Transactions and third-party influence - Business transactio...

Learning Outcomes

After reviewing this article, you will be able to identify when a lawyer’s business transaction with a client is subject to discipline under the MPRE. You will understand the requirements for fairness, disclosure, written consent, and the need to advise clients to seek independent legal counsel. You will also be able to spot conflicts of interest and recognize improper agreements limiting malpractice liability or acquiring interests in client property.

MPRE Syllabus

For the MPRE, you are required to understand the ethical rules governing lawyers entering into business transactions with clients and the influence of third parties. This article covers:

• The prohibition and exceptions for business transactions between lawyers and clients under Rule 1.8(a).
• The requirements for fairness, full written disclosure, and client consent.
• The duty to advise clients in writing of the desirability of seeking independent legal counsel.
• Restrictions on acquiring interests in client property or litigation.
• The prohibition on agreements prospectively limiting malpractice liability.
• The impact of third-party influence and conflicts of interest in business dealings with clients.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. A lawyer wishes to invest in a client’s new business venture. Which of the following is required before proceeding?
   1. Only oral consent from the client.
   2. The transaction must be fair, fully disclosed in writing, and the client must give informed written consent after being advised to seek independent counsel.
   3. The lawyer must charge a reduced fee.
   4. The lawyer must become a co-owner of the business.
2. Which of the following is true regarding agreements to limit a lawyer’s malpractice liability?
   1. They are always permitted if the client agrees.
   2. They are permitted only if the client is independently represented in making the agreement.
   3. They are never permitted under any circumstances.
   4. They are permitted if the lawyer believes the client will not sue.
3. A lawyer prepares a contract for a client and acquires a security interest in the client’s property to secure payment of fees. What must the lawyer do?
   1. Nothing, as this is always allowed.
   2. Comply with the requirements for business transactions with a client under Rule 1.8(a).
   3. Only notify the client orally.
   4. Accept the interest only after the representation ends.
4. Which of the following is NOT required for a lawyer to enter into a business transaction with a client?
   1. The terms must be fair and reasonable.
   2. The client must be advised in writing to seek independent counsel.
   3. The client must give informed consent in writing.
   4. The lawyer must guarantee the client a profit.

Introduction

Lawyers are strictly regulated when entering into business transactions with their clients. The rules are designed to prevent conflicts of interest, overreaching, and undue influence. The Model Rules, especially Rule 1.8(a), impose specific requirements to ensure that any business dealings are fair, transparent, and fully consented to by the client. Failure to comply can result in discipline, even if the client suffers no actual harm.

Key Term: Business Transaction with Client
Any arrangement in which a lawyer and client enter into a financial or property transaction outside the ordinary scope of the lawyer-client relationship, such as loans, investments, or joint ventures.

Rule Against Business Transactions with Clients

A lawyer must not enter into a business transaction with a client or knowingly acquire an interest adverse to a client unless all of the following conditions are met:

1. Fair and Reasonable Terms: The transaction’s terms must be fair and reasonable to the client.
2. Full Written Disclosure: The lawyer must provide the client with a full written disclosure of the terms and the lawyer’s role, in language the client can understand.
3. Advice to Seek Independent Counsel: The lawyer must advise the client in writing of the desirability of seeking independent legal advice and give a reasonable opportunity to do so.
4. Informed Written Consent: The client must give informed consent in writing, signed, to the essential terms and the lawyer’s role.

Key Term: Informed Consent
Agreement by the client to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks and alternatives.

Key Term: Independent Legal Counsel
A separate lawyer who can advise the client about the transaction, ensuring the client’s interests are protected and the client is not unduly influenced by the original lawyer.

Standard Commercial Transactions Exception

The rule does not apply to standard commercial transactions between a lawyer and client for products or services that the client generally markets to others (e.g., a lawyer buying a car from a client’s dealership at market price).

