The regulations governing solicitors’ behaviour prohibit them from acting for more than one client where conflict or a serious risk of conflict arises. The rules encompass all situations where acting in the best interests of one client in a transaction would prejudice another client in the same – or a related – transaction.
Where a solicitor acts for more than one client, he must keep the position under review and must cease to act for one or both of them if it becomes untenable to continue to represent both without prejudicing either client.
Cherney v Neuman [2011] EWHC 2156 (Ch); [2011] PLSCS 221 illustrates how conflicts can arise during the course of a transaction between clients who appear to place the utmost trust in each other and whose relationship appears unshakeable. It is essential – but uncomfortable – reading for anyone seeking to apply the rules to sale and purchase transactions.
The court was satisfied that solicitors are not under a general duty to advise on the commercial merits of a transaction or on the value of properties or the prices paid for them. However, clients are entitled to be told if, in the course of a transaction, their solicitor discovers information of potential significance to them.
The judge held that the existence of a back-to-back transaction is a material fact when acting for a purchaser – and that solicitors have a duty to inform clients in such cases, especially if the seller stands to make a profit as a result. In addition, solicitors acting for sellers have a duty to report any sums that are paid “under the table” to third parties because it is improper to conceal the true purchase price of property.
The court was unimpressed by the solicitor’s failure to recognise and manage conflicts of interests between clients. However, it rejected one of the claims against her firm on the ground that the buyer had been told about the profit that the seller stood to gain from the back-to-back transaction. The court also dismissed a separate claim in respect of a purchase, despite the fact that the solicitor had known about a side-payment made to a third party who was representing the buyer (and for whom her firm also acted), on the ground that the seller did not suffer any loss because he had known about it and was content for the payment to be made.
The judge agreed that the solicitor had adopted a high-risk strategy by preferring one client over another and paying sums out of client account in breach of trust and without the requisite authority. However, on the facts, the seller had not suffered any loss as a result.
The case highlights the vigilance required to prevent solicitors from becoming embroiled in conflicts of interest between clients. Conflicts can arise suddenly and unexpectedly – and may be irreconcilable.
Allyson Colby is a property law consultant
