THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK
FORMAL OPINION 2001-2
IN CORPORATE AND TRANSACTIONAL MATTERS
Conflicts of Interest; Waivers; Imputation of Conflicts
A law firm may represent a client whose interests in a corporate
transaction are adverse to those of a current client in a separate
matter, and may represent multiple clients in a single matter, with
disclosure and informed consent, so long as a disinterested lawyer
would believe that the law firm can competently represent the interests
of each. Satisfaction of the "disinterested lawyer"
test in this context will depend on an evaluation of the nature and
circumstances of the simultaneous representations, including those
DR 5-105; EC 5-1; EC 5-15; EC 5-16.
Under what circumstances, if any, may a law firm in a corporate
transaction represent a client adverse to a current client of the
law firm in another matter, or represent multiple clients of the firm
in a single transaction where those clients have differing interests?
will be many situations in which a lawyer will be able to provide
competent representation to multiple clients in a transactional setting,
including in situations where the lawyer represents a client whose
interests in a corporate transaction are adverse to those of another
current client represented by the lawyer in a separate matter.
Indeed, where the lawyer represents one party in a negotiated transaction
involving another client the lawyer represents in an unrelated matter,
we think that ordinarily a "disinterested lawyer" could
reasonably conclude that the lawyer can competently represent the
interests of each client. The same conclusion may also hold
where the lawyer represents multiple clients with differing interests
in the same transaction, depending on an analysis of a number of circumstances
described below. In these and similar situations, clients who
are fully advised of the relevant circumstances and of the material
and reasonably foreseeable ways that the conflict could adversely
affect their interests have the right to waive the conflict in order
to be represented by the lawyer of their choice, as set forth below.
has been written on conflicts of interest arising from a lawyer's
simultaneous representation of two clients with adverse interests
in litigation. Less guidance exists, however, about the ethical
issues involved in the simultaneous representation of multiple clients
with differing interests in transactional matters. Accordingly,
the Committee has been asked to address the circumstances in which
it is permissible for a lawyer to represent a client in a corporate
transaction whose interests in the matter are adverse to a client
that the lawyer or law firm represents in another matter, and the
circumstances in which a law firm may represent multiple clients in
a single transaction. The Committee has concluded that there
are a variety of circumstances in which client consent would permit
a lawyer in a transactional matter to represent one client whose interests
are adverse to those of another client in the same transaction or
an unrelated matter.
questions concerning the ability of a lawyer to represent one client
in a corporate transaction adverse to another client may arise in
a variety of contexts, we begin our conflicts analysis in the context
of a lawyer who represents a client ("ABC Corp.") in several
products liability lawsuits, who has been asked by another client
to represent it as the lender in a loan proposed to be made to ABC
Corp., which will be represented by another law firm in the loan transaction.
May the lawyer accept the representation of the lending client assuming
that both clients consent? What limitations, if any, would apply to
the simultaneous adverse representations?
analysis necessarily begins with Disciplinary Rule 5-105 of the New
York Code of Professional Responsibility (the "Code"), which
was amended effective June 30, 1999. 22 N.Y.C.R.R. §1200.24.
Under this rule, a lawyer may not represent a client in a matter that
is adverse to the interests of another client, even if the dual representations
are wholly unrelated, unless the lawyer has the informed consent of
both clients and "a disinterested lawyer would believe that the
lawyer can competently represent the interest of each . . . ."
DR 5-105(A) and (C); 22 N.Y.C.R.R. §1200.24.
5-105(A) is designed to protect the duty of loyalty and the duty of
confidentiality owed to every client. Wolfram, Modern Legal Ethics,
§7.3.1 (West 1986). The rule is triggered whenever a lawyer
simultaneously represents two clients in matters involving "differing
interests," regardless of the context in which those differing
interests arise. The Code defines "differing interests"
broadly to include "every interest that will adversely affect
either the judgment or the loyalty of a lawyer to a client, whether
it be a conflicting, inconsistent, diverse, or other interest."
