SELECTING THE MEASURES (IN THEORY)

All the above measures are designed to ensure that information received from clients remains confidential. Each option, however, has different strengths and weaknesses. Some offer a substantial degree of physical protection, whilst others work entirely on trust.

On one view the decision should be determined by the type of conflict. In the previous chapter it was suggested that conflicts of interest fell into three cat­egories:

1. Direct conflicts:

a)clients directly opposing each other;

b)clients’ interests directly conflicting;

2. Common-goal conflicts;

3. Confidential information conflicts:

a)information on former clients;

b)information possessed by new staff;

c) existing client reveals information relevant to another existing client.^[431] Certain types of conflict may be deemed more ‘acute’ than others and thus, perhaps, to require more stringent measures. One might expect that, in general, the more directly opposed the parties or their interests, the greater the need to segregate all documents and personnel relating to those clients. There are at least five reasons why this may be so:

1. Any leak of confidential information could provide the other side with a sub­stantial advantage. If, for example, a firm is representing two rival bidders, knowledge of, say, the other side’s ‘bottom line’ is bound to benefit one client to the detriment of the other.

2. In a direct conflict, where the interests of the two parties are directly opposed, one or other of the parties is more likely to raise objections if they consider the measures employed to be inadequate. Moreover, as the outcome of a direct conflict will usually result in one client losing to the other, if there is any indication that confidentiality has been breached it is more likely that action will be taken against the firm.

3. Where two parts of the same firm are competing directly against each other there may be a greater temptation for someone in the firm to obtain access to confidential information held by the other side.

4. Where there is a direct conflict the case is on-going and, therefore, will gen­erate more documents and more information as it progresses.

5. Where a firm acts in a direct conflict situation, third parties may take an interest in the case. In these circumstances not only must both clients’ inter­ests be adequately protected, they must be seen to be protected.^[432]

Some of the above points are also applicable to confidential information con­flicts. It could be said that such conflicts are likewise acute and require physical barriers to be in place. However, where one client’s case is no longer active (for example, where the firm holds confidential information on former clients, or such information is possessed by new members of staff) lesser measures may be appropriate. This is because the information in question is clearly identifiable and no further information or documentation is likely to be generated.

With common-goal conflicts even these safeguards may not be necessary. This is because much more information will be held in common by the parties. They will be working together rather than in opposition, and the degree of trust between them can also be expected to be greater.

Other factors may also play a part in determining which measures firms should adopt. For example, the number of fee-earners involved may be a factor. If, say, the case involves only two fee-earners, one representing client A and one representing client B, it may be possible to rely on a simple agreement that they will not communicate with one another. If, on the other hand, many fee-earners are involved, the risk of information being leaked is far greater and in these cir­cumstances it may be more appropriate to impose physical and/or electronic barriers.

Another key consideration will, of course, be the client’s view of the matter.

An additional concern for firms when considering these issues is whether their methods of protection will ever be challenged, whether this be by another law firm or by one of their own clients. This may be of particular concern if a firm chooses to act in a conflict situation without the consent of all parties. For exam­ple, if the firm acts against a former client without his consent, an agreement not to discuss the case and storage of relevant papers may be insufficient to allay the concerns of the former client. That client may then decide to challenge the firm and, in these circumstances, it would appear that only a properly-maintained wall could be relied on in court.¹⁶

SELECTING THE MEASURES (IN PRACTICE)

Only the large City firms appeared to make a distinction between the different types of conflict and the options available to them. For this reason the practice of these firms will be considered separately.

1. Large City Firms

The various measures employed by these firms were explained by one managing partner as follows:

Sometimes we will use a full-scale Chinese wall whereby there is total separation of personnel. More often though, we use ‘mini walls’ or cones of silence. In these cases, there is no physical separation but all relevant fee-earners are warned not to discuss the matter with so-and-so, and the papers are not made generally available. Alternatively, if it’s just a case that one person within the firm has at one time or other acted for a client and we are now acting against them, the relevant papers will be put away securely and if that fee-earner is still with us, he will undertake not to discuss the matter with anybody else.¹⁷

¹⁶ Above at 39.

¹⁷ Firm 29.

The above full-scale walls are distinguished from a variety of other devices. It may be helpful at this point to define exactly what was meant by a ‘full-scale’ and ‘mini’ wall and to review the protection afforded by such devices.

i. Full-scale Chinese Walls

Most large City firms said that written procedures were in place governing how a Chinese wall should operate. Firm 3 provided one example of the template which is meant to be adopted:

—Each party gives informed consent in writing to the firm.

