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Chapter 7 out of 14 chapters in the annotated Professional Conduct Handbook

 

CHAPTER 7
CONFLICTS OF INTEREST BETWEEN LAWYER AND CLIENT


The purpose of this Chapter is to state the general principles that should guide a lawyer's conduct when the lawyer is invited to act both as legal advisor and business associate.

Generally speaking, a lawyer may act as legal advisor or as business associate, but not both.

These principles are not intended to preclude a lawyer from performing legal services on his or her own behalf. Lawyers should be aware, however, that acting in certain circumstances may cause them to be uninsured as a result of Exclusion 6 in the B.C. Lawyer's Compulsory Professional Liability Insurance Policy and similar provisions in other insurance policies.1

[amended 04/03]


Direct or indirect financial interest

1. Except as otherwise permitted by the Handbook, a lawyer must not perform any legal services for a client if:2

(a) the lawyer has a direct or indirect financial interest in the subject matter of the legal services, or

(b) anyone, including a relative, partner, employer, employee, business associate or friend of the lawyer, has a direct or indirect financial interest that would reasonably be expected to affect the lawyer's professional judgement.

[amended 04/03]

Annotations


Financial or membership interest in the client

2. A lawyer must not perform any legal services for a client with whom or in which the lawyer or anyone, including a relative, partner, employer, employee, business associate or friend of the lawyer, has a financial or membership interest that would reasonably be expected to affect the lawyer's professional judgement.

[amended 04/03]

Annotations

Transaction with a client

3. A lawyer must not purchase anything from or sell anything to a client of the lawyer's firm unless the transaction is clearly severable from any legal work performed by the lawyer or by another lawyer in the firm for the client, and either:

(a) the transaction is of a routine nature to and in the ordinary course of business of the client, or

(b) the client is independently represented in all aspects of the transaction.

[amended 04/03]


Client loan, credit or guarantee

4. Unless the transaction is of a routine nature to and in the ordinary course of business of the client, a lawyer must not borrow money or obtain credit from a client of the lawyer's firm, or obtain a benefit from any security or guarantee given by such a client.

[amended 04/03]


Financial interest in a client

5. A lawyer must not acquire a financial interest in a client of the lawyer's firm unless

(a) the acquisition is effected on or through the facilities of a stock exchange, or

(b) the client:

(i) acknowledges in writing that the lawyer is not representing the client in the acquisition and the client will not rely on the lawyer's advice in the matter, and

(ii) is independently represented in all aspects of the acquisition.

[amended 04/03]


Ancillary business or occupation

6. A lawyer must not carry on any business or occupation other than the practice of law in such a way that a person might reasonably:

(a) find it difficult to determine whether in any matter the lawyer is acting as a lawyer, or

(b) expect that in the carrying on of the other business or occupation the lawyer will exercise legal judgement or skill for the protection of that person.

A lawyer who concurrently practises law and carries on another business or occupation must not act for a client if the client's interests and the lawyer's business or occupational interests differ.

[amended 04/03]

Annotations

Investing a client's funds

7. A lawyer must not invest the funds of a client of the lawyer's firm or advise such a client to invest the client's funds in anything in which the lawyer or anyone, including a relative, partner, employer, employee, business associate or friend of the lawyer, has a personal interest, if that interest would reasonably be expected to affect the lawyer's professional judgement.

[amended 04/03]

Annotations


*    *    *

FOOTNOTES:

1. Whether or not insurance coverage under the compulsory policy is lost is determined separate and apart from the ethical obligations addressed in this chapter. Review the current policy for the exact wording of Exclusion 6 or contact the Lawyers Insurance Fund regarding the application of the Exclusion to a particular set of circumstances.

[rescinded and replaced 04/03]

2. This rule does not prohibit a lawyer from acquiring an ownership interest in a client in lieu of a cash fee for providing legal services, provided the lawyer complies with Rules 2 and 5 of this Chapter.

[added 04/03]


*    *    *

ANNOTATIONS:

Rules 1 and 2 - Financial or membership interest

It is improper for a lawyer to provide environmental law advice to a publicly traded mining company in which the lawyer holds shares which represent a significant part of the lawyers net worth, since the lawyer's interest would reasonably be expected to affect his professional judgment.
EC September 1994, item 6

It is improper to agree to reimburse a client for costs if the client is unsuccessful in her litigation.
EC June 1995, item 4

A lawyer was vice-president of a public company, but owned less than 1% of the total share holdings. Her mother was the majority shareholder and other relatives had interests in the company. She wished to act for the company in collecting a small number of debts and acting on a potential litigation claim with respect to a mineral rights expropriation where the potential amount at issue was $25 million. With respect to the collection of the debts, the lawyer would not reasonably be affected by the personal and family interests she had in the company. However, with respect to the mineral rights expropriation, her financial interest at stake was so great that it would reasonably be expected to affect her professional judgment given the potential personal financial implications for her and her family and the lawyer should not act on that aspect of the matter.
EC April 1996, item 4