Def. 1, 22 N.Y.C.R.R. §1200.1.
the question posed, the clients have "differing interests"
as well as interests in common. To be sure, ABC Corp. wants
to obtain the loan, and the lending client of the lawyer wants to
make the loan, but the interests of the borrower and the lender
diverge with respect to a host of business and legal issues, including
pricing, covenants, defaults, security, remedies, warranties and the
like. Whether the interests of the two clients are so sharply
divergent that a "disinterested lawyer" would not conclude
that the same lawyer or law firm "can competently represent the
interest of each" client is a threshold question that must be
addressed before client consent can be sought. In this context,
conflicts are imputed, so if any lawyer in a firm cannot take on the
representation, then no lawyer can. See DR 5-105(D).
Committee believes, and other ethics committees have also concluded,
that there are many situations in transactional practice involving
the simultaneous representation of clients with "differing interests"
where the "disinterested lawyer" test of DR 5-105(C) may
be satisfied. In many transactional settings, for example, the
parties' interests may be both "differing" within the meaning
of the Code and overlapping in the sense that both share the goal
of consummating the transaction. The fact that the matter does
not involve litigation or another adversary proceeding between the
parties makes it less likely that the lawyer's judgment will be adversely
affected. See EC 5-15; N.Y. County 671 (1989) (other
factors to be considered include: (i) the extent and nature
of the lawyer's relationship with each client; (ii) the importance
of the matter to each client; (iii) the likelihood that the negotiations
will be contentious; (iv) the likelihood that the matter will result
in litigation). In transactional matters, there will be many
situations when a lawyer, with disclosure and consent, may represent
one client in a transaction with another client. In litigation,
the burden of the lawyer to justify simultaneous adverse representation
may be higher than in the corporate context. See Cinema
5, Ltd. v. Cinerama, Inc., 28 F.2d 1384, 1386 (2d Cir. 1976).
may also exist circumstances where a lawyer is asked to represent
multiple clients with differing interests in the same matter, such
as representing the borrower and lender simultaneously in a loan transaction.
If the subject matters of the two representations are wholly unrelated,
a "disinterested lawyer" might, after weighing the relevant
factors, believe that the lawyer or law firm can competently represent
the interests of each client. Where a lawyer undertakes multiple
representations of clients with actual or potentially differing interests
in the same matter, the possibility that a disinterested lawyer
may not believe that a lawyer or law firm can provide competent representation
of both sides is increased.
litigation, the answer is clear-cut. As Professor Simon states,
"Obviously, a lawyer cannot represent both sides in the same
litigation. That is one of the few per se rules in the
field of conflicts." Simon's New York Code of Prof'l
Resp. Ann., DR 5-105, at 337 (West 2000); accord Wolfram,
§ 3.7.2 ("Almost without exception, a lawyer may not represent
adverse parties in the same litigation."). In contrast,
the application of DR 5-105 to the representation of multiple parties
is more relaxed in a transactional context. See EC 5-15
("there are many instances in which a lawyer may properly serve
multiple clients having potentially differing interests in matters
not involving litigation"); Wolfram, § 7.3.4 ("Courts
demonstrate a somewhat more benign attitude as the scene of a conflict
of interest moves away from litigation and into contract and other
many law firms serve clients who are requesting, indeed, insisting
that they simultaneously represent two clients with differing interests
in a single negotiated transaction. It is understandable
that clients who have developed a longstanding and close relationship
with their lawyer or law firm may be far more willing to face other
lawyers from that same firm across the bargaining table in a
negotiated deal than be forced to retain a different law firm to handle
Indeed, if two clients who both regularly use the same law firm wish
to utilize the firm in the same transaction but are precluded from
doing so, it is likely to result in both clients being denied
an extremely important right, which is to select counsel of choice.
