It’s a conflict of interest...
Isn’t it?
‘Conflict of interest’ is a legal term or phrase. It is surprising how often it has been coined during legal disputes. It is even more surprising how often this concept is misunderstood.
Whether there is a conflict of interest
Firstly, there must be an actual basis of conflict between a person’s legal duty and a competing interest or duty. The conflict could arise in circumstances where:
- There is a conflict between 2 competing legal duties; or
- There is a conflict between a person’s legal duty and their personal interest – Clay v Clay (2001) 202 CLR 410, 434-435.
An example of the first type of conflict arises when a director of Company X has to make a decision that affects Company Y, of which he or she is also a director. The second type of conflict occurs, for example, where an executor of a deceased’s estate distributes money to the beneficiaries, of which he or she is also a beneficiary.
But that is not where the analysis of the concept ends. It is where it starts!
Just because an executor happens to also be a beneficiary of the same estate does not mean he or she must resign as an executor. There are a variety of other factors that also need to be considered when a Court of law is called upon to determine if a conflict of interest has occurred. For instance (referring to the earlier example), does the executor have a discretionary power under the terms of the deceased’s will or trust or will to pay a greater amount for his or her own benefit?
The underlying question is whether there is a real (i.e. not just a fanciful) possibility of a conflict between a person’s duty and their competing interest or duty – Farrington v Rowe McBride & Partners [1985] 1 NZLR 83, 89. For example, does the particular exercise of duty by an executor (applying the earlier example) give rise to a conflict with their personal interest as a beneficiary, or not?
The question becomes harder if the Court is called upon to determine whether there is a possible or potential conflict, but no conflict has actually occurred! Even if there is only a possibility (albeit a real possibility) of conflict, that can be enough to give rise to a conflict of interest: see Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. It begs the question, should a director resign from a company (or be removed) if he or she happens to be a director of another company? Could the second company potentially compete for business against the first company? No instant solution to these questions is set out in the ‘rule book’. The determination of each question will ‘turn’ upon the particular facts and circumstances.
The concept known as ‘conflict of interest’ is a well-recognised equitable doctrine. Therefore, it is more flexible and discretionary than the rules earlier developed at ‘common law’ (such as contract, tort and property).
Some possible scenarios of Conflict
The question of conflict of interest has arisen in a wide number of different scenarios – for instance:
- Where a company director uses company money for his or her own personal purposes;
- Where a judge is hearing a case brought by a partner of a law firm in which the judge was also once a partner;
- Where a resigning or retiring partner later uses goodwill or assets of that partnership for his or her own benefit;
- If a law firm acts against you in a case where that firm previously acted on your behalf in an earlier case;
- Where an employee of a company resigns, and then commences work with a competing company.
Remedies
Why does it matter whether (or not) a conflict of interest has arisen? The answer is not as simple as you might think. Unlike the common law (with hard and fast rules), equity looks at the underlying substance and the process needed for a proper legal relationship. For example, directors of a company are expected to avoid any conflict between their own personal interests and that of the company itself: see Hospital Products Ltd v The United States Surgical Corp (1984) 156 CLR 41.
If a company enters into a contract with one of its director’s spouses or partners, a conflict of interest may possibly arise. In those circumstances, the director in question should make ‘full and proper’ disclosure of the nature and extent of their personal interest. That disclosure should be made prior to the company directors deciding whether or not to enter into that contract. These factors are all relevant if the conflict of interest has to be later considered by a Court of law.
In that example, an adverse finding against the director would lead to a conclusion that a ‘conflict of interest’ has indeed occurred. A wide range of remedies can then be ordered by the Court in order to correct the problem which has arisen. For instance, an order can be made to terminate the contract, so that the company is no longer legally liable under the contract. There are even cases where the ‘rogue’ director and their spouse or partner might be called upon to restore any profits they gained while the contract was in effect: see Timber Engineering v Anderson (1980) 2 NSWLR 488.
A range of remedies may be made available where a breach of an equitable duty is found. The nature of the remedy awarded will vary according to the circumstances of the case. In certain circumstances, the Court may find it appropriate to order that the defendant “accounts” to a plaintiff (who is owed a duty) for any profits received under the contract.
Alternatively, the Courts might award such remedies as damages or equitable compensation: see Mordecai v Mordecai (1988) 12 NSWLR 58.
