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A conflict of interest

1 November 03

The scope of the conflict of interest rule, with particular reference to imputed knowledge

by David O’Donnell

Over the past year, I have given a number of CPD talks on conflicts of interest topics. Whilst this may not be the most exciting topic in the world, it is the one that probably throws up the most difficult problems in practice. An area of particular difficulty is the concept of imputed knowledge. This topic threw up many interesting and varied responses from solicitors and it became clear that not only is this subject not fully understood by many solicitors, but it is also by and large ignored in day to day practice. Such an approach could have serious consequences, and the purpose of this article is to highlight the existing rules regarding imputed knowledge.

The basic rule

The rule arises from the case of Cleland v Morrison (1878) 6 R 156 and can be stated thus:

Employment of a firm of solicitors is the employment of all the partners of the firm and the knowledge of one partner is the knowledge of all the partners.

The Scottish Solicitors Discipline Tribunal has also held that for the purposes of professional practice, it is not possible for a client not to be deemed the client of all the partners.

Taking both of these points together clearly defines the problem. In, say, a 20 partner firm, every solicitor is deemed to be acting for every client and every solicitor is deemed to have full knowledge of every client’s affairs. This problem is exacerbated where there is more than one office or branch in the partnership as the rule does not make any exceptions on this basis. In the ideal world therefore, before any partner commences work for a new client, he or she should ensure that this new piece of work will not conflict with any other client’s interests. It can be readily seen that do this in larger firms or firms with more than one office may be well nigh impossible. In practice therefore, either for reasons of expediency or misunderstanding, the imputed knowledge rule appears to be largely ignored. Accordingly, it is more than likely that almost every practice unit in Scotland is in breach of, or in the past has breached, this rule and therefore also the general rule prohibiting solicitors from acting where there is a conflict of interest.

The above may seem a somewhat overdramatic and extreme conclusion, and the question might reasonably be asked, if so many solicitors are falling foul of this rule, why is there not a plethora of complaints, based on this rule, flooding the Client Relations Office of the Law Society of Scotland? The reason why this rule does not create major problems lies in three distinct answers.

1. The overwhelming majority of clients are happy with the service provided by their solicitors and have no interest in complaining, particularly on grounds they are probably not aware of and understand even less.

2. In any conflict of interest situation, the perception of the client is vital. In cases based on imputed disqualification, it is likely the client sees his or her solicitor as an individual and not as a partner in a larger entity. The client will therefore judge whether that individual solicitor has breached their trust rather than the wider partnership. This also suggests that clients understandably prefer to think in terms of actual knowledge rather than imputed knowledge. This also seems to be the trend of the more recent court decisions dealing in general terms with conflict problems.

One of the commonest areas where imputed knowledge problems could be expected to arise has already been addressed in the 1986 Conflict of Interest Practice Rules. These Rules, however, themselves throw up an anomaly which only highlights further the difficulty arising from imputed knowledge.

Before examining these Rules, it is necessary to define what we mean by a conflict of interest. As the Rules contain no definition it must have been presumed that all solicitors are aware of what a conflict of interest is. Whilst this may be true, it is an extremely difficult concept to define succinctly and perhaps the best way of treating conflicts is not to attempt too precise a definition, but rather to devise a test to identify them. In this regard one of the best tests is found in the 1998 Law Society Guidelines, which provide that if a solicitor is giving different advice to different clients about the same matter, there is a conflict of interest. As we have seen, due to imputed knowledge, this will invariably be the case where there is more than one client seeking advice about the same matter from a firm.

The Conflict of Interest

Practice Rules 1986

Rule 3, which could be described as the general “golden” rule, provides that a solicitor shall not act in a conflict of interest. This rule is clearly aimed at every individual solicitor and is absolutely clear in its meaning. Rule 5 extends the prohibition to firms, but provided there is no conflict or none might reasonably be expected to arise, it appears to allow exceptions to the “imputed knowledge” prohibition. Arguably, it may be possible to justify these exceptions on the basis that they only apply where there is no conflict. Whilst this may seem reasonable, it is clearly contrary to the imputed knowledge principle. Unfortunately however, the matter is further confused by rule 8 which allows firms to act for more than one potential purchaser. In other words, it is perfectly competent in terms of the 1986 Practice Rules, for a firm to offer for more than one client at the same closing, provided no solicitor has advised more than one client of the firm. Simply put therefore, a firm could offer for as many clients at a closing as it has individual solicitors to take instructions. Such a position flies in the face of the imputed knowledge prohibition, however welcome and reasonable such a rule is for the profession.

More important perhaps are the two additional problems that rule 8 now throws up. First, firms are only entitled to act for more than one prospective purchaser if the client is informed of such intention. In larger firms it is likely that partners are unaware of other partners also offering for the same property until their respective trainees meet at the closing. Those clients would therefore not have been informed of the intention to act for other clients. Like most practice rules it is specifically stated that a breach of these rules may be treated as professional misconduct.

Secondly, if rule 8 permits firms to act for more than one potential purchaser, does it also permit the same firm to act for the potential seller at the closing? After all, at that stage there is a much greater conflict between the potential purchasers (who are in direct competition with each other) than between the potential seller and purchaser (who both wish an agreement to sell to be reached). Rule 8 is quite clear however in its terms and relates only to potential purchasers (or tenants). Firms of course do act for both buyer and seller at closings (and thereafter). Firms acting in this way will ensure that the potential seller and potential purchaser(s) will have been separately advised, but this offers no protection in terms of rule 8. Protection may be found however in the exemptions to the general rule contained in Rule 5. The most commonly used exemption is 5(d), that the seller and purchaser are both established clients of the firm. The Rules do not contain any definition of what an established client is, but the Law Society has decided in its 1998 Guidelines that an established client is a client for whom the firm has already opened a file that contains a piece of work that could be charged for. The piece of work can be either a completed or ongoing matter and it does not seem to be of any significance for the defining of an established client as to when this piece of work was instructed. It would appear therefore that it would be possible to create an “established client” almost immediately prior to taking the instructions to act in the closing by, for example, taking initial instructions to consider the making of a will or some other small piece of work.

Conclusion

It is clear there is confusion about when firms may act for more than one client in the same matter. At one level, due to the imputed knowledge rule, it would appear unwise ever to act. At another, due to the established client exception laid out in rule 5(d), many firms may act in situations where it would be wiser not to. In between these two extremes lie the rules governing acting at closings. It is difficult to draw a totally clear principle from the above, but the following can be said with some certainty.

  1. It is never permitted to act in an actual conflict of interest.
  2. The protection offered under rule 5(d) only applies to established clients and only where there is no actual conflict.
  3. The imputed knowledge rule still exists but may eventually be weakened or even removed in the future.
  4. It is essential to obtain the protection under rule 8 when a firm is acting for more than one client at a closing, to inform those clients. It is not clear how this should be done. It may be that every firm should reserve the right to do this in their initial letter of engagement with every purchasing client. Whether this would satisfy the terms of rule 8 if a complaint is made is unclear.