—Each party expressly consents in writing to the structure, organisation and maintenance of the Chinese-wall arrangement (such arrangement having been fully disclosed in writing to each party).

—An explanation is given by the firm to each party of potential risks associated with the wall arrangement.

—The firm gives a commitment not to favour one party to the detriment of the other.

—It is a condition of the retainer with each relevant party that the firm shall cease acting for all parties where any party, at any time during the retainer, requests in writing the firm to do so.

—Separate departments (and sub-departments within specialist departments) of the firm are located as far apart as can be reasonably achieved on separate sides of the wall (hereafter departments A and B respectively).

—No practitioner outside department A or B is to work on the relevant trans­action.

—All members of departments A and B, and all other relevant members of the firm, are informed in writing at the outset of the transaction and reminded at regular intervals thereafter of the rules of the wall arrangement and the requirements of confidentiality within and outside the firm.

—There is control of all documentation, property, know-how and other information, whether on the firm’s computer system or otherwise, and whether archived or non-archived, relating directly or indirectly to the trans­action.

—The firm’s computer system is set so that documents connected to the trans­action on one side of the wall are not accessible to any member of the firm or members of the relevant department on the other side of the wall, other than to persons employed or contracted by the firm as information-technology specialists.

Whilst this outline appears at first sight to accord almost exactly with the mea­sures set out by the courts and Law Society, there are some significant differ­ences. First, there is no independent supervisor. Secondly, there is no on-going educational programme for staff. Thirdly, and most fundamentally, these walls are created ad hoc. Although my interviews with firms were conducted before the House of Lords decision in Bolkiah v KPMG, it is unlikely that their stance will have altered significantly.^[433] There are two reasons for this. First, firms were well aware that the courts did not approve of solicitors’ use of Chinese walls prior to the House of Lords’ judgment.^[434] Nevertheless they persisted in that use. Secondly, the nature of legal practice does not lend itself to a regime whereby different departments are segregated by ‘walls’ on a permanent basis. Lawyers are accustomed to working as a team, sharing ideas and calling on each other for advice.^[435]

Though firms erected walls ad hoc, this was not to say that they were not secure. Furthermore, it was asserted that clients were briefed fully beforehand on the measures which would be employed and would be asked to give their consent in writing before the firm would agree to act. Firm 29 demonstrated how difficult it would be for any member of the firm to breach a wall con­structed in this way:

Each floor of our building is access-protected. So you can’t move around the building without your card for the proximity readers. When there is a wall in place, your access will be restricted. Although we don’t have independent supervisors, our conflict offi­cers would reserve the right to make personal inspections of both sides of the wall.

Even where there were no electronic barriers in place, Firm 14 observed that clients were usually happy to agree that physical barriers prevented movement of information and that staff could be trusted not to breach the wall:

Most clients are prepared to say, if you’ve got a wall in place, they are happy for the firm to act for both.

ii. Mini Walls

Firm 15 described what might be involved in a ‘mini’ wall:

Either an individual fee-earner will be appointed to work for each client or a team of fee-earners (depending on the complexity of the case). Of course, if there is a need for secrecy, the papers will be kept separately and all involved will keep the affairs of their particular client to themselves. There is no physical separation. It is all worked on trust. If you like, I suppose you could say that a system of mini-walls operates.

As defined, this so-called ‘mini’ wall is substantially different from a full-scale Chinese wall. As there is no physical separation of the fee-earners, the risk that information will be leaked, advertently or inadvertently, is presumably greater. The senior partner of firm 15, quoted above to the effect that everything works on trust, was the same senior partner who would not tell his fellow partners that the firm had been approached to act in a hostile take-over bid for an existing client of the firm.^[436] His argument then was that he could not be entirely sure that the partner whose client was to be subject of the bid would keep the informa­tion secret. He therefore appeared to be saying that he would trust his staff to maintain confidentiality in one instance, but he was unsure that they would not breach it in another. Arguably, there is a difference between the two circum­stances as, in the former, the partner would have to be deliberately dishonest in order to gain information, whereas in the latter he would already be in posses­sion of the information. However, a partner who has knowledge that he is not supposed to use may find it difficult to judge the matter objectively. It is always possible that the temptation to use information to the benefit of his client may prove too great.

