Most people have an intuitive grasp of what it means to have a conflict of interest.

However, it should be observed that consideration of the nature of conflicts of interest is made complex by the fact that relatively subtle changes in relationships can bring about a profound alteration in the type of conflict to be identified. Consequently, it is important to note some important distinctions.

In general, a conflict of interest arises when two or more people (the parties) seek either:

  • the same indivisible good or benefit, or
  • part of a divisible good or benefit in an amount or in such a manner that there is insufficient in reserve to satisfy the needs or wishes of the other party or parties, or
  • where the goods or benefits that each party seeks are of such a nature that they cannot be held by those parties without giving rise to some detriment to one party or the other.

Direct and indirect conflicts of interest

Conflicts of interest can either be direct or indirect. A direct conflict of interest arises whenever two or more persons seek a good or benefit in conditions such as those defined above.

An indirect conflict of interest arises when a person is obliged to protect or advance the interests of two or more others who are jointly or severally seeking a good or benefit in conditions such as those defined above. An indirect conflict of interest may be better styled a ‘conflict of duties’.

For ease of argument, when it comes to indirect conflicts of interest, the person owing the duty to advance or protect the interests of another will be referred to as the ‘service provider’ and the person owed the duty will be referred to as the ‘client’.

For the purposes of this advice, the relationships concerned must be such that the obligation to protect or advance the interests of the client is taken up by the service provider. This would exclude the most common commercial relationships.

For example, the supermarket owner has no obligation to protect or advance the interests of those whose products are sold in the store. Apart from the normal duty of care, the supermarket owner is only obliged to provide a place in which the goods may be displayed and sold in merchantable condition. On the other hand, those with a fiduciary duty or, for example, those acting as the agents of others will be liable to face an indirect conflict of interest (or conflict of duties).

It should be noted that an individual may, in respect of the same situation, have both a direct and indirect conflict of interest. For example, in circumstances where a lawyer wishes to act for two competitors in the same industry, the solicitor will have a prima facie interest in earning fees from both parties. There may then be a direct conflict of interests between the solicitor’s desire for fees and either client’s wish or need to ensure that the solicitor does not act for a competitor. The lawyer may also have an indirect conflict of interest (or conflict of duties) which arises because of the conflict between each competitor’s interests. That is, the solicitor will be unable to discharge her duty to both parties.

In many cases it will be better for the relationships to be maintained, notwithstanding a conflict of interest

Can conflicts of interest be resolved?

Before addressing this question directly, it is important to note one of the key assumptions on which the argument of this opinion rests. This is that individuals have a right to make decisions about matters affecting their own welfare.

In some cases this right can be voluntarily relinquished, in others it can be transferred to another who may exercise it on the person’s behalf. Unless specifically requested, it is not proposed to advance the philosophical arguments which tend to justify this assumption.

The rights of the parties with a direct conflict of interest are ‘symmetrical’ (fundamentally equal and of the same kind). However, in the case of indirect conflicts, there is an ‘asymmetry’ in the rights enjoyed by clients and service providers. In general, the service provider enters into an arrangement by which he or she agrees to protect or advance the interests of the client.

The service provider enters into this arrangement voluntarily and usually in return for some consideration. While remuneration is paid, in part, for access to the service provider’s goods, skills or advice, part of the payment is also made in order to secure the allegiance of the service provider. Hence there is an expectation that the interests of the client will be placed before those of others (including those of the service provider). In relation to the service provider and in the context of the terms of the retainer, the rights of the clients are paramount.

This is the basis for the asymmetry of rights identified in the case of indirect conflicts. The effect of this is that the service provider has no right to affect or determine the solution of an indirect conflict of interest save to discontinue one or more relationships giving rise to the conflict.

It should be noted that a direct conflict of interest can only be resolved by one or more of the parties giving way to another. At best, a direct conflict of interests will be resolved by way of a compromise in which each party obtains something less than would have been considered ideal. Each party enmeshed in a direct conflict of interest has a right, equal to all other parties directly affected, to make an autonomous decision.

In the case of an indirect conflict of interest (or conflict of duties) each party has the capacity to resolve the conflict. For example, the service provider might decide to terminate one or more of the relationships giving rise to the conflict.

However, it is not unusual for the service provider to wish to maintain each relationship intact. This may be prompted by the desire to maintain the tangible benefits that flow from multiple relationships. In such matters, it is rarely the case that the loss of one client or customer is made up by a corresponding increase in the benefits flowing from the remainder.

