LAWYERS ALSO LIABLE IN CONFLICTS OF INTEREST [LAW REPORTER]

We have commented over the last two to three years in particular in the pages of Company Director that directors face their greatest challenge in the area of allowing a conflict of duty and interest to arise. This is almost taboo territory and there are rare exceptions to the operation of this general rule. And, it is a rule that applies to other persons who are in a fiduciary position – this could include partners and professional persons, in particular solicitors. So, the High Court of Australia has recently held that the failure of lawyers to adopt a very strict approach to this question can have equally disastrous results for them.

In McGuire v Makaronis ((1997) 71 ALJR 781) the facts of the High Court decision were briefly these. The appellants (McGuire and another person) were members of a firm of solicitors. One of them had acted for both parties on the sale to Mr & Mrs Makaronis of a poultry farm. Another partner in the firm was retained by the Makaronises to obtain finance because the firm had a connection with a bank and this was regarded as a pretty useful connection. The Makaronises accepted the offer of finance and executed a mortgage over their family home to the firm of solicitors who were named personally as mortgagees. This fact was not disclosed to the Makaronises whose command of English was imperfect.

The lawyers charged the Makaronises a procuration fee and a rate of interest which was higher than that which they had been charged for procuring the finance. The Makaronises entered into the poultry farming business which regrettably they were inexpert at running and they soon became insolvent. The solicitors demanded payment of interest arrears and in default of the payment instituted Supreme Court proceedings for recovery of possession of the mortgaged premises. The Makaronises counterclaimed for rescission of the mortgage on various grounds including a breach of the duty owed by the solicitors to the Makaronises. The solicitors failed in their claim for possession of the property and the judge also ordered that the mortgage be set aside. An appeal was lodged to the Queensland Court of Appeal and this appeal having been dismissed they sought leave to appeal to the High Court.

The appellants were not denying that they may have acted in breach of their duty but that they should not be punished both by not having the ability to recover the property which was the basis of the mortgage or the right to receive repayment of the loan.

The High Court upheld the appeal. In essence, the High Court said that the mortgage should be set aside as a security. But, there had to be some payment made by the borrowers for the moneys lent. To deny the lawyers' lenders both remedies would be to re-fashion the transaction in a form which was not allowed by the law. It would in effect strike down the security interest without ensuring repayment of that which was paid in return for it. The Makaronises would have been left with the fruits of the transaction of which they complained – ie both the property and the money borrowed.

However, the High Court did recognise that the rate of interest was too high. It was clearly unfair that the Makaronises should pay the higher rate of interest. So the court was prepared to rewrite the contract at least in that particular context.

In that sense the decision parallels the decision in Natural Extracts Pty Ltd & Anor v Stotter & Ors noted in last month's Company Director where the court did allow the director recovery at least of part of the expenses incurred in pursuing a course of conduct which was in breach.

The appellants were not denying that they may have acted in breach of their duty but that they should not be punished both by not having the ability to recover the property which was the bais of the mortgasge or the right to receive repayment of the loan.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.