Ethics and professional conduct in business law and practice

What are the common conduct questions in business law and practice?

See attached.

What is maintaining trust and integrity in BLP (Business Law and Practice)?

When acting in BLP, you must maintain trust and act fairly in your relationship with your client and others. The Code sets out ways in which you may achieve this, and these are dealt with in turn.

You do not abuse your position by taking unfair advantage of clients or others (Para 1.2): as part of your practice in BLP, you may encounter unrepresented parties and, in such circumstances, there is potential for this duty to be breached (see Chapter 7 of Ethics, Unrepresented parties). This may, for example, be in relation to an unrepresented seller, buyer or party to a commercial contract.

You perform all undertakings given by you, and do so within an agreed timescale, or if no timescale has been agreed, then within a reasonable amount of time (Para 1.3): undertakings are a key element of work in BLP (transaction work in particular). For example, you may be asked to provide an undertaking to hand over documents on completion, discharge pre-existing charges or procure registration of a charge at Companies House. You may also be required to provide an undertaking to pay a third party’s costs.

What is your duty to not mislead clients or others (para 1.4)?

A solicitor must not mislead or attempt to mislead clients or others, either by their own acts or omissions, or by allowing or being complicit in the acts or omissions of others (including their client (Para 1.4). The rule is closely associated with Principles 2, 4, 5 and 7.

Misleading a client: solicitors may mislead a client by, for example, saying that a transaction is at a particular stage, when it is not. This could include confirming that draft documentation has been submitted to a potential buyer, or that a charge has been registered at Companies House.

Term

Definition

What is conflict, confidentiality and disclosure requirements?

Part 6 of the Code provides a series of rules relating to when a solicitor should decline to act for particular clients. This section sets out how situations involving these rules may apply in the context of BLP. Conflict of interest (Paras 6.1 and 6.2). You must not act if you have your own interest conflict or a significant risk of such a conflict (Para 6.1). This is an absolute rule and there are no exceptions. To act in such circumstances would also be a breach of Principle 7 (to act in the best interests of each client). The SRA guidance gives specfici example, within context of BLP, of where a client asks you to carry out due diligence on a company in which you or your spouse own shares. There would be a clear conflict here as the solicitor, or a closely connected party to the solicitor, would have a personal financial interest in the company. You must also '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' Para 6.2. The section applies equally to individuals and firms, and BLP can be a relatively high conflict area. Revision tip: it is important to be able to distinguish between an own interest conflict and a conflict of interest, go to Chapter 2 Ethics if forgotten. Some key examples of where a conflict of interest might occur in the context of BLP are the following: - acting for seller and buyer in transactional work - acting for one client seeking to lease an asset to another - agreeing a commercial contract between two parties. Of particular relevance to BLP is competing for the same objective exception, where a solicitor may act despite a conflict or a significant risk of one, where the clients are competing for the same objective (Para 6.2(b)). In this context, 'objective' is defined in Chapter 2 and the exception is very specific. Otherwise, according to SRA guidance, acting for two clients seeking separately to purchase a particular asset could give rise to a conflict of interest or a significant risk of one arising. A particular situation that can arise in the context of BLP is being instructed to set up a business (eg drafting a partnership agreement or incorporating limited company). In such circumstances, a solicitor may act under the substantially common interest exception, provided that the key terms have been agreed (eg management, shareholdings and finance). According to the SRA guidance, you may remove the risk of a conflict of interest or a potential conflict by restricting your retainer. This involves only advising on aspects of a matter where a conflict is not likely to arise. E.g. two commercial clients keen to do due diligence for company btut still deciding if will purchase individually or collectively. Solicitor may be able to act here on a retainer limited to due diligence on the basis that all the information will be shared. If the clients later decide to compete with each other, one or boht of them would need to seek independant legal advice.

What happens when acting for the seller and buyer?

Although, under the Code, there is no absolute prohibition on acting for both seller and buyer, the cases where this will be permissible are rare. General position is that - SRA guidance specifically states that there is likely to be a conflict of interest or a significant risk of one arising where a client sells or leases an asset to another conflict. A conflict is likley to exist where assets are transferred for value, at arm's length, usually between unconnected parties. The possibility of a conflict is also strongly linked to the need to negotiate between parties. The more likely the need for negotiation, the more likely there will be a potential conflict. The exceptions: - the substantially common interest exception does not usually apply to a sale and purchase. - The competing for the same objective exception does not apply, as the parties are each working towards different objectives (disposal and acquisition). Arm's length: a transaction is at arm's length where both parties are not connected and are each acting in their own commercial self-interest.

What is acting for joint buyers?

Subject to compliance with Para 6.2 of the Code, a solicitor may usually act for joint buyers in transactional work (eg a purchase as a joint venture or as partners), as they will usually have the same interest. In these circumstances, it is best practice to obtain instructions from all clients.

What are rules when acting for borrower and lender?

Whilst it Is usually possible to act for borrower and lender in straightforward residential property transactions, this is not usually possible within the context of commercial lending more generally. In many cases, a lender will insist on separate representation. - It is common for a solicitor engaged in BLP to be asked to act in relation to loan finance, such as general company borrowing, or company refinancing (effectively moving from one lender to another) - in this context, it is likely that the terms of the loan facility (facility letter) will need to be negotiated - it is also possible that the security documentation (eg debenture and legal charge(s) will be bespoke, and subject to negotiation. However, most institutional lenders use standard legal charges and debentures, particularly in straightforward and lower value transactions. - Where negotiations of loan and security documentation is not required, it may be possible to act for both parties, under the substantially common interest exception (subject to compliance with conditions in Para 6.2). Accordingly, a solicitor should not usually act for both parties in commercial lending transactions where negotiations are required. However, in some circumstances separate representation may be limited to key areas of potential conflict (eg the negotiation of the facility letter and, possibly, the security documentation), with the borrower's solicitor acting for both parties on completion of the documentation (and/or investigation of title). In the case of such a limited retainer, a solicitor may rely on the substantially common interest exception (subject to compliance with conditions in Para 6.2).

What are rules when acting for guarantors?

A solicitor in BLP may be asked to act for a third party in relation to the guarantee of a client's business debts. For example, a wealthy parent may be asked to guarantee the business debts of their adult children, who is setting up in an unincorporated business, or the debts of the child's newly formed limited company. The guarantee may be personal and, in some cases, secured. In these circumstances, there is a possibility of undue influence arising as, family connections aside, the guarantee will not strictly be in the third party's interests, as their personal assets will be at risk in the event of default. Exam warning: in the case of a guarantee, it is highely likely that there will be a conflict of interest or a significant risk of one. Look out for this is in an MCQ. In this situation, it would be advisable for another fee earner within this firm to act in these circumstances, or that the guarantor receives separate representation from another firm. In any event, if acting for a third party guarantor, it is necessary to follow the Etridge guidelines. It is also worth mentioning that a guarantee may be required between different companies within the same group, or between a director-shareholder and their 'own' company. In such circumstances, due to the connection between both parties and their sophisticated nature, it should be possible to act, either on the basis that there is no conflict of interest or significant risk of one, or under the substantially common interest exception (subject to compliance with conditions in Para 6.2)

What are confidentiality and disclosure requirements (paras 6.3-6.5)?

Paras 6.3-6.5 deal with the associated duties of confidentiality and disclousre. A solicitor is under a duty to act in the best interests of each client (Principle 7), and they must balance the two duties. In the event of conflict, the duty of confidentiality will usually prevail.