Property lawyer and Deputy Chair of the Property Law Section, Kristine King looks at the LCRO decision on this case; QP v ZH [2023] NZLCRO 22 (28/3/23) and applying this decision to your practice.
The recent LCRO decision of QP v ZH [2023] NZLCRO 22 (28/3/23) canvassed issues resulting from a payment to a client’s bank account by their lawyer. It gives guidance regarding payments to clients and what authority lawyers should hold to comply with the Lawyers and Conveyancers Act 2006 (the Act) and Lawyers and Conveyancers Act (Trust Account) Regulations 2008. It was found in that case that unsatisfactory conduct occurred even when funds were paid to the client’s own bank account.
Kristine King, Director at DK Law.A firm of lawyers acted for a trust, the ABC Trust1 and the trustees of the trust were Ms WO, Mr QP and ABC Trustees Limited, of which Mr QP and Ms WO were the directors. A letter of engagement was provided to the trust but was not signed or confirmed as accepted by Mr QP or Ms WO. The Trust sold a property and part payments towards the purchase price were received by the firm. Ms WO and Mr QP had been in a relationship. The firm was aware that the relationship had ended and the parties had commenced the relationship property division. Instructions to pay out funds were taken from Ms WO alone, and the funds were transferred into a bank account for the Trust. Mr QP was unaware of the transfer but later discovered that Ms WO had operating authority on the bank account and had transferred funds to another bank account within her control only. Mr QP’s primary complaint was that the payment of the funds held by the Trust was at the direction of Ms WO alone, notwithstanding that there were two other trustees of the Trust.
The Standards Committee accepted that the payment made by the firm was made in accordance with the letter of engagement that permitted “paying out any surplus settlement monies”. The authority to make payments to the ABC Trust was contained in the Trust’s acceptance of the letter of engagement. The Standards Committee found that where money is paid to a client, an express client authority is not required as this is in accordance with the provisions of s 110(2)(b) of the Act which requires funds to be “held exclusively for that person, to be paid to that person or as that person directs”.
Mr QP applied to the LCRO for review as he disagreed that the letter of engagement contemplated the deposits would be paid out when received, that the firm’s “client” was the three trustees, and that payment should not have been made at the direction of only one trustee. The LCRO reviewed and found that the trust is not a separate legal entity as its assets are vested in the trustees. The LCRO disagreed that the firm’s client was the Trust and that the payment into a bank account held by the Trust was permitted by s 110(2)(b) of the Act, on the basis that a trust is not a separate entity and payment could only be made on the instructions of all three trustees in accordance with provisions within the trust deed for the Trust.
In addition the LCRO reflected on guideline 6.2 of the Lawyers Trust Account Guidelines which includes the recommendation:
Preferably, you should obtain and hold on file written authority from the client for any payment or series of payments.
The LCRO commented on a number of circumstances that should trigger a prudent solicitor to take care to obtain written authority from the clients. These included the length of time since the letter of engagement was provided, whether all the clients had seen and accepted the terms of engagement, the nature of funds held, and whether there were any issues in the relationship between the clients. The LCRO rejected the suggestion that a firm can always act unilaterally and pay funds to the clients’ account. They went on to say that in all circumstances, where funds are held for more than one person, that a lawyer should not rely on terms of engagement to make payment out of the firm’s trust account to clients without confirmation from the clients.
The LCRO emphasised the strict approach that must be taken in respect of handling and protecting client funds as the courts, and the disciplinary process, require a lawyer to account scrupulously for monies held in a firm’s trust account. The LCRO determined that failure to obtain informed instructions is a breach of one of a lawyer’s fundamental obligations. By making the payment at the direction of Ms WO only, the firm enabled a breach of the Trust to occur. Although Ms WO was a beneficiary of the Trust, any distributions needed to be approved by all trustees. That did not occur, and it should have been within contemplation that this was a possibility that needed to be protected against. The failure to obtain authority from all trustees amounted to unsatisfactory conduct, pursuant to s 12(a) of the Act.
The reaction of many practitioners to QP v ZH is shock and confusion – it is seems illogical that a lawyer can be disciplined for paying funds into their client’s own bank account. However, if we look past the dramatic “headline”, the decision does not suggest that payment to a client’s account is a breach of the provisions of s 110(2)(b) of the Act. The issue was the failure to recognise that the firm was holding funds for more than one person and then to obtain authority for the payment from all of the clients.
The issue was the failure to recognise that the firm was holding funds for more than one person and then to obtain authority for the
payment from all of the clients
Whilst not fun bed-time reading for practitioners, disciplinary decisions can be useful tools to help lawyers improve their practices and, hopefully, prevent their own appearance before a standards committee or disciplinary tribunal. QP v ZH is a good example of this, and a lawyer can see the decision as setting “best practice” guidelines for payments analogous to those already used in firms to prevent payment scams.
The AML-CFT legislation has meant that transactional lawyers are already taking steps to ascertain the identity of their clients before a file is opened. This information is an invaluable tool to comply with a lawyer’s obligations as confirmed in QP v ZH. The AML-CFT information can be used as a cross reference against the file, to identify the clients and the controlling parties and should be the ‘go to’ when determining which clients’ instructions are required for trust account payments.
Care should be taken for the firm to record any arrangements the firm is aware of that might affect payment instructions, including property disputes, bare trust arrangements, appointed directors when the Companies Office has not been updated, and so on.
While the funds are in the lawyer’s trust account they are safe. They are only at risk when they are transferred from the trust account. A prudent practitioner should be taking all steps (whether a suspected scam or dealing with payment instructions when funds are held for more than party) to protect themselves with instructions from all the clients. If the instructions are potentially out of date, unclear or not given unanimously by all the clients that funds are held for, then the lawyer should not permit funds to be transferred from the trust account. As the LCRO commented in QP v ZH, there are a number of situations that could impact the payment:
The terms of engagement may have been delivered some time before the payment was made, and the clients may well not remember what was provided in the terms. The clients may also have separated unbeknown to the lawyer, and entitlement to the funds may be in dispute …
A good starting point is communicating with all parties to establish if the instructions are correct. Ideally these instructions would be in writing, and this could include a signed payment authority, email, text message, instant message and so on. This does not need to be an onerous task. It could be a group email or chat, where the clients are advised of the funds received and instructions are requested regarding payment. If one client responds with bank account details, the lawyer should insist that the remaining clients confirm by each replying that they consent to the payment and that the bank account details are correct. One client can then be telephoned separately to verbally validate the bank account number.
If it is anticipated that there will be time pressure to make a payment, some clients may be unavailable to confirm their instructions, or the number of clients involved in the transaction makes the process too time consuming, then measures should be put in place early to deal with the issues. This could take the form of signed authorities from all the clients to appoint one person as the point of contact, with authority to bind the remaining clients, or confirmation of the bank account details that will be used throughout the transaction. The LCRO warned of relying on letters of engagement but endorsed holding authorities on file in accordance with guideline 6.2 of the Lawyers Trust Account Guidelines.
QP v ZH is a timely warning to lawyers that the best protection against being caught in the middle of disputes between clients regarding funds is to ensure that they take instructions from all clients, before making any payment from the trust account.
Note: The Property Law Section Executive Committee considered the LCRO decision of QP v ZH at a recent meeting, and endorses the views expressed by its Deputy Chair in this article.
About the Property Law Section
The Property Law Section (PLS) was established to support property lawyers as they deliver the highest possible quality service to their clients. PLS works to support the professional development of property lawyers, advocates on behalf of the profession, and promotes the value and services that property lawyers offer to the public. To learn more, or to join PLS, please visit lawsociety.org.nz/pls