However, there is an equal difficulty for the service provider arising from the duty to act in the best interests of each client. For the service provider to end the relationship with a client unilaterally might be to the client’s detriment. In such circumstances, the service provider can face a genuine dilemma concerning how to extricate him or herself from the conflict. It is then up to those whose interests are to be protected or advanced to decide how the matter will be resolved.

One obvious solution to this type of conflict is for one or more of the clients to terminate their relationship with the service provider (or at least attenuate it to a degree sufficient to resolve the conflict). However, it should be noted that the existence of a conflict of duties does NOT necessarily mean that a service provider should be required to sunder ties with all but one of the parties. Instead, there is always the possibility that each client will freely grant its informed consent for the service provider to continue to act, both for itself and (by implication) for those with whom its interests conflict. As Professor Paul Finn, of The Australian National University has noted:

A critical lesson from the common law is that conflicts of duty and interest as such are not objectionable per se. What is objectionable first and foremost, are undisclosed conflicts.

(Finn, 1993, p. 97)

In order to resolve a conflict of duties each client must:

  • Be competent to make an informed decision
  • Be free to decide (unfettered by any influence or constraint emanating, either directly or indirectly, from the service provider)
  • Know of the existence, nature and extent of the service provider’s indirect conflict of interest
  • Know the nature (and sometimes extent) of any relevant direct conflict of interest
  • Take advantage of independent advice as may be required
  • Consent to the service provider continuing to act on its behalf

Thus, it is each of the parties who must ultimately decide whether or not to continue to maintain a relationship with a service provider which has a conflict of duties. There is no absolute prohibition against maintaining such a relationship.

Rather each of the parties has to weigh up the likely costs and benefits of continuing with the relationship. In this respect, a client will normally want to assess both ‘immediate’ and ‘remote’ benefits and harms. That is, a prudent client will wish to assess the full character of the circumstances of its relationship with the service provider. In practical terms this amounts to asking the following types of questions:

  • What is the primary interest to be served by this relationship?
  • Is the realisation of this interest in any way harmed by this relationship continuing in its present form (are the means appropriate to the end)?
  • Are there any realistic alternatives to this relationship (would some other relationship solve the present problem without giving rise to countervailing difficulties of equal or greater significance)? Will any of the alternatives produce a net gain?
  • Are there any relevant ‘coincidental’ interests that might be adversely affected if the current relationship is maintained? If so, then are these ‘coincidental’ interests of such importance that they cancel out the nett benefits of maintaining the current relationship?

The ability to answer these questions may be constrained to the extent that relevant information is available. For example, some information may be commercially sensitive or strictly confidential for other reasons. In some cases, it may be necessary to seek permission from an existing client before disclosing information that a prospective client would require in order to make an informed decision about whether or not to enter into a relationship with the service provider.

All of this might be demonstrated by a somewhat contrived, hypothetical example. Let it be supposed that two parties wish to engage the same lawyer to provide services relating to the conveyance of a rural property to the vendor’s long-standing neighbour. Let it also be supposed that the lawyer is related to one of the parties. In this case, there is clearly a range of conflicts of interest. Could the parties sensibly agree that the adviser continue to act for both? The matter can be explored from the perspective of one of the parties, the vendor.

  • The vendor’s primary interest will be to secure the best possible price and terms of sale for his property and then a trouble-free conveyance.
  • This objective could be compromised if negotiations break down or if the other client seeks to take unfair advantage of the vendor. In such a situation, would the lawyer be able to look after the vendor’s interests while at the same time serving those of the purchaser (who also happens to be the lawyer’s relative)? On the face of it, there seem to be grounds for terminating the relationship.
  • There are other lawyers to assist, however, they are based in another town many miles away. So, there is a practical cost to the alternative.
  • In terms of other ‘coincidental’ interests, the vendor also places a very high premium on continuing to use the services of the lawyer who has worked with the family for thirty years or so. And the vendor and purchaser have both established a relationship of trust over the years with each being perfectly content to rely on the other to engage in fair dealing. Why should either carry the cost of paying another set of fees? Finally, some of the locals might think it a bit odd that the lawyer has acted for her relative. This perception could be something of a problem (for the other side at least). And perceptions matter in country towns. Even so, the lawyer has a fine reputation as an honourable practitioner.
  • On balance, the vendor may very well conclude that consent be given to the lawyer’s continuing to act.

Once again, it should be noted that either client is free to terminate the relationship (thereby resolving the conflict). Having said this, providing that informed consent has been freely given, then a client may enter into a contractual relationship which will be binding until such time as the contract expires. Hence the importance of a client diligently assessing its interests and how they might be served by the service provider (a conflict of duties notwithstanding).

