Chapter 2: The C's Flashcards

Question

The conditions for SCI and CSO

Answer 1

So, what are the criteria or conditions which also need to apply before the SCI or CSO exceptions to a conflict of interests can apply? They are set out in paragraph 6.2(i)-(iii) of the Codes and are as follows: (i) all the clients have given informed consent, given or evidenced in writing, to you acting; (ii) where appropriate, you put in place effective safeguards to protect your clients’ confidential information; and (iii) you are satisfied it is reasonable for you to act for all the clients.

Answer 2

We have seen that you cannot act if there is a conflict, either an own interest conflict or a conflict of interests, unless one of the exceptions to a conflict of interests applies (which is rare). So, as a practical point, one of the things you will have to do is take steps to identify whether there is a conflict. CCF 2.1 says that firms must have in place effective systems to identify conflicts. You will see that a conflict check is something you carry out when you take on a new client.

Answer 3

If you are instructed by a new client you need to find out if you or your firm has acted for or against any of the parties to the transaction or owners of the parties in the past You here means you personally and you the firm. Note that there is no standard conflict check, each firm has their own.

Answer 4

· You cannot act if there is a conflict or a significant risk of one. · There are two types of conflict: an own interest conflict and a conflict of interest. · An own interest conflict has no exceptions but is very rare. · A conflict of interests is more common but has two exceptions. · The exceptions to the rule about not acting where there is a conflict of interests are 1) where there is a substantially common interest between the clients and 2) where the clients are competing for the same objective. In both cases, the three conditions set out in CCS/CCF 6.2 also need to apply.

Answer 5

· The competing for the same objective exception to not acting where there is a conflict of interests is very rare. The substantially common interest exception is rare. · Firms must have in place effective systems to identify conflicts. So, we have considered the rule that you cannot act if there is a conflict of interest, the definitions of own interest conflict and conflict of interest and the exceptions to the rule that you cannot act if there is a conflict of interests. Do remember to go to the primary source and read the provisions in the SRA Code on this to consolidate your knowledge.

Answer 6

In this element we will explore: * the general rule that you cannot act where there is a conflict; and * the two types of conflict: * own interest conflict, and * conflict of interest.

Answer 7

This element will refer to provisions in the Solicitors Regulation Authority’s (‘SRA’), the SRA Code of Conduct for Solicitors, Registered European Lawyers and Registered Foreign Lawyers (‘CCS’) and Code of Conduct for Firms (‘CCF’) , (together the ‘Codes’), so have these documents to hand. . You should read CCS 6.1 and 6.2 and the SRA Guidance on Conflicts of Interest whilst studying this element. These can be found on the SRA website at the links below. CCS:https://www.sra.org.uk/solicitors/standards-regulations/code-conduct-solicitors/ SRA Guidance on Conflicts:https://www.sra.org.uk/solicitors/guidance/ethics-guidance/conflicts-interest/

Answer 8

What are the SRA’s requirements regarding conflicts of interest? CCS 6.1: ‘You do not act if there is an own interest conflict or a significant risk of an own interest conflict.’ CCS 6.2: ‘You do not act in relation to a matter or a particular aspect of it if you have a conflict of interest or a significant risk of such a conflict in relation to that matter or aspect of it unless…’ These prohibitions apply to individuals under CCS and also to firms (CCF 6.1 and 6.2). NB CCS 6.2 goes on to set out two exceptions when it is possible to act if you meet certain conditions.

Answer 9

Why are lawyers subject to this prohibition? Remember the overarching Principles: Principle 2: You must act in a way that upholds public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons. Principle 3: You must act with independence. Principle 4: Act with honesty. Principle 5: Act with integrity. Principle 7: Act in the best interests of each client.

Answer 10

Principle 7: You must act in the best interests of each client. Imagine you are acting for a company (‘seller’) that plans to sell its business to another company (‘buyer’). The transaction will involve negotiation on a number of issues: the price, the protections afforded to the buyer etc. The interests of the buyer and the seller will conflict on many aspects. You will not be able to act in the best interests of both the seller and the buyer on the transaction. You may also have difficulty complying with Principles 2, 3, 4 and 5. This is why you are prohibited from acting where there is a conflict of interest.

