Doing business with clients is fraught with risks. Because the lawyer typically has superior expertise and holds a position of trust and authority over the client, this creates the opportunity for the lawyer to overreach. Entering into a business relationship with a client can also create a situation where the lawyer’s financial interests conflict with the lawyer’s duty to provide unbiased legal advice. For these reasons, Rule 1.8 of the North Carolina Rules of Professional Conduct imposes strict limitations on these arrangements. 

Rule 1.8(a) provides:

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest directly 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 a 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.

When presented with an opportunity to do business with a client, the lawyer must first ask whether the transaction would be fair and reasonable to the client. If it is not, the lawyer must decline. If the lawyer concludes that the transaction is fair and reasonable, he must then put in writing to the client the terms of the transaction in a way that can be reasonably understood. The written disclosure must also include advice to the client of the desirability of the client getting her own attorney and must give that client a reasonable opportunity to get independent counsel. Finally, the lawyer must get informed consent in writing from the client. The informed consent must clarify whether the lawyer is representing the client in the transaction and must discuss with the client reasonably available alternatives.

Note that the requirements of Rule 1.8(a) must be met even when the transaction is not closely related to the subject matter of the representation. For example, if a lawyer is representing a client in estate planning and the client wants the lawyer to make a loan to him, the lawyer must still comply with Rule 1.8(a). But the rule does not apply to ordinary commercial transactions. If a lawyer want to buy a new lawnmower from the clients home and garden supply store, the lawyer does not need to jump through the hoops of Rule 1.8(a). 

The comments to rule 1.8 make clear that the rule applies even when the lawyer is not representing the client’s interests in the subject transaction. The comments also point out that the risk to the client is greatest when the lawyer is representing the client in the transaction. This is rarely a good idea.

What about situations where the lawyer engages in a business transaction where the client is separately represented? Comment 4 to Rule 1.8 explains that, where the client is independently represented, paragraph (a)(2) of the Rule is inapplicable, and the paragraph (a)(1) requirement for full disclosure is satisfied either by a written disclosure by the lawyer involved in the transaction or by the client’s independent counsel. 

Lawyers who are considering business opportunities with clients must proceed with caution. As with any conflict of interest transaction, lawyers face increased risk of malpractice exposure. When there is the promise of financial gain for the lawyer, this can make objectivity difficult. If you are not certain that you can objectively evaluate the fairness and reasonableness of the proposed arrangement, you should decline the opportunity. 

If you elect to move forward with a business transaction with a client, be sure to check all of the boxes set forth in Rule 1.8 and document all of your communications with your client.