In brief - Declared or identified conflicts should be recorded in a register

The recent controversy surrounding whether the private activities of John Dyson Heydon AC QC could reasonably give rise to an apprehension that he might not be impartial as a Royal Commissioner of the Royal Commission into Trade Union Governance and Corruption, is a timely reminder for organisations to consider afresh the broad topic of conflict of interest which includes issues of bias. 

Reasonable person test critical element of conflicts of interest management

There is almost universal agreement regarding the need to manage conflicts of interest but a more limited understanding as to what constitutes a conflict of interest and how it might be managed. At a macro level, it is generally accepted that, while conflict of interest is not the same thing as corruption, conflicts of interest can directly lead to corrupt activity (see Conflicts of Interest in the Public Sector, Ombudsman Victoria, March 2008). Further, as the recent controversy surrounding the Royal Commission has shown, even an allegation of conflict of interest can have lasting reputational consequences. It is therefore generally accepted that a proper governance framework should be developed, implemented, reviewed and updated to provide confidence in organisational decision-making.

It is not uncommon, however, for decision-makers to find it difficult to identify conflicts of interest at a suitably early stage of the decision-making process. In such situations, it may be helpful, as a first step, to evoke the hypothetical "reasonable person". Understanding the "reasonable person" test is critical for decision-makers because, if the conduct in question does not comfortably pass the reasonable person test, other steps should immediately be taken, consistent with the organisation's conflict of interest protocols. 

This article, therefore, aims to flesh out the character of this reasonable person and how the "reasonable person" test forms part of the overall management of conflicts of interest.

Before addressing these issues, the first step is to consider what may constitute a conflict of interest.

Conflicts of interest in commercial and public spheres regulated by law

There is a variety of expressions used to convey the broad concept of a "conflict of interest". These include concepts of "lack of impartiality" and "undue influence". However, there is no strict definition that applies to all circumstances. This is because the existence of, or potential for, conflicts of interest is measured against the surrounding factual circumstances.

Nevertheless, the law does regulate certain behaviours that could otherwise result in conflicts of interest. Familiar examples include provisions of the Corporations Act 2001 (Cth) regarding improper use of one's position to gain an advantage and the obligation placed on directors to notify the remainder of the Board of material personal interests in a matter (refer to sections 182, 183 and 192). Another well-known example is the legal duty imposed upon a fiduciary (such as a lawyer) to act solely in another party's (for example, a client's) interest such that the fiduciary is not permitted to profit from their relationship with that other party without the other party's express informed consent. 

In the public sphere, as well, duties of public officers to avoid conflicts of interest are often enshrined in legislation. Hence, the common formulation that a holder of a public office must "act impartially and in the public interest". (See, for example, section 110 of the Occupational Licensing National Law 2010 (NSW).)

Protocols should address actual, potential and perceived conflicts

From a governance perspective, a broad definition should be adopted in order to best capture activities and behaviours that are antithetical to good governance. For example, the Law Society of NSW provides that a conflict of interest involves serving, or attempting to serve, two or more interests or duties which are not compatible. (See V.P. Shirvington, Ethics and Conflicts of Interest, The Law Society of New South Wales, 2006.) 


The broad concept of conflict of interest can then be sub-divided into three categories, which should be addressed in any conflict of interest protocols. Those categories are:

  •     "actual conflict of interest" (where a real or tangible conflict exists) 
  •     "potential conflict of interest" (where circumstances arise which could give rise to a conflict)  
  •     "perceived conflict of interest" (where a third party reasonably forms the view that a conflict exists or could arise) 

It is also generally accepted that, to be actionable, a conflict must meet a threshold “materiality” test, although the bar is generally set quite low. As long as the issue or interest is more than a remote or insubstantial one, then it is one that needs to be captured by conflict of interest protocols. 

It is, of course, the case that it may not be possible to avoid all situations where conflicts of interest could arise. This is particularly the case in niche industries or when operating in a small geographical area. Processes for managing conflicts of interest should, therefore, be as much a focus of an organisation as the initial identification of the conflicts. 

Apply reasonable person test to assist with identifying conflicts

A common approach to both identifying and managing conflicts is to list certain types of conduct which are prohibited unless consented to at a senior level of the organisation. Ideally, any such list would form part of the organisation's conflict of interest protocols and be cross-referenced to other appropriate policies, such as a sanctions and penalties policy and a conflict of interest register. Examples may include:

  • having a direct financial interest in a competitor 
  • accepting gifts, benefits and hospitality from suppliers above a nominal value
  • contracting with an entity with which you have a secondary employment arrangement

Of course, many conflicts of interest will not fit neatly within the parameters of any listed examples. Thus, one commonly recommended approach to assessing whether decision-making is tainted by any conflict of interest is to ask the theoretical question: how would a reasonable person view this conduct?

