Legal Conflicts of Interest are no Academic Matter
In an era of continuing crisis both here and across the country—and in a community of construction and real estate lawyers that seems (and usually is) small and somewhat incestuous—law firms often represent contractors, developers and lenders at the same time.
While each party knows this, each also assumes that the law firm’s procedures will identify potential conflicts of interest before the lawyer is placed in a position of representing two clients directly adverse to one another on the same project. But in long-standing attorney-client relationships, the wheels naturally tend to begin spinning before final checks are complete, and even when potential conflicts are identified, lawyers often believe that they can effectively identify all scenarios and avoid them.
An Emerging Concern
Whether for this, or other reasons, law firm conflict procedures don’t seem to be working. Real-world scenarios are arising, particularly in the environment of an increasing number of failed developments, where one business owner suddenly realizes that his or her lawyer is representing its adversary in an action where contractors, lenders and the like are all competing for priority over a limited (or non-existent) source of funds or, more often than not, a development that is the only asset of the estate.
Once upon a time, perhaps, when projects were not defunct, sole-purpose-entity developers were not in bankruptcy, and contractors were being paid, the conflicts of interest arising from such joint representation were more theoretical than actual.
Now, they are not only real, but potentially very damaging.
A Bottom-Line Issue
The problem with these conflict situations is that, just as in any case, someone will win and someone will lose. And even if a compromise is reached, both clients may get less than they might have otherwise. In a “bet the company” situation—more typical than not today—wins, losses and compromises make the difference for many companies of surviving to play another day.
So, what can industry players (and their lawyers) do to protect themselves? Ironically, options for addressing conflicts are limited (and probably unattractive), whether you learn of them after your lawyer has already taken positions adverse to your interests, or are lucky enough to have the lawyer identify the potential conflicts in time for you to make an informed decision. In the former situation, the choices are to demand that your lawyer withdraw or cease from taking adverse positions. In the latter, you can either waive the conflict (assuming it is waivable—a question with different answers, depending on too many variables to address here) or not.
A Need for Vigilance
Choosing not to waive the potential conflict risks the chamber of horrors that results if (when) the hypothetical becomes a reality. But with the assurance of your “go to” guy, it probably doesn’t seem fair to make your law firm pick its favorite child—surely there is enough love to go around, right? Wrong. Unfortunately, the economic conditions plaguing the construction industry today make such a lackadaisical attitude towards conflicts dangerous.
The only safe choice is to imagine the worst possible scenario that could arise from the conflict and adopt it as reality. Obviously, this alternative forces the law firm to choose between its two clients, at least as to the project at hand. But joint representation in today’s market seems to risk too high a price, both for the law firm and the client, in all but extraordinary circumstances—few, if any, that I can think of.
Hyper-vigilance? Probably. But industry and business realities dictate it because the consequences of “hoping for the best” are too serious to act otherwise.
Jenn Shafer is a partner at the Warden Grier law firm in Kansas City.
P | 816.877.8100
E | jshafer@wardengrier.com
Return to Ingram's November 2010