12. Conflict concerning a solicitor's own interests

12.1. A solicitor must not act for a client where there is a conflict between the duty to serve the best interests of a client and the interests of the solicitor or an associate of the solicitor, except as permitted by this Rule.

12.2. A solicitor must not do anything:

1. calculated to dispose a client or a third party to confer on the solicitor, either directly or indirectly, any benefit in excess of the solicitor’s fair and reasonable remuneration for legal services provided to the client, or
2. that the solicitor knows, or ought reasonably to anticipate, is likely to induce the client or third party to confer such a benefit and is not reasonably incidental to the performance of the retainer.

12.3. A solicitor must not borrow any money, nor assist an associate to borrow money, from:

12.3.1. a client of the solicitor or of the solicitor’s law practice; or

12.3.2. a former client of the solicitor or of the solicitor’s law practice who has indicated a continuing reliance upon the advice of the solicitor or of the solicitor’s law practice in relation to the investment of money,

UNLESS the client is:

1. an Authorised Deposit-taking Institution;
2. a trustee company;
3. the responsible entity of a managed investment scheme registered under Chapter 5C of the Corporations Act 2001 (Cth) or a custodian for such a scheme;
4. an associate of the solicitor and the solicitor is able to discharge the onus of proving that a full written disclosure was made to the client and that the client’s interests are protected in the circumstances, whether by legal representation or otherwise; or
5. the employer of the solicitor.

12.4. A solicitor will not have breached this Rule merely by:

12.4.1. drawing a Will appointing the solicitor or an associate of the solicitor as executor, provided the solicitor informs the client in writing before the Will is signed:

1. of any entitlement of the solicitor, or the solicitor’s law practice or associate, to claim executor’s commission;
2. of the inclusion in the Will of any provision entitling the solicitor, or the solicitor’s law practice or associate, to charge legal costs in relation to the administration of the estate; and
3. if the solicitor or the solicitor’s law practice or associate has an entitlement to claim commission, that the client could appoint as executor a person who might make no claim for executor’s commission.

12.4.2. drawing a Will or other instrument under which the solicitor (or the solicitor’s law practice or associate) will or may receive a substantial benefit other than any proper entitlement to executor’s commission and proper fees, provided the person instructing the solicitor is either:

1. a member of the solicitor’s immediate family; 
2. a member of the immediate family of the solicitor’s spouse, or
3. a solicitor, or a member of the immediate family of a solicitor, who is a partner, employer, or employee, of the solicitor.

12.4.3. receiving a financial benefit from a third party in relation to any dealing where the solicitor represents a client, or from another service provider to whom a client has been referred by the solicitor, provided the solicitor advises the client:

1. that a commission or benefit is or may be payable to the solicitor in respect of the dealing or referral and the nature of that commission or benefit;
2. that the client may refuse any referral, and

the client has given informed consent to the commission or benefit received or which may be received.

12.4.4. acting for a client in any dealing in which a financial benefit may be payable to a third party for referring the client, provided the solicitor has first disclosed the payment or financial benefit to the client.

Commentary

12.1 Conflict with solicitor's own interests

Solicitors must be vigilant in their dealings to avoid actual and potential conflicts between their own interests and their duty of 'undivided loyalty' to their client. "'[W]henever a solicitor, either personally or through his company, seeks to deal with his own client, then the potential for conflict is so great that it will only be in rare cases that such a dealing could be acceptable': Reilly v Law Society of New South Wales (1988) 24 NSWLR 204, 219. Rule 12.1 supports Rule 4.1.1 in reflecting the solicitor's fundamental duty: to act in the best interests of a client in any matter in which the solicitor represents the client. A solicitor cannot misuse their influence over a client, actively or passively.⁴⁴ A solicitor must promote the best interests of the client, even where that will be to a personal disadvantage. If there is a conflict with the solicitor’s personal interests or those of their associates, then the solicitor cannot act except as permitted by Rule 12. The associates may be professional, financial or family: see Glossary. Nor can the solicitor act where in doing so there is the possibility of a conflict with the solicitor's personal interest.

