The Nature of Conflicts

A. Situations

There are four main situations presenting actual or potential conflicts of interest in the lawyer and client relationship. The first is conflict between the lawyer’s and the client’s interests.

⁴ WH Simon, ‘Whom (or What) Does the Organisation’s Lawyer Represent? An Anatomy of Intra-client Conflict’ (2003) 91 California Law Review 59.

⁵ A Ashworth, ‘Ethics and Criminal Justice’ in R Cranston (ed), Legal Ethics and Professional Responsibility, (Oxford, Clarendon Press, 1995) at 172.

B. TornLoyalties

A conflict of interests creates a risk that someone with a duty towards another may suffer torn loyalties. It is not possible, for example, to perform fiduciary duties to two competing or disputing clients simultaneously. The possibility that a person’s motiva­tion to act in accordance with their duty may be undermined by a conflict is sufficient. Actual corruption of their motivation is not required. It is the risk of corruption that creates a conflict of interest, rather than actual corruption.

Between past and present clients there is no torn loyalty. The problems usually relate to the duty of confidentiality. The duty to disclose relevant information to a client is subject to the duty of confidentiality owed to all clients. If a lawyer holds information affecting the interests of a current client in a matter in which they are instructed, but cannot disclose it because of confidentiality, he used to be seen to have a conflict of interests. Except in limited circumstances, a lawyer should not continue to act for a client to whom he cannot disclose material information.

A contentious issue is whether a duty of loyalty continues in the same way as a duty of confidentiality. If, for example, a lawyer is asked to act for a competitor of a previous client, should that previous client expect loyalty as well as the preservation of their confidentiality? It may be that the lawyer does not know anything specific about the past client that must be protected as a confidence. He will, however, inevi­tably know general things about the past client’s business that could be very helpful to a present client, particularly if they are a competitor of the past client. In general, therefore, there is an issue about whether lawyers should be prohibited from acting in such situations.

C. Material Conflicts

No human being can act in a way that totally or exclusively prioritises the interests of another. A lawyer’s considerations include the need to run an efficient or profitable practice, balancing their own workload and managing relationships with partners and family. In reality, it is not possible to eliminate all these other considerations from the lawyer’s mind when dealing with clients. It may not be desirable that they do so. It is naive for any professional, whether doctor, lawyer or social worker, to maintain that they always put the interests, or the best interests, of the patient, client or child first. On material issues, however, they must do so.

V. The Common Law Position

Injunctions are issued by the courts to prevent solicitors acting in conflict of interest situations. They tend to be granted, however, only where it can be shown that harm will be caused otherwise.^[1691] Courts often act to offer redress in conflict of interest situations, without necessarily recognising them as such. Many of the cases involve lawyers, although other professions, persons and institutions in conflict of interest situations add to the jurisprudence. The professional conduct rules reflect these decisions.

A. Conflict between the Lawyer’s Interest and those of one or more Clients (Own Interest Conflicts)

At common law, solicitors would not be allowed to defend transactions with clients that were advantageous to the lawyer unless they could show that they had disclosed all the material facts.^[1692] Where they had done so, however, and it could be shown that the client had understood the terms of an arrangement, the solicitor would not be held to account.^[1693] Some court cases suggest that the legal profession was slow to recognise the danger of own interest conflicts.

B. Conflicts of Interest between Simultaneous Clients

i. Criminal Proceedings

In criminal defence, lawyers are generally precluded from acting for a party against the interests of a former client. The qualification is necessary because the criminal courts have not developed definitive rules. The case of R v Ataou,^[1695] illustrates the kind of situation that can arise and the risks of solicitors continuing to act for one of two former clients when their interests diverge.

In Ataou, three men were arrested in a car and charged with conspiracy to supply heroin. The appellant claimed he had nothing to do with the dealings of the other two in the case, but had merely been a visitor at the flat of one of them, a drug dealer, H. The appellant’s solicitors acted for both the appellant and H. H pleaded guilty and gave evidence for the prosecution, contradicting the appellant’s account. Because of the conflict of interest between them, H was invited to find other solicitors.

At the trial, H said that the appellant was involved in the conspiracy to supply heroin. During the course of H’s evidence, a representative of the appellant’s solici­tors was looking through his file. He found an attendance note of a meeting with H, prepared by a former employee of the firm. The note recorded H’s assertion that the appellant was not involved with any dealings concerning heroin.