A lawyer represented a company owned by his father-in-law which was reorganized to purchase an interest in another company, and which involved a transfer of ownership to the father-in-law's children and their spouses, including the lawyer and his wife. The lawyer then acted as the solicitor for the company in the reorganization and purchase transaction. The lawyer admitted to professional misconduct by acting for the company when he had a personal interest in receiving shares.
DCD 96-3

It is improper for a lawyer owning 5% of a company that intends to purchase property for $700,000 to act for the company in the purchase, as the lawyer would be purporting to act as both investor and lawyer. The lawyer's financial interest in the company would reasonably be expected to affect his professional judgment. It is not improper for the lawyer to prepare a shareholder/co-ownership agreement that will govern the relationship between the parties if the lawyer acts only for himself and each individual investor signing the agreement has retained independent counsel.
EC July 1996, item 7

It is not improper for a lawyer to act for her mother in a Small Claims Court action with respect to a constructive dismissal matter, as the mother's interest in this litigation would not reasonably be expected to affect the lawyer's professional judgment.
EC July 1996, item 11

It is proper for a lawyer to enter into an agreement with a client and a bank for the advancement by the bank of funds to cover the clients disbursements.
EC September 1996, item 5

A lawyer provided legal services to a person who was to lend $40,000 in a mortgage transaction even though the lawyer's personal interest in the loan conflicted with the interests of his client. The lawyer later informed another person, who ultimately assumed responsibility for paying off the mortgage loan, about the amount outstanding but did not disclose that he had previously had a personal interest in the loan. The lawyer admitted to professional misconduct by acting for the client when his interests conflicted with hers and to conduct unbecoming in failing to disclose his personal interest in the debt.
DCD 96-9

A lawyer acted for a village in an appeal before the Environmental Appeal Board and was instructed by his client to attempt to uphold the decision of the village Deputy Director of Waste Management to permit the discharge of effluent generated within a specified area in the village. The lawyer and his partner owned an office building in the specified area and the lawyer stood to benefit financially if the decision of the village official was upheld. The lawyer's partner was chairman of a group that sought to gain intervenor status in the appeal to support the decision of the village and was president of an association that was specifically established to promote the granting of the waste permit. It was not proper for the lawyer to act in the matter as he has a direct or indirect financial interest in the outcome of an issue, and the lawyers partner had an interest that would reasonably be expected to affect the lawyer's professional judgment.
EC October 1996, item 11

Where a lawyer has 21% interest in a company and his sister owns a 5% interest, it is not improper for the lawyer to be responsible for filing the annual reports and preparing the annual resolutions for the company, as the lawyers interest and that of his sister would not reasonably be expected to affect the lawyer's professional judgment.
EC December 1996, item 10

A lawyer who acts for a client who has established a British Columbia limited partnership, which will invest in a United States real estate development, is not precluded from investing in the clients limited partnership unit. However, it is improper for the lawyer to perform services for the limited partnership or any services in connection with it after the lawyer acquires an interest.
EC February 1997, item 11

A lawyer may not lend money to a client if the effect of lending money is to give the lawyer an interest in a matter contrary to Rule 1(a), or impair the lawyer's professional judgment contrary to Rule 1(b) or Rule 2.
EC June 1997, item 3

It is improper for a lawyer to accept a referral fee from a realtor for referring a client to the realtor where the lawyer acts for the client in respect of the matter referred. (But see Chapter 9, Rule 8, where the client may consent to the lawyers acceptance of such a fee in other circumstances.)
EC September 1997, item 7

A lawyer may take a mortgage against his clients property to secure fees, but must withdraw as counsel if he is joined as a party to litigation involving foreclosure of the property.
EC February 1998, item 14

A lawyer acting for clients who loaned money for investments in real estate developments in which he had a personal interest was in a conflict of interest when he failed to recommend that clients obtain independent legal advice, acted recklessly as to their interests in securing their investments, failed to disclose information to clients, deceived clients, delayed in refunding fees to a client and misappropriated client funds and wrongfully converted funds.
DCD 01-11

A lawyer arranged for a client to loan money to his daughter's company. He used confidential client information in arranging for the loan, had an indirect financial interest in the matter, failed to advise the client that he was not acting for her in the matter and failed to advise the client to obtain independent legal advice. Such actions constitute professional misconduct.
DCD 01-18

