Conflicts of interests: Much ado about nothing?

Legal Notes

with Grace Lindo

Wednesday, August 18, 2010

There have been many recent discussions regarding apparent conflicts of interest in the public sector and to a lesser extent the private sector. There are laws which govern some of these conflicts and which dictate the manner in which they can be resolved, if possible.

A conflict of interest may arise in different scenarios. An individual may sit on the board of directors of a company, become aware of a business opportunity available to the company and may choose to personally take advantage of this opportunity. Alternatively, a director of an NGO may suggest that his/her private company carry out services for the entity at a relatively low cost as a cost cutting measure. This director may, therefore, sit on a board and approve a contract from which he will ultimately benefit.

Directors of companies incorporated under the Companies Act have a statutory duty of care to act honestly and in good faith with a view to the best interests of the company. Such individuals must also exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The "best interests" may relate to the shareholders and employees of the company as well as the community within which the company operates. A conflict occurs where the interests of the company and the director differ.

Case law suggests that a director continues to have a duty to avoid conflicts even after he ceases to be a director of a company, particularly where the resignation occurs with a view to taking advantage of a business opportunity which is available to the company. In fact, the opportunity may be treated as the property of the company and the former director will hold the profits received on trust for the company. This means that the director could be asked to account for the profits made and pay these into the company.

It is incumbent on the director who foresees a potential conflict to declare this conflict as soon as possible. The shareholders or the directors (where the Articles of Incorporation allow) may authorise the transaction even if it presents a conflict.

It is important to note that officers of public bodies also have a duty to avoid conflicts. The Public Sector Procurement Regulations under the Contractor-General Act provide that a public officer who is directly or indirectly involved in a contract procurement process must declare any potential conflict of interest in relation to the proposed government contract. Further, a prospective contractor is ineligible to submit a proposal or bid where he has a potential or actual conflict of interest in relation to goods, works or services under the proposed government contract.

It is often argued that these rules as far too onerous particularly in a small country like Jamaica. However, directors and officers should be very mindful of the need to act in the best interests of the company (or public body) at all times. Ultimately, the rules assist in maintaining good corporate governance and reducing corruption.

Grace Lindo is an associate in the Commercial and Intellectual Property Departments at Myers, Fletcher & Gordon. She may be contacted via www.myersfletcher.com or at grace.lindo@mfg.com.jm.

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Conflicts of interests: Much ado about nothing?