Lawyers sometimes become involved in business opportunities with their clients. Doing business with clients is not prohibited, but because lawyers are in fiduciary relationships with clients, lawyers can only do so:
- If the client obtains independent legal representation.
- If the client does not obtain independent legal representation
- The transaction must be fair and reasonable to the client.
- The client must consent to the transaction.
Remember that consent always means fully-informed consent!
Conducting business with clients, or operating a business while practicing law, can pose difficult ethical issues. Lawyers who intend to enter into these arrangements should ensure that they have considered how these relationships may affect their duties to clients. Remember that the Practice Advisors are available to provide confidential information on these issues.
Independent legal representation for a client means that the client has a separate lawyer acting for him or her. “Independent legal representation” is not the same as “independent legal advice.”
If the client does not have separate legal representation, then the lawyer bears the onus of proving the fairness and reasonableness of the transaction and that the client was fully informed of all material facts relative to the transaction, as well as explaining the nature of any actual or potential conflict of interest.
The lawyer also must advise the client of the advantages of independent legal representation and at the very least recommend that the client obtain independent legal advice. However, even where the client waives independent legal advice, the lawyer still must assess whether he or she is able to proceed. All of these matters should be confirmed in writing . The old saying “Document, Document, Document” is as important for lawyers as it is for clients!
Rule 3.4-13 in the Code of Conduct further states that a lawyer cannot enter into a transaction with a client who does not have independent legal representation unless
- The transaction is fair and reasonable to the client.
- The client consents.
Transactions contemplated by the Rule and commentary include:
- Lending or borrowing money.
- Buying or selling property.
- Accepting a gift, including a testamentary gift.
- Giving or acquiring ownership, security or other pecuniary interest in a company or other entity.
- Recommending an investment.
- Entering into a common business venture.
The commentary to this Rule clarifies that the rule is not engaged when the lawyer is entering a transaction with a publicly traded corporation or entity in which the lawyer has an interest.
Conflicts may also arise if a related person transacts business with the lawyer’s client. Accordingly, lawyers must assess conflicts with respect to their own interests as well as those of related persons. Related persons are defined in commentary to Rule 3.4-13, paragraph [6], to include individuals related to the lawyer by blood, marriage, common-law partnership or adoption, as well as corporations owned or controlled directly or indirectly by the lawyer or a related person of the lawyer.
The fact that a lawyer will earn legal fees from representing a client on a transaction is not a conflict of interest. However, if the client wants to pay his or her legal bill by transferring an interest in a corporation, property, investment or other enterprise, the lawyer must recommend that the client seek independent legal advice.