Where there is informed consent in a same matter conflict, whereby the law firm is instructed both for client A and client B, problems arise when the firm learns some information in the course of acting for B which would obviously be of interest to A. Typically, a borrower will instruct a solicitor and the same solicitor will act for the mortgage lender on the conveyance, this avoids an unnecessary expense in instructing a second lawyer. There is no breach of the double employment rule because both parties consent but there is nevertheless an obvious potential for conflict if the solicitor learns something from the borrower which is material to the interest of the lender. The fall in the UK property market in the early 1990s led to many mortgage lenders losing money on the back of inadequate valuations, this led to numerous actions against solicitors as lenders were unable to recover their money from the borrowers and instead sought to recover them from solicitors on whose advice they had relied, turning to equity, alleging breach of fiduciary duty. The line of cases below will explore the situations a law firm may act or not.
The starting point of this discussion is the case Bristol and West Building Society v Mothew (t/a Stapley & Co), where the defendant solicitor acted for a husband and wife in the purchase of a house and also for the plaintiff to whom the purchaser had applied for a loan to finance the purchase. The plaintiff stated that he would only loan the money provided that the purchasers would provide the rest of the money required for the purchase of the house without resort to further borrowing and instructed the solicitor to report of any such behaviour. The solicitor knew that the purchasers had secured a second charge on the property but due to an oversight this was not mentioned in his report. Lord Millet, stated that the solicitor’s conduct in providing the plaintiff with the wrong information was neither dishonest nor intentional but due to an oversight. It was not alleged that he acted in bad faith or that he deliberately withheld information because he wrongly believed that his duty to the purchasers required him to do so and this was not guilty of a breach of fiduciary duty. Therefore, in effect if there had been deliberate concealment the solicitor would have been in breach of fiduciary duty as the core concept is loyalty with one of its facets being duty of good faith, and a breach if this duty need not be dishonest but intentional.
The next important case is that of Hilton v Barker Booth Eastwood (BBE) where Hilton had been a client of the defendant firm of solicitors (BBE) for many years. Bromage was also one of the firm’s clients, and to the firm’s knowledge had been found guilty of a variety of offences involving fraud. BBE had acted for Bromage in his criminal matters. BBE acted for both Hilton and Bromage in a subsequent property developing transaction. BBE never disclosed to Hilton the information in their possession concerning Bromage. Inevitably, a conflict arose that required the firm to stop acting for Hilton. Hilton suffered loss from the collapse of the transaction, and when he failed to recover from Bromage, he sued BBE. The Court of appeal held that that the firm was not in a position to pass on confidential information concerning one client to another, and that their breach of duty to Hilton lay in continuing to act for him, while in a position of conflict of duty. Hilton was therefore entitled to be placed in the same position he would have held had a solicitor who did not also act for Bromage acted for him. As the hypothetical independent solicitor would not have had knowledge of Bromage’s convictions, Hilton had not established the causal link between his loss and BBE’S breach of duty. In that hypothetical situation, Hilton would have not been informed about Bromage’s lack of trustworthiness, and would have gone ahead with the transaction and therefore, his claim failed. This was unanimously overturned in the House of Lords. They stated that the breach was in failing to protect client by giving him the information he needs, regardless of the fact that to do so would a breach of duty to the other conflicting client. This case shows the potentially serious consequences of a law firm acting under a conflict of interest.
The above cases have been those relating to same matter conflicts, the next point is that of separate matter conflicts better, where a fiduciary may be tempted to use information gathered from, or for, one client for the benefit of another.
The recent leading case is that of Marks & Spencer Plc v Freshfields Bruckhaus Deringer. Both the double employment rule and protection of confidential information were considered in this case. It involved a proposed offer for the shares of Marks and Spencer Plc (M&S) by Revival Acquisitions Ltd (Revival), a company owned by Mr Philip Green. The defendants, Freshfields Bruckhaus Deringer (Freshfields) are a well-known firm of City solicitors whom Revival instructed to act for it in connection with the proposed offer. M&S sought an injunction restraining Freshfields from acting for Revival, and an application for permission to appeal against the decision to grant an injunction was refused by the Court of Appeal. Freshfields had a current retainer from M&S to act for it in certain matters and in particular, Freshfields had been instructed to act for M&S in relation to important contractual arrangements between M&S and Mr George Davies in relation to a successful clothing brand which had not yet been concluded. By virtue of these and other matters on which they had advised M&S, Freshfields had acquired confidential information concerning M&S which would be of interest to a party seeking to launch a take-over bid for M&S.
