THE COMMONWEALTH

The approach of the regulatory bodies in Canada, New Zealand and Australia is almost identical to that of the American Bar Association with regard to simul­taneous transactions. All three countries allow clients to give consent to such representation.^[287] However, the reasons for allowing such representation may differ.

There are many areas of Australia... where parties have little choice but to brief the same solicitor to act for them in a transaction unless they wish to travel a great dis­tance to obtain separate advice.^[288]

In New Zealand it has likewise been claimed that clients have a more limited choice of law firm following recent mergers:

Practising mainly in Auckland and Wellington, there are in New Zealand five so- called mega-firms consisting of 50 or more partners employing a large number of staff and three firms comprising more than 25 partners... The mega-firms in New Zealand are larger per head of population than their overseas counterparts... The influence of the mega-firms in the delivery of legal services in New Zealand is immense, espe­cially in the area of commercial law. They are pictured by some as bestriding the legal profession dominating, in oligarchal fashion, the practice of law in this country.^[289]

Each of these jurisdictions offers rather more guidance than the USA as to what amounts to consent, and how such consent should be obtained. In Canada lawyers are advised to make ‘adequate disclosure to enable the client to make an informed decision’ and to

guard against acting for more than one client where, despite the fact that all parties concerned consent, it is reasonably obvious that an issue contentious between them may arise or their interests, rights or obligations will diverge as the matter pro- gresses.^[290]

The New Zealand code recommends that firms should establish systems to sep­arate information within the firm where clients are represented by different practitioners in the same transaction.^[291]

Differences emerge, however, in the approaches of these three countries to the management of successive representation conflicts.

1. The Canadian Solution

In 1991 the Federation of Law Societies in Canada^[292] was forced to re-examine its rules on conflicts of interests following the Supreme Court of Canada’s deci­sion in MacDonald Estate v Martin.^[293] That case, which has subsequently been cited with approval in other jurisdictions,^[294] concerned an application by one party in a dispute to prevent a former adviser’s new firm from acting for the other party. The Court held that the sole issue to be decided was the appropri­ate standard to be applied in determining whether the firm was disqualified from continuing to act in the litigation by reason of a conflict of interest.

In determining this standard the Court stated that it was concerned to obtain the appropriate balance between three competing principles, namely:

1. the concern of all to maintain the high standards of the legal profession and the integrity of the justice system;

2. the principle that a litigant should not be deprived of his choice of counsel without good cause; and

3. the desirability of permitting reasonable mobility in the legal profession.

After an extensive review of relevant cases at home, in the United Kingdom, the United States, and Australia, the Court concluded that the test to be applied in determining whether there was a conflict of interest was not the probability of mischief occurring, for that did not satisfy the requirement that there be an appearance of justice, but whether a reasonably informed person would be sat­isfied that no use of confidential information would occur. In determining this, the Court held that two questions needed to be answered:

1. Had the solicitor received relevant confidential information; and

2. Was there a risk that this would be used to the client’s prejudice?

Sopinka J, giving the leading judgment, thought that in response to the first of these two questions it was sufficient to show that there existed a previous fidu­ciary relationship related to the present case.

It was considered that such reasonable measures would include Chinese walls and cones of silence,^[295] but Sopinka J observed that as such devices were ‘not familiar to Canadian courts’, he expected the Canadian Bar Association to take the lead in determining whether they were effective and to develop standards for their use. In this respect he stressed that although he was not prepared to say that a Court should never accept these devices as sufficient evidence of effective screening, he did not foresee a court accepting such devices unless there were ‘exceptional circumstances.’^[296]

Although this attitude towards Chinese walls echoed that of previous judg- ments,^[297] the Supreme Court of Canada was prepared to accept that the Canadian Bar Association had the final say in the matter:

It must be borne in mind that the legal profession is a self-governing profession. The legislature has entrusted to it and not to the court the responsibility of developing standards. The court’s role is merely supervisory, and its jurisdiction extends to this aspect of ethics only in connection with legal proceedings. The governing bodies, how­ever, are concerned with the application of conflict of interest standards not only in respect of litigation but in other fields which constitute the greater part of the practice of law. It would be wrong, therefore, to shut out the governing body of a self­regulating profession from the whole of the practice by the imposition of an inflexible and immutable standard in the exercise of a supervisory jurisdiction over part of it.^[298]

The Supreme Court decided that, on the facts of the Martin case, the former lawyer was in possession of confidential information. Accordingly, sworn statements that there would be no discussion of the case at the new firm were insufficient to rebut the strong inference of disclosure.