Answer 11

An own interest conflict is defined in the SRA Glossary as: ‘Any situation where your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter.’ The SRA Guidance on Conflicts of Interest contains examples of circumstances that may give rise to an own interest conflict. These include: A financial interest of yours or someone close to you: for example a client asks you to carry out due diligence on a company you or your spouse/partner own shares in.

Answer 12

A personal or business relationship of yours: for example, you are asked to advise on a claim against a relative of yours, a friend, or someone you are involved with in a financial or business enterprise. Your role as an employee: for example a client asks for advice in relation to a dispute involving your employer or a fellow employee. Your own conduct as a firm or individual: for example where the wrong advice has been given to a client or a wrong action taken on their behalf.

Answer 13

CCS 6.1: ‘You do not act if there is an own interest conflict or a significant risk of an own interest conflict.’ There are no exceptions to this rule. If you have an own interest conflict, or there is a significant risk that an own interest conflict might arise, you must NOT act.

Answer 14

A conflict of interest is defined in the SRA Glossary as: ‘A situation where your separate duties to act in the best interests of two or more clients in the same or related matter conflict.’ The most obvious example is where there is a dispute between two clients or prospective clients. CCS 6.2 will prevent you acting for both sides in a litigation dispute. CCS 6.2 goes on to set out two exceptions when it is possible to act if you meet certain conditions.

Answer 15

The rules on client conflicts help you comply with Principles 2, 3, 4, 5 and 7.You must not act if there is an ‘own interest conflict’ or a significant risk of an own interest conflict (CCS 6.1). There are no exceptions to this rule. An ‘own interest conflict’ occurs where your duty to act in the best interests of your client conflicts with your own interests. You must not act in relation to a matter if you have a ‘conflict of interest’ or a significant risk of such a conflict (CCS 6.2).A ‘conflict of interests’ occurs where your separate duties to act in the best interests of two or more clients in the same matter conflict. There are two exceptions to the rule in CCS 6.2.

Answer 16

This element will refer to provisions in the Solicitors Regulation Authority’s (‘SRA’) Code of Conduct for Solicitors, Registered European Lawyers and Registered Foreign Lawyers (‘CCS’) and Code of Conduct for Firms (‘CCF’),(together the ‘Codes’),so have these documents to hand. In this element we will consider the two exceptions to the general rule that you cannot act where there is a conflict of interest: * Substantially common interest, and * Competing for the same objective (CCS 6.2).

Answer 17

Remember that there are no exceptions to the rule that you cannot act where there is an own interest conflict (CCS 6.1) You should have CCS 6.1 and 6.2 and the SRA Guidance on Conflicts of Interest to hand while you complete this element. These documents can be found on the SRA website: CCS:https://www.sra.org.uk/solicitors/standards-regulations/code-conduct-solicitors/ SRA Guidance on Conflicts:https://www.sra.org.uk/solicitors/guidance/ethics-guidance/conflicts-interest/

Answer 18

CCS 6.2: ‘You do not act in relation to a matter or a particular aspect of it if you have a conflict of interest or a significant risk of such a conflict in relation to that matter or aspect of it unless: a) The clients have a substantially common interest in relation to the matter or the aspect of it, as appropriate; or b) The clients are competing for the same objective, and the conditions below are met, namely that:

Answer 19

(i) all the clients have given informed consent, given or evidenced in writing, to you acting; (ii) where appropriate, you put in place effective safeguards to protect your clients’ confidential information; and (iii) you are satisfied it is reasonable for you to act for all the clients.’

Answer 20

The SRA Glossary defines substantially common interest as: ‘a situation where there is a clear common purpose between the clients and a strong consensus on how it is to be achieved.’ There are two important elements to the definition:

Answer 21

‘Clear common purpose’: It is arguable that for all commercial deals the clients have a clear common purpose: to get the deal done. Some students think that means the clients have a SCI but this is not the case, otherwise you would have the same firm acting for both the buyer and seller in most deals. You also need a ‘strong consensus’ as to how to achieve that common purpose. To satisfy this element the parties must have already agreed all the key terms of the deal and how it is going to proceed. This means there will be very little, if any, negotiation.

Answer 22

As soon as negotiation is involved, there is a risk that each of the parties’ best interests will differ and, in acting for both, you will not be able to act in each of their best interests. This will often be the reason why the SCI exception does not apply.

