Conflicts of interest and client disputes: WA Supreme Court dismisses claim against accountancy firm alleging breach of contract and fiduciary duties

NKH decision - breaches of contract and fiduciary duties

In dismissing a claim alleging breach of contract and fiduciary duties, a recent decision of the Supreme Court of Western Australia clarifies two matters of importance to accountancy firms:[2]

1. Not every conflict or adversarial relationship among clients gives rise to a “conflict of interest” within the meaning of APES 110.
2. The ordinary client-accountant relationship is not one of those types of relationships that necessarily gives rise to a fiduciary relationship.

Clyde & Co acted for the accountancy firm, instructing Eric Heenan SC and James O’Hara. Bennett acted for the plaintiff.

Here, Jehan-Philippe Wood, Partner, and Bijoux Arguijo, Paralegal, unpack the key findings in Justice Strk’s decision and the implications for accountants.

Summary

The accountancy firm had acted for the plaintiff, her family entities, siblings and various family companies for several years.  The plaintiff sued the firm in the context of a dispute with her siblings, alleging that the firm had breached contractual obligations requiring compliance with APES 110 and fiduciary duties owed to her.

She contended that once disputes arose between herself and her siblings concerning family companies and trusts, the firm was required to identify and manage a conflict of interest, obtain her consent to continue acting for others, or cease acting altogether.  She sought declarations, damages and equitable compensation.

Justice Strk dismissed all the claims.  

The Court held that although relations between the plaintiff and her siblings had become highly adversarial and the firm was aware of those disputes, the situation did not give rise to a “conflict of interest” within the meaning of APES 110.  Importantly, the firm was not performing the same professional service for competing clients in relation to the same matter, nor was there a conflict between its interests and those of any client.  Its work for SCS Investments (a company in which all three siblings were shareholders) on a proposed restructure and related tax issues was a separate engagement undertaken by the firm for that company and not any of the shareholders individually.

In addition, the Court held that the ordinary client-accountant relationship is not of a type that necessarily gives rise to a fiduciary relationship, and on the facts of this case, it did not give rise to fiduciary duties.  The firm had no discretionary power over the plaintiff’s affairs, and she was not vulnerable or dependent on the firm in the relevant sense.  Accordingly, the action was dismissed.

Factual Background

The plaintiff, a member of the Watt family, was an indirect owner of the Snap printing business through a one‑third shareholding in SCS Investments Pty Ltd, the balance of the shares being held by her two siblings.  SCS’s principal asset was a 50% shareholding in Falcon Investments Pty Ltd, the holding company of the Snap group.

The firm had acted for multiple members of the Watt family and related entities for many years.  

It acted for the plaintiff, her entities, her two siblings, SCS and Ballare Pty Ltd, as trustee of the family trust.

The plaintiff engaged the firm under written retainers in 2010 and 2011 to provide specific tax, accounting and related advisory services.  It was common ground that the plaintiff’s written retainers provided that the firm’s engagements would be conducted in accordance with the relevant standards and ethical requirements of CPA Australia and the Institute of Chartered Accountants in Australia.  The parties agreed those standards and ethical requirements included APES 110.

From about April 2014 a serious dispute developed between the plaintiff and her siblings about the governance and future of SCS and Ballare.  The firm knew of that dispute by at least June 2014 and later became aware of an oppression proceeding commenced by the plaintiff against her siblings and SCS in the Victorian Supreme Court.  By that time, the relationship between the siblings had become openly adversarial and remained so through the relevant period.

The Court accepted that the firm continued to act for all parties after those disputes arose.  This included being retained by SCS to advise on a proposed restructuring of the siblings’ shares in SCS, the transfer of Falcon shares, the liquidation of SCS and related tax issues. The plaintiff disagreed with aspects of that advice, including the firm’s recommendation that SCS seek a private ATO ruling, and complained that the firm was acting on instructions from her siblings as SCS directors rather than in the interests of all shareholders.  The plaintiff asserted that the firm should cease acting for her siblings because of a perceived conflict of interest.

Breach of contract claims

To succeed with the breach of contract claim, the plaintiff had to prove that the firm had breached the APES 110 obligations incorporated into her retainer.  Interestingly, the plaintiff sought to agitate claims with respect to several of her companies, which were not parties to the proceeding, on the basis that she was a director of those companies.  The Court found the plaintiff had no standing to pursue those claims and could pursue a claim only in respect of the retainer that was in her own name for services to be provided to her. 