The circumstances in which a conflict between duty and interest might arise are varied, and include transactions involving:

• the charging of excessive fees or disbursements (see Rule 12.2);
• lending to or borrowing from a client (see Rule 12.3);
• a will or other instrument benefiting the solicitor (see Rule 12.4);
• receiving or paying a referral fee or commission (see Rule 12.4);
• inter vivos gifts and benefits to the solicitor: Re a Solicitor [1975] QB 475;
• conducting a managed investment scheme: Reilly v Law Society of New South Wales (1988) 24 NSWLR 204;
• buying from or selling to a client;
• investment in a client’s business;
• the exercise of a power of attorney; and
• the representation of friends and family members.

Accepting gifts. This will depend on the answer to two questions. Firstly, the nature of the gift and secondly, whether a solicitor is continuing to represent the client. If the solicitor's retainer has ended then a modest gift given in gratitude by the client is acceptable.

12.2 Benefits in excess of fair and reasonable remuneration

Other than as expressly permitted by Rule 12, a solicitor must not gain benefit in excess of fair and reasonable remuneration for legal services or where the solicitor knows or ought reasonably to anticipate that they will induce the client or third party to confer such a benefit that is not reasonably incidental to the performance of the retainer; any excess benefit is presumed to be an exercise of undue influence over the client. Rule 12.2 reflects the civil law prohibition against a fiduciary deriving a financial advantage through undue influence, and extends to any financial dealings with their clients beyond charging a fair and reasonable fee. If a breach is found, the transaction may be set aside in equity with damages and an account of profits, in addition to any disciplinary charges: Law Society of New South Wales v Harvey [1976] 2 NSWLR 154.

Presumption of undue influence. The nature of the solicitor and client relationship is one of trust and confidence. As with all fiduciary relationships, there is a presumption of undue influence that stems from the imbalance in power and knowledge: Wright v Carter [1903] 1 Ch 27, 50. Any excessive gain by the solicitor is presumed to be a result of the undue influence. That presumption can only be rebutted by the client receiving full disclosure and independent advice. Any apparent common intention on the part of the solicitor and the client is irrelevant. 

Fair remuneration. The negotiation of legal costs is the transaction in which the solicitor's superiority of knowledge and experience, and therefore influence, is most apparent. The client's interests are therefore protected in equity, UCT and by the LPA, as well as by the Rules. The twin objectives of consumer protection and professional standards are met by the costs disclosure and assessment regime of LPA Part 3.4. The non-exclusive grounds set out in LPA s 328(2) for the setting aside of costs agreements are instructive as to what are 'fair and reasonable' costs.

The charging of excessive legal costs is capable of constituting unsatisfactory professional conduct or professional misconduct: LPA s 420((1)(b).⁴⁵ The court also has an inherent jurisdiction to supervise the conduct of solicitors in relation to costs and address any breach Re Morris Fletcher and Cross’s Bill of Costs [1997] 2 Qd R 228.⁴⁶ 

12.3  Borrowing from clients

Subject to exceptions, Rule 12.3 prohibits a solicitor from borrowing from a client, or from a former client who continues to rely on the law practice for advice relating to investments. The prohibition operates regardless of any consent from the client. The client’s prior written consent may, however, prevent a civil claim for breach of fiduciary duty.

12.3.1 Meeting the fiduciary duty. The fiduciary obligation to a client in respect of borrowing is particularly onerous. The solicitor must show that all steps have been taken to protect the client’s interests. The duty is discharged if the solicitor has given full and frank disclosure of the their personal interest; has advised the client to obtain independent advice; and has secured the client’s fully informed consent to the terms of the loan: Law Society of New South Wales v Harvey [1976] 2 NSWLR 154, where the solicitor was removed from practice.⁴⁷ These actions should avoid solicitors taking advantage of clients by providing inadequate security or poor terms of interest, or by exposing the client to excessive risk. 

Even if there is technical compliance with Rule 12, it is still possible that a discipline application could be brought for breach of the fiduciary duty and, in particular, the solicitor preferring his own interests over those of the client: e.g. Legal Services Commissioner v Hoolihan [2006] LPT 003, 9. 

12.3.2 Rule 12.3 prohibition. Nonetheless, the prohibition in Rule 12.3 is significantly stricter than the solicitor's fiduciary duty. Borrowings are prohibited unless allowed by the exceptions in the Rule. No amount of client consent can cure the breach of professional standards.

