The term “conflict of interest” is widely used to describe situations where a person or organisation is involved in multiple interests, financial or otherwise, which could corrupt the motivation or decision making of that individual or organisation.
A conflict of interest exists if the circumstances create a risk that a decision may be unduly influenced by one or more of the competing interests. However, it is not necessary for the decision to be influenced.
In terms of context, the International Federation of Consulting Engineers (FIDIC) has a policy on conflict of interest:
“FIDIC’s policy on conflict of interest requires that consultants provide professional, objective and impartial advice, and at all times hold the client’s interests as paramount, without any consideration for future work and strictly avoiding conflicts with other assignments or their own corporate interests.”
The most likely situations that would give rise to potential conflicts of interest where corporate interests may prejudice advice given or decisions made on behalf of clients, contractors, staff, or subcontractors are:
- Multiple contracts on the same project, where the performance of one is impacted by the performance of another.
- Undue or inappropriate influence is exercised or attempted to be exercised by those operating under one contract over another.
- Where a company or individual represent the interests of a client who has a competing interest to that of another party operating or contracting to work for a third party on the project; and
- Where personal or family relationships exist between those involved in the contract for the client or any other supplier involved in the project.
How do they occur?
Suppose the best interest of a client has been impeded or the perception is that it has been impeded either by an organisation or individual. In that case, a conflict of interest is likely to have occurred.
For example, someone working a tender then joins the client team who is then placed into a position of scoring tender returns may not deliberately favour their previous employer’s score, but there is a clear conflict of interest where they may not be impartial in scoring the bids.
Conversely, if someone worked for a client and helped draft an invitation to tender, and then that same person commenced employment with one of the tenderers, they would have inside information as to what the client expects to receive back. Therefore, as part of any conflict-of-interest management plan, they would need to be removed from the tendering process to preserve the integrity of the tendering process.
Similarly, in terms of contracting setups between clients and their supply chains, a conflict could arise whereby a client employs a design and build contractor and separately the services of a professional quantity surveyor to assess the contractor’s payment. For example, suppose the design and build contractor outsources the design to the same firm the quantity surveyor works for. In that case, a conflict will arise as they assess an element of the works that involves paying their own company by way of the contractor claiming for payment of design services. To manage this, the quantity surveyor would need peer review sign off from a non-conflicted third party before payment was made to remove a claim of a lack of impartiality.
How do you manage them?
Training – Most companies will have policies in place that help those working for that organisation to be aware of and identify conflicts of interest with suitable training alongside this. These policies will also describe how conflicts may arise, how they should be resolved and with whom the action lies to resolve.
Identification – In terms of when the conflict of interest should be identified, this should be reviewed at the tender stage or upon the receipt of an invitation to tender. Similarly, if you are then issuing tenders yourself, you should look out for conflicts of interest being identified in the returns, but in any case, you should ensure that suppliers or potential suppliers must identify them when bidding. You should state that a failure to declare should is a reason for you to set aside the bid at your discretion. It may be that the organisation has a management plan in place for managing conflicts and that you can deem this adequate and prepare to proceed accordingly.
Mitigation or Control – After identification to determine the extent of the areas of work that cause concern, you need to think about identifying mitigation measures that might be employed. If you can mitigate the conflict, this could enable the high risk to be reduced, thereby ensuring the integrity is retained for the whole of the works.
The mitigation review should be undertaken on a scheme-by-scheme basis to ensure any elements unique to that project are considered. Effective mitigation will be identified by reference to where similar situations may have existed before and been mitigated within previous settings, programmes of work, or work with other clients or suppliers.
To determine mitigation measures, they first need to be classified to determine severity:
- N – No potential conflict as the impartiality of the scope to be delivered and alignment of corporate interests are not compromised. No mitigation measures are to be proposed or required.
- A – Minor potential conflict may arise, which will be managed through the measures required within the standard company conflict of interest management plan and through escalation within the company organisational structure. No further mitigation is required.
- M – Potential for conflict may occur that will be manageable if additional mitigation measures over and above those contained within the standard company conflict of interest management plan are employed. Additional mitigation measures will therefore be proposed, including the use of non-disclosure agreements and/or confidentiality agreements.
- U – Potential for conflict is perceived or likely to occur that cannot be managed through the application of mitigation measures. This situation is undesirable and should not be pursued.
On-going management and review – Once a potential conflict area has been identified, ensure that it is recorded in a conflict management register, that you have notified those involved and, based on how you have proposed the mitigation measures and severity scale, you will then seek approval from the end client the measures you plan to put into place are acceptable.
Depending on the severity of the potential conflict, a project specific conflict management plan may be required because specific additional requirements above the standard conflict of interest management plan are required to ensure that the integrity of the project or business is not compromised.
Specific measures could include:
- Formalising the specific requirements by providing process and procedures that explain the revised working practices,
- Briefing individuals within the affected teams to ensure they understand the additional risks inherent in the project and the revised actions they are required to take,
- A project-level escalation process so that the individuals can express any concerns they may have during the delivery of the works.
What happens when they go wrong?
If there is a perception that a legal process has been compromised, the decision could be challenged and overturned. The need to establish and maintain impartiality in consideration of the dispute and determining entitlement is vital.
In 2012, when adjudication between Eurocom Limited and Siemens PLC, a dispute arose regarding the costs associated with delay and disruption plus post-contract changes that ultimately led to Siemens terminating Eurocom’s contract.
Eurocom launched an adjudication, the net result being that the adjudicator decided they should pay Siemens £35k. In the following year, Eurocom launched another adjudication. In their submission to the RICS regarding the request for an adjudicator, they listed people they perceived to be conflicted out. They included a statement on the form requiring anyone taking the case to declare a conflict of interest. They also listed companies they perceived to have a conflict of interest, therefore, debarring them from taking the case.
During the adjudication, which was subject to numerous extensions due to rejoinders and surrejoinders etc., it is clear that multiple exchanges took place between the parties. Three months after adjudication was launched (and noting this is a 28-day process), the final decision was to award Eurocom £1.6m. Eurocom, approximately four months later, sought to enforce the judgment, but Siemens raised a challenge, particularly around the second adjudicator’s appointment.
Siemens raised the issue that RICS should have notified them that Eurocom raised the matter of conflicts of interest when seeking to appoint the second adjudicator, which is their procedure for such matters and that, notwithstanding this, they went on to adjudicate again on the same information that had been determined by the first adjudicator which they considered to be a breach of natural justice. The adjudication decision was not enforced, and the Siemens legal team noted there was an implied term in the subcontract that they would not fetter the process for the appointment of the adjudicator, which Eurocom had clearly done.
The judge also stated the form completed by Eurocom in the appointment of an adjudicator was a false statement. The first adjudicator was not conflicted out from being nominated for the second adjudication, but this being a fraudulent act was not decided upon. The ruling stated that it believed the more likely case was they wanted a different adjudicator because they did not like the decision of the first one.
Ultimately, Eurocom’s move to limit the pool of adjudicators was deemed improper by the judge and that it was noted the party seeking to appoint an adjudicator should not act dishonestly and that to do so would put that party in breach of their obligations in the process of appointment of an adjudicator under the contract. In the appointment of an adjudicator, The RICS is not required to consult with the other party as part of the process. Therefore, any suggestion they should have sent the form to the other party was dismissed.
The consequences of not identifying and adequately managing conflicts of interest can be reputational damage and a reflection the organisation is not improperly operated. Damage such as this can be very difficult to repair, which is why it is best to empower all people in a team or organisation to flag potential conflicts, whether perceived or known, as with a proactive approach, you face a much better chance of avoiding one in the first place.