Conflict of interest and trust payment before bond registration
Legal practitioner P has acted for Mrs K for five years, including her current divorce. Three years ago P acted for Mr S in a commercial dispute and learned, in confidence, that S held an offshore account not disclosed to his creditors. S is also a personal friend. S asks P to prepare a loan agreement under which K will lend him N$300,000, secured by a mortgage bond over his farm. P agrees, prepares the agreement and bond, tells S the terms are 'standard', and does not advise him to seek independent advice. K pays N$300,000 into P's firm's trust account. Before the bond is registered, P pays the money to S against S's personal undertaking to register the bond. S defaults. K instructs P to sue S on the loan and to foreclose the bond. P's bookkeeper queries the trust payment.
1. Identify the professional-conduct problems in P's conduct.
Read the worked answer
P has placed himself in a serious conflict of interest by acting for both lender and borrower in the same transaction. The parties' interests are not identical: K needs security and repayment; S needs the money and may be under financial pressure. P also has confidential information about S from the earlier commercial matter, and a personal friendship with S. Acting for both without full disclosure and informed consent is improper, and the friendship increases the risk of overreaching.
P failed to advise S to obtain independent legal advice before signing a secured loan. P also paid trust money to S before the bond was registered, against a personal undertaking. Trust money must be dealt with strictly in accordance with the mandate and the rules; using it before the security exists exposes K to risk and may amount to a trust-account breach. P's statement that the terms were 'standard' is no substitute for advice.
2. May P continue to act for K against S? Explain.
Read the worked answer
P should not continue. A legal practitioner may not act against a former client in a matter where confidential information obtained in the earlier relationship is relevant without that client's informed consent. P learned about S's offshore account in the commercial dispute, and that information could be relevant to enforcement, asset tracing or S's financial position. Even if P does not consciously use it, the appearance of impropriety is enough to justify restraint.
P also acted for S in the very loan transaction and failed to give independent advice. Suing S on that same transaction would compound the conflict. P should withdraw from acting for K against S and should not disclose S's confidential information. K should be advised to instruct independent counsel. If P wishes to continue, he would need S's fully informed consent, which is unlikely and should not be assumed.
3. What should P do about the trust money and the bond?
Read the worked answer
P must immediately reconcile the trust account and restore any shortfall. The N$300,000 was entrusted to the firm for a specific purpose; paying it to S before the bond was registered was not merely an administrative slip. P should determine whether the bond was ever registered and whether K authorised the early payment. If not, P must account to K and take steps to recover the money from S.
P should also report the trust irregularity internally and consider the applicable professional reporting obligations. P must not use K's money to cover the shortfall or prefer one client over another. The bond file should be transferred to an independent conveyancer, and P should cooperate with any investigation. A personal undertaking from S is not a substitute for trust-account compliance.