TO MANY PEOPLE, "lawyers' ethics" may sound like a contradiction in terms, but to attorneys it is a serious business. In fact, since 1977 an American Bar Association commission has spent more than $650,000 to revise the profession's code of behavior, and the controversial results are scheduled to come before the ABA's policymaking body for a final vote next week in New Orleans.

The new code's significance does not lie in rules about gouging or laziness or stealing, the stuff of most disciplinary proceedings. The reformers have taken aim at a much broader target: not merely lawyers but clients as well.

The principal issue is whether lawyers must remain faithful to their clients no matter what the clients have done or may do. Most lawyers cling to the belief that they must never "squeal" on a client, that in all but the rawest cases -- a client about to commit murder, for example -- they must swallow hard and keep the clients' guilty secrets.

Suppose a defendant in a criminal case tells his lawyer that he plans to present a phony alibi at trial. Many, perhaps most, lawyers believe they are barred from blowing the whistle on the client -- or even from resigning as defense counsel -- if he does.

Suppose the client needs a legal opinion that all is in order in a registration statement to be filed with the Securities and Exchange Commission for the public sale of stock. The lawyer subsequently discovers that the client lied about material facts required to be disclosed. Many lawyers believe their code of ethics prevents them from alerting the SEC.

Suppose a client wants his lawyer to negotiate a bank loan, and the lawyer discovers the client has been lying about the value of collateral. Many lawyers believe they are forbidden from telling the bank that the deal it's about to sign is fraudulent.

Or suppose a lawyer learns from a client who has committed murder that an innocent man has been convicted of the crime. Many lawyers believe they are powerless to act to free the innocent man. In the notorious Leo Frank case, just such a situation occurred in 1914 in Atlanta. A vengeful mob lynched Frank, who had been unjustly convicted of murder, while the real killer's lawyer kept his silence (only revealing his knowledge 30 years later in his memoirs).

Understandably, the proposed rules, which would permit lawyers to come forward in all these cases -- and which demand that they come forward in some -- have stirred bitter disputes. To opponents, the "model" rules would be dangerous, forcing lawyers on many occasions to forsake their clients. Arch-critic Monroe J. Freedman of New York's Hofstra Law School, for example, brands them "a radical assault on tradition."

To supporters, however, the code merely conforms attorneys' ethics to common sense rules that legislatures and courts increasingly are laying down. In New York two weeks ago, Robert J. Kutak, chairman of the commission that fashioned the code, said it is simply meant to "guide the conscientious lawyer in what conscientious lawyers have always done: balancing competing duties in the professionally responsible representation of clients." (Kutak, who worked tirelessly to promote the new rules, died suddenly last Sunday.)

Some might well wonder why a debate at all: Doesn't everyone know that honesty is the best policy? After all, several thousand years later the consensus continues to hold on all but a couple of the Ten Commandments.

The answer is that the argument centers on conduct in specific circumstances, not on generalized moral imperatives. It may seem remarkable but lawyers, who keep our society operating according to highly detailed rules, are themselves subject to so few professional rules -- and, at that, rules that the lawyers themselves have written.

No less remarkable, these rules are often so vague and confusing that they almost always permit clients to purchase their silence merely by paying their fees. Many lawyers agree, for example, that the present code permits them to disclose their clients' ongoing fraud, but the language is murky enough for many other lawyers to disagree.

In recent years state courts have moved into this vacuum. Decisions in malpractice suits and other legal actions have begun to establish new standards of behavior. But most lawyers seem oblivious to this trend, failing to realize that they are already in potential jeopardy in many jurisdictions if they fail to respect much stricter standards than their own canons now require.

In simpler times, lawyers got along without any formal code of ethics at all. The ABA adopted the first vague code in 1908. Strewn about the canons of ethics, as they were called then, were rules of etiquette (an attorney should be punctual), tactics (don't worry over much about the comfort of jurors), and fraternal concern (don't charge the families of deceased attorneys).

Among the many flaws of the 1908 canons, two stood out. They masked points of conflict, and they were suitable at best to an outmoded view of what lawyers do.

Lawyers were told to give "entire devotion" to the client's interest, but only within the bounds of law. A lawyer, Canon 32 said, "will find his highest honor in a deserved reputation for fidelity to private trust and to public duty . . ." The canons did not tell the lawyer what to do when those private and public duties collide.

Second, the canons viewed lawyers as people who performed professional duties in a courtroom. They were virtually silent about the lawyer's other tasks as counselor, negotiator, draftsman.

By the 1960s, the often amended canons were too rickety to survive. They reeked of self-interest and answered few questions. The ABA named a committee, and new rules, now dubbed the Code of Professional Responsibility, were adopted in 1969. Though a stylistic improvement, the new code was little different from its predecessors. It did not recognize that different kinds of lawyers have different kinds of practical concerns, and it was soon shaken by social, political, and legal earthquakes.

