LAW SOCIETY RULES AND LEGAL PRINCIPLES: THE DEBATE

In chapter 2 we saw that the Law Society adopts a preventative stance in rela­tion to conflicts of interest. Rather than allowing solicitors to ‘manage’ conflicts by reference to specific guidelines, the rules prohibit firms from acting where there is or may be a significant risk of conflicting interests.

As one commentator has observed, however, rules of this nature have

drawn their inspiration and vitality from relatively simple relationships and dealings in which the relevant actors were natural persons usually known to each other and in which the business or professional function of the person subject to fiduciary duties was of a known and limited character and was geographically confined.^[451]

Relationships between solicitors and their clients have undergone fundamental changes over the last 50 years. Firms have grown dramatically in size; competi­tion has increased; solicitors are more mobile; clients seek specialist advice in increasingly complex areas of law; and they often use more than one firm.

The Law Society has recognised that existing rules can be criticised on a number of grounds. For example, it can be argued that the rules fail to reflect modern business practices, and, in particular, that they do not reflect the needs of large corporate clients.

The main thrust of the working party’s proposals were as follows:

1. to define ‘conflicts of interest’;

2. to take the duties of confidentiality and disclosure outside the conflict rule and deal with them in the rule on confidentiality;

3. to place outside the definition of conflict certain specific situations which might be considered as involving minor, or potential, conflict;

4. to introduce the idea that in situations of minor or potential conflict a solic­itor may continue to act with the client’s consent; and

5. to examine whether or not a solicitor who acts personally for any party in litigation can act against that party in an unrelated matter.⁸

With these aims in mind, the working party proposed the following definitions, effectively limiting the circumstances in which there would be, as defined, a con­flict of interest.

1. It was proposed that there would be a conflict if:

(a) a solicitor 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 will conflict; or

(b) a solicitor owes a duty to act in the best interests of any client in relation to a matter and that duty conflicts, or there is a significant risk that it will conflict, with his own interests in relation to that or a related matter; or

(c) a solicitor acts personally for one party in litigation (or another form of dispute resolution) and acts personally for an opposing party in those proceedings in an unrelated matter.

2. No conflict would exist for the purposes of 1(a) above if:

(a) the different clients have a substantially common interest in relation to that matter or a particular aspect of it, and the conflicting interests of these clients are substantially less important to all of them than their common interest, and it is unlikely that a subsequent dispute will arise between those clients; or

(b) there is no contractual or other cause of action between the clients whose interests will or may conflict in connection with that matter, and there is no significant risk that such a cause of action will arise;

and it is reasonable for the solicitor to act for all those clients in relation to that matter in all the circumstances.⁹

3. A solicitor who himself holds information confidential to a client or former client must not put such confidentiality at risk by himself acting on any mat­ter for another client where the confidential information might reasonably be expected to be relevant.

⁸ RRWP report at 16.

⁹ Any solicitor relying on this exception must be able to demonstrate that he has drawn all the relevant issues to the attention of the clients by notice in writing and that those clients are of full capacity and possess the experience and ability to understand the issues and exercise their own inde­pendent judgement in relation to them.

4. A solicitor working in a firm may act on a matter where confidential informa­tion held, or to be held, by another member of the same firm for a different client, former client, or prospective client would be relevant to the retainer provided:—

(a) adequate safeguards are put in place to protect the confidentiality of the information held, or to be held, on behalf of the other, or former, client or prospective client;^[457] or

(b) the other client, being of full capacity and possessing the experience and ability to understand the issues and exercise their own independent judgement in relation to them, has agreed in writing to the arrangements.

If implemented, these proposals would significantly alter the current position with regard to conflicts of interest. For example, provided certain safeguards were in place, firms would be able to act against former clients without their consent. Solicitors would also be able to act for two or more parties in the same matter where the parties give their informed consent, and on separate matters without specific consent.