This question is analogous to the test used by courts to examine allegations of bias and, as adopted by Royal Commissioner Heydon in his Reasons for ruling on disqualification applications, is that “…a judge is disqualified if a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide.” (Ebner v Official Trustee in Bankruptcy [2000] HCA 63 at [6].) The question for the fair-minded lay observer (or reasonable person) is said to be largely a factual one, albeit one that must be considered in the legal, statutory and factual contexts in which the decision is made. (See Isbester v Knox City Council [2015] HCA 20.) 

I note here for completeness that the application of a judicial bias test to decision-makers other than judges must necessarily recognise and accommodate differences between court proceedings and other kinds of decision-making and, consequently, the content of the test may differ (Isbester v Knox City Council at [22]). So, for example, the test may be re-formulated to ask whether a reasonable person may apprehend that a decision-maker lacks impartiality as a consequence of his or her material personal interests in the matter being decided.

A reasonable person considers all circumstances before judging

So what, then, is the mindset of this reasonable person? This person has certain qualities. The reasonable person, among other things, does not make snap judgments (Johnson v Johnson [2000] HCA 48 at [14]) and is informed by their training and experience (see Reasons for ruling on disqualification applications, [40] at page 14). He or she also knows all the relevant circumstances of the matter and, importantly, reserves judgment until all circumstances are considered (ibid [73] at page 23).

The reasonable person does not assume that a decision-maker is devoid of life experiences and personal view points. Instead, the reasonable person understands that a decision-maker is entitled to be predisposed to a view, as long as he or she does not prejudge the matter so as to be incapable of being swayed by evidence or judgment. Royal Commissioner Heydon acknowledged this point and stated: "If it was enough to disqualify a person from a role because the fair-minded observer might conclude that the person held political views, there would be no-one who could occupy the role." (Ibid [76] at page 24.) This is consistent with the views expressed by Justices Gleeson and Gummow quoted earlier in Royal Commissioner Heydon's reasons that:

Decision-makers, including judicial decision-makers, sometimes approach their task with a tendency of mind, or predisposition, sometimes one that has been publicly expressed, without being accused or suspected of bias. The question is not whether a decision-maker’s mind is blank; it is whether it is open to persuasion. … Natural justice does not require the absence of any predisposition or inclination for or against an argument or conclusion… (Minister for Immigration v Jia Legeng [2001] HCA 17 at [71] - [72])

Finally, Royal Commissioner Heydon adopted a three-step test from Justice Gageler in an earlier decision (Isbester v Knox City Council at [59]), as follows:

  1. Identify the factor which might cause a question to be resolved otherwise than as a result of a neutral evaluation of the merits. 
  2. Articulate how the identified factor might cause that deviation from a neutral evaluation of the merits. 
  3. Consider the reasonableness of the apprehension of that deviation being caused by that factor in that way.

It is in connection with step three that the surrounding circumstances, including adherence to existing conflict of interest protocols, are particularly relevant. So, for example, if an organisation's conflict of interest protocols requires a decision-maker to: 

  • declare any relevant personal relationship which might impact a business decision (such as friends/associates or family members who have expressed interest in tendering to supply works or services)
  • decline any gifts or hospitality above a specified or nominal value (or at least record receipt of the item where it would cause offence to decline it)
  • register financial or economic interests, or political, personal or professional affiliations, relevant to the industry or sector in which they operate
  • involve a third party to participate in, oversee or review the decision-making process where the decision-maker is concerned that his or her private interests could be viewed as incompatible with the decision to be made, and/or
  • remove themselves from further consideration of a matter where the issue cannot otherwise be satisfactorily resolved,

then evidence as to whether or not the decision-maker has turned his or her mind to compliance with these requirements is highly relevant. The reasonable person would also consider the decision-maker's consideration and compliance with all other organisational procedures, processes and codes of conduct and with their terms and conditions of employment (which may contain relevant controls or restrictions, such as restrictions on secondary employment).

Conflict of interest register may provide defence against lack of impartiality claims

Best practice dictates that an organisation records in a conflict of interest register all declared or identified conflicts of interest (whether existing, perceived or potential) and how they have been managed. The records should cover in suitable detail the period from when the conflict of interest first became known until the issue was resolved. Ideally an individual management plan should be prepared for each conflict of interest. Such records can provide the best defence to an argument that a reasonable person might reasonably apprehend that a decision-maker lacks impartiality.

There is another equally good reason as to why a conflict of interest register should be kept: it provides valuable data regarding the ethical issues that are faced by decision-makers in an organisation. Such data should be regularly reviewed, and if trends are identified, the organisation is then suitably armed to update its policies and decision-making processes. Finally, of course, by following these suggested processes in a consistent fashion, an organisation will be best positioned to prevent decisions later being challenged and, importantly, to grow a strong organisational culture.

A version of this article first appeared in the December 2015 issue of Governance Directions.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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