THE EMPIRICAL EVIDENCE

As no empirical research had previously been undertaken into how firms in England and Wales respond to conflicts of interest, it was essential to study the matter at first hand.

1.

The first thing to emerge from my conversations with representatives of law firms was that conflicts do indeed pose a significant problem. Difficulties arise at all stages. As firms have become larger, so too has their client-base. With more fee-earners, the likelihood of a conflict arising somewhere in the firm is greatly increased. Although solicitors have developed complex procedures for identifying potential conflicts, merely trying to secure work, or an approach from a potential new client, can create seemingly irreconcilable problems.

2. Do Firms Comply with the Rules?

The way in which many solicitors cope with the increasing number of conflicts is, in effect, by breaching Law Society rules. Only 30 per cent of the firms ques­tioned appeared, by their own account, to comply with Law Society regulations when faced with a conflict of interest. The manner in which the remaining prac­tices approach conflicts depends on their size, client-base and location, and on the type of conflict which they face. Large City firms are prepared to act in a wide range of conflict situations. Where they are faced with a successive repre­sentation conflict, they will act against former clients if they conclude that they are not in possession of relevant confidential information. With simultaneous conflicts, these firms will generally obtain express consent for same matter con­flicts but they will tend to assume that consent is given where separate matter conflicts may arise.

The remaining firms, namely medium-sized City, national and provincial practices, are more cautious about undertaking work where there is, or may be, a conflict of interest.

3. Why Do Firms Not Comply?

Large City firms justify their failure to comply with Law Society rules on the grounds that these rules are out of touch with commercial reality. They main­tain that the number of potential conflicts is so great that the City would grind to a halt if they were bound by the rules. In addition they argue that sophisti­cated clients would be prejudiced because they would be forced to use solicitors who lacked the necessary expertise and resources. Accordingly, they argue that they are entitled to adopt their own criteria for determining when a conflict exists. They maintain that clients are happy for them to act in conflict situations, and indeed believe that it is in their interests for the firm to continue to act.

Medium-sized City and national practices believe that the only way they can hope to compete with larger firms is by expansion. This cannot be achieved if they are forced to operate within the Law Society rules governing conflicts. Smaller firms, on the other hand, tend to argue that where they do breach the rules this is at the behest of their clients. They are preoccupied with maintaining existing relationships with clients and will only act in the face of conflict where this does not compromise the interests of any of the parties involved.

4. What Measures Do Firms Adopt When Acting in a Conflict Situation?

Large City firms use a variety of measures, depending on the nature and sever­ity of the conflict. Where the clients’ interests are directly opposed in a same matter conflict, a full-scale Chinese wall will usually be erected. This ensures that teams working for different clients are physically separated.

Smaller firms, in the main, do not employ physical barriers in order to sepa­rate staff and paperwork. They maintain that individual fee-earners can be trusted to safeguard the interests of whoever they are asked to represent.

5. Are Clients’ Interests Safeguarded?

It might be argued that by acting in conflict situations firms place their own commercial interests above the interests of their clients and those of the profes­sion in general. However, these firms, although not complying with Law Society rules, maintain that clients’ interests are nevertheless safeguarded as:

—consent is usually obtained;

—where it is not practical to obtain consent, clients are generally aware when instructing the firm that a conflict may arise;

—solicitors would not do anything to damage their relationships with clients; —where the firm acts in a conflict situation, physical barriers may be erected to inhibit the flow of information; failing that, individual fee-earners can be relied on to protect clients’ interests;

—for the most part (other than where very large firms act against former clients) firms act in accordance with guidelines laid down by the courts, and indeed in some instances they provide more protection for their clients than the law dictates.

Firms which routinely act in conflict situations contend that no harm is suffered by their clients, and indeed that in successfully ‘managing’ conflict situations they are both lubricating commercial practice and maintaining the spirit (if not the letter) of the prescribed solicitor/client relationship.

6. What Do Clients Think?

Clients’ attitudes towards conflicts of interest depend, to a large extent, on the nature of their business interests and whether they instruct one or a number of law firms. Those who tend to use only one firm would not be happy for that firm to act in any type of conflict situation. On the other hand, clients who routinely spread their work amongst several firms believe that conflicts are inherent within legal practice. Clients are asked to give their consent when a firm wishes to act even though a conflict has arisen, and they usually give their approval. The system operates on trust, as clients have no way of checking that any mea­sures adopted to protect their affairs are in place. Clients nevertheless have rea­sonable confidence that their interests are protected. This is because:

—firms would not wish to upset them and, as a result, lose their business;

—their own in-house legal team oversees all work;

—given they wish to instruct firms with the necessary resources and expertise, they have to accept (inevitable) conflicts.

Clients operating in highly competitive business environments, and those who may suspect that they carry less commercial weight with law firms, are less con­fident that it is appropriate for lawyers to act in conflict situations. Some believe that they are in a position to circumvent the problem by ‘buying’ a firm’s loy­alty. Others feel forced to accept that firms will continue to act in these circum­stances.

7. What is the Impact on the Profession if the Rules are Broken?

The fact that some firms are prepared to act in contravention of Law Society rules means that not all solicitors are operating within the same parameters. Therefore, at least in theory, some firms may have a commercial advantage over others. Those solicitors who adhere strictly to the rules will turn down work where there is a potential conflict of interest. As the chances of a conflict arising are much greater than they once were, this means that certain firms may turn away significant amounts of business.

It is also necessary to consider the effect on the legal profession, which is sup­posed to be self-regulating. What is the impact on the profession as a whole if some members ignore those components of the regulatory framework which they find inconvenient? Although no significant harms may result at present from non-compliance in the area of conflicts of interest, this does not mean that clients will not be prejudiced in the future. Also, might this not suggest a cava­lier approach to other rules, breach of which might indeed be damaging to clients’ interests? It is difficult to assess what damage may be done to the repu­tation of the profession through firms breaching their own professional code of conduct, but it is plausible to suppose that a gulf between rules and practice may damage the image of the profession in the longer term.

8. Do Firms Think the Rules Should be Amended?

Whether firms believe that the current Law Society rules should be amended depends very much on how conflicts of interest currently affect them. Although very large firms face the greatest problems, the manner in which they handle conflicts means that their business practices are not unduly restricted. Such firms, therefore, see no reason for the rules to be reviewed, but of course this is on the basis that they are free not to comply with those rules. Indeed, some firms even suggested to me that the rules should remain exactly as they are for the ben­efit of smaller firms which ‘may not be as ethically minded’ [as the informant and his colleagues].

The Law Society, in inviting the City of London Solicitors to make recom­mendations for new draft rules on conflicts, recognised that the current require­ments caused ‘particular problems for the City firms and their clients’.^[491] It was unsurprising, therefore, that the City Solicitors panel—contrary to what indi­vidual firms told me—advised the Law Society that new rules on conflicts were urgently needed.

It is the medium-sized City firms, national practices and provincial firms which are most troubled by conflicts in practice. They told me that they would like to see a change in the rules. For the most part they take the view that the Law Society’s rules should reflect the position reached by the courts, namely that clients should be able to give their consent to allow firms to act in conflict situations. They argue that such a step would also allow fairer competition between themselves and their larger City counterparts. These firms no doubt welcomed the proposals put forward by the Regulation Review Working Party of the Law Society in its consultation document.

Smaller provincial firms do not at present experience the same amount of dif­ficulty with conflicts of interest as do larger firms. For the most part they favour the status quo, arguing that it is important that the profession adhere to high ethical standards of behaviour, and that it be seen to promote such standards.