Another concern about the ‘mini-wall’ relates to the degree of understanding which clients possess. As no details of the procedures used for erecting a wall appeared to be given to clients in these circumstances, it seems doubtful that clients will be fully aware of what is going on within the firm. They may believe that they are approving a complete Chinese wall, whereas what they are in fact agreeing to affords them rather less protection. Firms, however, argued that this was not the case, essentially because their clientele comprised experienced com­mercial operators. As one managing partner put it:

Our clients recognise that we have to operate in this fashion as it is a natural conse­quence of today’s business world. There are undoubtedly going to be conflicts. They are sophisticated clients who understand the score. They will often have in-house legal teams advising them. So we are often dealing directly with another lawyer. There is no way they would agree to such arrangements if there were any cause for concern.^[437]

When these firms were asked whether they were ever concerned about informa­tion being transferred between fee-earners working for different sides in the same matter, typical responses were as follows:

Once you lay down the rules, people abide by them. You have to remember the cul­tural approach of our type of practice. We are doing price-sensitive activity all the time. At any one time, we’ll have a number of transactions which are stock-exchange sensitive. People recognise that they have to be discreet. They don’t sit around saying ‘I’m doing such-and-such a take-over’. So it is the kind of environment we operate in.

There is always the risk that someone will say something inadvertently but where a wall has been established, this is unlikely because everyone is alert to the dangers.^[438]

With the number of fee-earners we have, you will often be on the opposite side of a transaction to someone you hardly know. It is, therefore, most unlikely that solicitors will discuss the case socially.^[439]

These firms argued that to breach any walls that were put in place would disad­vantage both the fee-earner and the practice as a whole. After all, one of the pur­poses of acting in a conflict situation is to maintain an on-going relationship with both sets of clients. If trust is breached it is unlikely that the firm would be asked to act again. As one observed:

Even if somebody on the right-hand side of the wall found something out about the left-hand side, he simply wouldn’t use it. After all, he wouldn’t be doing himself any favours in the long run.^[440]

Perhaps the critical issue is how firms select which measures to use when faced with a conflict. Large City firms were generally clear that this would be deter­mined by the type of conflict:

If it is a direct conflict, that is where clients’ interests are directly opposed, then you need a full-scale Chinese wall. In such cases there is a greater need to ensure confiden­tiality. Moreover the clients demand it. But where you have acted on something a long time ago and now are instructed to act against that client, lesser measures can be adopted. We just make sure that all relevant paperwork is securely stored and that anyone who acted for the former client has nothing to do with the new case. Similarly, where the conflicts are less acute, there is no need for a proper wall to be erected. You can use ‘mini-walls’ whereby Mr X would act for client A, Mr Y for client B, and so forth. Mini-walls would be used if all clients party to a project wished us to act for all of them.^[441]

It would appear therefore that large City practices perceived the measures required when acting in a conflict situation to be determined by what they deemed to be the severity of the conflict and, secondly, by the views of their clients. They regarded physical separation as necessary when the clients’ inter­ests were directly opposed, but a full-scale Chinese wall was not thought to be necessary when, for example, acting in a common-goal conflict. As one manag­ing partner explained:

If all parties to a deal want to get the documentation sorted out properly but are in agreement as to what the basic terms will be, there is no need to erect a full Chinese wall. In fact, no physical measures need be taken. This is not to say that each individ­ual party’s interests will not need protection. But such protection can be afforded by appointing particular fee-earners to be responsible for each client.^[442]

Arguably this approach matches the legal requirements in that the firm ensures that all clients agree to it acting. It circumvents the conflict by relying upon client consent. In fact, by appointing individual fee-earners to watch over each party’s interests, it could be argued that these firms afford more protection to clients than the law requires.