Answer 23

Examples of where the SCI exception apply include: Two people are buying a house to live in together. They both have a clear common purpose, buying the house. They also both have a strong consensus on how it is to be achieved as they will both have the same interest in there being no problems with the title to the house they buy.

Answer 24

Two clients instruct you on setting up a business together. The clear common purpose is setting up the business. To demonstrate a strong consensus, they will need to have agreed the key terms, for example how the business will be owned, and its purpose. Remember that in practice SCI is rare. Even if both of the elements in CCS 6.2(a) (clear common purpose and strong consensus) are satisfied, you will also need to satisfy all three elements at 6.2(i) – (iii).

Answer 25

The SRA Glossary defines substantially common interest as: ‘any situation in which two or more clients are competing for an “objective” which, if attained by one client, will make that “objective” unattainable to the other client or clients, and “objective” means an asset, contract or business opportunity which two or more clients are seeking to acquire or recover through a liquidation (or some other form of insolvency process) or by means of an auction or tender process or a bid or offer, but not a public takeover.’

Answer 26

An example where this exception could apply is where two clients are competing to buy a business at an auction or through a tender process. One of the clients winning the action or tender process means that the objective (ie the business) will be unattainable to the other client. In practice this exception only applies to sophisticated clients. In addition to satisfying 6.2(b) you will need to ensure that all the conditions in 6.2(i) –(iii) are also satisfied. Again, this is rare in practice.

Answer 27

For either SCI or CSO to apply, the lawyer involved will need to comply with all the conditions in 6.2(i)- (iii) namely: (i) all the clients have given informed consent, given or evidenced in writing, to you acting; (ii) where appropriate, you put in place effective safeguards to protect your clients’ confidential information; and (iii) you are satisfied it is reasonable for you to act for all the clients.

Answer 28

The SRA Guidance on Conflicts gives useful guidance on how to apply these conditions. Condition (i): (i) all the clients have given informed consent, given or evidenced in writing, to you acting; The SRA Guidance states: ‘What will constitute informed consent will vary according to the circumstances. You must ensure that all the clients have given their agreement with appropriate knowledge and understanding of the situation. If the client is more vulnerable you will need to take this into account when giving them the necessary information.’ If one of the clients is more vulnerable than the other, it might not be in their best interest for you to act for both parties, see also condition (iii) below.

Answer 29

Condition (ii): (ii) where appropriate you put in place effective safeguards to protect your clients’ confidential information; This condition can be a stumbling block to the exception applying. As you know, lawyers have a duty of confidentiality to their client. The SRA Guidance states: 'where there is a conflict of interest or a potential one, it is likely that information relevant to the matter cannot be passed by you between clients. This could be because of a lack of consent to disclose it or because it is not in the client's best interests to do so. In these circumstances you must not act or cease acting - for one or both clients - unless either of the following situations apply...'

Answer 30

‘First you are a firm and can put effective safeguards in place. This will need to include separate fee earners acting for the clients. The courts have made it clear that ...such safeguards require established structural separation within a firm so that confidential information cannot pass from the lawyer acting for one client to the lawyer acting for the other client. Alternatively, it may not be “appropriate” for effective safeguards to be put in place. This might arise, for example, where your clients consider it desirable for the same lawyer(s) to represent them, and they agree with you which information can and cannot be shared, and therefore that structural safeguards to protect their confidential information are not required.

Answer 31

You will need to ensure that you obtain informed consent from each client that no structural safeguards are needed.' You can see that in practice condition (ii) can be a stumbling block to the exception applying. It is very rare for clients to agree that effective safeguards to protect their confidential information are not necessary.

Answer 32

Condition (iii): (iii) You are satisfied it is reasonable for you to act for all the clients. The SRA Guidance gives various factors to consider including:

Answer 33

* The respective knowledge and bargaining power of the clients: if one client is more vulnerable than the other, then it might not be reasonable for you to act for both of them. You should consider recommending that the vulnerable client obtains their own independent advice. Equally if a company is entering an agreement with an individual, it is likely that the company will be in a stronger bargaining position than the individual. If so, the individual should obtain their own advice.