The appellant’s counsel sought to cross-examine H on the basis of the alleged previous inconsistent statement. H claimed privilege and the judge ruled that cross­examination without H’s consent would be a breach of privilege between client and solicitor. The appellant was convicted and appealed against the judge’s ruling. The Court of Appeal allowed the appeal because the trial judge had not heard relevant arguments on the asserted privilege.

The Court of Appeal deplored the handling of the situation by the solicitor’s representative. By informing counsel of the note, the solicitors’ representative had acted in complete disregard of the firm’s duty of confidentiality to H, their former client. In delivering the judgment French J offered the opinion that

the solicitors’ profession should, we consider, be alert to prevent any similar problem arising in future, particularly where... counsel is assisted at the trial by a representative who is... [not] familiar with the rules of confidentiality governing the profession.

The case also illustrates how solicitors can be affected by a conflict of interest in a case while a barrister acting for the same client is not affected. The duty that the solicitors were under did not affect the appellant’s whole team of representatives. The court found that counsel’s duty was to make the argument of behalf his client, the appel­lant. He owed no duty to anyone else.

Surprisingly, in view of the lecture given to the lawyers in Ataou, the Court did not endorse a ban on acting for multiple defendants in the circumstances of the case. French J was only prepared to say that ‘[w]e consider it at least doubtful, in circum­stances where conflict may arise at the trial between the interests of an existing and a former client, whether it is proper for a solicitor to continue to act for either client’. Presumably this reticence was necessary because of the possibility of circumstances where lawyers may be constrained in withdrawing. If, for example, a trial has reached an advanced stage, the balance of argument may be in favour of them continuing to act, despite a risk of conflict of interest.

Firmer guidance was given to lawyers on what to do in the circumstances found in Ataou in Saminadhen v Khan.¹ In that case Lord Donaldson said,

I can conceive of no circumstances in which it would be proper for a solicitor who has acted for a defendant in criminal proceedings, the retainer having been terminated, to then act for a co-defendant where there is a cut-throat defence between the two defendants.

ii. Civil Litigation

a. Co-defendants

Civil litigation may appear to lack the dynamic that gives rise to conflicts of interest as dramatic as those in criminal litigation. It is, however, easy to imagine circum­stances where defendant parties may have a common interest in defeating a claim, but divergent interests in how it is defended. Such circumstances might arise where

¹¹ Saminadhen v Khan [1992] 1 All ER 963. an employer could be vicariously liable for an employee’s negligence. In such circum­stances, there are divergent interests in arguing against the finding of fault. Allocation of liability could determine which party is likely to pay damages. Similarly an owner and tenant of land may have a common interest in defeating the claim of a trespasser, but divergent interests in how the claim should be defended.

b. Class Actions

Class actions were common in early English law. They allowed several claimants, pos­sibly with small claims, to band together, save costs and make it worth a lawyer’s while to represent them. The class action died out in England in the nineteenth century. The circumstances of modern life suggest a need for class actions. Major disasters, such as air crashes, adverse reactions to drugs or environmental problems, can affect large groups of people, all or some of whom may want to seek compensation. Modern society also creates conditions that make class actions viable; wide and targeted communication means that hardly any member of a class is not contactable.

Although there is a case for the viability of class actions, the arguments for them are not all supportive. There may be conflicts of interest between the victims and also between them and their lawyers. Some victims may not be aware that litigation is underway or, if they are, will not understand what is happening. The majority of the victims may leave the matter to a small group of representative claimants or even to the lawyers alone.

The difficulties of managing class actions mean that they are relatively rare any­where else than the US.

In England and Wales, mass actions demonstrated the problems of not having a developed system of class actions. Prior to the creation of new Civil Procedure Rules in 1998 two options existed. The first option was that the parties sued at the same time, leaving the court to join them as parties equally involved in the progress of the case. The second option involved some parties bringing the action as representatives of others. This avoided the need to join large numbers of people as claimants, but every person represented was bound by the outcome of the litigation.

Representative actions were comparatively rare. The more common multi-party group actions include litigation relating to injury caused by industrial operations, for example, asbestosis and mining, contraception, Dalkon Shield for example, and drugs, for example Opren.^[1697] A multi-party action against British Coal in respect of miners’ lung disease was relatively successful, leading to a compensation scheme being established.^[1698]

The Opren case concerned the alleged side-effects of the anti-arthritis drug. Two group actions, involving about 1500 claimants, were launched against the manufacturers, Eli Lilly & Co and were co-ordinated by a group of solicitors known as the Opren Action Group (OAG). The clients set up an Opren Action Committee (OAC), and the Law Society set up a register of solicitors acting for Opren victims.

