Law Society draft conflict rules meet barrage of City criticism

City law firms have berated the Law Society for the ambiguity of new draft rules governing conflicts of interest.

The new rules, which are yet to be approved by the Department of Constitutional Affairs (DCA), attempt to provide a framework that is more workable for City law firms.

The proposed system relaxes the rules for corporate deals involving auction sales by allowing firms to act for rival bidders and/or those involved with the funding of bidders.

The criticisms have also been backed by the DCA’s legal services consultative panel in its advice to the Lord Chancellor. In a report published last month, the panel expressed concern about the breadth of the proposed rule. It recommended that the wording be redrafted to clarify the rules regarding exceptions to the duty not to act and the requirement for client consent.

For some, the new rules represent a clarification of a confused position. One corporate partner at a top 10 City firm welcomes their introduction. “Nobody really knew what the old position was in relation to auctions, so I view the rules as being rather helpful as they’ve clarified the position on such deals,” he says.

Norton Rose compliance partner Jonathan Ody also welcomes the new rules. “It’s a useful relaxation of the existing rules, which are more rigid,” he asserts.

However, a number of City-based partners interviewed by The Lawyer argue that the new rules remain ambiguous in the context of certain transactions, such as project and structured finance deals. Indeed, some even pleaded ignorance, admitting that they were not entirely sure how the new rules impacted on their practice area.

Denton Wilde Sapte chief executive Howard Morris says: “The new rules represent best practice, but the exemptions are still ambiguous.”

Morris also says the new rules could pose problems for practices operating financial models that envisage firms advising multiple parties on the same deal.

Currently, law firms are permitted to act for multiple parties on a deal with the consent of their clients. The new rules, however, only allow firms to act for more than one party on the same deal if the individual clients have a “substantially common interest” and they have all given their “informed” written consent.

The Law Society’s explanatory notes say it is up to firms to decide objectively on the facts of each case whether there is a common interest; and in making their decisions they must consider whether clients will be represented evenhandedly, with equal weight being given to each instruction.

The confusion surrounding the meaning of “substantial common interest” has prompted Lovells’ project finance practice to review whether it will be possible for the firm to act for both the sponsor and the banks on the same transaction, a practice that is currently a common feature on large-scale project finance deals.

Lovells project finance head Gavin McQuater says: “The issue is, to what extent do the sponsor and the banks have a common interest?”

One school of thought is that lawyers may be able to satisfy the common interest limb of the draft conflict rules simply because the sponsor and bank can obtain cost efficiencies by instructing one firm. However, other partners have taken a more cautious stance, arguing that, during some stages of a transaction, the sponsor and lenders may be negotiating with each other and will therefore have competing interests.

Bronwen Still, head of policy in the Law Society’s professional ethics department, argues: “The new rules are a relaxation of what existed previously. If firms have been complying with the old rules, they’ll still be compliant now.

“I think [substantial common interest] means where all parties have the same goal. To an extent, I don’t think this exclusion will bring about a substantial change.”

City law firms are reasonably satisfied with the draft conflict rules, but both the Law Society and its members have a huge learning curve to navigate before greater clarity is achieved.