Answer 34

if it is likely that there will be negotiations between the clients, you should not act for both of them, as it is likely that there will be a conflict of interest.

Answer 35

There might be benefits in you acting for both clients. For example if the matter requires specialist knowledge, (for example for an aviation matter, there may be a limited number of solicitors who are competent to advise.) There might also be benefits of speed, convenience or lower cost from one lawyer acting for both clients.

Answer 36

Under CCS 6.2 and CCF 6.2, there are two exceptions where you may be able to act where there is a conflict of interest or a risk of a conflict of interest:where the clients have a substantially common interesting relation to the matter or the aspect of it, as appropriate; orthe clients are **competing for the same objective. **For each exception you must meet all the following conditions:all the clients must have given informed consent, in writing, to you acting;where appropriate you put in place effective safeguards to protect your clients’ confidential information; and you are satisfied it is reasonable for you to act for all the clients.In practice the occasions when you will fall within these exceptions are **rare. **There is no exception to the rule that you cannot act if there is an own interest conflict (CCS 6.1 and CCF 6.1).

Answer 37

In this element we will consider: * the requirement to carry out a conflict check, and * how you carry out a conflict check. This element will refer to provisions in the Solicitors Regulation Authority’s (‘SRA’) Code of Conduct for Solicitors, Registered European Lawyers and Registered Foreign Lawyers (‘CCS’) and Code of Conduct for Firms (‘CCF’).

Answer 38

There is a prohibition on acting where there is an own interest conflict (CCS 6.1) or a conflict of interests (CCS 6.2). There are two exceptions in CCS 6.2 to the general rule that you cannot act where there is a conflict of interest: * substantially common interest, and * competing for the same objective. There is no exception to the rule that you cannot act where there is an own interest conflict (CCS 6.1).

Answer 39

CCF 2.1: ‘You have effective governance structures, arrangements, systems and controls in place that ensure: (a) You comply with all the SRA’s regulatory arrangements, as well as with other regulatory and legislative requirements, which apply to you’.

Answer 40

As far as conflicts of interest are concerned, CCF 2.1 means that law firms need to have systems in place to ensure that there are no conflicts in place at the outset of the instruction. So what do you need to do? * Before you take on a new instruction you will need to check whether the work you are proposing to do for the client conflicts with any work your firm is doing for another client or if it conflicts with your own interests. * If you work for a national or international law firm this will involve checking whether the work conflicts with work your firm is doing for an existing client in another office in this country or overseas. * You should carry out a conflict check when you take on a new instruction from both new and existing clients.

Answer 41

A search should be carried out against: * The client name (and any of its parent or subsidiary companies). * The client’s company number (and that of its parent or subsidiary companies). * The names of any counter parties to the matter (for example if the new client is proposing to sell its subsidiary company X to Y, you need to check whether your firm is acting for Y on any matters).

Answer 42

* The company name and number of the company being bought, X, in the above scenario. * The names of directors of the client (including directors names of any parent company and subsidiaries) and of the company being bought to see if the new client and new matter conflicts with any previous clients or matters on which the firm has acted. * The name of the matter (which would include the name of any target company on these facts). Each law firm will have their own procedure for carrying out a conflict check.

Answer 43

Consider the following example: Jason Shelly, the managing director of Libris Ltd (‘Libris’), would like to instruct your firm to act for Libris in connection with its acquisition of another company, Braxton Books Ltd (‘Braxton Books’). Braxton Books is a wholly owned subsidiary of Braxton PLC. Against whom should you carry out a conflict check? Write down your answer and check it against the next slide.

Answer 44

You should carry out a search of Libris at Companies House to identify the directors and shareholders of Libris, its company number, its directors, and any parent company or subsidiary companies. You should carry out a conflict search against: * Libris (the potential new client) * Any parent or subsidiary company of Libris * The directors of Libris and any parent or subsidiary companies * Braxton Books * Braxton PLC * Any other subsidiaries of Braxton Books or Braxton PLC, and * The directors of Braxton Books, Braxton PLC or any subsidiaries of those companies.

Answer 45

CCF 2.1 requires law firms to have systems in place to ensure compliance with the SRA’s Regulatory Requirements, including relating to conflicts of interest. You should carry out a conflict check before accepting instructions on a new matter from both new and existing clients. Each firm will have its own conflict of interest policy. As a minimum you should carry out a conflict check against: The name of the client, its parent and subsidiary companies. The name of the counter party, its parent and subsidiaries. The directors of the client and the counter party.

