City backing for Chinese walls

Law firms should ensure that there is physical division between groups working on conflicting matters and that the need for Chinese walls is identified as early as possible, a report on handling conflicts of interest has recommended.Commercial firms welcomed the report by the City Disputes Panel which clarified how they should build ad hoc Chinese walls to separate different clients' interests on transactions.As well as the need for physical separation, the report stressed the importance of timing in setting up Chinese walls, warning firms to avoid building walls after disclosures could already have taken place.Since the findings in the Prince Jefri case, there has been uncertainty as to the validity of certain Chinese walls.

The panel -- sponsored by most top 20 City firms -- began work in 1999 to clarify this and other confidentiality issues.In Prince Jefri, the law lords found Chinese walls were effective if they were part of an existing arrangement within firms.

This created uncertainty for those firms using ad hoc Chinese walls to handle conflicts.

Last year Mr Justice Laddie in the Robson Rhodes case said ad hoc Chinese walls could be acceptable.In setting its own guidelines, the panel welcomed Mr Justice Laddie's interpretation, saying Chinese walls are an essential feature of the smooth working and international competitiveness of the City.Neil Fagan, a partner at Lovells whose submissions were considered by the panel, said: 'The panel has done a good job in providing pragmatic guidelines.' Freshfields' chief executive Alan Peck, a member of the panel, said: 'All City firms need to use ad hoc Chinese walls because they aim to operate as integrated wholes.

The guidelines should help practitioners in this developing area of the law.'The panel said the client's informed consent is the best protection for firms; where this is not forthcoming, 'firms may have to err on the side of caution'.

It also recommended that firms consider whether employment contracts should deal with the need for employees to keep clients' information confidential even after they have left.X Prince Jefri of Bolkiah v KPMG [1999] 2 AC 222; Young v Robson Rhodes [1999] 3 All ER 524.

Jeremy Fleming