M&S's application for an injunction was based upon the conflict of interest inherent in a solicitor acting both for and against the same client and on the possibility of leakage of confidential information within Freshfields during the course of the proposed transaction. M&S were successful in both arguments. The court was satisfied that there was a real or serious risk of conflict of interest. In particular, the transaction with Mr Davies, which had not yet been concluded, was likely to be criticised during the bid and Freshfields would be involved in the production of documents which would conflict with their duty to act in the best interests of M&S in connection with the Davies contract.
The Court of Appeal rejected the defence that this principle was to be confined to cases where the conflict of interest arose out of the same transaction as the one in which the solicitor was instructed by the new client, that being same matter conflicts, the court stated it was sufficient that there was ‘a degree of relationship’ between the two transactions and it had no doubt that such a relationship existed in this case.
The Court of Appeal also rejected the argument that ‘Chinese Wall’ arrangements could be erected to prevent any leakage of confidential information in Freshfields' possession. The issue of ‘Chinese Walls’ is explained and analysed further in relation to former client conflicts. This case shows that the courts are likely to prove zealous in their protection of the rights of principals in their dealings with fiduciaries, notwithstanding the potential inconveniences which this may cause in the conduct of large-scale commercial transactions.
Former Client Conflicts
Confidential information forms the basis of a former client conflict, where the risk is that a professional may use confidential information disclosed by a former client to assist a current client. There fiduciary obligation lies in protecting the confidential information of the former client sufficiently to enable the professional to act for the new client. It is not a question of taking reasonable steps to protect the information but an absolute obligation and an injunction will be granted unless there is no real risk of disclosure.
This brings in the use of Chinese walls, which are information barriers that are set up in order to prevent the flow of information between different parts of a law firm acting for different clients, past or present, whose interests conflict. The Law Commission described the effective use of Chinese walls as involving some combination of organisational arrangements such as physical separation of various departments in order to insulate them from each other, a recurring educational programme to emphasise the importance of not improperly or inadvertently divulging confidential information, the use of strict and carefully defined procedures if it is necessary to cross the wall, and keeping proper records where this occurs, monitoring by compliance officers of the effectiveness of the wall and disciplinary sanctions in the event of a breach of the wall.
The contentious issue in recent cases involve questioning the adequacy of the Chinese wall as an effective information barrier.
The law in this area was explained by the House of Lords in Prince Bolkiah v. KPMG(Bolkiah). Prince Jefri Bolkiah was the Chairman of The Brunei Investment Agency (BIA). KPMG had acted as auditors of a substantial part of its assets and also carried out advisory work for the BIA. KPMG were also retained on behalf of Prince Jefri to undertake an investigation into his affairs in connection with major litigation in which he was personally involved with the Manoukian brothers (Project Lucy). Project Lucy involved KPMG's forensic accounting department providing extensive litigation support services of a kind normally undertaken by solicitors. In the course of undertaking this work, KPMG became privy to confidential information about Prince Jefri’s affairs.
After KPMG had finished with work related to Project Lucy, therefore no longer considering Prince Jefri to be their client, were instructed by the BIA to investigate certain withdrawals of assets from the core funds (Project Gemma). It was clear that the work being undertaken by KPMG on Project Gemma was potentially adverse to Prince Jefri's interests and might well lead to civil or criminal proceedings against him. KPMG did not inform Prince Jefri about Project Gemma or seek his consent to work on it. KPMG accepted that the confidential information which they had obtained whilst working on Project Lucy might well be relevant to Project Gemma. When they accepted the BIA's instructions they took steps to establish a Chinese wall within the forensic accounting department to insulate the confidential information the firm possessed about Prince Jefri. Most of the work on Project Gemma took place in Brunei. Work in London was done in a separate building from the one housing the forensic accounting department. KPMG also sought and received the BIA's consent to withhold disclosure to it of the confidential information KPMG had obtained relating to Prince Jefri. This avoided a conflict of duties between the duty of confidentiality owed to a former client and the duty to inform a current client of all matters relevant to the retainer, including confidential information of other clients. The Court of Appeal allowed KPMG's appeal against an injunction being granted but the House of Lords reversed the Court of Appeal's decision.