Although the likelihood of a non-consentable conflict arising in such
circumstances is greater than where the clients' interests diverge
in distinct matters, there is no per se ban on simultaneous
representations of clients with antagonistic interests in a single
matter. In fact, ethics committees have recognized various circumstances
in which such an arrangement is ethically permissible. E.g.,
ABA Informal Op. 518 (1962) (concluding that attorney may ethically
represent opposing parties in drafting a contract "with consent
given by them after full disclosure"); N.Y. State 611 (1990)
(concluding that lawyer may represent both seller and lender in real
estate transaction in certain limited circumstances and where both
parties provide fully informed consent); N.Y. State 162 (1970) (concluding
that attorney may represent both buyer and seller in simple real estate
transaction where all terms have been agreed to and no major points
of negotiation remain); N.Y. County 615 (1973) (same).
must give especially heavy weight to the fundamental right of clients
to select counsel of their choice because the New York Court of Appeals
has decisively established that the right of multiple parties to utilize
a single lawyer in a transaction is virtually absolute, even in an
area such as the representation of both spouses in the preparation
of a separation agreement, which is fraught with potential adversity
and is often extremely contentious where substantive terms need to
be negotiated. Levine v. Levine, 56 N.Y.2d 42 (1982)
(Jasen, J.). In Levine, one attorney who was related
to the husband and had also represented the husband in connection
with his business, represented both the husband and wife in the preparation
of a separation agreement providing, among other things, for custody
of the children and allocation of property. The attorney,
who had known both clients for several years, advised the wife that
she was free to seek the advice of another attorney. Although
the basic terms had been agreed upon at the time of the lawyer's retention,
further negotiations ensued before the final agreement was reached,
and two amendments were thereafter executed. In an action by
the wife to rescind the separation agreement and amendments, the Court
of Appeals rejected the wife's argument that "she was not represented
by counsel of her own choosing", based on the lawyer's joint
representation of the couple. Judge Jasen stated:
long as the attorney fairly advises the parties of both the salient
issues and the consequences of joint representation, and the separation
agreement arrived at was fair, rescission will not be granted. . .
. While the potential conflict of interests inherent in such joint
representation suggests that the husband and wife should retain separate
counsel, the parties have an absolute right to be represented by
the same attorney provided "there has been full disclosure between
the parties, not only of all relevant facts but also of their contextual
significance, and there has been an absence of inequitable conduct
or other infirmity which might vitiate the execution of the agreement".
at 48 (citations omitted; emphasis added).
The Court of Appeals reaffirmed this conclusion in Matter of Estate
of Cassone, 63 N.Y.2d 756 (1984), in which it rejected a challenge
to an arbitration clause based on the fact that the clause had been
drafted by an attorney representing all parties to the contract.
Id. at 758. Thus, in determining whether "a
disinterested lawyer would believe that the lawyer can competently
represent the interests" of two simultaneously represented clients
with differing interests under DR 5105(C), whether in the same
or unrelated matters, we must be mindful of the overarching right
of clients to be represented by their chosen counsel, even where they
choose the same one. Accordingly, we believe the following factors
should be considered:
The nature of the conflict. In a transaction where
common interests predominate over issues in dispute, the possibility
of an adverse effect on the exercise of the lawyer's independent professional
judgment is significantly mitigated. In the example of simultaneous
representation of one client in litigated matters and the other in
an unrelated loan transaction, the interests of the two clients
in closing the loan transaction appear to predominate over the areas
of conflict, many of which raise business (as opposed to legal) issues.
