London must stop over-regulating conflicts

Imagine this: MegaCo needs greater resources so it can expand. It decides to pursue a dual strategy – it will invite offers, but at the same time it will prepare for an IPO. It instructs MediumFirm on the possible sale and BigFirm on the IPO.

Voracious Inc wants to buy MegaCo. It asks BigFirm, its usual lawyers, to act for it. With consent from Voracious, BigFirm asks MegaCo if it can act for Voracious, even though it is acting on the IPO. MegaCo is happy for BigFirm to do this (behind an information barrier) as it doesn’t want to discourage any bidder.

Everyone is happy until the BigFirm conflicts partner sees a problem. He insists that MegaCo’s plans for a sale and to do an IPO are related matters and that BigFirm cannot therefore act for both MegaCo and for Voracious; he cites Rule 3.01(2)(a). BigFirm sadly tells Voracious it cannot act, despite the fact that all the parties involved want them to do so.

The general counsel of Voracious is furious. He says the outcome is absurd; in all his extensive experience, he has never come across any country that impedes freedom of choice like this. He says that London will soon cease to be a leading business centre if it over-regulates in this way.

Separately, BigFirm is about to agree to act for SteelCo on a possible supply contract to ConstructCo. Once again, the conflict partner steps in, saying that BigFirm cannot act because it is acting for ShipCo on a wellpublicised dispute with ConstructCo for delays in delivery of a cruise ship (allegedly due to steel shortages) and is threatening to make them bankrupt.

The partner wanting to act for SteelCo insists that SteelCo knows that BigFirm is acting for ShipCo and has no problem with that. SteelCo expects BigFirm to advise them, as it has acted on all their supply contracts. The partner acting for ShipCo says his client will consent to the firm acting for SteelCo, but the conflicts partner tells them that the clients’ consent is irrelevant as there is a significant risk that the demands SteelCo will make of ConstructCo in negotiating a possible contract will not be aligned with the interests of ShipCo.

The SteelCo partner looks at Rule 3.01(2)(a). He also sees the common interest exception in Rule 3.02(1)(a). Surely, he argues, SteelCo and ShipCo have a common interest in getting steel to ConstructCo? The conflicts partner is reluctant to apply the exception, as he believes there are simply too many points on which their interests could conflict. The deal is in the public eye and his firm’s reputation could be damaged.

The general counsel of SteelCo is furious.

As these examples demonstrate, Rule 3.01(2)(a) annoys clients as much as it impedes law firms. Clients feel they should be able to waive conflicts. Law firms feel they should be able to satisfy the demands of their clients. To my knowledge, England is the only country where clients are not allowed to waive conflicts in circumstances such as those outlined.

The rationale for the restriction is that many clients need to be protected from being persuaded by law firms to waive conflicts. But a rule that might well be necessary for some clients (most obviously individuals) should not be applied universally. The SRA has, of course, committed itself to risk-based regulation. It should therefore change the rules to permit sophisticated clients to waive conflicts.

The usual objection to such reform is that it is impossible to define a ‘sophisticated client’. I do not agree. How about: a sophisticated client is a client that has either taken separate legal advice on the issue, or that has access to a qualified in-house lawyer?

The SRA has been asked by the City of London Law Society to pursue this reform. The issue is now with the Ethics Committee of the SRA and their response is awaited.

Chris Perrin, executive partner and general counsel, Clifford Chance