The management of the Opren case was difficult, with underlying conflict between the different groups. It was further complicated by funding issues. The action was brought only by claimants entitled to legal aid, but the Court ordered that the costs of the action should be shared equally by all claimants, including those not legally aided.^[1699] The unaided parties naturally had a different attitude towards the risks of the litigation than the legally aided, the latter being unlikely to face any personal liability for the costs of the action.

A settlement was finally reached whereby a lump sum payment was agreed with the defendants and was distributed between the various claimants by the solicitors in OAG, subject to an appeal to a judge as arbitrator. It subsequently transpired that the solicitors did not discuss the terms of the settlement with OAC and, moreover, told their clients that if the settlement were not agreed they would cease to act.^[1700]

The Opren case illustrated the actual and potential conflicts inherent in class-based litigation. The case involved investigations and scientific research costing millions of pounds. Without acting as a class, the group would have been unable to get any redress, bearing in mind the complexity and costs of the litigation. The parties had to sacrifice some of the protection provided by conflict of interest rules in order to obtain benefits, in terms of finance and expertise. These inherent conflicts had to be appropriately managed if justice was to be done equally to all the parties.

Lord Woolf’s Final Report on civil justice recommended special procedures for managing group actions. The Civil Procedure Rules 1998 reintroduced the possibil­ity of class actions in England and Wales.^[1701] The rules allowed one or more persons with the same interest in a claim to begin or, at the order of the court, continue an action. This may be by, or against, one or more of the persons with the same interest as representatives of any other persons who have that interest.^[1702] The court may, on application or on its own motion, make a group litigation order. This will set up a register establishing the court and judge, the issues and the management of the case.

There were only two reported cases launched in the first 10 years of the operation of the rules. This low number of class actions may reflect the English courts’ cau­tion regarding aggregated claims, perhaps because of the scope of potential liability. Actions have failed where the claimant group cannot be clearly defined.^[1703] There has been limited use of similar mechanisms, such as group litigation orders and opt-in actions under the Competition Act 1998, section 47B.²0

There is suspicion of class actions, certainly on the US model, across Europe. This aversion is such that policy-makers use terms like ‘collective actions’ and ‘representa­tive actions’.^{[1704] [1705] Such actions are, however, suited to consumer class actions and have advantages as a means of facilitating competition policy. The opt-in model has severe limitations because, in most situations, it severely limits the scale of damages.}

The European Competition Commissioner, Joaquin Almunia, signalled plans for Europe-wide measures to be published in 2011. The proposal finally appeared in 2013 with a view to implementing a directive for 2015-16. The particular focus is class actions in competition cases. The European Commission estimates that, in Europe alone, breaches of competition law amount to over 20 billion euros (£16.6 billion) a year of uncollected damages.^[1706] The proposals are not limited in to competition cases however.

Class actions raise issues of conflict of interest, both within and beyond an identi­fied class. There is an obvious risk that individuals’ interests will not be prioritised, for example, where a claim is pursued by a core group of activists. This risk has to be balanced against the possibility that individual claimants will not be bothered to pursue small claims. It seems inevitable that an opt-out regime, of the type that encourages class actions, will be introduced to the UK.^[1707] This is likely to be heavily policed by the courts, in order to prevent abuse of the litigation process by claimants and by lawyers. It is likely that court regulation, rather than conduct rules, will be the primary mechanism for regulating agents.

C. Transactions

i. Conveyancing

Solicitors acting for a purchaser in conveyancing transactions were frequently also instructed by the mortgage lender providing the loan to purchase the property. This is advantageous to the lender, since the solicitor is able to provide assurances on title and hold monies. In most circumstances this does not present a problem. Purchasers benefit because they might otherwise have to pay for another solicitor to represent the lender. They save the additional cost of a lawyer familiarising themselves with the

file. Representing both borrower and lender has caused considerable litigation against solicitors.

Lord Justice Peter Gibson noted in National Home Loans Corporation v Giffen Couch & Archer,^[1708] that

the recession and the collapse of the housing market at the beginning of this decade, left mortgage lenders, who had vied with each other to obtain business in the 1980’s, with defaulting mortgagors and substantial losses which they were unable to recover out of the security they had taken. This has led mortgage lenders to seek ways to recover their losses from others, and actions in negligence against their professional advisers have become only too common.^[1709]

Actions by lenders whose borrowers have defaulted on the repayments caused heavy calls upon the compensation fund. Several cases occurred before the rules were changed to restrict the terms of instructions from mortgage lenders. In the National Home Loans Corporation case, the loan company lent the borrower over £92,000 on the security of a home which was already subject to another mortgage. On default of repayment the property was sold for £70,000. The loan company sued for their loss.