Answer 46

In this element we will: * explore why law firms send client care letters; * look at the SRA’s requirements relating to service and competence; and * explore when it is possible to terminate your retainer with a client. You should read CCS 1.1 and 3.2-3.6 and CCF 4.2-4.4. These documents can be found on the SRA website at the links below. CCS:https://www.sra.org.uk/solicitors/standards-regulations/code-conduct-solicitors/ CCF: https://www.sra.org.uk/solicitors/standards-regulations/code-conduct-firms/

Answer 47

Helping the client understand what you are doing, and why you are doing it is vital in any service business. For law firms, client surveys point out that, as a profession, solicitors do not always clearly explain what it is they actually do. In order to treat your client fairly (in accordance with CCS 1.1) it is recommended that firms send their clients a client care letter (also known as an engagement letter, or retainer letter) setting out the terms and conditions on which they are acting.

Answer 48

The SRA does not require firms to send client care letters. However the SRA does require certain information to be set out for the client in writing. Most firms choose to send client care letters to their clients as a good way of demonstrating that they have met the SRA’s requirements. Most firms will have their own standard forms of client care letters.

Answer 49

The requirements as to the level of service the SRA expects from legal professionals are set out in CCS and apply to all legal professionals, whether they work in law firms, in-house or another setting. You ensure that the service you provide to clients is competent and delivered in a timely manner (CCS 3.2 and CCF 4.2); You maintain your competence to carry out your role and keep your professional knowledge and skills up to date (CCS 3.3);

Answer 50

You consider and take account of your client’s attributes, needs and circumstances (CCS 3.4 andCCF 4.2); Where you supervise or manage others providing legal services: (a) you remain accountable for the work carried out through them; and (b) you effectively supervise work being done for clients (CCS 3.5); You ensure that the individuals that you manage are competent to carry out their role, and keep their professional knowledge and skills, as well as understanding of their legal, ethical and regulatory obligations, up to date (CCS 3.6).

Answer 51

CCF also places the following obligations on firms: You ensure that your managers and employees are competent to carry out their role, and keep their professional knowledge and skills, as well as understanding of their legal, ethical and regulatory obligations, up to date (CCF 4.3); You have an effective system for supervising clients’ matters (CCF 4.4).

Answer 52

In some circumstances you might feel that you have to terminate your retainer (or relationship) with a client. There is no specific provision in CCS or CCF dealing with terminating your retainer, however the following are examples of what might be a ‘good reason’ to terminate your retainer with a client: * you cannot obtain clear instructions (for example each of the two partners from a two-partner firm of accountants give you conflicting instructions);

Answer 53

* to carry on acting for the client would break the law or breach the Codes (for example where there is a conflict of interests); or * your client has failed to pay its bills. Traditionally, this was not considered a ‘good reason’ to terminate the retainer, but firms have sought to resolve the issue by having a specific contractual agreement in writing with a right to send the client interim bills and a right to terminate the retainer for non-payment of an interim bill.

Answer 54

A lawyer or law firm cannot terminate their retainer with a client on grounds of self-interest as paragraph 1 of CCS and CCF requires you to treat a client fairly. Principle 7 also requires you to act in the best interests of each client. Principle 4 and Principle 5 require you to act with honesty and integrity.

Answer 55

* The SRA does not require firms to send client care letters, but it does require certain information to be set out for the client in writing. * The SRA also has requirements regarding the competence and level of service legal professionals should provide to their clients, set out in CCS 3.2-3.6. * Most firms choose to send client care letters to their clients as a good way of helping clients understand what they are doing and demonstrating that they have met the SRA’s requirements. * There is no specific provision in CCS or CCF permitting a lawyer to terminate their retainer with a client. However, good reasons for terminating your retainer include:

Answer 56

* not being able to obtain clear instructions from your client; * when to carry on acting would break the law or breach CCS or CCF; * in certain circumstances where your client has failed to pay its bills. * Lawyers have to comply with CCS 1.1 and Principles 4, 5 and 7. Therefore they cannot terminate their retainer on the grounds of self interest.