Following the working party’s report, the Law Society, through its Regulation Review Working Party (RRWP), drafted a consultation document^[458] which summarised the above proposals and offered them as a possible template for a revised set of rules governing conflicts of interest. Then, at the conclusion of this consultation exercise, the Law Society Council, at its meeting in January 2002, approved in principle the approach proposed by the RRWP. However, rules governing conflicts are as yet unchanged. The intention, apparently, is to undertake further work on a possible re-drafting of the rules and, thereafter, to consult the profession yet again in respect of this proposed re-draft.^[459]

It is a feature of both the City Solicitors’ Working Party Report and the sub­sequent consultation document prepared by the RRWP that they canvass pos­sible options for reform of the rules, but do not attempt a thoroughgoing review of the underlying issues. This gives a sense that solutions are being sought to a problem that remains ill-defined and only partly articulated. The most funda­mental question, one could say, is still to be answered: should commercial inter­ests, whether of the solicitor or the client, be a factor when determining the rules governing conflicts of interest? The courts have recognised that the changed environment within which solicitors operate should be taken into account when reviewing the solicitor-client relationship.^[460] They have nonetheless concluded that confidentiality needs to be maintained in order that clients may have the confidence to disclose all relevant information.^[461]

In determining the appropriate balance between preserving confidentiality and permitting solicitors to meet the needs of their commercial clients in an increasingly specialised legal environment, the courts have distinguished between different types of conflict of interest.^[462]

1.

Where the conflict arises because a firm seeks to act against a former client, the courts have determined that the overriding principle should be the protection of confidential information.^[463] Although there is no absolute rule prohibiting a firm from acting against former clients, the courts will intervene to prevent this from happening unless all risk of inappropriate disclosure has been eliminated.^[464] It appears that the only way in which a firm can satisfy the court that such risks are eliminated is by having in place a pre-existing system of Chinese walls.^[465] As was explained above, this is not a viable option for most firms.^[466]

2. Simultaneous Representation

If a firm wishes to act in the same matter for two or more clients whose interests may potentially conflict, then the courts accord much more weight to the clients’ right to retain the solicitor of their choice.^[467] Provided informed consent is obtained from all involved, there is nothing to stop firms from taking on such work. Where the conflict arises because a firm wishes to act for two or more clients with potentially conflicting interests in separate matters, the courts have taken the principle of consent one step further. It has been held that if a client instructs a firm knowing that, because of the nature of that firm’s business, it is likely that his interests will conflict with the interests of another of the firm’s clients, then the client’s consent is impliedly given to the firm for it to continue to act for both parties.^[468]

Commercial considerations, therefore, have been accorded a lesser impor­tance in successive representation conflicts, but have been deemed to be overriding in simultaneous representation conflicts. Have the courts got the balance right? Alternatively, has the Law Society been correct to ignore changing commercial patterns and, at least for the present, to maintain a blanket prohibition on firms acting in conflict situations?

In considering these issues it is necessary to distinguish between successive and simultaneous conflicts, even though some of the points raised may be applicable to both.

3. Allowing Successive Representation: Arguments For and Against

There is no doubt that information given in confidence to solicitors by their clients requires protection. This stems not only from the general need to main­tain client confidentiality, but also because of the practical needs of the practice of law and the administration of justice.^[469] As one judge has put it: ‘The freedom for a client to divulge its affairs to its solicitors in confidence is an important fac­tor in the public interest and underlies the fiduciary relationship of solicitor and client... Knowledge that information which is imparted will be kept confiden­tial and not placed at risk of disclosure to others reassures the client and leads to the free and full exchange of information essential for the conduct of legal affairs.’^[470]

Against this, it has been suggested that for a firm to be disqualified from act­ing against a former client where it cannot be demonstrated that there is a gen­uine risk of disclosure, creates a standard which flies in the face of commercial reality.^[471] Accordingly, the test adopted by the House of Lords in Bolkiah v KPMG^[472] has been considered by some to be too strict and to result in unjusti­fied impediments to the way large solicitor firms and major commercial clients conduct their business.^[473]

At present, once a former client has established that information of a confi­dential nature was at some stage passed to a law firm, that firm will be disqual­ified from acting against that client unless it can be shown that all risk of disclosure has been eliminated. This rule takes no account of the nature of the information held, or of the extent of the harm which may be suffered by the former client should the information be disclosed. Therefore, as was seen in the case of Re a Firm of Solicitors (1999),^[474] although it is not enough for a former client to make a general allegation that his solicitors are in possession of relevant confidential information, the burden of proving such possession is relatively easily satisfied. In that case Walker J acknowledged that the former client was not in a position to identify any specific relevant information. He nev­ertheless was prepared to

draw the inference that some of the existing (or future, if the dormant file revives) information imparted by the [former client] to the solicitors acting on behalf of the [existing client was] or may be relevant to the proceedings.^[475]

