Recognizing and avoiding conflicts of interest can be thorny. Rule 1.8(a) of the NC Rules of Professional Conduct addresses one such conflict: engaging in business transactions with clients. Specifically, the Rule provides that an attorney may engage in a fair and reasonable transaction with a client under certain conditions, which include informed, written consent by the client and the opportunity to consult independent counsel. The Rules are clear that you may engage in these transactions with certain restrictions, but does that mean you should?
Regarding conflicts of interest with current clients, Rule 1.8(a) provides:
(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest directly adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
The Reasoning behind Rule 1.8(a)
Comment one provides the rationale behind the Rule. “A lawyer’s legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property or financial transaction with a client, for example, a loan or sales transaction or a lawyer investment on behalf of a client.”
When Does the Rule Not apply?
Rule 1.8(a) generally would not apply in the following circumstance:
- Business dealings with former clients;
- Commercial transactions between the lawyer and client where the client normally markets those services to the public such as medical or banking services, products distributed by the client etc.;
- Fee agreements between the attorney and client except where the lawyer obtains an interest in the client’s property as payment for a fee;
Further, if you have a situation where the client is independently represented in the transaction, paragraph (a)(2) of Rule 1.8 would not apply.
Comment 3 of the Rule provides:
The risk to a client is greatest when the client expects the lawyer to represent the client in the transaction itself or when the lawyer’s financial interest otherwise poses a significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s financial interest in the transaction. Here the lawyer’s role requires that the lawyer must comply, not only with the requirements of paragraph (a), but also with the requirements of Rule 1.7. Under that Rule, the lawyer must disclose the risks associated with the lawyer’s dual role as both legal adviser and participant in the transaction, such as the risk that the lawyer will structure the transaction or give legal advice in a way that favors the lawyer’s interests at the expense of the client. Moreover, the lawyer must obtain the client’s informed consent. In some cases, the lawyer’s interest may be such that Rule 1.7 will preclude the lawyer from seeking the client’s consent to the transaction.
Is it Ever a Good Idea?
Bottom Line: I do not believe it is a good idea to engage in business transactions with current clients and strongly discourage the practice. It is tough to be completely objective when your own financial interests are involved. Even if you believe you can be objective, your client may see things differently. You can avoid the possibility of even inadvertent over-reaching, and potentially a grievance, by not engaging in transactions with current clients. However, if you must, consider requiring your client to obtain independent counsel. Further, even small firms should have written policies regarding the guidelines on doing business with current clients along with detailed documentation that makes the type of disclosures required by Rule 1.8 (a).