It was not until some three years later that the Federation produced such a rule.^[299] The rule,^[300] which runs to some seven pages, is entitled ‘Rule with respect to conflicts of interest arising as a result of transfer between law firms.’ It states that:

Where the transferring member actually possesses relevant information respecting the former client which is confidential and which, if disclosed to a member of the new firm, may prejudice the former client, the new law firm shall cease its representation of its client in that matter unless:

(a) the former client consents to the new firm’s continued representation of its client, or (b) the new law firm establishes, in accordance with sub-rule (8), that:

(i) it is in the interests of justice that its representation of its client in the matter con­tinue, having regard to all relevant circumstances, including:

(A) the adequacy of the measures taken under (ii),

(B)the extent of prejudice to any party,

(C) the good faith of the parties,

(D) the availability of alternative suitable counsel, and

(E) issues affecting the national or public interest, and

(ii) it has taken reasonable measures to ensure that no disclosure to any member of the new law firm of the former client’s confidential information will occur.

The direction to firms to have regard to all relevant circumstances listed in (A) to (E) reflects the concern of the Supreme Court in Martin to obtain the appro­priate balance between competing interests. Yet the Federation, by stating that firms can act provided they take reasonable measures, has authorised the use of institutional devices—the very devices in respect of which the Supreme Court expressed misgivings. Do these ‘reasonable measures’ ensure that information will not move within a firm? Are they sufficient to protect the former client’s interests?

The Federation felt it was ‘not possible to offer a set of “reasonable measures” which [would] be appropriate or adequate in every case.’ It recommended that the new law firm should ‘exercise professional judgment in determining what steps must be taken.’ Some guidelines are included at the end of the rule.^[301] These included what might be thought obvious recommendations, such as that the transferring lawyer should have nothing to do with the case or discuss it with anyone.

—The files of the current client, including computer files, should be physically segregated from the new law firm’s regular filing system, specifically identi­fied, and accessible only to those lawyers and support staff in the new law firm who are working on the matter or who require access for other specifi­cally identified and approved reasons.

—The measures taken by the new law firm to screen the transferring member should be stated in a written policy explained to all lawyers and support staff within the firm, supported by admonition that violation of the policy will result in sanctions, including dismissal.

—Affidavits should be provided by the appropriate firm members, setting out that they have adhered to and will continue to adhere to all elements of the screen.

—The former client should be informed of the procedures to be adopted.

—The screened member’s office or workstation should be located away from the offices or work stations of those working on the matter.

—The screened member should use associated and support staff different from those working on the current client matter.

On the face of it these guidelines would protect the former client’s interest to a far greater extent than the proposals put before the Supreme Court in Martin. It is surprising however, given that the new firm is acting without the former client’s consent, that there is no insistence upon a physical barrier (unless this is the construction which we are expected to place upon ‘located away from’). Moreover, no provision is made for some sort of independent supervision to ensure the integrity of the wall.

What is clear is that the Federation of Law Societies in Canada has adopted a pragmatic approach to conflicts of interest. Rules have been drawn up which seek to protect the interests of former clients whilst at the same time reflecting the transformation which has taken place in the legal environment.^[302]

2.

These two countries have adopted an approach to the regulation of the legal profession which differs markedly from that of Canada. Rather than the regu­latory bodies of the profession having the final say over the conduct of its mem­bers, the Professional Conduct Codes of these two countries focus upon the need for lawyers to have regard to their responsibilities under the common law.

The introduction to the Code of the Australian Capital Territory specifically refers to this point:

Practitioners should serve their clients competently and diligently. They should be acutely aware of the fiduciary nature of their relationship with their clients....

The New Zealand Code also makes reference to the common law, noting the appropriate case law in the commentary which accompanies the rules.^[303] The matter is covered by rule 1.05 which states:

A practitioner must not act for a client against a former client of the practitioner when through prior knowledge of the former client or of his or her affairs which may be rel­evant to the matter, to so act would be or would have the potential to be to the detri­ment of the former client or could reasonably be expected to be objectionable to the former client.