One commentator has argued that disqualification in these circumstances ‘is an excessive sanction for a concededly non-existent impropriety’ and that ‘the mere appearance of impropriety is too slender a reed on which to rest a disqualifica­tion order except in the rarest of cases.’^[476]

It can be argued, on the other hand, that a presumption of risk is appropriate given that firms are seeking to act against former clients without their consent. As Ipp J has pointed out:

Even if confidential information is not used against a client, the opponent would be granted a psychological benefit over the former client which could have a real preju­dicial effect in the person’s state of mind and demeanour.^[477] In such circumstances it might be considered appropriate that firms should bear the burden of having to prove that no harm would result to the former client.

Does a rule requiring solicitors to show that all risk has been eliminated ‘cre­ate an unrealistic standard for the protection of confidential information which would create impediments in the way... large international firms conduct their practice’?^[478] The size and scale of operation of large international firms is such that the number of former clients is enormous. It must also be remembered that solicitors frequently move between firms,^[479] clients often spread their legal work between a number of firms,^[480] and the number of firms offering services in cer­tain specialised areas of law can be quite limited.^[481] If the only manner in which adequate protection can be offered to clients is by establishing permanent Chinese walls within firms, such a standard of protection will make life very dif­ficult for solicitors. An established system of walls could undermine many of the benefits associated with practising as a large firm.

It is not only the firm of solicitors which may be disadvantaged by such a rule. Clients may lose out as well. As one commentator has observed:

... against this danger [of the risks to former client confidences] must be weighed the public interest in larger and better-equipped law firms able to handle substantial trans­actions, and in persons being able to choose their advisers. If legal controls on such sit­uations are too rigorous, firms may too easily become disqualified and the choice available to litigants and others much reduced; perhaps more important, litigants may too easily have to meet the considerable expense of instructing new firms.^[482]

It has been suggested that a better approach would be to allow firms to continue to act if they had taken all reasonable measures to protect confidences and, fur­thermore, if the disclosure of information were not probable.^[483] In that case, the test for safeguarding confidential information might be similar to that advo­cated by Lord Woolf in the Court of Appeal decision of Bolkiah v KPMG, namely:

1. Is there confidential information which, if disclosed, is likely to affect the for­mer clients’ interests?

2. Is there a real risk that confidential information will be disclosed?

3. Does the nature and importance of the former fiduciary relationship mean that the confidential information should be protected by means of the court exercising its discretion and intervening?

The advantage of this more relaxed approach would be that former client con­fidences are offered protection, whilst at the same time some account is taken of the commercial environment.

Not all are agreed, however, that the principles which have traditionally governed the fiduciary relationship should be modified in order that lawyers’ practice may accord with commercial reality. Some maintain that even if the test laid down by the House of Lords in Bolkiah v KPMG creates difficulties for the way in which large firms operate, it is fundamentally important that the legal profession adheres to the highest possible ethical standards.^[484] Moreover, if impediments are created for large firms, this is not necessarily a bad thing. For some, the creation of the mega-firm is seen as a threat to the ethical standards upon which the legal profession rests.^[485] The fact that it is often these large firms which are contending that ethical standards ought to be relaxed could be seen as lending weight to this argument. In other words, the mega-firm is seeking to operate as an independent commercial entity in much the same way as do its larger customers. In these circumstances the practices, and the underpinning values, risk becoming those of the commercial world rather than those of the legal profession.

Is it possible to reconcile these differing views and so to maintain high ethical standards whilst allowing commercial developments to be taken into account? The manner in which the courts have dealt with simultaneous conflicts suggests that there are possible solutions to these dilemmas.

