The sixth article in a series based on the paper “Agreement Between Partners: Three Layers, Four Functions, and the Limit of Legal Formalization.” The previous one was about what a signature gives besides legal force. This one is about why there is no such thing as a document “for us” from a single lawyer, and what follows from that for partners.
“Draft us a contract”
Partners come to a lawyer for a contract and expect a document “for us.” But the interests of future co-owners in the split of shares, the terms of a buyout, non-competition, and the scenarios of death differ by default, even if today they agree on all of these. A document that fixes these terms also fixes the difference between the partners. Let us call this the adversarial nature of legal formalization: it turns partners into parties with diverging interests before any dispute has arisen between them.
This is not a judgment on lawyers. The rules of the legal profession are built precisely on this, and everything below is derived first of all from those rules and from court practice.
The rule of the profession
A lawyer may not be the adviser, defender, or representative of parties whose interests conflict. In Ukraine, an attorney is prohibited from entering into a legal services agreement if they are already assisting another person whose interests may conflict with those of the person seeking help (Article 28(1)(7) of the Law of Ukraine “On the Bar and Practice of Law”). The Rules of Attorney Ethics add that, without the written consent of the clients, an attorney may not simultaneously represent two clients whose interests conflict or are likely to come into conflict, and if a conflict arises in the course of the work, the agreement is terminated (Article 9 of the Rules).
The Supreme Court reads this rule broadly. In a case decided on November 26, 2020, an attorney represented one person in a dispute over a plot of land, having earlier helped that person’s opponent with the privatization of the same plot. The disciplinary commission suspended the attorney’s right to practice for three months, and the Supreme Court upheld the sanction: the mere likelihood of a conflict is a violation, and the duty to avoid it continues after the work for the previous client has ended (ruling of the Administrative Cassation Court within the Supreme Court of November 26, 2020, case No. 818/1718/17).
In the United States, the same rule is Model Rule 1.7 of the American Bar Association. In startup practice, it has been reduced to a standard clause in founders’ agreements: company counsel represents the company, not the founders, and each founder is advised to hire their own lawyer.
Three questions partners do not ask themselves
Can the lawyer who drafted the document for both later defend one of the partners under it? Only with the written consent of the other. While drafting the document, the lawyer learned from each partner what they came with and what they wanted. The law treats such information about a client, as well as the document itself, as attorney-client privilege (Article 22(1) of the Law “On the Bar and Practice of Law”), and the lawyer cannot use it on one side against the other without the written consent of both. The chance that the opposing side will give that consent is close to zero.
Does a law firm help, where there are many lawyers and the partners can be assigned to different ones? No. The law prohibits an agreement in a conflict of interest not only for an individual attorney but also for an attorney’s bureau or association (Article 28(1) of the same Law), that is, it treats the firm as a single attorney.
Whom to choose if the dispute has nonetheless reached the court? With hourly or stage-based billing, the fee grows with the length of the dispute. So partners should choose lawyers who compete in the market: each of them aims at a result for their own client. This article does not claim that lawyers who know each other prolong disputes, but the economics of fees pushes in that direction.
An example. Two partners set up a company through a lawyer they knew: he drafted the charter and the corporate agreement after hearing both of them out. Three years later, one of them wants to leave, and the partners disagree on the price of the share. The first goes to the same lawyer, because he “knows everything.” The lawyer can take the case only with the written consent of the second partner, and the second, of course, will not give it. In the end, both look for new lawyers, and the one who knew the most about their agreements cannot work for either of them. The example is typical, not drawn from a specific case.
A legal adviser without attorney status
A document can also be drafted by a legal adviser who is not a licensed attorney: the Rules of Attorney Ethics do not bind them, and they answer to the client under the contract. But the difference disappears at the point where it becomes important. In a commercial dispute, except for minor cases, only an attorney can act as a representative in court (Article 58(1) and (2) of the Commercial Procedure Code of Ukraine). No one may represent persons with opposing interests in the same case, and one person may represent several only if there is no conflict between them (Article 58(4) and Article 59(2) of the Commercial Procedure Code). So when the partners reach the court, their joint adviser effectively cannot represent anyone.
Lawyer and facilitator
A lawyer who handles transactions knows how to find out a client’s interests. In his 1984 article “Value Creation by Business Lawyers,” Ronald Gilson described the business lawyer as a transaction cost engineer who creates value precisely at the deal stage. But engineering needs a subject, and the partnership session provides it. The lawyer is the agent of a party. The facilitator is the agent of the partnership the partners have created. The lawyer’s product is an enforceable text; the facilitator’s product is the agreements from which that text grows. A signature under such agreements is an acknowledgment, a promise, and a reference point for the partners, not an act in favor of one side, as discussed in the previous article in the series: “A Signature Under a Partners’ Agreement: Acknowledgment, Promise, Reference Point, and Only Then the Law.”
A lawyer can run a partnership session. But at that moment they are working in a different profession: the person leading the session is a facilitator, whatever their degree, and their work is judged by the rules of facilitation. There is also a price. Having run the session, the lawyer is in the position described in the first question above: they have learned from each partner what that partner came with, and they will be able to represent one against the other only with the written consent of the other. In other words, they give up the future dispute between the partners as work in their main profession. A facilitator has no such conflict: their work ends with the agreements, and by default they cannot earn from a dispute in court.
Adversarial procedure is not a flaw in itself
Mergers and venture rounds are closed by separate teams of lawyers because the parties’ interests there are opposed by nature: seller and buyer, investor and founders. A partnership is a different thing: not a deal between counterparties, but a common cause of people with a common interest. An adversarial procedure applied to such an object brings into the relationship a frame of confrontation for which there was no basis. That is the genre of legal formalization, and partners should know this feature in advance rather than discover it at the moment when their joint lawyer declines to act for either of them.
What this means for partners
A document “for both” does not mean “for us.” The lawyer who drafts it formalizes the difference of interests, and that is their job, not a flaw.
Work out the agreements before the lawyer and without them. A partnership session with a facilitator provides the subject for formalization, and the facilitator does not become a party to a future dispute.
If a dispute has reached the law, each partner needs their own lawyer. From different firms that compete in the market. By law, a joint lawyer will effectively be unable to represent either of you.