• A solicitor who advised the client to obtain independent advice, and whose client refused to do so, was still found to be in breach of the former Rule 86, and fined $2,500: Re X, SCT/13, 27 July 1999.
• In Queensland Law Society v Wakeling [2004] QCA 42, a solicitor received instructions to act for clients A, B and C in a sale of land. He was paid $10,000 by the purchaser as a deposit, which the solicitor held in his trust account. However, before completion of the contract, client A authorised the solicitor to transfer the $10,000 to his office account as an unsecured loan for 'general use'. Neither B nor C nor the purchaser gave permission for this transfer, so the transfer was not properly authorised. Even if it was authorised, the court noted (at [18]) that such a borrowing contravened the rule.
• The prohibition on borrowing is violated when a solicitor makes an unauthorised withdrawal of trust money that is subsequently reimbursed. If the solicitor secured some use of the money in the period before reimbursement, there has effectively been a borrowing from the client.

A breach of the predecessor Rule⁴⁸ has led to solicitors being removed from practice: Re Barry, SC/372, 30 October 1996; Re Andersen, SCT/74, 13 August 2002.

Exceptions to prohibitions. The exception categories are listed in Rule 12.3. The solicitor may avoid disciplinary action where the client is:

• the solicitor's employer, authorised to take deposits under the Banking Act 1959 (Cth), a trustee company, or the responsible entity or custodian of a managed investment scheme, or
• the solicitor's associate, and all fiduciary duties are discharged.

In all these cases, the solicitor still owes the fiduciary obligations noted above to obtain the client's fully informed consent to the terms of the loan.

12.4.1 Solicitor as executor. A solicitor should exercise caution before agreeing to accept appointment as an executor. If agreeable to appointment, the solicitor must make the disclosures required by Rule 12.4.1 and satisfy their fiduciary duty to their client. The law that restricts a gift to a solicitor under a will (see Rule 12.4.2) may also apply to an executor’s commission.

Avoid acting as executor. As there is a real potential for conflict, solicitors when approached should preferably decline to act as executors. In Re Will and Estate of Mary Irene McClung [2006] VSC 209, [34] ('McClung"), the court stated that:

"The occasion on which a solicitor receives instructions for the preparation of a will for a client by a solicitor can place the solicitor on the horns of a dilemma if the solicitor is asked to act as executor under the will. It is not a position which the solicitor should seek."

Other cases concerned with the conflict inherent in acting as a solicitor and executor are: Walker v D’Alessandro [2010] VSC 15; Re Will and Estate of Foster [2012] VSC 315. 

Informed consent of client. Rule 12.4.1 sets out the disclosures that must be made in writing prior to the client signing the will:

• any entitlement to a commission for acting as executor, and that client may appoint another person with no entitlement to commission, and
• any entitlement to claim legal costs.

The intention is to ensure that the client understands the entitlement of the solicitor and the consequences of the appointment of the solicitor as executor. With respect to costs, Master Evans in McClung noted at [34]:

"It is reasonable for the solicitor to preface acceptance [of the position as executor] with a requirement that the will contain a charging clause in relation to any legal services performed for the estate. To request inclusion of a charging clause so wide as to enable the solicitor to charge for all executorial functions is not reasonable unless the solicitor ensures that the will provides that such charges may be made in lieu of any entitlement to commission and the full import of the clause is explained to the client."⁴⁹

The solicitor should also inform the client the maximum rate of commission which would be charged, and the possible burden such commission may impose both on the corpus and income of the estate: McClung at [35]. A solicitor-executor who charges a commission beyond that entitled may be guilty of professional misconduct. In Legal Services Commissioner v Bone [2013] QCAT 550 a practitioner was charged with a number of offences but only two were proceeded with. The subject of those two charges were:

• a failure to provide written notice to testators before signing their respective wills in contravention of Rule 10 under the then current Legal Profession (Solicitors) Rule 2007 (which is now Rule 12.4.1); and
• the charging of fees for 'care and consideration' for which no provision was made in the costs agreement.

