Conflict of interest: Overview, definition and example
What is a conflict of interest?
A conflict of interest happens when someone’s personal interests, relationships, or outside responsibilities interfere with their ability to act fairly or make unbiased decisions in a professional or business setting. In a business context, it often arises when an employee, contractor, or decision-maker has competing loyalties that could affect their judgment or actions.
For example, if a procurement manager awards a contract to a company owned by a family member, even though another supplier offers better terms, this could be a conflict of interest.
Why is a conflict of interest important?
Conflicts of interest matter because they can compromise trust, fairness, and the integrity of business decisions. In business-to-business relationships, undisclosed conflicts can lead to poor decisions, financial losses, or damaged reputations.
Addressing conflicts of interest ensures transparency and accountability, protecting the interests of all parties involved. Many businesses have strict policies requiring employees and contractors to disclose any potential conflicts to avoid issues.
Understanding conflict of interest through an example
Imagine a software company hires a consultant to help select a vendor for its new IT infrastructure. Unbeknownst to the company, the consultant has a financial stake in one of the vendors being considered. If the consultant recommends this vendor over others, despite higher costs or lower quality, the conflict of interest could harm the company’s operations and finances.
In another case, a board member of a retail chain also serves as an advisor to one of its suppliers. If the board member influences purchasing decisions in favor of the supplier, it could create a conflict of interest, especially if better options are overlooked.
An example of a conflict of interest clause
Here’s how a conflict of interest clause might look in a contract:
“Each Party agrees to disclose any actual or potential conflicts of interest that may arise in connection with this Agreement. In the event of a conflict of interest, the affected Party shall notify the other Party promptly and take appropriate steps to mitigate or resolve the issue in good faith.”
Conclusion
A conflict of interest arises when personal or outside interests interfere with professional responsibilities or business decisions, potentially leading to unfair outcomes or ethical issues. In business-to-business relationships, addressing conflicts transparently helps build trust, maintain fairness, and protect the integrity of decisions.
By understanding and managing conflicts of interest, businesses can foster stronger partnerships, make better decisions, and safeguard their reputation in competitive markets. Transparency is key to avoiding issues and ensuring professional relationships remain unbiased and equitable.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.