Constitutional change began in the late 1960s when the Supreme Court voided ethical provisions prohibiting lawyers from providing legal services to clients in various forms of group legal practices. Through amendments to the 1969 code beginning the next year, the bar fought an unseemly and unsuccessful rear-guard action to preserve the traditional and more lucrative individual form of private practice. By the mid-1970s, the High Court also had struck down bar minimum fee schedules (they violated the antitrust laws) and state bans on lawyer advertising (they violated the First Amendment).

By 1980, moreover, the lawyer population had jumped to over 500,000, more than double the number in 1970. More and more younger lawyers began to practice inlarger institutions -- law firms and government. The older model of the solo practitioner on which the Code of Professional Responsibility was based became ever more outdated.

Stray ethical issues arose steadily from the late 1960s. Prof. Freedman infuriated many when he insisted that a lawyer was duty- bound (under the code) not to reveal a client's perjury to the court when on trial -- indeed, that the attorney was obligated to help the client perjure himself if the client insisted. Taking the opposite tack, then-federal judge Marvin E. Frankel (a member of the Kutak Commission) incensed others by suggesting that the adversary system led to too much chicanery in courtrooms and that lawyers should be reined in.

The case of National Student Marketing, in which company officers were convicted of securities fraud, brought home the failure of the code to govern in the nontrial setting. Keeping the confidence of the client in that case (as arguably the code required), various lawyers in establishment firms failed to take steps that might have prevented innocent investors from losing millions of dollars.

Finally, underlying all these developments was Watergate, the legal profession's Waterloo. Readers of this newspaper need only the briefest reminder that all but one of the major felons and most of the minor miscreants were lawyers.

The bar's immediate response to this national shame was predictable: It directed law schools to teach ethics forthwith. And as the teachers began to investigate the existing code and prepare materials for their students, they discovered how murky and even contradictory its provisions were.

In 1977, the ABA appointed the commission that developed what has become known as the Model Rules of Professional Conduct. An earlier version created an uproar when announced in 1980. Among other "hot" provisions was one calling on every lawyer to devote 40 hours a year to free public service. That notion was quickly deleted, and the entire set of Model Rules eventually went through two major revisions.

Today, on the brink of passage by the ABA's House of Delegates, the rules should no longer be thought of as a code of ethics, says Yale Law School's Geoffrey C. Hazard Jr., chief draftsman of the model code. They are "legal rules, a code of law that sets forth minimum rules of conduct." (ABA approval does not make them law, of course. They must be adopted in each state, usually by the state supreme court. Those who rightly object to lawyers' writing law for themselves should note that during years of public debate and repeated requests for views, not a single non- lawyer group came forward with comments.)

Four key sections are at the heart of the current debate. They govern the lawyer's general duty to keep the client's secrets, to keep the confidences of a corporate client, to eschew a client's perjury in court, and to refrain from lying about a material fact during the course of representing a client.

The latter two provisions -- concerning perjury and lying -- are mandatory: A lawyer, for example, would have to tell a court if a client commits perjury during trial. The first two are discretionary: They permit the lawyer to reveal client confidences under certain circumstances, but they do not require it.

Perhaps no single provision has so exercised Kutak Commission critics as the general rule about client secrets. It says that a lawyer may reveal "information relating to representation of a client" if the lawyer reasonably believes it necessary in four circumstances. One is "to prevent the client from committing a criminal or fraudulent act that the lawyer reasonably believes is likely to result in death or substantial bodily harm, or in substantial injury to the financial interests or property of another." A second is "to rectify the consequences of a client's criminal or fraudulent act in the furtherance of which the lawyer's services had been used."

This second circumstance has been much in the news of late in the extraordinary tale of O.P.M. Services Leasing Inc., the central firm in one of the nation's largest corporate frauds. In 1981, O.P.M. (short for "other people's money"), which leased computers it purchased with borrowed money, went bankrupt. It developed that the firm had bilked lenders of more than $210 million by forging signatures to use a single piece of equipment as collateral for many transactions, by fraudulently inflating the value of equipment, and by bribing customers' employes.

Throughout the 1970s, a New York law firm, Singer Hutner Levine & Seeman, handled O.P.M.'s legal work, unaware of the fraudulent transactions. But in June 1980, senior partner Joseph Hutner was confronted with the probability that something was amiss: Evidence came to light indicating that Singer Hutner's work for O.P.M. had been based on false documents.

