Regularly, we read from news articles that an entity recently started its own business and entered into a business transaction or agreement with another entity. In response, we sometimes assume such an agreement or transaction was conducted at “arm’s length,” meaning the two parties to the agreement or transaction are independent and generally do not share a close relationship with each other, and often are presumed to possess equal bargaining power. In addition, one party to the agreement or transaction would not have any heightened duty to correct mistakes and exercise extra care in connection with the inexperienced counterparty.
However, in practice, not every transaction is conducted at arm’s length and the nature of a business relationship between two parties can vary depending on the relevant factual circumstances. Indeed, special relationships exist that do not arise out of an ordinary arm’s length business transaction. One of them is a fiduciary relationship between lawyer and client.
As Virginia courts have correctly put it, “[a] fiduciary relationship exists in all cases when special confidence has been reposed in one who in equity and good conscience is bound to act in good faith and with due regard for the interests of the one reposing the confidence.” In other words, a fiduciary in the relationship would “hold a position of trust and confidence with respect to another’s financial or personal benefit,” giving rise to specific duties of good faith and responsibility.
The lawyer-client relationship is such a fiduciary relationship. As such, a lawyer must “deal honestly with the client, and not employ advantages arising from the lawyer-client relationship in a manner adverse to the client.” Rest §16(3). While ethical rules governing lawyers vary by state, all fifty states and the District of Columbia have adopted legal ethics rules based at least in part on the Model Rules of Professional Conduct by the American Bar Association (“MR”). Section 1.8(a) of the MR provides the following:
(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
Simply put, lawyers may not drive hard bargains in dealings with clients unless the terms of the dealings are fair, reasonable, and fully disclosed, and the clients were properly advised of, and subsequently provided written, informed consent, to the terms. The applicability of the aforesaid fiduciary principle and ethical rules is not just limited to matters concerning the lawyers’ representation but rather extends to all dealings between the lawyers and their clients, including the lawyers’ business transactions with clients, and their acquisitions of ownership, security, or other financial interests adverse to the clients.
While the scope of the fiduciary principle and ethical rules is quite broad, it does have limits. The ethical rules under MR 1.8(a) generally do not apply to standard commercial transactions between the lawyer and the client for products or services that the client generally markets to others. For example, if a lawyer of the firm that happens to represent McDonald’s in a commercial litigation matter stops at a McDonald’s drive-thru lane and purchases some chicken nuggets, such purchase will likely be deemed one of the previously mentioned standard commercial transactions, and the ethical duty under MR 1.8 (a) would not be imposed on the lawyer for such transaction. This is because the chicken nuggets would cost the same at McDonald’s for the lawyer as it does for any person, and the lawyer would not have an unfair advantage over the client in the purchase of the chicken nuggets.
Outside the area of standard commercial transactions, the fiduciary principle and ethical rules strictly govern the lawyer’s conduct. Given that a client should not be in a position to hire a third lawyer to determine whether his/her current lawyer’s conduct is ethical or consistent with the fiduciary principle in the first place, the client would need a lawyer who can properly assume the stance of objectivity and impartiality whenever he/she advises his/her client and ensure that their dealings with the client are fair and reasonable, and in the client’s best interest.
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