Brief History of Regulating Solicitors’ Conflicts of Interest

A. Solicitors’ Practice Rules 1990

The Solicitors’ Practice Rules 1990 contained no general rule against conflict of interests, but did contain a rule about avoiding conflicts of interest in conveyancing, property selling and mortgage-related services.³⁹ This emphasis is probably explained by the fact that avoidance of conflicts of interest in general was, like confidential­ity, considered ‘a necessary and traditional incident’ of the relationship.

i. The Solicitors’ Practice (Conflict) Amendment Rules 2004

In the wake of Bolkiah v KPMG⁴⁰ the priority of the Law Society was to clarify prac­tice on what were seen as past and present client conflicts of interest. This was not however, the only purpose. The Law Society had decided to thoroughly review all of its rules. Therefore, as part of this process, the City of London Law Society Working Party was asked to consider the whole area of conflicts.

The rules produced by the working party amended the Solicitors’ Practice Rules 1990 by adding a new sub-section, 16D. This amendment underpins the current rules and practice. The key section on past and present client conflicts provided that firms could not act when owing ‘separate duties to act in the best interests of two or more

³⁹ The Solicitors’ Practice Rules 1990, as amended to 2001.

⁴⁰ Bolkiah v KPMG [1999] 1 All ER 517 and see ch 10: ‘Confidences’. clients in the same or related matters, and those duties conflict or... there is a significant risk that those duties may conflict’.^[1720] The rules also provided that ‘a related matter will always include any matter which involves the same asset or liability’.^[1721]

Two exceptions were introduced to the ban on acting for two clients with interests in the same matter; the common interest exception and the competing for the same asset exception.

a. The Common Interest Exception

Where different clients had a substantially common interest in relation to a matter, or a particular aspect of it, the solicitor and firm could act for both.^[1722] The clients had to give their written, informed consent in relation to a matter in situations of conflict or possible conflict. For there to be common interest, a clear common purpose and a strong consensus on achieving it was needed. The solicitor had to consider whether equal weight could be given to the instructions of each client and keep that assessment under review.

The chair of the working group stated that the common interest situation might be relevant to several areas of work for City firms. These include acting for a borrower and a parent company guarantor on a financing, acting for arrangers on a note pro­gramme and, at the same time, for the trustees, acting for lenders on a syndicated loan and advising on an inter-creditor agreement between them and acting for joint venture partners in seeking to achieve a specific contract.^[1723] He envisaged that, in the event that differences arose, firms could agree arrangements to ‘carve out’ the problem area for handling by another firm.

b. The Competing for the Same Asset Exception

The rule amendment provided that two or more clients could give written consent to a firm acting where clients wish to compete for the same asset, which only one of them could attain.^[1724] This was subject to the proviso that there is no other conflict, or significant risk of conflict of interest between the parties. The chair of the working group explained that this exception is primarily aimed at two situations common in corporate practice: the public auction of a business and situations of company insol­vency and financing.

The exemption of the public auction of a business reflected City practice. Private equity houses wished to retain certain financial advisers, accountants, lawyers or other consultants, and were usually content to accept that they would act for com­peting interests, provided suitable information barriers were in place.

The other areas of work that the exception was expected to apply to concerned insolvency and refinancing. Firms could act for more than one client in competition for limited assets and potentially advise them how assets would be split in the event of the insolvency or restructuring of a company. The firm might also act for creditors on the preparation of an inter-creditor agreement, in cases where this did not fall within the ‘common interest’ exception. The Solicitors’ Code of Conduct 2007 repealed the Solicitors’ Practice Rules with effect from 1 July 2007.

B. The Solicitors’ Code of Conduct 2007

The Solicitors’ Code of Conduct 2007 provided an opportunity to consolidate the new rules on conflicts of interest into the code, with the accumulated guidance devel­oped for the Guide. This was particularly useful in determining the scope of solicitor and own client conflicts of interest.

The Solicitors’ Code of Conduct 2007, Rule 3.01 provided that solicitors must not act if a conflict of interest existed. The Rule continued to say that conflict of interest existed if:

(2) (a) you owe, or your firm owes, separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict; or

(b) your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter.

(3)... a related matter will always include any other matter which involves the same asset or liability.^[1726]

i. Solicitor and Own Client Conflicts

The obligation on solicitors not to act was limited by Rule 3.02(b) to situations where the solicitor thought there was a conflict in the same or related matter.

a. Buying from and Selling to Clients

A conventional conflict of interest arises where the solicitor, or his firm, buys from or sells, or lends, to the client, or has a personal interest in any transaction which the client is undertaking. In these cases solicitors were required to reveal the interest to the client with ‘complete frankness’.^[1727] The client had to receive independent advice from another solicitor or other professional adviser. The rule applied where another member of the firm had an interest, providing the solicitor was aware of the fact and it impaired their ability to give independent and impartial advice’.^[1728]

b. Divided Loyalty

A lawyer’s loyalty may be divided between contemporaneous clients, even though they do not have interests in the same cases. An example that is well established in the literature is where lawyers attach too much importance to relationships with opponent professionals or court officials. In such cases they may not pursue their own client’s interests sufficiently vigorously.

An analogous situation is where lawyers receive repeat work from a client. A firm of solicitors, might, for example, have close ties with the local police, one of their partners being an ex-policeman. They might handle divorces and conveyances for officers working in the local police station. Arrested suspects who know of these circumstances and arrangements might wonder whether a solicitor advising them would advise a course of action that might upset those arrangements. However, it was not clear that this was an example of conflict of interest under the 2007 Code.

c. Publishing

An example of a situation of potential conflict arises when a solicitor proposes publishing details of a client’s case. There could be financial advantages to both par­ties in this arrangement, but the situation is fraught with ethical issues.