The commentary accompanying this rule then refers practitioners to recent cases and articles on the subject.

The Australian Capital Territory Code also prohibits lawyers from acting against former clients if the ‘[lawyer] might reasonably conclude that there is a real possibility the information will be used to the [former client’s] detriment.’ No guidance is given as to what amounts to a ‘reasonable conclusion’ or what amounts to a ‘real possibility’. In both jurisdictions, therefore, it is necessary to examine case law to determine whether it is possible for a new firm to act against one of its lawyers’ former clients.

The leading authority in New Zealand is the case of Russell McVeagh McKenzie Bartleet v Tower Corporation.^[304] Here, Tower Corporation sought to restrain the firm of Russell McVeagh from acting against it in a reverse take-over bid on the grounds that, although not using the firm as its principal solicitor, it had sought advice on taxation law from its Wellington office between 1995 to 1997. During this period a partner in the Auckland office was consulted by a different client with regard to the possible acquisition of Tower. The Auckland partner spoke to the partner in the Wellington office at that time to determine whether it was appropriate for the firm to act for both clients. They concluded that there was no conflict of interest as the two matters were separate and there was no relevant information in common. The firm did not inform Tower of the potential conflict at that time as this would have alerted Tower to the fact that they could be subject to a take-over bid.

It was not until several months later, when the bid for Tower was in progress, that Tower discovered what had happened. By that time Russell McVeagh had ceased to act in relation to the taxation matter, but it nevertheless erected barri­ers to ensure that no confidential information passed between the two teams.^[305] Tower sought an injunction to prevent Russell McVeagh from acting against them.^[306]

The New Zealand Court of Appeal stated that three questions emerged from the case:

1. whether confidential information was held which, if disclosed, was likely to affect the concerned former client;

2. whether in the particular factual circumstances, viewed objectively, there was a real or appreciable risk that confidential information would be dis­closed; and

3. if 1 and 2 were answered affirmatively, whether the Court’s discretionary power to disqualify should be exercised.

In considering whether such disqualification was necessary, the Court felt it should take into account the following additional factors:

1. a person’s right to the services of a solicitor of his choice;

2. the right of a solicitor to offer his services to the public generally;

3. mobility within the profession;

4. access to specialist services and market competition; and

5. the integrity of the fiduciary relationship.

In trying to achieve a balance between these competing interests the Court rejected the notion that a lawyer could never act against a former client, prefer­ring instead what it called a ‘common sense, practical approach’. It held that:

The circumstances will dictate whether there is an unacceptable risk of disclosure of information where there is possession of relevant information. In the absence of negat­ing evidence of protection the Court will readily infer there is a risk of disclosure.

On the facts of the particular case, the Court did not consider that Tower Corporation had put forward sufficient evidence to justify disqualifying Russell McVeagh from acting against them. Although Chinese walls and cones of silence were to be viewed with suspicion, changes to the way in which the legal

profession operated made such devices an essential feature of modern legal practice:

The concepts of Chinese walls and cones of silence leave much to be desired, and can­not be allowed to obscure the realities of life and the ordinary behaviour and incidents of relationships where individuals practise together in a firm. Internal control mea­sures may nevertheless in some circumstances be appropriate and sufficient to ensure protection. Other aspects of today’s conditions must also be kept in mind. New Zealand is still comparatively small, and in some professional areas the availability of expert advice is limited. That availability should not be unduly restricted by court- imposed control or sanctions which are not required in the overall interests of justice to protect individual rights.

As one commentator observed:

What the majority has done... is [to] take a pragmatic and less strict approach than might have been anticipated from its earlier decisions. In particular, in advancing an approach that requires a balancing of the factors outlined... it has opened the way for judicial approval of the Chinese wall.^[307]

This pragmatic approach is in line with the position adopted by the Federation of Law Societies in Canada. Australian courts, on the other hand, do not appear so willing to amend the traditional duties owed by fiduciaries. The leading deci­sion in that jurisdiction is the Western Australian Supreme Court case of Littlejohn v Phillips Fox (a firm).^[308]

In 1996 Mr and Mrs Littlejohn instructed the firm of Hely Edgar to act in a dispute against Fletcher Construction. In April 1999 it was announced that the firm of Hely Edgar was dissolving and that some of the staff were joining Phillips Fox, the firm representing Fletcher Construction. The Littlejohns were informed that no-one at Hely Edgar would be able to continue to represent them and that all staff who had worked on their case and who were transferring to Phillips Fox would give written undertakings that they would maintain the confidences which had been entrusted to them.^[309] The Littlejohns were not happy with these proposals and sought an injunction to restrain Phillips Fox from acting.