The company and the borrowers had both been represented by the same firm of solicitors, Giffen Couch & Archer. The company maintained that the solicitors should have told them that the lenders were in arrears with their existing mortgage and had been threatened with legal proceedings. They succeeded at first instance. On appeal, however, it was held that, in the circumstances of the case, there was no duty on the solicitors to pass this information about the borrower to the lenders.

In the National Home Loans Corporation case, it was said that the solicitors’ duties in acting for a mortgage lender depended heavily on what they were instructed to do, and were paid for, by the client. In this case they were instructed to report on title and to certify whether there had been a change in circumstances since the loan had been offered. They had to undertake a bankruptcy search. They were not asked to report on the personal credit-worthiness of the borrowers.

The National Home Loans case can be contrasted with that of Mortgage Express v Bowerman^[1710] which held that there was a more extensive and onerous duty to report. In that case, a solicitor acting for both lender and borrower became aware that the lenders had been told that the value of the property was £220,000, whereas in fact the purchaser was buying it at £150,000. In the report on title to the lender the solicitor did not mention this discrepancy. The borrower eventually defaulted on the loan and the property was repossessed and sold for only £96,000.

It was held that the solicitors did have a duty to pass on information which had a bearing on the value of the lender’s security. Their duty was not confined to advis­ing on title alone. The instructions to the solicitors required them to undertake ‘the normal duties of a solicitor when acting for a mortgagee’.^[1711] Lord Bingham considered that

if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security, or some other ingredient of the lending decision, then it is his duty to point this out.^[1712]

ii. Spouses

Representing both parties to a marriage may seem natural, but their interests often diverge. A common situation is when the matrimonial home is charged, usually in order to raise finance for the family business. In the past, this was often run by the husband. A not uncommon circumstance was that the marriage breaks down and the business goes into liquidation, leaving the wife in a matrimonial home under threat of repossession. The courts have tended to leave the decision of whether to act for spouses to solicitors, even in situations where problems that can arise are well known. In Royal Bank of Scotland v Etridge,⁷-^[1713] the court said it was a matter of ‘professional judgement’ for a solicitor to decide whether to continue to represent both a husband and a wife where the home was to be charged.

In Barclays Bank v Thomson, the bank obtained a charge over the home, which was owned by the wife.^[1714] The solicitors acted for the husband’s business, for the wife when the home was transferred into her name and for the bank in registering the charge. They were also asked by the bank to ensure that the wife fully understood the nature of the charge. In resisting a possession order when the loan repayments were in arrears, the wife attempted to negate the validity of the charge on the ground, inter alia, that she had not been properly advised by the solicitors of the extent of her potential liability under the charge.

It was argued in Barclays Bank v Thomson that the bank had constructive knowl­edge of this deficiency in the wife’s knowledge because the solicitors were acting for them. The solicitor’s fee was paid initially by the bank, but would be added to the borrower’s total liability. The wife lost the case because the bank was entitled to rely on their solicitor’s assurance that they had discharged their duty to the wife to warn her of the nature of the charge.

Significantly, there was no comment in the judgments of the Court of Appeal on the wisdom or the propriety of one firm of solicitors acting for all the parties, despite an obvious conflict of interests. The position may well have been very different had the action been against the solicitor or had the solicitor been asserting some right in the same circumstances. Similar outcomes were achieved in other cases of this kind.^[1715] The lesson is that solicitors should not act for the wife in such circumstances where any conflict of interest is possible.

iii. General Transactions

The case of simultaneous client conflict is illustrated by the case of Hilton v Barker Booth & Eastwood.^[1716] Surprisingly, the case travelled to the House of Lords for a deci­sion that many would consider uncontestable. The defendant solicitors had acted for B when he was convicted and imprisoned for fraud and in his bankruptcy proceedings. B subsequently contacted H, a small builder eager to get into property development. B suggested that H buy some commercial property from him. H agreed, and also agreed to sell on the property to B once it was developed. B had, at the same time, agreed to sell the property to a third party. The three contracts were all completed on the same day, the solicitors acting for both B and H, having lent the deposit to B.

All the background facts were unknown to H and the solicitors did not enlighten him. B failed to complete the contracts, resulting in financial disaster for H. H sued the solicitors for breach of contract. In the Court of Appeal he lost on the extraordi­nary basis that there was an implied term in his contract with his solicitors excusing them from revealing the confidential information they held on B. The House of Lords reversed the decision.