In relation to the failure to provide the required notice the Tribunal found that:

1. the urgency with which the wills were drawn;
2. the verbal advice provided by the articled clerk to the wife; and
3. the prominence of the charging clause in the will was so as to make it highly improbable that either testator did not see it, or overlooked it,

was evidence enough that the relevant matters were brought to the attention of the testators and that the technical breach of the rule (the failure to provide written notice prior to the execution of the wills) in these circumstance was not enough to bring the conduct of the practitioner within the meaning of 'unsatisfactory professional conduct'. A number of lessons can be drawn from this decision:

1. the failure to strictly comply with the rule will not necessarily lead to a finding of 'unsatisfactory professional conduct' in circumstances where a disciplinary tribunal is satisfied that there are exceptional circumstances and where the objectives of the conduct rules have been met;
2. where a client requests a solicitor to act as their executor:

1. ensure that you comply with the requirement of the rule;
2. ensure that the charging clauses feature prominently in the will;
3. if exceptional circumstances arise and it is not possible to technically comply with the rule then it is recommended that the solicitor –

• orally explain to the client the requirements set out in the rule; and
• record such explanation in an appropriate note (preferably signed by the client).

(c) an agreement entered into by a solicitor executor of a will and the solicitor in their role as a legal practitioner where both parties are the same, will be void and unenforceable. While this is a problem for sole practitioners it would not be a problem for a partnership (or possibly an incorporated legal practice) pursuant to s. 50 Property Law Act 1974 (Qld);

(d) one of the appropriate courses for a sole practitioner to take, where the practitioner is the solicitor executor, is not to enter into a costs agreement with him or herself, but rather to charge the estate for legal services rendered and calculated by reference to schedule 1 of the Scale of Costs under the Uniform Civil Procedure Rule 1999 (Qld) (UCPR).

For disciplinary action against a solicitor see: Legal Services Commissioner v Hession (Legal Practice) [2010] VCAT 1328.12.4.2

12.4.2 Solicitor as beneficiary

A solicitor receiving a substantial gift under a will or other instrument is a special case of the general rule against benefits: see Rule 12.2. Both the professional conduct standards and the common law restrict such gifts. The rule is not concerned with gifts of a trifling nature. A solicitor may only receive a substantial benefit under a will if the testator is in their immediate family, or the family of a partner, employer or employee of the solicitor. In those cases, the presumption of undue influence must be rebutted by adequate disclosures. In other cases, the solicitor cannot advise on the will, or will face disciplinary penalties in addition to civil law remedies.

Prohibition against acting if a beneficiary. The common law strongly suggests that, as a professional conduct standard, the solicitor who was to receive a benefit under a will or other instrument should not act. In Re a Solicitor [1975] QB 475, solicitors who failed to do so were struck from the Roll. The standard of conduct applied was that solicitors in such a situation should not only suggest but should ensure that independent advice is taken and should forgo any benefit where such advice is not taken. Rules 12.1 and 12.4.2 make this prohibition explicit. They prohibit the solicitor from acting for the client even if the client is exercising a free judgment in leaving the gift to the solicitor. The civil standard allows the solicitor to act for a client in drawing a will (or other instrument) even if the solicitor is to receive a material benefit although the gift may eventually be regarded as invalid: Dore v Billinghurst [2006] QCA 494.

Rule 12.4.2 does, however, allow the solicitor to obtain a material benefit under a will drafted for their own or their spouse's immediate family. It is the only exception to the prohibition: where the client is 'a member of the solicitor's immediate family; or their spouse's immediate family; or a solicitor, or a member of the immediate family of a solicitor, who is a partner, employer, or employee, of the solicitor'. Nevertheless, the presumption of undue influence will still apply in these cases, and some of those listed may be people who are even more vulnerable to undue pressure. Accordingly, the solicitor must rebut the civil law presumption of undue influence. If not, there may still be disciplinary proceedings for breach of the civil standard: Legal Practitioners Complaints Committee v Clark [2006] WASAT 119.