What toodo? A "nonlawyer" (as lawyers like to refer to everyone else) might be excused for supposing that the surprised Singer Hutner lawyers would immediately confront O.P.M. executives, demand the truth, resign the client, and go to the authorities. But it did not happen that way.

Six days after first receiving danger signals, the law firm undertook a characteristic American act. It hired a lawyer -- two, in fact, the then-dean of Fordham University Law School and one of the law school's ethics professors. That act was testament to the murkiness of the present Code of Professional Responsibility: Lawyers themselves do not know what it means or requires.

The specialists advised the firm that it could continue to work for O.P.M. so long as it did not know for certain that the company was continuing to engage in fraud and so long as it was planning to investigate further; that it was not duty-bound to inform previous recipients of legal opinion letters based on fraud; and that it would have to keep secret everything it had already learned.

Three months later, confronted with unequivocal evidence that O.P.M. was using the law firm to continue making fraudulent leases, Singer Hutner concluded it would have to resign the client. This was understandably a bitter moment for a firm dependent on O.P.M. for 60 percent of its business. But, again on advice of counsel, the law firm did not sever its relationship with O.P.M. all at once. It withdrew over a three-month period, still refusing to tell anyone of the reasons for withdrawal or of the fraud.

This policy of silence reached its apotheosis when O.P.M. found new counsel, Kaye Scholer Fierman Hays & Handler, one of New York's most prominent firms. One of that firm's partners was an old friend of Joseph Hutner. The Kaye Scholer partner wondered whether "there was anything he should be aware of" in taking on O.P.M. as a client. On advice of counsel, Hutner's response was tight-lipped: "The decision to terminate was mutual and . . . there was mutual agreement that the circumstances of termination would not be discussed."

Thus the Code of Professional Responsibility not only covered up a fraud that was bound to explode in public in the near future, but it did so at the expense of a personal friendship. Moreover -- and this is perhaps the most astonishing aspect of the case -- as the specialists interpreted the Code of Professional Responsibility, one lawyer was forbidden from telling another lawyer the facts, even though the other lawyer would stand in the shoes of the first lawyer and thus be bound by the same duty to preserve the client's secrets, and even though the only effect of the policy of confidentiality in this instance was to permit the fraud to continue.

Does the current code really intend such results? Arguably, it does. Hazard, for one, thinks it does not, but he asserts that "the present code can be read to assume no conflict between confidentiality and the duty not to help a client commit fraud, and so the operative principle is not to ask questions."

The new Model Rules acknowledge that the lawyer's duty to client and to larger public interests can conflict. It would encourage the lawyer to ask questions and empower him to blow the whistle if necessary to prevent the fraud from continuing.

Opponents say that the confidentiality provisions will be destructive of lawyers and clients. The most vocal opponent is John C. Elam of Columbus, Ohio, past president of the American College of Trial Lawyers, a prestigious group of courtroom practitioners. Elam denounces the Kutak Commission as naive and says the confidentiality provisions "put the lawyer at peril."

Elam's arguments sound rather like the attorney defending the guilty client -- all heat and little light. Indeed, so shrill is his opposition that at a press conference called last August in San Francisco at the ABA's annual meeting, he wound up rejecting similar rules embodied in the American College's own ethical guidelines.

The usual argument for absolute confidentiality is that it will encourage clients to tell all to the lawyer, who will thus have an opportunity to talk the client out of his nefarious schemes. The trouble with this argument, says Harvard Law Schoold g Prof. Andrew Kaufman, chairman of the Massachusetts bar's ethics committee, is that it cannot be tested empirically. No one knows how often such situations as Singer Hutner found itself in arise, nor how often the lawyer in that situation succeeds in persuading the client to abandon his illegal behavior.

Hazard questions as "fantasy" the notion that lawyers will have a completely honest exchange with a client. Lawyers, he says, do not like "to confess there is a tragic element in their work, that they can't always prevail, that there are cases in which nothing can be done (privately) to make the client honest."

Despite the 266 pages of amendments awaiting the 387 members of the ABA's House of Delegates at their February meeting, most boil down to attempts to remove the confidentiality provisions. (The general provision is itself a watering down of an earlier version that required -- rather than permitted -- the lawyer to blow the whistle when he discovered that a client had used him to commit fraud.)

It seems likely that attempts substantially to weaken the Model Rules will fail, although predicting what 387 lawyers will do when placed together all day in a ballroom is fraught with hazard.

What does seem clear is that if the ABA snubs its own commission, it will for the most part be thumbing its collective nose at rules that courts -- through malpractice suits and other actions -- have imposed or likely will impose anyway. If lawyers do not understand this -- and there is impressive evidence that many do not -- some day soon we will witness the unedifying spectacle of the lawyer going off to jail with the client whose criminal interests he has sworn to uphold above all else.