Significantly, the law firm's representation of ABC Corp. in products
liability litigation will not be affected in any way by the representation
of the lender client in connection with the loan, which does
not provide the law firm any motive or incentive to be less zealous
in its representation of ABC Corp. Indeed, the law firm
would have no reason to be less vigorous in its representation of
ABC Corp. in the products liability litigation merely because it was
representing a lender to ABC Corp. because the lender client would
not benefit from any such diminished loyalty. Finally, the dynamics
of the lender/borrower relationship, at least at the early stages,
are very differentindeed, some might say more alignedthan
the contentious relationship that typically prevails between plaintiff
the context of the proposed representation of multiple clients in
the same transaction may dictate the outcome of the disinterested
lawyer test. Where the interests of the parties are inherently
antagonistic, such as the interests of the hostile bidder and the
target in a corporate takeover, simultaneous representation generally
will be ethically impermissible. See Wolfram, §
7.3.4; Simon's New York Code of Prof'l Resp. Ann. DR 5-105,
at 337 ("only rarely may a lawyer ethically represent both sides
of the same transaction"). Situations in which a lawyer
or members of a single law firm would be required to negotiate directly
with herself or each other on behalf of multiple clients in a transaction
also will rarely be consentable.
other contexts, however, the conflict involved may be less direct
and contentious and, therefore, more amenable to simultaneous representation
with informed client consent. We think it too simplistic merely
to inquire whether a lawyer or law firm is on "both sides"
of a transaction. The more relevant inquiry is whether the nature
of the concurrent roles that the lawyer is being asked to play precludes
consent from being effective. This distinction is illustrated
by two corporate clients requesting a single law firm to represent
both in the purchase and sale of a subsidiary. If the
dual representations require lawyers to directly negotiate the substantive
business terms with each other, the direct adversity could preclude
such concurrent representation-even with consent. On the other
hand, if the engagements were limited, at least on one side, so that
head-to-head negotiations between lawyers in the same firm were eliminated,
concurrent representation with consent would be allowable.
In this vein, where a single firm serves as mergers and acquisitions
counsel to one corporation in a friendly merger and as antitrust counsel
to the other merging corporation for purposes of securing regulatory
approval, we do not think the nature of the conflict forecloses effective
consent. Under these circumstances, mergers and acquisitions
counsel could represent its client without an adverse effect on its
professional judgment because counsels primary interest is the
consummation of the merger on the best terms available; antitrust
counsel's primary work on behalf of the other client will be in furtherance
of obtaining necessary regulatory approvals for the transaction to
proceed, and not on improving the terms of the deal. Because
the antitrust lawyer's engagement would not be directly opposed to
its own firm's efforts on behalf of the other party, informed consent
could be effective.
illustrations are by no means a comprehensive catalogue of the various
means available to ameliorate the direct adversity that might otherwise
emanate from multiple representation in a single transaction.
Indeed, adverse clients desiring to utilize a single law firm on opposite
sides of a transaction could each retain separate counsel to assure
adequate representation by the lawyers from the law firm retained
to represent each side. In the Committee's view, this practice
would sufficiently ameliorate the nature of the conflicts to allow
consent to be adequate. As EC 5-15 recognizes, "If the
interests vary only slightly, it is generally likely that the lawyer
will not be subject to an adverse influence and that the lawyer can
retain his or her independent judgment on behalf of each client .
. . ." To be sure, whether the divergence in the positions
of the two clients in the transaction is so severe as to render a
conflict non-consentable must be evaluated on a case-by-case basis,
with the ultimate resolution turning on the nature of the specific
engagement undertaken and the other precautions the attorneys employ.
The likelihood that client confidences or secrets in one
matter will be relevant to the other representation. As
noted, one function of the rule against simultaneous adverse representation
is to protect the client's confidences and secrets. To the extent
that neither client's confidential information could be used to its
disadvantage in the conflicting representation or to the advantage
of the other client, this concern is not implicated. It is true
that the propriety of an adverse concurrent representation in litigated
matters is measured not by the similarities in the two matters, but
by the duty of loyalty that the attorney owes to each of the clients.