Giving the leading judgment in the House of Lords, Lord Walker said that he found the case ‘particularly shocking’. The solicitors could not act for both parties in the circumstances, even if they had obtained informed consent, which they had not. The Court of Appeal’s decision that the solicitors could rely on an implied term limiting their duty of disclosure to their client was, he said, ‘contrary to common sense and justice’ as well as being contrary to legal principle. Remarkably, neither the Court of Appeal nor the House of Lords suggested that the solicitors were guilty of a breach of professional conduct justifying disciplinary sanctions.

D. Conflict of Interests between Past and Present

Clients in Different Matters

Clients may consider that there is a conflict of interests because, for example, they are business competitors with later clients of their former lawyers. The lawyers may hold general information related to a past client that does not appear relevant to a later matter for a different client, but is in fact useful to the present client’s business. This may be detrimental to the interests of the past client. To permit such potential conflicts of interest undermines client confidence in the integrity of the profession. Different legal professions have taken different lines in balancing the important values of confidentiality and choice.

In the US, strict rules prohibit conflicts of interest between past and present clients. If a business competitor of a prospective client has used a law firm in the past, the firm may be ‘conflicted out’ of acting for the prospective client. Commercial clients can use these rules against conflict cynically, as a litigation tactic.^[1717] This was noted as an emerging phenomenon in England in the Report of the Solicitors’ Complaints Board for 1994. This brings policy considerations into the equation, for example, whether choice of lawyer should be fettered or whether there is adequate legal exper­tise in the market to deal with the problem at hand.

English case law has developed a less draconian approach to potential past and present client conflicts. Generally, it recognises a need to strike a balance between the need to protect client confidences on the one hand, and maintaining the freedom of clients to instruct lawyers of their choice on the other. Preventing lawyers from acting, especially where it is because a client’s business competitor has used them in the past, represents a significant restriction of choice.

E. Conflict of Interests between Past and Present

Clients in the Same or Related Matter

i. Firms

For most of the twentieth century it was assumed that the common law imposed no absolute ban on solicitors acting against previous clients, even in the same matter. The lesson of Rakusen v Munday, Ellis and Clarke (1912)^[1718] was that there is no inherent conflict of interest in acting against a former client. Any potential conflict relates to the information held about that client or his matter and whether it is relevant to the current matter. It was a matter of substance and of fact whether holding knowledge about a former client created a conflict of interest.

In Rakusen, C’s ignorance of R’s matter was crucial to him being allowed to act against the firm’s former client. It is on this basis that it is possible for firms to act against their former client. The possibility is contingent on those involved in the present matter having no knowledge of the past matter. It also depends on it being possible to erect an information barrier to prevent them from acquiring that knowledge from their colleagues.

ii. Individual Lawyers

The risk of breaches of confidentiality greatly increased with the trend towards greater mobility among solicitors and mergers of firms. Solicitors may find that their new firm is acting against their own former clients. As might be expected, the firm must cease to act if there is likely to be a leakage of confidential information as a result of such moves. In Re A Firm of Solicitors,^[1719] a solicitor who had been employed by a firm acting for a claimant in patent litigation moved firms. Some two and a half years later the new firm was retained to act for the defendants in the patent litigation.

The individual solicitor had never been involved in the case against the defendants in his previous employment. Moreover, he managed to establish that he had no infor­mation relating to the previous litigation that could now be recalled, confidential or relevant, bearing in mind the lapse of time and the complexity of the issues. The application for an injunction to prevent the firm from acting was refused. The judge reaffirmed the principle that grounds for the court intervening was not a perception of possible impropriety. The jurisdiction was based on the protection of confidential information.

The judge acknowledged that the American-based claimants in the action were ‘genuinely aghast’ at the circumstances. In the US, there would be no question of the solicitor continuing to act. The court had to balance two conflicting principles, namely the protection of client confidence and the freedom of the client to instruct a solicitor of its choice. It held, however, that it was for the solicitor to prove that there was no reasonable prospect of a conflict between the two clients. It was not for the complainant to prove that there was a conflict. The court considered that the same rules applied to barristers.

The court accepted the principle that barristers are independent of other barristers in their chambers in Laker Airways Inc v FLS Aerospace Ltd.³⁶ It was held that no conflict of interest existed where an arbitrator was appointed from the same set of chambers as counsel for the defendant. Barristers were said to be sole practitioners working ‘on their own papers for their own clients and sharing neither career nor remuneration’.³⁷ The breadth of such a ruling will probably not survive significant numbers of barristers joining corporate entities.

VI.