The House of Lords held that where accountants or lawyers were providing services and were in possession of information which was confidential to a former client, and might be relevant to a matter in which they were instructed by a subsequent client with an adverse interest, the court should intervene to prevent their acting unless it was satisfied that there was no real risk of disclosure. The basis of the jurisdiction was the protection of the confidential information of the former client rather than the avoidance of any perception of possible impropriety.
The court stated that a former client cannot be completely protected from accidental or inadvertent disclosure, but he is entitled to prevent his former solicitor from exposing him to any avoidable risk and when on to consider the degree of risk which is appropriate. According to Lord Millett, essentially two basic approaches were open to him, either to base his test on the ‘probability of real mischief’ or on the ‘possibility of real mischief’. The former approach is generally accepted as having been derived from the Court of Appeal's decision in the Rakusen v. Ellis, Munday & Clarke. Lord Millett, however, rejected the Rakusen approach, adopting instead a stricter approach of ‘the possibility of mischief’ much favoured by some commonwealth jurisdictions, namely Australian and Canada. Lord Millett thought that this stricter approach was further justified as the ‘probability test’ imposed an unfair burden on the former client, exposing him to a potential and avoidable risk to which he has not consented. It fails to give him sufficient assurance that his confidence will be respected especially where the information was not only confidential but also privileged, as was the case in relation to information obtained during the provision of litigation services.
Lord Millett did not deny that a Chinese wall could not eliminate the risk of confidential information being leaked but that it needed to be an established part of the organisational structure of the firm, not created ad hoc. KPMG's wall was not sufficient to convince the Court that information obtained working on Project Lucy might not reach those working on Project Gemma. Further more KPMG's wall was erected to attempt to create a barrier within single, not separate departments and in circumstances where a large number of employees were involved on a rotating basis.
Although, there was no consent obtained from Prince Jefri, this as defence was a redundant as the Court stated this was only relevant to existing client conflicts and is not of importance where a fiduciary no longer acts for a principal whose interests are at risk.
Since the case was about accountants it was questioned whether Lord Millet’s judgement had application to solicitors. Lord Millet in his judgment stated that,
‘the duties of an accountant cannot be greater than those of a solicitor, and may be less, for information relating to his clients affairs which is in the possession of a solicitor is usually privileged as well as confidential’
and then went on to suggest that it is easier to separate departments when it came to accountancy as the matters are less unrelated then when it comes to provision of litigation services where matters are inherently interlinked.
This suggests that Chinese walls could never be effective for solicitors as they would not be able to ever create secure walls. However, the judgement has been cited with apparent approval in relation to solicitors.
After Bolkiah
The decision in Bolkiah stated that Chinese walls were only effective if they were part of the organisational structure and not ad hoc, but recent cases have rowed back from this strict approach. In Young v Robson Rhodes (a firm) and another, where the plaintiffs were a syndicate of Lloyd's Names sued their auditors Pannell Kerr Forster (PKF) and instructed a partner in Robson Rhodes to undertake forensic accounting work on their behalf. Robson Rhodes and PKF announced that the firms were to merge and intended to terminate their retainer with the plaintiffs. The plaintiffs sought an injunction to prevent the merger from proceeding until after their action against Pannell Kerr Forster. Robson Rhodes offered to put in place a Chinese wall which would protect confidential information which Robson Rhodes had but the plaintiffs argued that this was not sufficient as it would be created ad hoc. The Court felt that the wall would be sufficient given the facts of the case and it did not matter that the wall was created ad hoc as long as it was effective, stating that the test set out in Bolkiah must be applied in consideration of the specifics of a case.
Although once again the case involved an accountancy firm, it is clear from the principles of law which the judges applied, the ruling has far-reaching implications for those law firms that rely on Chinese walls to resolve problems associated with former client confidentiality.