The Court held that it is clear from the express wording of APES 110 that APES 110 is only concerned with conflicts of interest that involve duties owed by the accountant to different clients whose interests conflict in relation to the same matter, or a conflict between the accountant's own interests and those of the client.[3]  That much was apparent from the examples of conflicts given in APES 110, such as acting for parties on opposite sides of the same transaction or dispute or advising a client on a transaction in which the accountant has a financial interest.  The Court also found considerable force in the firm’s submission that the phrase “conflict of interest” had a well-established legal meaning (referring to a conflict of duties owed to different clients or a conflict between the interests of the practitioner and the client).[4]

Here, the mere existence of hostilities between clients did not itself create a conflict of interest under APES 110.  Although the siblings were in dispute, the firm’s duties to each client were not inconsistent. The advice given by the firm in relation to the restructure and tax consequences was provided pursuant to a separate engagement with SCS, and not to any individual shareholder.  The express limitations on that advice meant that it was clear the firm was not engaged to provide advice on any shareholder’s individual position. Although the firm indicated such advice could be provided under a separate engagement, the plaintiff did not seek any such advice (and the Court found that the existing retainers did not extend to giving any such advice).

Accordingly, the Court concluded that there was no conflict of interest within the meaning of APES 110, no threat to the fundamental principles of objectivity and confidentiality outlined in APES 110, and no obligation on the firm to implement any conflict management measures, such as obtaining consent from the plaintiff, implementing safeguards, or withdrawing from engagements, as the plaintiff had alleged.  

Breach of fiduciary claims

It was common ground that a client-accountant relationship may give rise to a fiduciary duty.

However, referring to Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 and other High Court decisions, the Court confirmed that the ordinary client-accountant relationship is not an established category of accepted fiduciary relationship, in contrast to other relationships of trust and confidence or confidential relations, such as solicitor/client, agent/principal, employer/employee, director/company, trustee/beneficiary and partner.

Further, it was accepted that contractual and fiduciary relationships may co-exist, and in those cases where they co-exist, the fiduciary duty must accommodate itself to the relationship created by the contractual arrangements. 

However, this case did not indicate the existence of any fiduciary duty.  The foundation of the fiduciary relationship is the obligation to act in the interests of another.  Here, the firm did not undertake to act “for or on behalf of or in the interests of” the plaintiff in any way that could operate to her detriment in any legal or practical sense.  The firm had no discretionary power over her affairs.  That being the case, the plaintiff was not vulnerable to an abuse of power or discretion by the firm.  

Further, the fact that the plaintiff was a shareholder of SCS when the exit advice was given did not give rise to a fiduciary relationship between her and the firm.  It was also relevant to consider in that context that the plaintiff was legally training and had corporate experience and access to (and obtained) other independent legal and tax advice.  In those circumstances, there was no evidence of any vulnerability, reliance or confidence of the plaintiff in respect of any services provided by the firm to SCS related to the exit proposal, including the recommendation to seek a private tax ruling.

Having concluded that no fiduciary relationship existed, it was not necessary to address the fiduciary duties, save to say that no fiduciary duty arose and there was no conflict of fiduciary duties.

Implications for accountants

Key takeaways for accountants include the following:

• Not all conflicts are equal:  Disputes among clients do not necessarily disqualify an accountant from continuing to act, provided the accountant’s duties are not inconsistent.  Clients may litigate against each other, make allegations against each other or disagree on strategies.  In those cases, the question is not whether they are in disagreement, but whether the accountant is acting for competing clients in relation to the same matter or is unable to discharge duties to one client without prejudicing another.
• Clearly define the scope of the engagement:  The firm’s defence was assisted by having put in place clear, separate written retainers with each client which clearly set out the services to be provided.  The Court emphasised the separate engagements, including one engagement for the plaintiff and a separate engagement with SCS, and the absence of any overlap between them.
• Acting for a company does not mean acting for its shareholders:  The plaintiff complained that the firm ought to have acted in the interests of all shareholders rather than simply following instructions from SCS’s directors i.e. her siblings.  However, the firm was entitled to take instructions from the directors.  Accountants should be clear about who their client is and who they are taking instructions from, and if acting for a company, instructions should come from the directors, not the shareholders.
• Document conflict of interest and confidentiality decisions carefully:  The plaintiff complained that the firm had not managed confidentiality issues appropriately, including when seeking personal information from each shareholder for the purpose of preparing a private tax ruling.  However, the firm was able to demonstrate that it had sought each shareholder’s consent to using personal information in the proposed application for the private ruling (and the plaintiff did not provide her personal information).  Good note taking and record keeping can assist in demonstrating compliance with conflict of interest and confidentiality obligations and professional standards.  Where potential or existing conflicts of interest are identified in relation to a particular matter or transaction, prudent practitioners should identify the conflict clearly, record their analysis of the position including whether a conflict falls within APES 110 and why, and be prepared to revisit that analysis on an ongoing basis, as the matter or relationships develop.
• Long term relationships do not create fiduciary duties:  The Court acknowledged that the plaintiff and firm had been in a longstanding relationship over many years, the firm’s personnel had intimate knowledge of the plaintiff’s financial affairs, and the plaintiff trusted the firm and was used to seeking the firm’s advice on a range of tax and business matters.  None of that was sufficient to establish a fiduciary relationship in the absence of an undertaking by the firm to act for or on behalf of the client in a way that could impact the client’s interests.  Further, agreeing to perform work for the express purpose of enabling the client to comply with their legal obligations, such as filing tax returns, does not amount to such an undertaking.  Accountants should take comfort from this that their ordinary relationships will not create fiduciary relationships.  Equally, accountants should be alive to the possibility that they may give, or be seen as having given, such undertakings, such as when they assume responsibility for managing a client’s bank accounts or payments, and should be aware of the potential for a fiduciary relationship to exist in those circumstances.

Accountant’s checklist

Practitioners may ask themselves the following questions to assist in managing the risks of acting for multiple clients:

• Have I clearly identified the client (individual, company, trustee, family members, shareholders etc)?
• Am I receiving instructions from a person authorised to bind the client?
• If acting for a company, have I clearly distinguished the company from its directors, shareholders or other stakeholders?
• Do we act for any potential opposed parties, such as shareholders, directors, family members, trustee and beneficiaries, related entities etc, which may affect our ability to act for any client independently and objectively?
• Are any of those parties involved in a dispute, litigation or other governance issue with each other?
• Is there a potential or actual conflict of interest within the meaning of APES 110 i.e.
  • Are we providing professional services on the same matter to clients whose interests are in conflict?
  • Do the firm’s interests conflict with the client’s interests?
• Before escalating a perceived conflict, ask:
  • Is the conflict merely a disagreement between clients?
  • Does any dispute relate to the engagement we are performing?
  • Can we still discharge our duties to the client independently and objectively?
  • Have I documented why there is no conflict of interest under APES 110?
• Consider the following ‘red flag’ questions:
  • Are we acting, or being asked to act, for parties on the opposite side of the same transaction?
  • Are we acting, or being asked to act, for opposing parties in litigation (either in the litigation or in relation to the subject matter of the litigation)?
  • Are we giving, or being asked to give, advice to one client that could prejudice another client?
  • Are we using, or being asked to use, confidential information of one client for the benefit of another client?
  • Would a reasonably informed bystander question our ability to  provide our services objectively?
  • Have we received, or are we likely to receive, any complaints by clients that we are favouring other clients to their detriment?
• Before taking on new work, ask:
  • Is the work being performed under an existing retainer or a new (and separate) engagement?
  • Have letters been drafted clearly distinguishing the engagements?
  • Have we clearly identified which client gets which advice and who pays for it?
  • What is the risk of confusion among clients – e.g. could one client contend that it is entitled to see advice to be given to another client?
• If the engagements involve using or disclosing confidential information of another client, have I clearly understood what consents are required and documented what consents have been requested, given and refused?  Can the work proceed without the confidential information of a client?
• If a conflict under APES 110 is identified:
  • Have we considered and documented the significance of the conflict?
  • Have we considered and established appropriate safeguards?
  • Have we made appropriate disclosures to the clients?
  • Have we obtained informed consent where required?
  • Have we taken the steps required to reduce the conflict (or any threat to the fundamental principles) to an acceptable level?
• If safeguards are not adequate:
  • Can we continue to act objectively?
  • Can we maintain confidentiality?
  • Can we discharge the duties owed to the clients consistently?
  • If not:
    • Decline the engagement
    • Withdraw from the engagement
    • Withdraw from all relevant engagements if necessary.
• Finally, document all decision-making carefully.

If you would like advice or assistance with any of the matters addressed in this briefing, please contact Jehan-Philippe Wood.