Acquiring Interests in Client Property

If a lawyer acquires a security interest in client property to secure payment of fees, this is treated as a business transaction and must comply with Rule 1.8(a). This includes taking a mortgage, lien, or other proprietary interest in the client’s property.

Key Term: Proprietary Interest
An ownership or security interest in the subject matter of litigation or client property, generally prohibited except for liens to secure fees or reasonable contingent fees in civil cases.

Agreements Limiting Malpractice Liability

A lawyer may not make an agreement prospectively limiting malpractice liability unless the client is independently represented in making the agreement. Simply advising the client to seek independent counsel is not enough; the client must actually have such representation.

Key Term: Prospective Limitation of Malpractice Liability
An agreement made before any claim arises that restricts the client’s right to hold the lawyer liable for malpractice, only permitted if the client is independently represented.

Literary or Media Rights

A lawyer may not negotiate for literary or media rights relating to the representation of a client prior to the conclusion of the representation.

Soliciting Gifts

A lawyer may not solicit a substantial gift from a client or prepare an instrument giving the lawyer (or a close relative) a substantial gift, unless the client is related to the donee.

Conflicts of Interest and Third-Party Influence

Business transactions with clients often create conflicts of interest. The lawyer’s own financial interests may materially limit the representation. The lawyer must reasonably believe they can provide competent and diligent representation and obtain the client’s informed written consent.

Key Term: Conflict of Interest
A situation where a lawyer’s personal, financial, or other interests may materially limit or adversely affect the representation of a client.

Worked Example 1.1

A lawyer agrees to lend money to a client to help fund the client’s new business. The lawyer drafts a loan agreement with a high interest rate and does not advise the client to seek independent counsel. The client signs the agreement, and the lawyer later sues to collect.

Question: Is the lawyer subject to discipline?

Answer:
Yes. The lawyer entered into a business transaction with the client without advising the client in writing to seek independent legal counsel, and without obtaining informed written consent. The transaction’s fairness is also questionable due to the high interest rate.

Worked Example 1.2

A lawyer takes a mortgage on a client’s home to secure unpaid legal fees. The lawyer discloses the terms in writing and advises the client in writing to seek independent counsel, but the client declines to do so. The client signs a written consent.

Question: Is the lawyer subject to discipline?

Answer:
No. The lawyer complied with Rule 1.8(a) by making full written disclosure, advising the client in writing to seek independent counsel, and obtaining the client’s informed written consent. The client is not required to actually obtain independent counsel, only to be advised and given a reasonable opportunity.

Worked Example 1.3

A lawyer prepares a contract for a client and includes a clause stating the lawyer is not liable for any malpractice arising from the representation. The client is not represented by another lawyer in making this agreement.

Question: Is this agreement enforceable?

Answer:
No. Prospective limitation of malpractice liability is only permitted if the client is independently represented in making the agreement. Without such representation, the lawyer is subject to discipline.

Exam Warning

Be alert: Even if the client does not lose money or later consents, a lawyer who fails to meet all requirements for business transactions with a client may still be disciplined. The rules are strictly enforced.

Revision Tip

Always check for written disclosure, advice to seek independent counsel, and informed written consent when a lawyer enters into any business deal with a client.

Key Point Checklist

This article has covered the following key knowledge points:

• Lawyers must not enter into business transactions with clients unless strict requirements are met.
• The transaction must be fair and reasonable, with full written disclosure.
• The client must be advised in writing to seek independent legal counsel and given a reasonable opportunity to do so.
• The client must give informed consent in writing, signed.
• Acquiring a proprietary interest in client property or litigation is generally prohibited, with limited exceptions.
• Agreements prospectively limiting malpractice liability are only allowed if the client is independently represented.
• Conflicts of interest may arise in business transactions with clients and must be addressed.

Key Terms and Concepts

• Business Transaction with Client
• Informed Consent
• Independent Legal Counsel
• Proprietary Interest
• Prospective Limitation of Malpractice Liability
• Conflict of Interest