Cases since Bolkiah have often involved solicitors who moved to firms which were handling cases against their previous firm's clients. In the case of Halewood International Ltd v Addleshaw Booth & Co (ABC) a solicitor, Mr. Robinson was appointed to work for ABC, a firm which was acting against Mr. Robinson’s former client, Halewood International. ABC claimed that Mr. Robinson would have no involvement in the case and a Chinese wall had been erected when the conflict arose. Also, undertakings had been given by all the lawyers, including Mr. Robinson that they would not discuss the case. The court however, was not prepared to accept that all the risks had been eliminated and ordered that Mr. Robinson be moved to a different office until the case was over. However, it was pointed out that ABC’s departments were relatively small in comparison to those in KPMG, in Bolkiah, and that it would be easier to police a system involving fewer people, suggesting that it may easier for small law firms to act against former clients.
Another recent case of this type was GUS Consulting GmbH v Leboeuf Lamb Greene & Macrae. Investment bank GUS Consulting GmbH (GUS) was involved in arbitration with DCL-KF Corporation (DCL). DCL was originally represented by Debevoise & Plimpton, but lawyers handling DCL's case left to join Leboeuf Lamb Greene & Macrae, and took the case with them. However, Leboeuf had acted for GUS in earlier transactions relevant to the arbitration. GUS therefore sought to restrain Leboeuf from acting for DCL in the arbitration. After it identified the problem, Leboeuf put in place an information barrier preventing the DCL team from having access to the firm's files on GUS. The information barrier included software that denied access to electronic documents relating to the old files. Further, the old files were physically stamped ‘restricted'.
The Court of Appeal held that Leboeuf had shown that the risk of disclosure was more theoretical than real and it was important that the information related to transactional matters conducted some years before. The Court also said that one had to stand back from the adversarial process and assess how likely the risk of disclosure really was. The decision in GUS emphasises that the courts will consider each case on its facts, but will adopt a pragmatic view as to the real risk of confidential information being disclosed and that courts generally will not grant injunctions where a practical solution can be found. This seems to be a decision in line with modern principles as technology has made it easier to disclose information but the use of protected passwords and codes can form part of an effective Chinese wall.
The Policy Issues and Chinese Walls
The trend towards mergers of law firms has accentuated problems in relation to fiduciary responsibility, especially client confidentiality. Firstly, it is claimed that the Law Society adopts strict rules as it has the duty to regulate the entire profession. In addition to this, looking at the case law above, although the courts recognise the existence of Chinese walls, they tend to be very sceptical about their effectiveness. The policy issues raised by the attitude towards Chinese walls are discussed below.
Law firms today have to sell their services in a highly competitive environment and therefore mergers are aim of securing socially desirable economic benefits, so that they are able to offer a greater deal of specialisation and expertise. Firms that do not respond to such a competitive climate will lose out, with business going to competitors with more extensive legal networks and by transforming itself into a one-stop legal provider, the firm ensures that clients need not look elsewhere. This will be beneficial for clients as they will receive the high standards of legal representation, extensive administrative support and more choice.
However, set against these considerations are concerns that, as firms grow larger, there is an increased risk that client confidentiality will be prejudiced. There is a public interest in ensuring that those who relay information in confidence to a solicitor feel sure that the information will remain secret. A loss of confidence in the principle of client confidentiality ‘would deliver a serious blow to the integrity of the profession and the public's confidence in the administration of justice’. Law firms have to strike a balance between the competing policy objectives of protecting client confidences and maintaining their market dominance. Essentially the argument here is that solutions such as Chinese walls, whether between departments or within departments, ad hoc or permanent, enable firms to secure economic benefits without imperilling the interests of justice. The legal rules are claimed to be antiquated as a consequence of their strictness and thus fail to reflect commercial reality and impose unwarranted costs on firms.
In Re Solicitors it was explained that the law seeks to strike a balance between two public interests. The first being a client’s entitlement to have full confidence in his solicitor without the risk that confidential information relating to him or his affairs will not be disclosed to anyone else. Second, there is the interest in the freedom of all members of the public to instruct a solicitor of their choice. Therefore, legal rules which are overly strict might unduly disqualify firms and restrict a client's freedom to choose the firm which he feels has the requisite expertise to perform the task asked of it and in turn could prove costly to clients where work has already begun and the firm is subsequently disqualified.
