Firm's own error in a trust matter: openness and own interest conflict (Code 6.1, 7.11)
A firm acts for the trustees of the Ashdown family trust. Two years ago the trustees instructed the firm to invest £400,000 of trust money in line with a written investment strategy. An associate forgot, and the money has sat in a non-interest-bearing account ever since, causing the trust a significant loss. The trustees have not noticed. The supervising partner suggests either saying nothing and quietly investing the money now, or telling the trustees and asking them to sign a consent letter so that the firm can keep acting on all trust matters, including any claim arising from the error.
Which of the following best describes what the firm should do?
Choose one answer to see the reasoning.
Worked answer
Correct answer D: Explain fully and promptly to the trustees what happened and its likely impact, put it right if possible, and not act where its interests conflict with theirs.
THE RULE TO REMEMBER
When a firm's error causes a client loss, it must be open and explain promptly; it cannot act where its own interests conflict with the client's, and consent does not cure an own interest conflict.
Firm's own error in a trust matter: openness and own interest conflict (Code 6.1, 7.11)
Paragraph 7.11 of the Code requires a solicitor to be honest and open with clients if things go wrong. If a client suffers loss or harm as a result, the solicitor must put matters right if possible and explain fully and promptly what has happened and its likely impact. The firm must therefore tell the trustees about the uninvested money. Paragraph 6.1 prohibits acting where there is an own interest conflict or a significant risk of one. The SRA's conflicts guidance gives the firm's own conduct, such as wrong advice or the wrong action being taken, as an example. It says there are no exceptions: neither the client's consent nor telling the client to take independent advice changes the position. The firm cannot advise the trustees on a claim against itself, and it should recommend that they take independent advice on that. Whether it can keep acting on other trust work depends on whether its own interests create a significant risk of conflict on that work. Saying nothing and quietly investing the money would also breach Principles 4 and 5 (honesty and integrity).
Why A is wrong: The duty to be open when things go wrong does not depend on a complaint; concealment would also breach Principles 4 and 5.
Why B is wrong: There are no exceptions to the own interest conflict rule, so client consent does not allow the firm to advise on a claim against itself.
Why C is wrong: The firm must volunteer the information promptly, not wait to be asked.
Why E is wrong: The clients are the trustees, and the duties of openness and confidentiality are owed to them.
A little more practice done.
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