Other remedies may be awarded in the form of an injunction which prevents the defendant (often called a fiduciary) from continuing the breach of their duty.
Case Summaries
The doctrine has been applied in almost all areas of law. Some examples are (though not limited to):
- Solicitor and client relationships;
- Company and directors;
- Partnerships;
- Trustee and beneficiaries;
- Employment relationships; and
- Wills and probate generally.
The case summaries below should provide further information as to this ‘elastic concept’. The case notes will also demonstrate some of the more substantive aspects of the doctrine concerning ‘conflict of interest’.
Solicitor and Client Relationships
In Maguire v Makaronis, two solicitors loaned money on mortgage to their clients to assist with a purchase. The mortgage required the clients to pay interest at a slightly higher rate than the solicitors were paying on it, having borrowed the money themselves in order to on-lend it to the clients. The clients had been unable to obtain finance elsewhere. The solicitors were nevertheless held to have breached their duty of avoiding a conflict of interest. Their duty to protect their clients in the circumstances was in conflict with their personal interest in getting the best deal they could as lenders (i.e. in terms of interest rates).
In a Victorian case (Maher v Millennium Markets Pty Ltd [2004] VSC 174), a solicitor acted for the plaintiffs, both as individuals and for companies which they controlled. The solicitor negotiated a deal where his clients were able to escape from a situation in which their bank was calling up all of their debt. In the process, the solicitor was paid a commission of $150,000 by one of the incoming purchasers. Although the transaction was beneficial to the clients, the solicitor was held to have breached his duty by receiving the commission.
Partnerships
In UDC v Brian Pty Ltd, a joint venture between Company X and Y realised a substantial profit. As the companies’ joint venture was largely financed by the plaintiff, the plaintiff claimed that it was entitled to retain all the proceeds of sale through a collateralisation clause. It was later found that Company X had retained the collateralisation clause without the knowledge of Company Y.
The High Court held that the arrangements between Company X and Y had passed ‘beyond the stage of mere negotiation at the time the mortgage was executed’. Both companies had an equitable obligation to refrain from pursuing, obtaining or retaining any collateral advantage from the arrangements. As the plaintiff and Company X obtained a collateral advantage without the knowledge and consent of Company Y, they had breached their duty.
Employment Relationships
The concept of conflict of interest rests upon the notion that a person may not ‘serve two masters at the same time’: see Farrington v Rowe McBride & Partners [1985] 1 NZLR 83. In Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169, the English Court of Appeal prevented skilled manual workers (employed by Company X) from working for a rival manufacturer (Company Y) in their spare time. However, the Court considered two competing rights and duties: the first being the right of a worker to make use of his leisure for profit; and the second, being his duty not to do anything that would inflict harm on his employer’s business.
In similar cases, terms of the employment contract may create such duties. In a NSW case (DPC Estates Pty Ltd v Grey and Consul Development Pty Ltd), a property investment manager was hired by Company X and required to devote himself exclusively to the company. Part of his duties was to investigate prospective properties for investment. Unbeknown to Company X, the manager entered into a ‘catch and release’ investment arrangement with a third party. The Court found that the manager had breached his duty to avoid conflict.
In a case before the Supreme Court of WA (Green v Bestobell Industries Pty Ltd), G was employed as manager of the respondent company’s business in Victoria. G resigned from Company X to work with its competitor, Company Y. Company X succeeded in claiming an account of profits for G’s breach of duty. The Court held that G was in a fiduciary position, and had placed himself in a situation where his duty and own interest could possibly conflict. As he did so and made a benefit, he was liable to account for that benefit to Company X (to whom the duty was owed).
Wills and Probate
In a High Court matter (Clay v Clay [2001] HCA 9), the deceased left behind 4 children and his second wife (who was the guardian of the 4 children). By the deceased’s will, the children were to take the deceased’s estate (the Queenslea property) in equal shares as tenants-in-common owners. Some 3 years later, the executor sold the Queenslea property to the deceased’s second wife for $45,000 (which was held to be of market value).
The Court found that the second wife had not breached her duty as a guardian to the 4 children by purchasing the Queenslea property. She had purchased the property for fair market value, without any loss accruing to the estate. Further, the Court found that she had acted in the interests of her 4 wards by providing a home for them. She would not have been able to do so if she had not acquired the property.
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