a dispute. In addition, Rule 2.04(3) states: A lawyer shall not act or continue to act in a matter where there is or is likely to be a conflicting interest unless, after disclosure adequate to make an informed decision, the client or prospective client consents.

Although the Rule and its commentaries and related rules on confidentiality and disclosure seem simple enough, the number of conflicts-based claims and complaints against lawyers indicate that lawyers have difficulty applying the rules in practice because they either fail to recognize the situation or choose to ignore it.

Standard of care at common law

Usually, the standard of care imposed on lawyers in contract and tort is to act as a reasonably competent and diligent lawyer. In a professional liability claim, the allegation of a conflict of interest casts a very onerous burden of proof onto the lawyer to show that the client who now complains received the best possible advice which could have been obtained from a truly independent lawyer.

Fiduciary duty in equity

The fiduciary duty imposed on a lawyer, breach of which gives rise to very broad equitable relief, includes the obligations to provide full disclosure, to act with undivided loyalty and exclusivity, and to maintain the client's affairs in confidence. A lawyer's ability to meet these obligations is challenged when that lawyer is confronted with a conflict of interest situation; failure to manage the conflict likely will result in allegations that the fiduciary duty was breached, paving the way for a broadly based damage award.

 

Last update: Oct. 7, 2002