4. Allowing Simultaneous Representation: Arguments For and Against

The starting point in explaining the courts’ different approach to these types of conflict could be said to derive from the basis of the courts’ jurisdiction to inter­vene on behalf of clients. The position was clearly expressed by Lord Millett:

[With regard to a former client] the court’s intervention is founded not on the avoid­ance of any perception of possible impropriety but on the protection of confidential information... It is otherwise where the court’s intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting in the opposite interest. His disqualifica­tion has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation.^[486]

It can be seen therefore that with simultaneous conflicts the courts are not concerned to protect confidential information, but to uphold the fiduciary rela­tionship between solicitor and client. In these circumstances the courts accept that the duty owed to a client by the solicitor may be varied by agreement. Thus the key factor is consent. The thinking behind allowing a firm to act for two clients in these circumstances is presumably that clients would not give consent if they felt that their interests were compromised. If no consent is obtained then the firm would be in breach of its fiduciary duty and the court could intervene if necessary. Yet, even though consent must be obtained, this approach has been deemed undesirable. This rests on a view that ‘the duty of loyalty is, of course, the essence of the fiduciary relationship.’^[487] How can a firm do justice to two par­ties’ interests where the possibility exists that those interests will, at some point in the future, conflict? One commentator has observed:

It seems to me that the practice of a solicitor acting for both parties cannot be too strongly deprecated. It is only because of the possibility that something may be wrong in a transaction, or may go wrong during its implementation, that the employment of highly trained professional people at professional scales of remuneration can be justi­fied. To scrutinize a transaction to discover whether something is wrong in a way that may affect his interests, or to notice and deal with something that goes wrong during the transaction, is what a party employs such a person for. He is entitled to assume that that person will be in a position to approach the matter with nothing [in mind] but the protection of his client’s interests against [those] of the other party. He should not have to depend on a person who has conflicting allegiances and who may be tempted either conscientiously or unconsciously to favour the other client, or simply to seek a resolution of the matter in a way which is least embarrassing to himself.^[488]

It may, however, be argued that the courts ought to allow dual representation because otherwise some clients will be disadvantaged. For example, the cost of legal representation is likely to rise, the scope for ‘conflicting out’ purely to gain a strategic advantage will increase, and there is likely to be increased delay. As Shapiro has noted with respect to US law firms:

By encouraging downsizing, boutique practice, and divesting of specialisations, [the rules] may be limiting economies of scale and, thereby, increasing the cost of legal rep­resentation. By discouraging lawyers from acting on behalf of multi interests, the rules increase the need for multiple lawyers and, thereby, the cost of resolving disputes or facilitating transactions. Indeed, in some instances, the increased cost results in the denial of legal representation entirely for some clients. The rules also limit clients’ choice of lawyers, in some instances compelling the clients’ own experienced lawyers to refer their case elsewhere because of conflicts; in others, restricting access to experts because they have been conflicted out by the clients’ competitors or adversaries. The need to get these new unconflicted lawyers up to speed once again increases the cost of legal services and probably reduces the efficacy of representation... The rules also encourage strategic efforts to conflict out one’s adversaries’ law firm by contriving facades of responsibility or inciting disqualification battles in which assertions of responsibility are made purely for strategic outcomes. Again, these strategic activities increase the cost of legal representation and contribute to delay in the legal process.^[489]

The question therefore becomes one of whether legal principle overrides economic considerations even if this means that some clients are adversely affected. Of course it is also not in firms’ commercial interests to be restricted from acting in simultaneous conflicts. In this respect there may be some danger in permitting firms to act on the sole proviso that informed consent has been obtained from their clients. In these circumstances firms may be tempted to place their own interests first. Nicolson and Webb have pointed out that this test is vulnerable in that it contains elements of circularity:

It was said that lawyers must disclose material facts. Consequently informed consent means consent given in the knowledge of the material facts.... The courts have been at pains to suggest that materiality is assessed in the light of what clients want. This rather overlooks the fact that what they want will depend on what they know, which in turn will depend on what their lawyers have told them.^[490]

These problems are compounded when one considers implied consent in rela­tion to separate matter conflicts. It would cause difficulty if consent could not be deemed to be given in such circumstances. For example, a large firm specialising in commercial work is bound to be instructed by many companies, some of which would be greatly advantaged by learning of other clients’ business strate­gies. It would be unrealistic to obtain express consent from each client to every transaction because a conflict might occur without the firm even realising it. Against this, some clients may not realise that their law firm is acting for a com­petitor. Other clients may feel unable to have a full discussion with their solici­tor if the firm is under no duty to ensure that measures are in place to protect the confidentiality of the information which is being given.

It is for these reasons that the Law Society currently prohibits members from acting in conflict situations. Much can be said for this approach, even if it takes no account of the changed commercial environment. On the other hand, what harms result from allowing firms to follow their commercial instincts? These were questions which I posed in the course of my empirical investigations.