A lawyer represented his wife on an indemnity agreement, a matter in which he had a personal interest, and failed to recommend that she obtain independent legal advice. The lawyer had drafted the indemnity on the spur of the moment to protect his wife's interests and there had been no apparent prejudice to anyone. His breach of this Rule did not have the requisite degree of disgrace or dishonour, nor was it tantamount to a breach of duty to the public or the state, so as to constitute professional misconduct.
DCD 01-23

A lawyer performed legal services respecting security for a loan in which he had a personal interest. He placed his own interests in direct conflict with his clients and did not advise her on the nature of her security or recommend independent legal advice. Such actions constitute professional misconduct.
DCD 01-25

A lawyer was in a conflict of interest situation where he acted for a housing society, served as director of a company that loaned money to the society, made a personal loan, and loaned more money through his personal management company. The mortgages were secured to himself and his company. He executed discharges of his mortgage security in transactions in which he represented the interests of the client and further acted for the client with respect to sales when he had an interest as a mortgagee in the transactions, although he was not repaid from the sale proceeds and not until after the first mortgage was discharged. His conduct in acting while in a position of conflict amounted to professional misconduct.
DCD 02-13

A lawyer who had a 12.5% unregistered interest in a company that purchased real property for $2.6 million was disqualified from acting as the company's lawyer in an action against the vendor and agent for misrepresentation. His interest would affect his professional judgment.
EC December 2002, item 6

A client must receive independent legal advice prior to executing a codicil naming a lawyer as beneficiary who has the discretion to choose and make a charitable disposition with the money.
DCD 03-06

A lawyer represented the plaintiff in a Rule 18A application to determine liability in a MVA. The plaintiff was unsuccessful and estimated costs of $2,500 were assessed against her. Lending $1,000 to the client to assist her in paying the costs would not result in the lawyer taking an interest in his clients matter because the action had concluded.
EC June 2005, item 4

An aboriginal lawyer was a beneficiary of trusts created by the Band for the benefit of Band members. The trusts were intended to promote educational, cultural, and social programs as well as provide benefits to individuals as authorized by the trustees. In the past, individual beneficiaries had received about $90,000 each from the trust capital. The lawyer sought advice on his intention to work as an analyst for the Band in the area of trust law. He would give general legal advice regarding the trusts designed to enhance the trust benefits accruing to beneficiaries, including himself. He did not intend to give advice on the controversial question of encroachment on capital. The Committee regarded the individual and shared financial benefits as substantial. The responsibilities the lawyer would undertake, coupled with the significant personal and shared interests he had in the trusts, would reasonably be expected to affect his professional judgment in the work the Band expected to assign to him. It would be improper for the lawyer to undertake such work.
EC January 2007, item 10

A lawyer owned 25 shares in a non-reporting company, at $1,000 each, giving him a 3% share in the company. He had been a director of the company, but had recently resigned. His law firm handled the company’s corporate affairs and acted for the company on the purchase and sale of land and houses. The Ethics Committee was of the opinion that the lawyer’s investment in the company would not reasonably affect his personal judgment, although he should seek further advice if his investment increased or the character of the legal services changed.
EC October 2007, item 3

Chapter 7, Rule 1 prohibits a lawyer from drafting a will where the lawyer is a beneficiary of the will.
Benchers' Bulletin, No. 4 Winter 2009

Case Law

The plaintiff sought damages against the defendants for wrongful dismissal. A was counsel for both defendants. He was also a member of the first defendant and held executive positions within it. The plaintiff wanted to examine A for discovery and brought an application to enjoin A and his firm from representing the defendants. The court noted two grounds to the application: first that A was nominated as a witness and second, that A had a membership (and executive interest) in one of the defendants. The court found that the first issue was not relevant because A had not yet given viva voce or affidavit evidence. As for the second issue, membership alone was not enough to restrict legal services. The membership interest must reasonably be expected to affect the lawyer's professional judgment. The plaintiff had not proven that fact and the application was dismissed.
Jacks v. Victoria Amateur Swim Club 2003 BCSC 845

Rule 6 - Ancillary business or occupation

A lawyer was found guilty of professional misconduct when he entered into an agreement to develop property with clients. In carrying out the transaction, he made it difficult for his clients to distinguish whether he was acting as a lawyer or a businessman. He drafted an agreement that was onerous and unfair to the clients. He also failed to take steps to ensure that the clients received independent legal advice. Although he did not intend to trick his clients into entering the transaction without proper advice or to take advantage of them, he ought to have known that they would rely on him to protect their interests.
DCD 95-6

Rule 7- Investing a clients funds

A lawyer was found guilty of professional misconduct when he acted as a committee under the Patients Property Act and invested the patients funds in a company in which he had an interest (which investment was not authorized under the Trustee Act).
DCD 94-12

 

 

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Chapter 7 out of 14 chapters in the annotated Professional Conduct Handbook