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Commercial Litigation, Corporate, Employment & Labour

Extra vigilance helps avoid conflicts of interest in business law

Although all lawyers are duty-bound to avoid conflicts of interest, this task is not always as easy as it seems, especially for those who practise business law, Toronto employment lawyer and commercial litigator Anatoly Dvorkin and lawyer Matthew Rendely write in Lawyers Weekly.

As Dvorkin, a founding partner of D2Law LLP, and Rendely, an associate with the firm, explain, lawyers who act for corporate clients, engage in drafting business agreements and deal with mergers and acquisitions “must be extra vigilant in avoiding conflicts of interest.”

The first task in doing so, they write, is to identify precisely who the client is and who the client is not. This task can be complicated by the nature of a corporation, which is incapable of making decisions without the involvement of its human principals.

“Herein lies the potential for conflict: when retained by a corporation, do the instructing parties (and other stakeholders of the corporation) know and understand that counsel is retained to act for the corporation only and for no other party? It is the lawyer’s job to make this crystal clear but even if the lawyer has done so, the instructing individual(s) may expect the lawyer to prefer their personal interests over the corporation’s or over other stakeholders in the corporation based on a pre-existing lengthy business relationship. This is but one obvious example of the type of conflict of interest that business lawyers are required to navigate on a daily basis,” write Dvorkin and Rendely.

Also, they say, unlike in litigation matters, where it is obvious that one lawyer cannot represent two parties who are directly adverse in interest to one another, this is less clear in business law matters, “where parties to an agreement or a transaction often appear to have common goals and interests (such as the shareholders of a corporation who are working toward arriving at a shareholder agreement).”

At the same time, lawyers have both a professional and a legal duty to avoid conflicts of interest.

As Dvorkin and Rendely write, “the Rules of Professional Conduct (the rules) provide that a lawyer shall not act or continue to act for a client where there is a conflict of interest, except as permitted under the rules. Pursuant to the rules, ‘a conflict of interest exists when there is a substantial risk that a lawyer’s loyalty to or representation of a client would be materially and adversely affected by the lawyer’s own interest or the lawyer’s duties to another client, a former client, or a third person.’ Substantial risk means more than a mere possibility that a material adverse effect will occur; ‘…there must be a genuine, serious risk to the duty of loyalty or to client representation arising from the retainer…’”

As a result, business lawyers should take a number of steps in order to avoid conflicts of interest, write Dvorkin and Rendely, including: determining precisely who the client is and is not; drafting clear letters of engagement and letters of non-engagement so that all parties involved understand clearly who the lawyer is representing and who the lawyer is not representing; recommending that all non-represented parties engage their own counsel and if they choose not to do so, requiring that they sign an acknowledgment confirming that they understand that the lawyer is not representing them; and avoid taking on retainers which result in the lawyer being unable to act solely in the best interest of the client.

“Consistently using the best practices described above will not only assist the lawyer in providing appropriate representation to her client, but also to avoid liability in the event of discord between the parties and the inevitable blame that will be laid at the feet of the lawyer by the parties who are unhappy with the outcome of a transaction,” they write.

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