The claim that law firm mergers will enhance the legal services provided to clients is questionable. The trend towards multi-disciplinary practices (MDPs), combining law, accountancy, and financial services could in the long term be adverse to clients' interests as they will reduce coherent professional control by a single regulator, and expose clients to the risk that former confidences will not remain secret. The transformation of law firms from profession to business is for some an undesirable development which threatens to undermine many of the standards upon which the legal system has built its reputation.
In relation to restrictions on client choice, the number of instances when this will seriously prejudice clients is unlikely to be large and as Justice Cory, in his dissenting judgment in MacDonald Estate v. Martin has stated ‘the requirement of change imposed upon a client is, on balance, a small price to pay for maintaining the integrity of our system of justice.’
Conclusion
The trend in the ever expanding legal profession, which has involves greater number of mergers and increased job mobility among solicitors, has exacerbated the problem with conflicts of interest. It seems that lawyers have a higher threshold in terms of conflicts of interest than other professions attributable to the fact that policy highlights integrity of the system of justice, placing great importance on the sensitive solicitor-client relationship. The Law Society rules reflect this by giving lawyers a heavy responsibility not to place themselves in position of conflicts.
The unpalatable truth as seen from most of the cases discussed, is that a law firm can do little to ensure that it will not be subject to an allegation of breach of duty from a disgruntled client, if a transaction proves to be a failure. Although the general assertion is that the fiduciary relationship that exists is paramount to any commercial aspects, the Courts are now dealing with cases based on their specific facts showing a slightly relaxed approach.
Bibliography
Textbooks
C Hollander QC and S Salzedo, Conflicts of Interest & Chinese Walls, London: Sweet & Maxwell, 2000
G Moffat, Trusts Law Text and Materials, 4th Ed, Cambridge University Press, 2005
J Glover, Commercial Equity Fiduciary Relationships, Butterworths: Adelaide, 1995
J Griffiths-Baker, Serving Two Masters: Conflicts of Interest in the Modern Law Firm, Hart Publishing, 2002
McKendrick, Commercial Aspects of Trusts and Fiduciary Obligations, Clarendon Press, Oxford, 1992
Articles
C Hollander, ‘Conflicts of interest and the duty to disclose information’, Civil Justice Quarterly, 2004, C.J.Q 2004, 23(Oct)
C Hollander, ‘Conflict? What conflict?’, Journal of International Banking Law, 2000, 15(4/5)
H McVea, "Heard it through the grapevine: Chinese walls and former client confidentiality in law firms", Cambridge Law Journal, C.L.J. 2000, 59(2)
J. Griffiths-Baker, ‘Further Cracks in Chinese Walls’, 1999, 149 N.L.J. 162
K Uff, ‘Restraining a Solicitor from Acting: Case Comment’, Civil Justice Quarterly, C.J.Q. 2004, 23(Oct)
R G Lee, ‘From Profession to Business: The Rise and Rise of the City Law Firm’ (1992) 19 J.L.S. 31
Cases
Aberdeen Rly v Blaikie Bros(1854) 1 Macq 461
Bristol and West Building Society v Mothew [1998] 1 Ch 1
Clarke Boyce v Mouat[1993] 3 WLR 1020 824, 833
GUS Consulting GmbH v Leboeuf Lamb Greene & Macrae [2006] EWCA Civ 683
Halewood International Ltd v Addleshaw Booth & Co [2000] Lloyd's Rep PN 298
Hilton v Barker Booth Eastwood [2005] UKHL 8
MacDonlad Estate v Martin, (1991) 77 D.L.R (4th) 249
Marks & Spencer Plc v Freshfields Bruckhaus Deringer [2004] EWCA Crim 741
National Mutual Holdings Pty. Ltd. V Sentry Corp. (1989) 87 A.L.R. 539 (Fed. CT. Gen. Div.)
