What are a Lawyer’s Duties to Their Client During a Business Sale?

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• Fiduciary Duty
• Honesty and Fairness
• Maintaining Confidence
• Due Care and Diligence
• Avoiding Conflict of Interests

In a business sale, there can be up to 9 (or more) different parties involved. These parties are generally:

1. The vendor;
2. The vendor’s lawyer;
3. The vendor’s accountant;
4. The purchaser;
5. The purchaser’s lawyer;
6. The purchaser’s accountant;
7. The landlord;
8. The landlord’s lawyer; and
9. The business broker.

A large number of parties means that the sale can become quite complicated very quickly as each party is attempting to protect each other’s interests. Despite the above, however, the different parties can mostly be grouped into four, and arguably three as the landlord, although important, is not directly part of the sale (they are better characterised as a 3^rd party, similar to employees, suppliers, service providers and customers).

These three parties are then as follows:

1. The vendor’s party (comprised of the vendor, their lawyer and accountant);
2. The purchaser’s party (comprised of the purchaser, their lawyer and accountant); and
3. The business broker.

Grouped this way, it’s clear that the vendor’s and purchaser’s respective lawyer and accountant are practically the same. This is because the lawyer and the accountant act for and are responsible to their client (i.e. the vendor or the purchaser).

This further means that the vendor’s lawyer and/or accountant cannot act, or take instructions from the purchaser’s lawyer and/or accountant and vise versa. Also, this means the lawyers and accountants cannot take instructions or act for the business broker.

Quite simply, in the case of the lawyer, this would be a blatant conflict of interests and counter to their duties and obligations to their client. A lawyer’s duty to their client is governed not only by the common law (known as the lawyer’s fiduciary duty) but also the solicitor rules. Notably, each Australian State and Territory has their own solicitor rules, however the basic rules relating to duties to a client are essentially the same.

Fiduciary Duty

A lawyer’s relationship with their client is known as a fiduciary relationship. This means that the client has placed their confidence, trust, and reliance on the lawyer to advise them and act in their interests concerning a matter.

For the lawyer, this requires them to not only act in the client’s best interests but to also:

1. Act honestly and fairly with the client;
2. Maintain the client’s confidence;
3. Act with due care and diligence; and
4. Avoid conflicts of interests.

Note that these duties are rarely entirely mutually exclusive. In most circumstances, there will be more than one duty that overlaps and applies concurrently.

Honesty and Fairness

This duty requires that the lawyer always acts honestly and with fairness regarding their client’s interests. They must always ensure to provide their honest opinion and disclose any information that may be relevant to their client.

Maintaining Confidence

Maintaining confidence is the duty of ensuring any communications between the lawyer and the client are kept confidential. This even includes potentially prejudicial information. Only in very limited circumstances can this information be disclosed.

Due Care and Diligence

The lawyer must ensure that at all times, he or she acts professionally and to the appropriate standard. Lawyers must ensure that they complete any work on behalf of the client carefully, and comprehensively.

Avoiding Conflict of Interests

In the case of business sales, this is one of the most important duties as there are, as set out above, a large number of parties involved in the sale. Accordingly, a lawyer acting for a party in a business sale must take steps so ensure he or she is not acting for, or giving even the appearance of acting for any party except the once which has engaged them. In practice, this means that although a lawyer may, for example (when acting for the vendor), communicate directly with other parties and obtain information from them, they must always disclose this information to their client, and not act unless instructed to do so by their client.

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When acting for a party in a business sale, a lawyer’s obligation and duty is to their client. They must ensure that they act in a manner that complies with their fiduciary duties and must ensure that there is no conflict with any other party. Questions? Let us know.