Sometimes, a company retains an attorney for business purposes. The attorney becomes a trusted advisor for the company and therefore forms a relationship with the leaders of the business. As the mutual trust, decision-making skills, and professionalism grow, a proposal may ensue to become more than just a client and attorney, but also to become business partners. While this may seem beneficial, it can cause complications for the attorney.

At the foundation of this situation is the duty of the attorney to the client. When the attorney was retained to represent them, the client had an expectation that their best interests were at the forefront of every decision. When the two become business partners, however, the attorney may have a conflict of interest with their client, as they now have a personal investment in the project.

Because of this, there are statutes in place that restrict opportunities for this scenario to become reality.

California Rules of Professional Conduct

Rule 1.8.1 specifically outlines that an attorney may not enter into business transactions with a client. In addition, they may not knowingly acquire ownership, possession, security, or any other pecuniary interest in a client. However, there are exceptions to this rule.

  • Any transactions or acquisitions are fair and reasonable for the client. The role of the attorney must be specified, fully disclosed, and transmitted through written documentation. The client must also fully understand this role.
  • In any acquisition or transaction, the client must be represented by an independent third-party attorney of their choice. The client must also be provided with the necessary time to seek out that representation and gain advice.
  • The client must give written consent outlining the terms of the acquisition or transaction. This must include the specified role of their attorney.

Although it is a general rule, there is nothing explicitly stating that these types of attorney-client relationships cannot exist. In fact, there have been cases where an attorney’s fees were paid by a client in the form of a business stake. This often occurs with start-ups that may not have the funds to pay those fees outright.

Fair and Reasonable

While conflicts of interest are at the forefront of any such business agreements, an additional consideration includes fairness and reasonable conduct towards a client. In situations where a business partnership forms, there should be unambiguous evidence that the attorney did not take advantage of any knowledge, or lack thereof, that the client may or may not have. An attorney, by profession, understands the legal precepts that apply to businesses (the reason they are retained by the client). That could cause an attorney to take advantage of this and create policies or agreements that unfairly balance business between the two parties.

This potential conflict is further complicated when it involves finances. There are greater opportunities for disparity because the attorney now has a financial investment in the business. They could therefore make decisions that are either financially unequal or could harm the client by selling secrets or working behind the client’s back.

Informed Written Consent

If the agreement is to move forward, there should be informed written consent between the attorney and the client. In this agreement, the attorney should notify the client specifically of the circumstances and risks involved with the potential course of conduct. This agreement should include any potential consequences that could arise as well.

The consent exists to empower the client and define the role of the attorney in the process. The client must be able to make an informed decision, which entails full disclosure of the terms of the transaction. This agreement should be ironclad. If a situation arises where the agreement needs review by a third party, it must clearly show that the client was informed.

Independent Counsel

In any agreement that moves beyond the general attorney-client relationship, seeking third-party advice can be the wisest choice. As Rule 1.8.1 suggests, clients, and even attorneys, should seek the help of independent counsel. They can examine the relationship that has already formed out of the situation and help make informed, independent decisions. Most clients are encouraged to seek the help of an independent counsel because it adds to the evidence that their decision was reasonable and informed.

FAQs

Q: What Is the General Rule About Business Transactions Between Lawyers and Clients?

A: In general, if an attorney and their client wish to enter into a business transaction agreement, then the client should have been reasonably informed of the dynamics of the relationship and it should be provided in writing to the client. If the client understands all the terms of the agreement, then the two parties may enter into a business transaction.

Q: What Is the 1.7 Rule?

A: This rule pertains to the conflict of interests between an attorney and a client. In short, the rule states that an attorney must not represent a client if that representation negatively affects another client in either the same or a separate legal matter. However, they may do so if they obtain informed consent in writing from both clients.

Q: Are Clients Entitled to Attorney Notes in California?

A: Under California’s Rules of Professional Conduct, if an attorney ends their representation of a client, the client has the right to request, and the attorney has an obligation to release any documents, client materials, and property. This is subject to any applicable protective orders, NDAs, or laws.

Q: What Is the Name of the Ethics Code for Lawyers in California?

A: Attorney ethics are governed by the California Rules of Professional Conduct. The ethical rules and statutes were revised in 2018 and closely follow the American Bar Association rules of conduct. These were first introduced in 1908 and have developed and changed over time as the dynamics of the profession change. However, many of the same rules originally introduced are still in effect.

Business Attorneys

If you are a client or an attorney that is seeking to enter into a business agreement with the other, it is important that you seek the help of independent counsel. At Fishman, Larsen & Callister, our attorneys have the knowledge and expertise to answer your questions and help you make an informed and reasonable decision. Contact our offices today.