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11 November 2013
Several recent high-profile judgments have highlighted the pitfalls for professionals trying to overcome conflict and confidentiality issues. There has been a shift from the classic husband-wife and lender-buyer cases to those where larger commercial firms are forced to decline instructions where the potential for conflict exists. Factors contributing to this trend include mergers, lateral hires, increasing use of a small group of firms for high-value and complex work and the use of panels of firms.
The price paid for getting it wrong can be high. Sanctions include injunctions to restrain firms from acting, claims for breach of fiduciary duty and contract and disciplinary proceedings. Each of these can prove expensive, time consuming and damaging to a firm's reputation.
So where might a solicitor turn for guidance on dealing with conflict issues? If they have consulted the current Guide to the Professional Conduct of Solicitors, they would find it out of step with common law principles such as those established in the Marks & Spencer, Koch and Bolkiah cases. Following pressure from the profession, the Law Society has been working on an update to the rules on conflict and confidentiality. The drafts have now been published and are awaiting the Lord Chancellor's approval. This is anticipated imminently. The question is whether the new rules will provide more clarity and flexibility for practitioners.
The current regime
There are essentially three different types of conflict which arise for solicitors:
Self interest conflict, where a solicitor's own interests conflict with those of the client.
Client conflict, where the interests of two or more clients conflict or potentially conflict.
Confidentiality conflict, where a solicitor holds information confidential to a client or former client that is relevant to another client.
The current conduct rules provide that, in each of these situations, a solicitor cannot act. The conduct rules are absolute and do not provide any flexibility, even when the client consents or an effective information barrier could be constructed.
In contrast, the position in law has become less restrictive. The courts have examined conflict and confidentiality issues in the context of the law on fiduciary and contractual duties. A more flexible approach has emerged - in particular where the client has given consent or where effective information barriers have been implemented.
For example, in Clark Boyce v Mouat (1994), the court found that a solicitor can act for two clients with potentially conflicting interests provided that "informed consent" is given. A client provides 'informed consent' where it has been told the nature of the conflict and advised that it should seek independent advice.
Courts have also prescribed some core principles in the operation of information barriers, although in applying these principles each case will be considered on its own facts. Examples include:
Bolkiah v KPMG - factors relevant to the adequacy of a Chinese wall include the number of personnel with access to the confidential information and whether the arrangements are "ad hoc".
Koch v Richards Butler - where a lateral hire had provided undertakings, there was found to be no more than a fanciful risk of inadvertent disclosure.
Marks & Spencer v Freshfields - inadequate information barrier, large number of people involved.
The proposed new rules
The new rules will not replace the current rules but will be incorporated into the Solicitors' Practice Rules 1990 as Rules 16D (dealing essentially with self interest conflict and client conflict, as set out above) and 16E (confidentiality conflict). A set of explanatory notes provide guidance on the interpretation of the new rules. It is worth bearing in mind that, at present, the rules are proposals only - but they are expected to be approved as they stand.
For the first time, the rules define conflict of interest. The starting point is that, if a conflict exists, the solicitor must not act. However, they then go on to set out a number of exceptions. These apply where the different clients have a "substantially common interest" or are competing for the same asset. In each case, certain conditions must be satisfied, including that the clients must provide their written and informed consent and that it must be "reasonable" to act.
On confidentiality conflicts, the new rules require that, if a solicitor holds confidential information for a former or existing client which might be material and adverse to the interests of another client, the solicitor cannot act for that client. However, again for the first time, the new rules set out exceptions to this principle. These include:
Where both clients provide their informed consent.
Where the solicitor has explained that they hold material information which will not be disclosed.
Where the conditions under which the solicitor will act are agreed.
Where it is reasonable for the solicitor to act.
Where it is not possible to obtain the consent of the client for whom the solicitor holds the confidential information, the solicitor may continue to act in an existing transaction if a compliant information barrier is erected.
The proposed rules do move closer to matching the common law in many respects. Together with the explanatory notes, they are helpful in clarifying the circumstances in which a solicitor may act in situations of conflict.
Solicitors will still need to consider the latest principles established by common law, though. In fact, the new rules seem to anticipate that the common law principles will continue to evolve, as the rules refer to the need for information barriers to accord with "safeguards which comply with the standards required by law at the time they are implemented".
Therefore, while the new rules achieve greater clarity, we have not seen an end to judicial intervention on the topic. The guidance notes on the measures constituting adequate information barriers are helpful, but as before each situation is specific to the facts. It is doubtful whether the new rules would have changed the course of the recent raft of decided cases.
Tina Campbell is a senior solicitor in the lawyer's liability group of Reynolds Porter Chamberlain