The presumption of undue influence. The relationship between solicitor and client has long been presumed by courts of equity to be one of undue influence. As a result, a solicitor who receives a benefit (such as a gift or a legacy) under the will or instrument of a client is presumed to have exercised undue influence. Without proving anything more, other beneficiaries of the client may have the gift or legacy set aside: see Dowsett v Reid (1912) 15 CLR 695, 707.⁵⁰

Importantly, it is not necessary that the solicitor who received the gift or legacy is actually the solicitor who drew the will or instrument. The presumption may arise where the solicitor has been instructed in other matters, for the mainspring of equity is the habitual reliance and confidence arising from the relationship. Nevertheless, it would normally be the case that the relationship between solicitor and client be one that has been close and maintained for some longer period. Therefore, the presumption would not necessarily arise where the solicitor who has been instructed in one isolated matter (other than the drawing of the will in question), or if the client has simultaneously retained a number of different solicitors for different matters.⁵¹ 

Rebutting the presumption. If the presumption exists, the onus is on the solicitor wishing to keep the gift to show that:

• 'the gift was the independent and well-understood act of a man in a position to exercise a free judgment based on information as full as that of the donee', and
• that the transaction cannot be attributed to the relationship of inequality between solicitor and client: Johnson v Buttress (1936) 56 CLR 113, 134-5, considered in Weiss v Barker Gosling (1993) 16 Fam LR 728, 761.

How that 'free judgment' is shown will depend on the circumstances. Advising the client to obtain independent advice is 'an important factor in determining whether the gift is the pure voluntary and well-understood act of the donor'. The more valuable the gift, the more important independent legal advice will be: Union Fidelity Trustee Company of Australia Ltd v Gibson [1971] VR 573, 577. Where a presumption is raised, the court will set aside the gift unless the solicitor can establish it was the spontaneous act of the donor acting in circumstances which enabled [the donor] to exercise an independent will. If the evidence establishes the fact it should not be disregarded solely because the donor did not receive independent legal advice. On the other hand the receipt of independent legal advice may rebut the presumption although it is not acted upon. But to have that effect it must be given with a knowledge of all the relevant circumstances, and be such as a competent and honest adviser would give if acting solely in the interest of the donor: Inche Noriah v Shaik Allie Bin Omar [1929] AC 127, 135. Whether the client is generally 'sophisticated and well-informed' will be a factor.⁵²

12.4.3 Referral fees from third parties

A solicitor may contemplate receiving a benefit or commission from a third person in two circumstances:

• where the solicitor receives a client as a result of a referral; or
• where the solicitor refers the client to a third person who offers a commission ('a referral fee').

For Queensland practitioners, refer to Guidance Statement No. 4 – Receiving Referral fees and Rule 12.4.3 ASCR.

Secret payments or commissions. Serious criminal responsibility can arise in any case where a solicitor secretly receives a commission from a third party in relation to a client's business, or that would in any way influence the solicitor's representation of the client: ss 442A-442M Criminal Code (Qld). These penalties are in addition to disciplinary rules.

Payments or commissions with informed consent. A solicitor who refers a client to a third person is not to accept a benefit or commission from the third person⁵³ unless the conditions of statute law and Rule 12.4.3 are both satisfied. In personal injury cases in Queensland and conveyancing in South Australia, such referrals are prohibited and criminal penalties apply. For further commentary refer to Statutory prohibitions on referrals below.

Under Rule 12.4.3, the solicitor must receive the client’s informed consent to the benefit, having disclosed:

• that a commission or benefit is or may be payable;
• the nature of the commission or benefit; and
• that the client may refuse any referral.

Note that the rule applies whether or not the solicitor is to represent the person they are referring.

Nature and quantity of benefit. Though the rule requires only 'the nature of the commission or benefit' to be disclosed, it is strongly advised that the actual amount or formula should also be disclosed. The nature of the benefit may be a payment of money, cross-referral of other business to the solicitor from the third person, discounted payments or rebates for services provided to the solicitor from the third party, a success fee or even a shareholding or financial interest in the third person: see Law Society of the ACT v Lardner [1998] ACTSC 187 ('Lardner'). The rule does not explicitly require disclosure of a quantification of the commission or benefit. However, the rule requires that the client give 'informed consent to the commission or benefit received' and, if the solicitor is capable of identifying the amount or formula involved, it is unlikely that consent will be ‘informed’ if that is withheld from the client. Secondly, the common law standard of disclosure in cases involving referral fees and benefits has been 'full and frank disclosure to the client of all information known to the solicitor which the client should know': Lardner at [22]; Maher v Millennium Markets Pty Ltd [2004] VSC 174, [72]-[72]. If the solicitor knows the amount of or formula for calculating the benefit, this should be scrupulously disclosed: Maher at [69]-[83]. The full and frank disclosure of the commission or benefit is also the best course to take to avoid criminal responsibility for accepting secret commissions.