Prince Bolkiah v. KPMG [1999] 2 W.L.R. 215
Rakusen v. Ellis, Munday & Clarke [1912] 1 Ch 831
Re A Firm of Solicitors (1999) 18 Oct
Re Solicitors [1997] Ch 1
S.I. Galt, ‘Multi-Disciplinary Practices and Networks’, 1998, Scots Law Times 95
Young v Robson Rhodes (a firm) and another [1999] All ER 524
Rules and Guidance
Court and Legal Services Act 1990
Solicitors Act 1974
Solicitors Code of Conduct 2007
Solictors’ Publicity Code 1990
Law Commission’s Fiduciary Duties and Regulatory Rules, No. 23
Law Commission, “Fiduciary Duties and Regulatory Rules”, Consultation Paper 124, 1992
J Glover, Commercial Equity Fiduciary Relationships, Butterworths: Adelaide, 1995, pg 202
G Moffat, Trusts Law Text and Materials, 4th Ed, Cambridge University Press, 2005, pg 821
This concept of the ‘no conflict’ rule is referred to in the Law Commission’s Fiduciary Duties and Regulatory Rules, No. 236, para 1.4
Court and Legal Services Act 1990, ss 34,53 and 98 and the Solictors’ Publicity Code 1990
J Griffiths-Baker, Serving Two Masters: Conflicts of Interest in the Modern Law Firm, Hart Publishing, 2002, pg 9-10
This categorisation is borrowed from Finn who separated conflicts according to same matter conflicts, former client conflicts, separate matter conflicts and fair dealing conflicts. P Finn, ‘Fiduciary Law and Modern Commercial World’, in McKendrick, Commercial Aspects of Trusts and Fiduciary Obligations, Clarendon Press, Oxford, 1992, pg 23-49
SS. 32-34, Solicitors Act 1974
S3.01(2), Solicitors Code of Conduct 2007
Bristol and West Building Society v Mothew (t/a Stapley & Co), 1998 Ch. 1., at 19
[1993] 3 WLR 1020 824, 833
C Hollander, ‘Conflicts of interest and the duty to disclose information’, Civil Justice Quarterly, 2004, C.J.Q 2004, 23(Oct), at 258
C Hollander, ‘Conflict? What conflict?’, Journal of International Banking Law, 2000, 15(4/5), at 110
[2005] 1 W.L.R. 567, para 38
[2005] P.N.L.R. 4, para 10
K Uff, ‘Restraining a Solicitor from Acting: Case Comment’, Civil Justice Quarterly, C.J.Q. 2004, 23(Oct), para 251
C Hollander QC and S Salzedo, Conflicts of Interest & Chinese Walls, London: Sweet & Maxwell, 2000 para
Law Commission, “Fiduciary Duties and Regulatory Rules”, Consultation Paper 124, 1992, at para 4.5.2
National Mutual Holdings Pty. Ltd. V Sentry Corp. (1989) 87 A.L.R. 539 (Fed. CT. Gen. Div.) per Gummow J
MacDonlad Estate v Martin, (1991) 77 D.L.R (4th) 249, 257 per Sopinka J
Re A Firm of Solicitors (1999) 18 Oct, Walker J unreported and Halewood International Ltd v Addleshaw Booth & Co [2000] Lloyd's Rep PN 298
H McVea, "Heard it through the grapevine: Chinese walls and former client confidentiality in law firms", Cambridge Law Journal, C.L.J. 2000, 59(2), pg. 371
[2000] Lloyd's Rep PN 298
R G Lee, ‘From Profession to Business: The Rise and Rise of the City Law Firm’ (1992) 19 J.L.S. 31., pg 42
M Galanter and T Palay, ‘Large Law Firms & Professional Responsibility, in Legal Ethics & Professional Responsibility by R. Cranston, Oxford, 1995, pg 189
M Brindle and G Dehn, ‘Confidence, Public Interest and the Lawyer’, in Legal Ethics & Professional Responsibility by R. Cranston, Oxford, 1995, pg 115
J. Griffiths-Baker, ‘Further Cracks in Chinese Walls’, 1999, 149 N.L.J. 162 , pg 175
R. Cranston, ‘Legal Ethics & Professional Responsibility’ in Legal Ethics & Professional Responsibility by Cranston , O.U.P., 1995 pg 19
S.I. Galt, ‘Multi-Disciplinary Practices and Networks’, 1998, Scots Law Times 95, pg 97
(1991) 77 D.L.R. (4th) at 249.