See Cinema 5, Ltd. v. Cinerama, Inc., 28 F.2d 1384,
1386 (2d Cir. 1976). Nevertheless, the fact that the concurrent
representation in a transactional matter of one client with interests
adverse to another client in a different transactional matter does
not give rise to the opportunity to compromise confidences or secrets
of either client because of the dissimilarities of the two matters
is relevant in evaluating the potential impact on the lawyer's professional
judgment in this context. In cases where a lawyer is asked to
represent multiple clients in the same transaction, the confidences
and secrets of those clients are clearly relevant. Nonetheless,
concurrent representation is permissible where appropriate measures
may be taken to protect those confidences and both clients knowingly
The ability of the lawyer or law firm to ensure that confidential
information of the clients will be preserved. Assuming that
confidential information of one client may be relevant to the adverse
concurrent representation of the other, what safeguards can the lawyer
or law firm offer to ensure the confidential treatment of all such
information? "Screening" has not yet attained general
recognition in New York as a substitute for client consent or as a
conflict avoidance mechanism, except to avoid firm-wide disqualification
in the case of the former government lawyer, or in other limited circumstances.
See DR 9-101(B); Kassis v. Teacher's Insurance & Annuity
Assân, 93 N.Y.2d. 611 (1999); see also, Gillers, Barbara
S., "`Kassis' Case and its Impact on the Legal Hiring Practices
at New York Law Firms," New York Law Journal, September
21, 1999; but see Cummins v. Cummins, 264 A.D.2d 637
(1st Dep't 1999). Nevertheless, screening and the
establishment of other information control devices may be appropriately
offered by the lawyer or demanded by the client as a condition of
the client's consent. The client may agree to information control
mechanisms such as "firewalls," file segregation and separate
legal teams to protect the confidentiality of its information.
is no reasoned basis to believe that screening could not be effective
in a situation where a firm simultaneously represents parties with
differing interests in the same matter. See Jonathan
J. Lerner, "Eliminating the Gamesmanship," N.Y.L.J.,
Feb. 7, 1984 (quoting dissent by Judge Newman in Armstrong v. McAlpin,
625 F.2d 433, 453 (2d Cir. 1980) (en banc) (dissent), vacated on
other grounds, 449 U.S. 1106 (1981) ("I do not see why a
Chinese Wall should be thought more impervious to information that
originated from a government investigation than to information learned
from a client without adverse interests."). In fact,
the risk of misuse of client confidences and secrets can be reduced
further depending on the nature of the dual representation.
By minimizing direct adversity of the dual roles played by counsel,
the effectiveness of screening is likely to be enhanced. For
example, where the firm's mergers and acquisitions department represents
one client and its antitrust or tax department the other client, "the
likelihood of contact between a 'screened' attorney and one handling
an adverse representation is normally reduced when the two groups
operate in different departments within the firm." "Conflicts
of Interest in Private Practice," 94 Harvard L. Rev. 1284, 1367-68
The ability of the lawyer to explain, and the client's ability
to understand, the reasonably foreseeable risks of the conflict.
DR 5-105(C) requires that a lawyer seeking to obtain consent make
"full disclosure of the implications of the simultaneous representation
and the advantages and risks involved." In so doing,
the lawyer should apprise the client whose consent is sought of the
kinds of conflicts that the client would be consenting to waive and
the effect of the consent. There may be circumstances where
a lawyer's duty of confidentiality to one client will prevent the
lawyer from being able to explain fully to the other client the nature
of the conflict and the material and reasonably foreseeable ways that
the conflict could adversely affect the client's interests.
this connection, the sophistication of the client is a factor that
must be considered in determining the effectiveness of client consent
to a transactional conflict. See EC 5-16 ("the lawyer
should explain fully to each client the implications of the common
representation and otherwise provide to each client information reasonably
sufficient, giving due regard to the sophistication of the client,
to permit the client to appreciate the significance of the potential
conflict . . . ."). A client represented by other counsel
or in house counsel in connection with the waiver may more readily
comprehend the possible effects on loyalty and confidentiality of
the simultaneous adverse representation. To be sure, sophisticated
corporate and institutional clients can consent to conflicts which
might be non-consentable in cases involving unsophisticated lay clients
who are not represented by independent counsel in connection with
the consent. For example, in Allegaert v. Perot, 434
F. Supp. 790, 799 (S.D.N.Y.), aff'd, 565 F.2d 246 (2d Cir.
1977), the United States District Court for the Southern District
of New York relied on the fact that an attorney's clients were sophisticated
Wall Street brokerage firms in rejecting an allegation that the attorney's
failure to notify these clients of the perils of simultaneous representation
violated Canon 5. In this same vein, the United States District
Court for the District of Wisconsin found that the independent review
and approval of a simultaneous representation by a commercial client's
internal legal department effectively authorized the multiple representation.