Informed consent. In addition to the required disclosures, the client must give 'informed consent to the commission or benefit received'. In cases involving referral fees and commissions, the common law requires 'fully informed consent' (Maher at [76]). What amounts to consent that is 'informed' is 'a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given'. It is not always necessary to advise that independent and skilled advice should be sought from another adviser (including another solicitor), but this may often be necessary if the consent is to be informed: Maguire v Makaronis (1997) 188 CLR 449, 466; Maher at [76]. The more care that is taken to ensure the client is in an informed position to give consent, the more likely the conditions of Rule 12.4.3 will have been met. It is therefore recommended that solicitors advise clients that they should seek independent and suitably skilled advice before consenting to the commission or benefit. 

Form of disclosure and consent. Rule 12.4.3 does not require the disclosures to be in writing. However, it is strongly recommended that a solicitor makes the disclosures, advises of the need for independent advice, and obtains consent in writing. Similarly, in circumstances where the solicitor has made the referral, the solicitor should send to the client he is referring to another, a standard letter of non-engagement.⁵⁴

Statutory prohibitions on referrals. In Queensland, no person can reward or receive a reward from another for soliciting or inducing a 'potential claimant' to make a claim for compensation or damages for personal injury: Personal Injuries Proceedings Act 2002 (Qld) s 68(1). A solicitor who pays a referral fee may be soliciting a potential claimant to make a claim, and the solicitor who receives a referral fee may be involved in that inducement.

In South Australia, a solicitor may not pay or reward a person for referring business involving the preparation of any 'conveyancing instrument': Land and Business (Sale and Conveyancing) Act 1992 (SA) s 29. A 'conveyancing instrument' is any document for which an entry in the Register Book is directed, required or permitted by the Real Property Acts. A solicitor who benefits from referring conveyancing business to another solicitor may also be criminally liable as a party to an offence. The section effectively bans the payment and receipt of referral fees for conveyancing in South Australia.

12.4.4 Referral fees to third parties

Apart from the statutory prohibitions noted under Rule 12.4.3, a solicitor may pay a third party a benefit for referring the client, provided that benefit is disclosed to the client.⁵⁵

For Queensland practitioners, refer to Guidance Statement No. 3 – Paying Referral Fees and Rule 12.4.4 ASCR.

44 See for example Professor PD Finn, Fiduciary Obligations, The Law Book Company Ltd, 1977, p 161-168.

45 Council of the Queensland Law Society v Roche [2004] 2 Qd R 574 and Legal Services Commissioner v Duffield [2007] LPC 05/07.

46 See also: Law Society of New South Wales v Foreman [1994] 34 NSWLR 408.

47 Law Society of New South Wales v Moulton [1981] 2 NSWLR 736.

48 Rule 86  Queensland Law Society Rule 1987 (Qld).

49 Emphasis added.

50 See also: Oldham v Hand (1751) 2 Ves Sen 259; 28 ER 167; Welles v Middleton (1784) 1 Cox 112, 125; 29 ER 1086, 1091-2; Haywood v Roadknight [1927] VLR 512 at 520.

51 R Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis, 4th ed, 2002) 509-10. 

52 For a recent decision concerning a discipline application, see Law Society of Singapore v Wan Hui James [2013] SGHC 85.

53 Rule 12.4.3 applies to the solicitor who receives a benefit or commission; the former rule 32 of the Legal Profession (Solicitors) Rules 2007 (Qld) applied to the solicitor who paid the benefit or commission.

54 See also Guidance Note for Members: 'Referral Fees – Solicitors obtaining work by paying a financial benefit to a third party' on the Ethics Centre website.

55 See 'Referral Fees Caution' on the Ethics Centre website.