Answer 57

CCS 8 requires you to give certain information to clients, to ensure they are properly informed. Many firms provide this information in their client care letters. You give clients information in a way they can understand. You ensure they are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them (CCS 8.6);

Answer 58

You ensure that clients understand whether and how the services you provide are regulated. This includes (a) explaining which activities will be carried out by you, as an authorised person; (b) explaining which services provided by you, your business or employer and any separate businesses are regulated by an approved regulator; and (c) ensuring that you do not represent any business or employer which is not authorised by the SRA, including any separate business, as being regulated by the SRA (CCS 8.10); You ensure that clients understand the regulatory protections available to them (CCS 8.11).

Answer 59

CCS 8.6, 8.10 and 8.11 apply to client care generally. In relation to the client care letter, you need to be transparent in what it is you are going to do for your clients. You also need to ensure that the delivery of this information is ‘timely’. Many firms consider that the best way to achieve this is to provide a suitably detailed client care letter to your client as soon as is practicable after receiving instructions on a new matter. The SRA has produced guidance on how to provide information in a user friendly way.

Answer 60

Costs will be a really important concern for your client so it is no wonder that the Codes deal specifically about the standards concerning costs. There are various obligations setting out the need to be transparent as to the cost of advising the client, particularly the basic obligation of informing them as to how much you are going to or are likely to charge them. You can’t just pluck a figure out of the air! The costs information should be contained within the client care letter and also discussed with the client in order that they understand it.

Answer 61

Information as to likely costs should be provided at the time of engagement and also during the course of the matter as appropriate, and should also be discussed with the client in a way the client can understand. Transparency is the key issue here in terms of the detail of the information you give in relation to your charges but also in relation to potentially contentious issues such as complaints on a bill. The standards apply equally to Firms pursuant to CCF 7.1(c).

Answer 62

CCS 8 requires that you: ensure that clients receive the best possible information about how their matter will be priced and, both, at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of the matter and any costs incurred (CCS 8.7). ensure that any publicity in relation to your practice is accurate and not misleading, including that relating to your charges and the circumstances in which interest is payable by or to clients (CCS 8.8).

Answer 63

While CCS does not require you to provide information on costs to your client in writing, it does require you to provide ‘the best possible information’ about how their matter will be priced. Most firms consider that the clearest way of doing this is to include the information in the client care letter. This is a good way for firms to demonstrate their compliance with CCS 8.7.

Answer 64

It is very important to keep track of the costs as you are going along. Sometimes the simplest of jobs can get very complicated. For example, you may be instructed to collect a debt and issue proceedings. But when you receive a defence from the defendant, it turns into a full-blown litigation case. The costs implications for a claimant are huge. You should be pre-warning such a client that although they may think it’s just a case of suing and collecting the debt, if the debtor wants to fight and has an arguable defence, the proceedings could be a lot more involved and very much more expensive than was originally envisaged – what could have been less than £1,000 in costs can snowball into a projected cost of many thousands. Pre-warning your client, keeping their expectations realistic and explaining all the possible outcomes of litigation (or any matter) is part of your job.

Answer 65

Every law firm must have a procedure for dealing with complaints. CCS 8 requires that you: ensure that, as appropriate in the circumstances, you either establish and maintain, or participate in, a procedure for handling complaints in relation to the legal services you provide (CCS 8.2).

Answer 66

You must also inform your client in writing of the complaints procedure at the time of engagement: you ensure that clients are informed in writing at the time of engagement about: (a) their right to complain to you about your services and your charges; (b) how a complaint can be made and to whom; and (c) any right they have to make a complaint to the Legal Ombudsman and when they can make any such complaint (CCS 8.3). Law firms commonly include their complaints procedure in the client care letter.

Answer 67

· The SRA requires lawyers and law firms to give clients certain information about the service they are providing. Key provisions include: · Lawyers must be transparent with their clients. They must give clients information in a way they can understand. They must ensure clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them (CCS 8.6).

Answer 68

· Lawyers must give clients the ‘best possible information’ about how their matter will be priced (CCS 8.7). · Law firms must have a complaints procedure (CCS 8.2). · Lawyers must inform their clients in writing about their complaints procedure (CCS 8.3).