On occasions, however, it appeared that large City firms did not seek the express consent of clients before acting in the face of conflict. This can be seen particularly with reference to confidential information conflicts. First, in relation to acting against former clients, one firm explained its procedures as follows:

Former clients are easy to deal with because you just store the relevant paperwork and tell all the people who worked on the other case not to talk about it.^[443]

Although in practice this method of isolating information may be effective, no reassurance is given to former clients that their affairs will not be discussed within the firm. Moreover, such an approach would almost certainly be consid­ered inadequate by the courts.^[444]

Large City firms also took the view that consent was not required when the conflict arose because the firm was in possession of confidential information from one client which would be of interest to another client. Nor, in these cir­cumstances, did it appear that barriers were in place to prevent information from being passed to other fee-earners. When asked to justify this, one manag­ing partner explained that such consent was deemed to be implicit when certain clients gave their instructions:

We are particularly well-known as a banking practice. In fact, we act for well over one hundred banks. Of course, their interests are going to conflict, but these clients realise that when they come to us. They know we will already be acting for several of their rivals but that is taken for granted because there are only so many solicitors firms who can offer the expertise which they require.^[445]

Firms which adopted this approach admitted that, from time to time, they had received complaints. One partner explained what usually happened on such occasions:

If the client complaining is a valued and important client then we will have to weigh up our options and decide whether it would be better for us commercially to drop the other client. Usually such complaints arise not because concerns are raised that information will be leaked in the firm, but because that client is unhappy about us act­ing for that particular competitor.^[446]

In other words, some clients expect loyalty, defined in terms of exclusivity, from the solicitors they instruct. If this is not forthcoming, they are inclined to go elsewhere.

iii. Conclusion

Based on my interviews, the approach of large City firms to acting in the face of conflict can be summarised as follows:

a) different devices were used depending on the nature and degree of the con­flict;

b) the most physically secure devices were employed only where there was a direct conflict;

c) mini walls were used for common-goal conflicts;

d) where firms faced a confidential information conflict concerning a former client, ‘storage’ was the method typically employed;

e) for confidential information conflicts arising because one client imparted information which was relevant to another client, no measures were employed;

f) prior consent to the above arrangements was obtained in most circum­stances, but not when a firm was acting against a former client, or when the firm was in possession of information from one client which might be con­sidered of interest to another client.

2. The Remaining Practices

It appeared at first that little if any distinction was made by the remaining firms between the type of conflict facing the practice and the nature of the measures employed. A typical response was to the effect that ‘where we act in any conflict we always erect a Chinese wall.’ However, as will be demonstrated below, it appeared that the term ‘Chinese wall’ was a label employed by these firms to describe almost any form of isolation procedure. In other words, no distinction was drawn between a Chinese wall, as defined by the courts and Law Society, and an undertaking by one partner not to reveal information in his possession. Both were subsumed under the one heading of ‘Chinese wall’.

By way of example, the following definitions were used by these firms to describe what was meant by the term ‘Chinese wall’:

—an agreement between the partners involved not to talk about a case;

—an understanding that no-one looks at each other’s papers;

—separate teams;

—two members of the firm treating each other as if they were in different offices.

The label attached to the measures taken by these firms may be immaterial. It is the effectiveness of the steps taken to isolate information that matters. To this extent the national firms within this group enjoyed an advantage because they had, in effect, an in-built system of Chinese walls. As these firms had several offices in different parts of the country, they did not have to take any physical steps to erect Chinese walls. Firm 30 described how this worked:

Different offices sometimes act against each other. There are, of course, different per­sonnel, and each office has its own computer system which cannot be accessed by any of the other offices. There is, therefore, complete physical separation of fee-earners, paperwork and support staff. There is never any danger of the wall being breached, because it is as if we are dealing with a separate firm. Moreover, from a practical point of view, the offices are sometimes situated hundreds of miles apart and, more often than not, we do not know the fee-earners in the other offices.

It can perhaps be said that these large multi-office practices adopted the safest possible procedures when they acted in such a way, as these walls were not cre­ated ad hoc but existed as a matter of course. However, Firm 30 added:

We sometimes erect a Chinese wall within a single office. This happens where one office is keen to keep the work generated by both clients. Although we have one profit­share agreement between the offices, we are quite competitive with each other.

Where this happened, national firms were on a par with other practices. These one-city firms did not have an in-built system of walls, relying in effect on infor­mal mechanisms. All walls were constructed ad hoc and no written guidelines were available to clients. Again, definitions as to what constituted a Chinese wall varied quite considerably. Firms 17 and 18 appeared to have the clearest procedures:

We assemble all the parties and stress that strict confidentiality procedures apply. If communications are necessary between the different sides of the wall, then they are to be made through a third party. Any post which comes into the office bears a specific reference so that it does not get delivered to the wrong side of the wall by mistake. I could see that if we had a huge matter, then it might be desirable for a colleague to move to a different floor, but we haven’t found that necessary. At the end of the day, the whole procedure is operated on trust. You don’t look at each other’s documents and you don’t discuss the case.³²

We ensure physical separation to the extent that the team involved would be a part­ner, a fee-earner and maybe a wider group of people providing backup and secretarial services. The same secretary would not work on both sides of the transaction. To a limited extent, we also use codenames and we password all documents on the com­puter system so that they cannot be read by the other side.³³

Firm 20, on the other hand, appeared to have no clearly-defined arrangements:

Different sides are represented by different individuals, sometimes different offices, but even if it is in the same office, there shouldn’t be a problem. We divide our

³² Firm 17.

