The word “stake” is in common parlance used to apply to any money to be disposed of, in accordance with what may happen in future, and whoever is in possession of the money is often described as a stakeholder.
 
Lawyers are frequently made stakeholders in sale and purchase transactions undertaken for their clients.  For example, in sale and purchase transactions involving land, lawyers acting for either the purchaser or vendor often holds the purchase consideration as a stakeholder pending the completion of the sale and purchase agreement.
 
However, despite the appointment to act for either the purchaser or vendor, a lawyer acting as stakeholder is required to remain neutral.  In other words, a stakeholder is almost like a middleman managing monies not just on behalf of the client but for both parties, and can only disburse the monies in accordance to the terms on which it is held.
 
A stakeholder’s duty is strict and unforgiving.  A breach of it is prima facie an act of professional misconduct.  In the Federal Court case of Datuk M Kayveas & Anor v Bar Council[1], the court held that the relationship between the stakeholders and the parties in the transaction is fiduciary in nature, akin to the relationship between trustees and beneficiaries.  As such, a breach of stakeholders’ duty is a breach of trust. 
 
While complying with stakeholder duties may sound easy enough in theory, it’s often times not in practice.  Based on claims notified by lawyers to the Malaysian Bar PII Scheme, about a quarter of notified claims annually involves some form of breach of stakeholder duty.
   
A Paradox 
 
Claims statistics reveals that the most common reason lawyers are found to have breached their stakeholder’s duty is when they do what they were trained to do – acting on client’s instructions.  Lawyers often make the mistake of releasing stakeholder monies upon receiving their client’s instruction, without giving much thought as to whether the person giving the instructions has the authority to give such instructions, and more importantly, whether the instructions itself would be in accordance to the terms of the stakeholding.  In any case, even upon receiving instructions from an authorised person according to the terms of the stakeholding, it is crucial to check those instructions against the terms of the stakeholding.  Where there is deviation, one should obtain the express written consent of all relevant parties.  
   
 
A Rock and a Hard Place
 
In a recent claim notified to the PII Scheme, a firm had acted for the vendor in a sale and purchase transaction of a piece of land.  Upon execution of the sale and purchase agreement, the purchaser paid to the firm the deposit to be held as stakeholder.  It was a condition precedent under the agreement that the deposit shall only be released upon the vendor applying for sub-division of the land and procuring separate individual titles.  As the vendor required funds to apply for the sub-division, the vendor had pressured the firm to release the deposit.  Upon obtaining a letter of indemnity by the vendor to hold the firm harmless against any breach, the firm complied with its client instructions.  When the vendor failed to procure the sub-division within the prescribed time, the purchaser terminated the SPA and demanded refund of the deposit.  As the firm had already released the deposit to the vendor, the purchaser sued both the vendor and the firm. 
 
When placed in a similar situation, it is important to not give in to any pressure.  Even when you are convinced by the client that the money would be dealt with appropriately, it is the duty as a stakeholder to only disburse monies pursuant to agreed terms or by consent of parties.  Although the firm in the above claim had obtained a letter of indemnity from its client, the said letter would not absolve the firm against a finding of professional misconduct by the court.
 
The Wheel of Fortune
 
Another common cause of breach of stakeholder duties is when lawyers make assumptions about who is entitled to the trust money and releases the money to a party not entitled to receive it.  It is a dangerous game of guess that can cost both lawyers and the PII Scheme a fortune.  Although such mistakes can easily be avoided by checking the terms of stake before monies are disbursed, lawyers often forget to do so especially when stakeholder funds are held for some time or where the lawyer responsible over the stakeholding has left the firm and the lawyer who takes over the matter does not fully appreciate the terms of the stakeholding. 
   
 
Although only a fraction of claims were notified to the PII Scheme arises from breach of stakeholder duties, the consequences are severe.  Lawyers who are in breach not only risk apprehension by the disciplinary board, but also risk the chance of losing it all when they are unable to make good of losses if found liable for the breach.
 
The Policy
 
The PII Policy expressly excludes coverage towards claims arising from misconduct which is defined as “dishonest or fraudulent” conduct.  As such, where is it found that a lawyer had acted dishonestly in breach of his or her stakeholder duty, coverage against the lawyer shall be excluded.  Nevertheless, limited coverage of up to RM350,000 is provided towards the firm’s “innocent” members who were not involved in the breach.
 
And the Lesson
 
When acting as stakeholder, it is crucial that you:

• remain neutral;
• adhere strictly to stakeholding terms;
• obtain the written consent of parties when disbursing trust monies; and
• interplead when there is a dispute.