Having said this, it should be observed that the type of hypothetical assessment, engaged in above, seems to be an example of consequentialist reasoning. That is, it presupposes that it is legitimate to determine a matter according to what are perceived to be the ‘best’ outcomes.

Some might object to this whole approach by arguing that certain actions are prohibited, irrespective of their consequences. One such alternative approach seeks to assess proposed actions by submitting them to the test of whether or not they can be expressed as a maxim that meets the form of a ‘categorical imperative’. And there are other similar tests that might be applied.

It is not my intention to pursue this matter. This is because debates such as these are valuable when concentrating on the quality of reasons relied upon by individuals when making assessments about what they ought to do. However, they are not strictly relevant to a discussion about how conflicts of interest can be resolved. As noted above, it is assumed that people ought to be free to decide matters affecting them. Part of respecting personal autonomy involves accepting that people should, in general, be able to act according to reasons that they find to be compelling. Although an independent observer might challenge the basis for, or reasonableness of, any decision that a person might make, this is strictly extraneous to the decision-making process.

Perceptions of conflicts of interest

It should be noted that the perception, by others, of a conflict of interest can often be of concern equal to or greater than the actual conflict of interest itself. This is usually because those who perceive a conflict of interest are usually led to conclude that some office or duty is unlikely (or less likely) to be discharged either fairly or impartially.

This is a particular concern when one of the parties to a conflict exercises some kind of public office. In such circumstances, the need to maintain public confidence in the probity of decision-making processes is seen to be of sufficient importance to make the issue of conflicts of interest one of considerable significance.

However, it should be noted that the good of preserving public confidence is itself constantly being balanced against other goods such as the rights of public officials to own property, participate in the political process and so on. In common with other situations, the mere fact of a conflict of interest does not, in itself, give rise to a requirement that the ‘offending’ relationships be severed. Rather, a host of measures ranging from disclosure to divestment are available. These measures may include, in appropriate circumstances, the use of ‘Chinese walls’ and the disclosure of limited information (being sufficient to resolve the conflict).

Any decision about how to handle a conflict of interest (including the effects of a perception of a conflict of interest) will ultimately need to be based on a perception of the parties’ own view of how their best interests will be served.

In many cases it will be better for the relationships to be maintained notwithstanding a conflict of interest. This may be so for a number of reasons including: the unavailability of a suitable alternative, the overall ‘cost’ of making a change and so on. As stated above, what counts as a ‘good’ reason in determining such matters will ultimately be up to the parties exercising the right to decide.

In the case of governments and their related institutions, the guiding standard will always be the public interest. Bearing this in mind, it is not at all clear that the public interest will always be served by terminating a relationship because of a real or perceived conflict of interest. For example, the public interest requires that members of the community stand for election to Parliament. It is not necessarily in the public interest that all Members of Parliament sever ties with family and other interests. It is more to the point that the interests be disclosed so that a measure of transparency prevails.

Similarly, the public interest may best be served by the existence of a public service whose members serve faithfully the government of the day. There would seem to be a prima facie conflict of interest in cases where public servants are active members of political parties who oppose the government. Yet, the public interest is best served by allowing this conflict to exist in the context of a democratic polity. Ultimately, a judgement about conflicts of interest involving public bodies must be based on a balanced assessment of the relative goods to be secured in service of the public interest taken as a whole.

Once again Professor Finn’s views are instructive. In general he would allow a public official to continue to act, a conflict notwithstanding where:

(a) … the conflict is of a minor character or is a purely hypothetical or formal one, (b) where the official’s involvement in, or responsibility for, the matter in question is insubstantial, or (c) where the personal interest is judged to be no different from that possessed by the public generally or a significant section of it.

(Finn, ibid, pp. 100 and 101)

In other circumstances, a public official should be able to act, a conflict notwithstanding, where:

… the official concerned would bring such distinctive advantages to the matter in question, that the interests of the public would probably be prejudiced by that person’s disqualification – prejudice which would outweigh that which could result from appearances created by his or her continuing to act; or (ii) the official function in question could not be discharged adequately or at all because of the unavailability of persons who could act as a substitute for the interested official – a consideration which could, for example, be of relevance in a statutory authority where the disqualification of several members interested in the same matter could prevent a quorum being formed.

(Finn, ibid, p. 101)

In this it should be noted that Finn is discussing the situation facing a public official.