Int'l Union, United Automobile, Aerospace & Agricultural Implement
Workers v. Allis-Chalmers Corp., 447 F. Supp. 766, 771 (E.D. Wis.
1978). In cases where a corporate client itself has an in-house
legal department, it is difficult to see why such a client should
not be allowed to consent to simultaneous representation by the same
law firm of diverging interests in the same matter, especially where
that client desires, or is demanding, that the firm do so.
The lawyer's relationship with the clients. The
"disinterested lawyer" test requires that the lawyer be able
to represent both clients with equal and undiminished vigor. If
the lawyer's relationship with one client (as opposed to the other)
is so disproportionate as to create a bias in favor of the more "important"
client (because of the length and nature of
the relationship, the amount of fees earned or other factors), a "disinterested
lawyer" may consider this to be a factor in determining whether
the lawyer will be able to represent each client with undivided loyalty.
See, Restatement Third, The Law Governing Lawyers, §
121 RN Comment c(iii) ("[r]elevant factors in determining whether
there is potential for adverse effect include the duration and intimacy
of the lawyer's relationship with the client or clients involved, the
function being performed by the lawyer, the likelihood that actual conflict
will arise and the likely prejudice to the client from the conflict
if it does arise; [t]he question is often one of proximity and degree").
This subject is also one as to which disclosure may be required for
consent to be informed.
sum, a lawyer may represent one client in a transaction with a concurrent
client in another matter, with disclosure and informed consent, so long
as a "disinterested lawyer would believe that the lawyer can competently
represent the interests of each." A lawyer may also represent
multiple parties in a single transaction where the interests of the
represented clients are generally aligned or not directly adverse, with
disclosure and informed consent, so long as the "disinterested
lawyer" test is satisfied. Satisfaction of the "disinterested
lawyer" test in a non-litigation context will depend on an evaluation
of the circumstances of the simultaneous representations, including
those enumerated above.
DR 5-105 provides in relevant part:
A lawyer shall decline proffered employment if the exercise of independent
professional judgment in behalf of a client will be or is likely to
be adversely affected by the acceptance of the proffered employment,
or if it would be likely to involve the lawyer in representing differing
interests, except to the extent permitted under DR 5-105 [22 N.Y.C.R.R.
A lawyer shall not continue multiple employment if the exercise of
independent professional judgment in behalf of a client will be or
is likely to be adversely affected by the lawyer's representation
of another client, or if it would be likely to involve the lawyer
in representing differing interests, except to the extent permitted
under DR 5-105 [22 N.Y.C.R.R. 1200.24] (C).
DR 5-105(D) provides in relevant part: "While lawyers
are associated in a law firm, none of them shall knowingly accept
or continue employment when any one of them practicing alone would
be prohibited from doing so under . . . DR 5-105(A)
or (B) . . except as otherwise provided therein."
Depending on the size of the law firm involved, the client
may never even have met, much less worked with, the lawyer who would
be representing the other party to the transaction (who may not even
be located in the same office as the lawyers with whom the client
In situations where the law firm cannot represent both clients,
it is likely that neither client will be able to use its firm of choice
because the other client is unlikely to consent to the exclusive use
by the other party.
We hasten to add that clients are free to knowingly waive the
attorney-client privilege if they do so on a fully-informed basis.
A fortiori, then, a client may consent to a conflict although
it could compromise confidences.
Issued: April, 2001