Vol. 76, No. 11, November 2003

Conflicts in Transaction Matters

by Dean R. Dietrich

Question

I have read a lot about conflicts of interests in litigation matters but have not heard much about conflicts in transaction matters. Do the same rules apply for lawyers involved in transactional matters?

Answer

You are correct that conflict of interest questions seem to arise more in the litigation context than in transactional representation matters. The Supreme Court Rules, however, still apply to lawyers representing clients in transactional matters. It is often the interpretation of the rules, however, that can be more difficult to apply.

SCR 20:1.7 is the general rule regarding conflicts of interest in the representation of current clients. Under this rule, a lawyer may not represent one client if such representation is adverse to the representation of another client unless both clients consent (agree) to waive the conflict in writing. SCR 20:1.9 is the rule governing conflicts of interest with former clients; it prohibits a lawyer from representing a client against a former client in a same or substantially related matter as the prior representation unless the former client waives the conflict in writing.

Further, under SCR 20:1.7, a lawyer may not represent a client when the representation will be directly adverse to another client even if the conflict is waived, unless the lawyer reasonably believes the representation will not adversely affect the relationship with the other client or the representation will not be adversely affected by the lawyer's responsibility to another client, to a third person, or to the lawyer's own interest. Incorporated within this rule is the requirement that a lawyer analyze the nature and circumstances of the conflict of interest to determine whether the representation of one client will or will not adversely affect the relationship with the other client even if the other client waives the conflict of interest. Therefore, even though both clients may consent to a waiver to allow the attorney to represent one client in a conflict situation, the lawyer still must independently determine that the representation of the client will not adversely affect the relationship with the other client who has agreed to waive the conflict. Examples of situations in which this independent analysis takes place and the conflict is likely to be unwaiveable are representations in which the attorney is representing one client in a lawsuit against another current client or a situation in which a lawyer is representing one client against another client who does not have representation. These situations seem so fraught with peril and confusion over where lies the loyalty of the lawyer that such representation cannot occur.

Situations of this nature often arise in transactional legal matters when a lawyer is asked to represent both parties in a transaction or is asked to represent one client in a transaction and another client is on the opposite side of the transaction (with separate counsel). Under those circumstances, the lawyer must make an independent judgment as to whether the lawyer may represent the one client in the transaction while representing the other client on other legal matters not related to the transaction or even representing both clients in the transaction.

Factors to Consider. Lawyers faced with these situations should consider the following factors when determining whether the representation of one client will not adversely affect the relationship with another client:

• The nature of the conflict. In a transaction in which common interests are outweighed by issues in dispute, the possibility of an adverse effect on the exercise of the lawyer's independent judgment will likely be limited.
• The ability of the lawyer or law firm to ensure that the clients' confidential information will be preserved. Assuming that confidential information of one client may be relevant to the adverse concurrent representation of the other, the lawyer must assess whether the lawyer or law firm can implement safeguards to ensure the confidential treatment of all such information.
• The likelihood that client confidences or secrets in one matter will be relevant to the other representation. One function of the rule against simultaneous adverse representation is to protect the clients' confidences and secrets. The lawyer should consider whether either client's confidential information could be used to its disadvantage in the conflicting representation or to the advantage of the other.
• The lawyer's ability to explain, and the clients' ability to understand, the reasonably foreseeable risks of the conflict. A lawyer seeking to obtain consent must make full disclosure of the implications of the simultaneous representation and the advantages and risks to the clients involved.
• The lawyer's relationship with the clients. The conflict rules require that the lawyer be able to represent both clients with equal and undiminished vigor. If the lawyer's relationship with one client (as opposed to the other) is so disproportionate as to create a bias in favor of the more "important" client (that is, because of the length and nature of the relationship, the amount of fees earned, or other factors), a lawyer may consider this to be a factor in determining whether the lawyer will be able to represent each client with undivided loyalty. See Restatement Third, The Law Governing Lawyers, § 121 RN Comment c(iii) ("[r]elevant factors in determining whether there is potential for adverse effect include the duration and intimacy of the lawyer's relationship with the client or clients involved, the function being performed by the lawyer, the likelihood that actual conflict will arise and the likely prejudice to the client from the conflict if it does arise").

Lawyers who are placed in the position of considering whether they could represent a client in a transaction involving another client (but not in the same transaction) must determine whether their existing relationship with the adverse client will or will not be harmed by representing one client in the transaction. Consideration of the above factors will allow the lawyer to determine whether the relationship with one current client will not be harmed by representing the other client in the transaction, even though the current client is represented by separate counsel.

Even more difficult to assess are instances in which a lawyer or law firm is asked to represent both parties to a transaction. The law firm must make sure that both clients make an agreement to waive the conflict with a clear understanding of the potential negative impacts of the law firm representing both clients in the transaction. The lawyer also must independently determine that such representation will not adversely affect the relationship with each client. While not common, it is within the realm of possibilities for a law firm to represent two clients in a transaction, but certainly the major components of the transaction must have been previously worked out between the two clients so that the lawyer or law firm is not required to be an advocate for the terms of the transaction on behalf of one side or the other.

Lawyers must be extra cautious when considering a request to represent both clients in a transaction, because of the obvious potential that circumstances may arise during the representation that would create adversity between the two clients and prohibit the lawyer from the continued representation of both clients, even though they knowingly waived the conflict of interest. Lawyers in the past have looked to SCR 20:2.2 for guidance when asked to serve as counsel to two clients in a transaction. This rule has been eliminated from the Model Rules of Professional Conduct but still contains the appropriate considerations for a lawyer asked to represent two clients in a transaction. The rule requires that the lawyer 1) consult with each client concerning the implications of the common representation, including the advantages and risks involved and the effect on the attorney/client privileges; 2) obtain each client's written consent to the representation; and 3) reasonably believe that the matter can be resolved on terms compatible with the clients' best interests, that each client will be able to make adequately informed decisions in the matter, and that there is little risk of material prejudice to the interests of any of the clients if the contemplated resolution is unsuccessful.

Lawyers representing a client in a transaction matter are subject to the same conflict of interest rules and requirements as lawyers representing clients in litigation matters. The circumstances surrounding representation in transactional matters may provide different opportunities for lawyers to represent clients against other parties who may be current clients or former clients, but every circumstance requires the lawyer to determine that such representation will not adversely affect the relationship with the other client.

Wisconsin Lawyer