Two’s a crowd

Larger firms suggest conflicts are getting out of hand. Which is why the courts are seeking a compromise between client confidentiality and the realities of business. By David Halpern

The dispute between Marks & Spencer (M&S) and Freshfields Bruckhaus Deringer this year raised fundamental questions about the role of solicitors in the 21st century. Are they professionals, expected to loyally put the interests of the client first, or are they businessmen entering into commercial relationships with their clients on an equal footing? Nowhere is the divergence between these alternative models more acute than in relation to the thorny issue of conflicts.

M&S has a policy of instructing various firms of solicitors, including Freshfields. The businessman Philip Green and his company Arcadia were proposing to make a takeover bid for M&S and instructed the firm. M&S sought an interim injunction on the grounds of both conflict of interests and confidentiality. The matter came before Mr Justice Collins on 2 June 2004. The following day the Court of Appeal refused permission to appeal.

As regards conflict of interests, the courts applied the broad fiduciary principle of loyalty. Generally, a firm of solicitors may not act for two clients whose interests actually or potentially conflict, such as in Bristol & West Building Society v Mothew (1998). In some cases the conflict can be avoided by limiting the scope of the retainer and/or by obtaining the informed consent of both clients (see Clarke Boyce v Mouat (1994)). However, that is unlikely to work unless both clients cooperate. The obligation of loyalty generally ends with the termination of the retainer. What is unusual about the Freshfields case is that M&S continued to retain the firm, albeit in relation to other transactions.

As regards confidentiality, the courts applied the principles set out by the House of Lords in Prince Jefri Bolkiah v KPMG (1999). These continue to apply following the end of a retainer. Where there is a real possibility of breach of confidentiality or privilege, the solicitor will not be permitted to act. Lord Millett in the Lords was sceptical about ad hoc Chinese walls, ie information barriers created in order to deal with the particular issue which had arisen but which did not form part of the firm’s organisational structure.

In relation to both loyalty and confidentiality, the courts have accepted that there must be a real, and not merely a theoretical, risk of breach. But subject to this, both principles are absolute. Once the ex-client has established a real risk of breach, it has a right to prevent it. The only bars will be the equitable bars to any injunction (such as undue delay or acquiescence). Proportionality is irrelevant. There is no room for a balancing exercise between the prejudice to the firm (or the new client) if the firm is prevented from acting and the risk to the ex-client of breach. This reflects the traditional equitable view that the fiduciary owes an obligation of undivided loyalty.

There were several reported decisions between Bolkiah and Freshfields. The trend seemed to be towards introducing a balancing exercise and taking a more pragmatic view regarding ad hoc Chinese walls. But in Freshfields the courts appear to have returned to the stricter test. Indeed, Freshfields goes further in extending the principle of conflict of interests to other transactions which have a sufficient relationship to the transaction in question. It remains to be seen what degree of connection the courts will require, but they will probably favour the client when in doubt.

By contrast, the rules are relaxed in the case of estate agents. In Kelly v Cooper (1993), an agent acted for two neighbours who were both selling. He found a purchaser for one house but did not tell the owner of the other. Although he was held to owe a fiduciary duty to each client, the scope of it was moulded by the nature of the relationship. Each client knew, or should have known, that estate agents act for a large number of sellers, some of whom will have conflicting interests. In order to comply with his duty of confidentiality to one, a term had to be implied that he was under no duty of disclosure to the other. So we now have judicial confirmation that higher standards are expected of solicitors than of estate agents.

The relevant principles were first laid down by courts of equity in the 19th and early 20th centuries. No doubt it was never envisaged that they would be applied to issues arising between multinational companies and firms of solicitors with hundreds of partners. It might be argued that large, modern companies are well able to look after themselves. They do not need to rely on principles which equity devised for widows and orphans. As firms become larger, it becomes more difficult to avoid the risk of breach. The risk extends to different departments within the same firm, and even to different offices in different countries. It does not sit easily with the modern trend for solicitors to move from one firm to another and for firms to merge. In this respect, the bar, with its prohibition on partnerships, has a real advantage.

The contrary argument is that the principles of loyalty and confidentiality are at the heart of what distinguishes professionals from businessmen. In order to keep professionals up to the mark,
the courts will not compromise these principles. A firm has considerable freedom in choosing its clients and agreeing a charging rate. But having accepted a retainer, the firm is then under a duty to put the client’s interests first. The moral of the story is that firms will have to tighten up on their internal conflicts procedures before they agree to accept new clients.

Finally, there is the impact of the Guide to Professional Conduct. One might have expected the Law Society’s professional rules to reflect the general law. Instead, the current Chapter 15 lays down a rigid rule which prevents a solicitor from acting where there is an actual or potential conflict of interests, even if they have the informed consent of both clients. It also says that Chinese walls are unlikely to be effective, save on the merger of two firms. There is no mention of Bolkiah. It is no wonder that the Law Society is currently considering revisions to the guide.

David Halpern is a barrister at 4 New Square, Lincoln’s Inn, specialising in professional negligence and chancery work