Steyler J, who delivered the judgment of the Court, believed that the justifi­cation for the court intervening in such a case was founded on three principles: the protection of confidential information; restraint from a breach of fiduciary duties in the context of a conflict of interest; and the court’s control over the conduct of solicitors as its officers. He held that on the facts of the case, the first and third of these principles provided sufficient foundation for intervention. Nevertheless the Court stated that it also proposed to take into account policy considerations. These policy considerations included the following:

1. the general preservation of confidentiality and encouragement of full and frank disclosure between client and solicitor;^[310]

2. the principle of loyalty to the client (namely, whether the existence of the for­mer relationship has the potential to create in the mind not only of the for­mer client but also of the reasonable bystander a reasonable apprehension that use will be made of information provided in the course of the former relationship to the detriment of the former client);^[311]

3. the right of a client to have the services of a solicitor of choice;

4. the need to preserve mobility of lawyers;

5. the principle of whether an entire firm should be disqualified because one lawyer possesses confidential information (namely, is there a presumption of imputed knowledge between solicitors of the same firm?).

It was against this background of competing policy considerations that the Court had to decide whether the firm should be disqualified.

The test eventually adopted was that laid down by the House of Lords in Bolkiah v KMPG—that the Court should intervene unless it was satisfied that there was no risk of disclosure. Steyler J felt that such a stringent test was justi­fied by the need to ‘safeguard the proper administration of justice’, as this was ‘the most important of all the policy considerations’.

In considering whether the risk had been eliminated by Phillips Fox, the Court held:

Walls or information barriers... have not often found favour with the courts (see D & J Constructions at 122-123 per Bryson J, Effem Foods Ltd v Trade Consultants Ltd [1998] BCL 77 and Mallesons at 373]. These examples are... more than adequate to illustrate the difficulty facing any firm seeking to answer a challenge of this kind by ref­erence to an intention to construct a Chinese wall.

Although the Court was unwilling to suggest that a wall could never be relied upon, it identified the guidelines set out by Lord Millett in Bolkiah v KMPG as the minimum measures which would need to be in place within a firm. In effect, therefore, the Western Australian Supreme Court dismissed any walls which were created ad hoc. As the measures put in place by Phillips Fox were indeed ad hoc, an injunction was granted to restrain them from acting further in the case:

The ‘wall’ which has been proposed falls... short of what is required. Like that in Bolkiah it is proposed only to be established ad hoc. It will be unaccompanied by any educational programme or procedures of the kind discussed in Bolkiah. Nothing has been proposed with respect to monitoring and record keeping and nor is there any pro­posal with respect to the imposition of disciplinary sanctions.

This decision was reached even though the Court recognised that ‘a change of lawyer [would] unquestionably prejudice Fletcher Construction’^[312] and that ‘Chinese walls [might] become more important as legal talent in particular areas of expertise becomes increasingly concentrated in the “mega-firms”.’ The justi­fication given was that prejudice to the interests of one client cannot outweigh the fundamental policy considerations of the need to safeguard the proper administration of justice.

Although there were differences between the facts in Littlejohn v Phillips Fox compared to those in Russell McVeagh McKenzie Bartleet v Tower Corporation,^[313] it is the underlying policy considerations thought by each court to be significant which make the two cases interesting. The New Zealand court, whilst accepting that it was important to maintain the integrity of the fiduciary relationship which exists between solicitors and their clients, was strongly influ­enced by what it saw as the practicalities of modern commercial and legal practice. The Western Australian Supreme Court, on the other hand, was not prepared to compromise the traditional duties owed by solicitors to their clients.^[314]

EUROPE

In 1988 the Council of the Bars and Law Societies of the European Union (CCBE) adopted a Code of Conduct for Lawyers in the European Community.^[315] It was anticipated that by setting out a common set of rules for lawyers operat­ing across Europe, any difficulties which might arise through lawyers being subject to incompatible regulatory regimes would be overcome. Although the Code applies only to cross border activities, it is hoped that member states will interpret and apply their national rules in a way that is consistent with the Code.