A startling example of this situation arose in relation Frederick West, convicted of multiple murders in 1994. His solicitor was alleged to have been commissioned by a publisher to write a book about the case when it was concluded. The guidance stated that a solicitor should never enter into any arrangement relating to publication rights with the client prior to the conclusion of the matter.^[1729] This suggests there was no problem with agreeing publishing deals with clients once cases finished.

d. Personal Relationships

Lawyers are in a potential conflict of interest situation when in a personal relationship with clients. It raises the issue of whether either lawyer or client will be frank in their professional dealings when this might affect their personal relationship. The guid­ance to the 2007 Code stated that solicitors in a sexual relationship with a client must ‘consider’ whether this impaired the ability to act in the best interests of the client.^[1730]

The guidance appeared a little thin. It did not seem to reflect the spirit of Core Duty 1.04, to treat the interests of the client as paramount. It failed to deal adequately with the risk of abuse of power by lawyers in relationships with clients. If professionals claim higher standards than the norm, it might be expected that rules would preclude solicitors and barristers acting for their spouses, cohabitants or lovers or from starting relationships with existing clients. The advice also seemed to underestimate the risk that the reputation of all lawyers would be undermined if sordid allegations appeared in the press.

e. Holding an Office Creating a Risk of Conflict

The 2007 Rules stated that a solicitor must decline to act for a client where the solicitor, or a partner, employee or relative, held an office giving rise to a significant risk of a conflict of interest.^[1731] The guidance gave examples such as local councillor, judge, coroner and member of the police authority. Solicitors were told to consider whether the duties or interests of the public role conflicted with the ability to provide the client with independent advice.

The guidance gave examples of office holding that created risks of conflict of interest. They included a solicitor member of a Police Authority appearing as an advocate in prosecutions brought by the CPS in the Authority’s area. It also included the example of a solicitor, being a recorder, deputy judge or registrar, not sitting in a court in which any member of his firm regularly practised.

Oddly, the advice against solicitors holding public office seemed to be based on Core Duty 1.06, not acting to damage the reputation or integrity of the profession, rather than concern to avoid conflict of client interest. This impression was reinforced by guidance stating that the solicitor should consider whether to act where there ‘is likely to be a public perception that you, or your firm, have been able to obtain an unfair advantage for your client as a result of the office or appointment’.

f. Possible Liability of Solicitor to Client

The 2007 Code provided that, when solicitors discover a prospective claim against them, for example for negligence, clients must be informed and advised to take inde­pendent advice. When a claim was made, the Code continued, the solicitor must cease to act.^[1732]

ii. Contemporaneous Client Conflicts

a. Same or Related Matters

The formulation of the new conflict of interest rule provided scope for not find­ing conflicts of interest where they might be expected. For example, Rule 3.01(2)(a) only forbade acting where a conflict of interest between clients existed in the ‘same or related matters’. It would be easy to imagine circumstances where lawyers might not be able to do their best for two clients for whom they acted even if their current matters were not related.

The guidance recognised that the solicitor would have to make a judgement on what matters are related. For example, suppose a solicitor acts for a company in dispute with a garage over the cost of repairs to a car. If a potential bidder for the company then asks the solicitor to act for them, the work could be accepted. Although the car is an asset of the company being bid for, it is a very minor asset and the two issues are not related.^[1733] Solicitors were advised that they should get the views of their existing client if that can be done without a breach of confidentiality.

b. Exceptions

The Solicitors’ Code of Conduct 2007 included the new exceptions to contemporane­ous client conflict situations described in the previous section. The first of these was provision for acting for two or more clients where a conflict existed provided clients had substantially common interests and gave informed consent in writing.^[1734] The conflict must therefore be substantially less important to the clients than their common interest.

Under the common interest exemption solicitors could act for a number of family members in relation to family affairs, or a number of people setting up a company. It had to be reasonable to act in all the circumstances and care has to be taken to ensure that the clients are aware of the situation, capable of understanding it and not under any undue influence. Where this was in doubt, separate representation was recommended.^[1735] The solicitor had to show that the representation was reason­able, the test being whether ‘one client is at risk of prejudice because of the lack of separate representation’.^[1736] Solicitors needed to be particularly careful where a couple re-mortgaged their home.^[1737]

Rule 3.02(2) permitted a firm (but not an individual solicitor) to act for consenting clients competing for the same asset where there is no other conflict between the par­ties. The solicitor had to be satisfied the parties were of full capacity and understood the issues. It also had to be reasonable to act. This exception was specifically intended to cover ‘multi-party, complex commercial transactions where sophisticated users of legal services, who have a common purpose’ want a single firm to act for two or more parties because this would speed up the transaction or make it more efficient.^[1738]

The 2007 Rules stated that solicitors acting for two or more clients when a dispute or conflict arose between them could act ‘for one of the clients... provided that the duty of confidentiality to the other client(s) is not put at risk’.^[1739] There was no guidance on which client to choose to continue to represent in these circumstances. Subsequently, encouraged by the City of London Law Society, the SRA consulted twice, in 2008 and 2009, on further relaxations of the rules.^[1740]

The SRA consultations on conflicts concerned two situations. One involved allowing representation of multiple clients with consent, except in litigation. The other pro­posal was to allow representation of new clients without the consent of past clients where no material information was held on the past client. The first of these was not pursued. As to the second, Rule 4, on confidentiality, was amended to allow use of information barriers to protect the information of past clients with their consent and, in very limited circumstances, without consent.⁶²

VIII.