³³ Firm 18.

solicitors into teams anyway. So you might work in one team and not necessarily have anything to do with another team.

Firm 5 was likewise typical of the less well-organised practices, having a very loose definition of what constituted a Chinese wall:

A wall exists where two different members of the firm treat each other as if they were in different firms for the purposes of the case. Strict self-discipline is observed over the confidentiality of documents.

A similar view was held by firm 28, which maintained in respect of one conflict that:

No-one looked at each other’s papers and there was no discussion about the case.

Even less protection appeared to be afforded to clients by firm 10, as that prac­tice was under the impression that no specific measures were needed where ‘clients wished us to act, because [client consent] negates any conflict’.

In most provincial firms, therefore, it appeared that there was no attempt at physical separation and, in some instances, the same support staff were avail­able to both sets of fee-earners. Nevertheless such firms generally claimed that adequate protection was afforded to their clients:

Lawyers are trained to be confidential about their clients’ affairs. You don’t talk about clients’ business at dinner parties, and so on. So why shouldn’t you continue to meet socially and for lunch when you are acting in a conflict? Your instincts tell you that certain topics are just off-limits.^[447]

One firm, however, provided a slightly different response, appearing to accept that the cases might well be discussed by the fee-earners involved:

You mean—do they talk about the case? I suspect that they probably do on occasions. It’s only natural. But there is a senior person in charge. So hopefully not too much of that goes on.^[448]

It appeared that these firms were actually relying upon ‘cones of silence’ rather than Chinese walls, and that the term ‘Chinese wall’ was a catch-all term applied to protective measures of all types. This falls far short of the physical protections commonly understood to be implied by the term Chinese wall, but often the size of these practices meant that physical separation was impractical. As one managing partner explained:

We do not have the premises to separate physically teams of solicitors and support staff permanently. Also, it would not be a good use of resources to adopt such a structure.^[449]

Even though no physical protection might be provided by these firms to safeguard confidential information, client consent would be sought in some circumstances before deciding to act. Provided such consent was given, these practices could be said to be complying with legal requirements. However, as with large City firms, questions may be asked about the degree of understand­ing which clients possessed when they agreed to such devices being employed. It might be supposed that some of these clients were less sophisticated than the clientele of large City firms, and by and large would not have their own legal departments from which they could obtain independent advice. So what did these firms consider amounted to informed consent? Firm 30 explained how consent was usually obtained:

When clients ask what measures will be in place, we usually use the blanket expres­sion, ‘We’ll establish a Chinese wall’, because Chinese walls mean different things to different people. In reality, how much information is provided will often depend firstly on the fee-earner involved and secondly on individual clients. Some clients will require more detail than others. I suppose you could say that there might have been circum­stances when clients have given their consent in the perhaps mistaken belief that a full­scale Chinese wall will be erected and when, in reality, the only measures adopted were cones of silence.

No firm claimed to advise clients to seek independent legal advice before giving their consent. Moreover, it appeared that in respect of certain conflicts no express consent was sought from clients:

We have also acted without getting consent where a conflict exists because we have information from one client which may be of relevance to another. Consent is inferred in such cases because clients are well aware that we will be acting for some of their competitors. Express consent would only become an issue in such cases if we ended up acting for the only two players in a particular specialist field.³⁷

By and large these firms were of the view that express consent was not needed unless there was a direct conflict. The mere fact of the firm having access to information which would be of interest to another client was not, for the most part, deemed to constitute a conflict.

Conclusion

The approach adopted by firms in this group, as it was reported to me, can be contrasted with the approach of the large City firms in a number of respects:

1. there was no systematic distinction between different conflict management strategies and different conflict types;

2. much greater reliance was placed on cones of silence, and on trust, than upon physical separation;

3. client consent was sometimes sought prior to acting in a conflict situation, but this depended very much on the nature of the practice and the type of conflict encountered.