In keeping with this aspiration, some countries have incorporated the word­ing of the CCBE Code into their national rules. Other countries have not done this, but whilst conflict rules in continental Europe differ as between jurisdic­tions, they are broadly similar to the CCBE Code. As a broad generalisation,^[316] the regulatory regimes in other European countries are less restrictive than the UK in that:

1. a firm may act adverse to the interests of an existing client without consent unless:

• the firm acts for that client on the same or a related matter and/or

• there is a risk that duties of confidentiality might be violated.

2. a lawyer is under no obligation to communicate to a client any information relevant to that client where it is received by the lawyer from another source in confidence.^[317]

The position is similar in effect to Article 3.2 of the CCBE Code which also per­mits lawyers to act in certain conflict situations that are currently prohibited by the Law Society. Article 3 is drafted as follows:

3.2.1 A lawyer may not advise, represent or act on behalf of two or more clients in the same matter if there is a conflict, or a significant risk of a conflict, between the inter­ests of those clients.

3.2.2 A lawyer must cease to act for both clients when a conflict of interests arises between those clients and also whenever there is a risk of a breach of confidence or where his independence may be impaired.

3.2.3 A lawyer must also refrain from acting for a new client if there is a risk of a breach of confidences entrusted to the lawyer by a former client, or if the knowledge which the lawyer possesses of the affairs of the former client would give an undue advantage to the new client.

3.2.4 Where lawyers are practising in association, paragraphs 3.2.1 to 3.2.3 above shall apply to the association and all its members.

The CCBE Code differs from the Law Society rules in three respects. First, Article 3.2.1 only prohibits a lawyer from acting for two or more clients in the same matter. Thus, whereas solicitors in England and Wales may not act against an existing client on matters unrelated to advice given to that client, lawyers in continental Europe face no such bar. Client consent, whether it be express or implied, is not deemed to be necessary and no guidance is given as to what mea­sures, if any, should be in place to protect the interests of both parties. Second, the Code allows a lawyer to act against a former client provided there is no risk that confidential information will be used against the former client for the ben­efit of the new client.^[318] This is impossible under Law Society rules in England and Wales and only possible at law if the very stringent standards set out by the House of Lords in Prince Jefri Bolkiah v KPMG^[319] are met. Once again client consent is not considered to be necessary and, rather surprisingly, no informa­tion barriers are required. Third, by virtue of Article 3.2.2, if a conflict arises between two clients, the lawyer must cease acting for both. Law Society rules are not so restrictive on this point and allow a solicitor to continue to act for one party (provided there is not a problem with possession of confidential informa­tion provided by the other).^[320]

The CCBE Code, however, is less permissive in one respect than the rules adopted in the US and in the Commonwealth countries analysed above. It does not allow clients to give their consent to a lawyer acting in the same matter where there is a potential conflict of interest. This seems odd given that the test to be applied when considering whether to act against a former client is consid­erably more permissive than that adopted by the US and Commonwealth juris­dictions since it does not require information barriers to be in place.

The difference between the CCBE rules and UK regulations, coupled with the fact that the national rules of other European nations have a broadly similar effect, has prompted some to argue that the current UK rules make solicitors in England and Wales ‘uncompetitive’ compared to their counterparts in conti­nental Europe.^[321] This is true even where a UK solicitor is conducting cross­border transactions as, although the CCBE Code has been adopted by the Law Society, the extent to which English and Welsh solicitors are liberated from their own more restrictive regulatory regime remains unclear. Practice rule 16, which is set out in chapter 10 of the Guide to Professional Conduct, states:

In relation to cross-border activities within the European Community, solicitors shall, without prejudice to their other obligations under these rules or any other rules, prin­ciples or requirements of conduct, observe the rules codified in articles 2 to 5 of the CCBE Code....^[322]

The rules on conflicts of interest are set out in Article 3.2 of the Code. It would at first appear that any solicitor conducting cross-border activities, and faced with a potential conflict, should refer to this Article of the Code. However, in July 1999 the Council of the Law Society issued a statement to the effect that a solicitor will fulfil his obligations under Articles 2 to 5 of the Code by observing the rules of conduct adopted by the Law Society.^[323] This, in turn, seems to negate the liberating effect of the Code’s generally more permissive conflict rules.