Great war of conflict

As more firms merge, concerns surrounding conflicts heighten.

Chris Baker looks at the problems facing solicitors and asks whether the proposed changes to Law Society rules may come a little too late

With increased fluidity between law firms, conflict of interest and confidentiality issues are becoming more and more of a headache.

Some maintain that there is less of a problem, but the Law Society is concerned and there are fears that proposed changes to its rules will not emerge in time to prevent further trouble.

There have been recent high-profile calls for a code of conduct for City firms in an attempt to avoid conflicts of interest claims brought by aggrieved clients.

Once again, not everyone agrees that such a code would be the best way forward, but there is general agreement that the Law Society's rules need to change, and the sooner the better.

David Gold, head of litigation at City firm Herbert Smith, started the ball rolling last month with a call for a code of conduct for his peers.

He accuses some firms in the Square Mile of trying to circumnavigate conflict rules rather than turn down instructions (see [2003] Gazette, 5 June, 5).

Predicting future disputes between parties who share the same adviser, Mr Gold warns: 'There has been a creeping tendency for firms to be slightly less concerned about this than they might have been in the past.'

Public perception has changed, and is an important factor to take into account.

'In the old days, a firm of lawyers might be instructed to act for a borrower and a bank in a transaction,' says Mr Gold.

'Now people are a lot more aware of conflicts of interest and the potential for embarrassment is there when it emerges that a firm has acted for two parties with different interests in the same transaction.'

Conflicts of interest, and connected confidentiality breaches, can arise in several ways in commercial transactions, such as when a firm advises two parties in a business takeover, or whenever the interests of one client are in opposition to another client of the same firm.

Then there are project finance deals where firms may act for the borrower and lender at the same time.

These all raise the perennial issue of Chinese walls, or internal information barriers, designed to ensure confidentiality within a firm that may be conflicted.

The Law Society views conflicts of interest with increasing concern.

Bronwen Still, head of policy in the professional ethics department, says: 'We generally don't see problems with the big City firms manifesting themselves as complaints [to the Law Society].

Most of the complaints we get are from small firms with issues such as a certain firm has worked with the husband, can it now work for the wife?

'The sort of clients the City firms have will go to the courts and seek an injunction if they want a remedy.

There have been a lot of cases of that nature, and also cases about information barriers.'

Nigel Boardman, a top corporate partner at City firm Slaughter & May, says: 'We do have rules on conflicts.

They exist and I think they are honoured.

They are being modified, but in the meantime they work well enough - I don't see this as a particular area of problems.'

Mr Boardman adds that as firms merge and grow, avoiding conflicts of interest between expanding client bases can be difficult.

But, he says, careful attention to the business plan can safeguard against attack.

At City firm SJ Berwin, head of litigation Tim Taylor agrees that rationalisation in the profession has been an emerging theme for potential and real conflicts of interest.

'As more and more law firms combine and get bigger, the conflicts problems become more acute,' he says.

The well-known Prince Jefri case (Prince Jefri of Bolkiah v KPMG [1999] 2 AC 222) made it 'practically impossible' to set up Chinese walls, but recent cases have taken a slightly more lenient view, he adds.

Mr Taylor, while admitting conflicts have become an issue, also argues that law firms are in a different position to financial institutions.

'We haven't got the sort of conflicts where lawyers are trying to influence the sale of shares,' he says.

However, Mr Gold maintains that 'commercial considerations should take precedence over professional matters'.

He explains: 'Anything that could be said to impact on the transaction on which you have advised a client I would say has the potential for problems.

And working for two parties after the same target in a takeover is an example of that.'

Meanwhile, new Law Society rules on the issue are progressing, albeit slowly.

The proposed changes - part of a wide-ranging review of all the Society's rules and regulations - will be submitted to the council early next year.

After a further consultation period of four or five months, amendments will be drafted and referred back to the council for its views.

Ms Still says: 'The main changes here cover conflicts and confidentiality - the two are almost indivisible.'

The most fundamental change on the table will refer to the so-called Chinese walls - at present not allowed by the Law Society.

'There is a proposal to permit information barriers,' says Ms Still.

'This has become more important as more mergers and firms getting bigger lead to a lot more fluidity.

There is more movement of staff, partners and in some cases even departments moving.'

Most people may be forgiven for thinking of some of the juicier US corporate scandals when they hear of Chinese walls.

But Ms Still points out that conflicts of interest faced by auditors - such as in the Enron case - are somewhat different to those faced by lawyers.

'[The auditors'] role was a conflict in itself,' she says.

'If they are performing a reporting duty where they are providing company analysis reports, they have a whistle-blowing duty.

But when acting for the company in an advisory capacity, there are more issues of confidentiality.

Solicitors do not have that dual role.'

The proposed changes could also do away with rules against firms working with two opposed clients even where there is 'informed consent'.

Mr Taylor welcomes this move: 'You can get two people competing for the same outcome where it makes sense to have the same solicitor's involvement from a cost savings point of view.'

The Council of Bars and Law Societies of Europe, whose code of conduct regulates cross-border matters, is also working on allowing informed consent (see [2003] Gazette, 30 May, 1).

Mr Gold is not inclined to agree.

To him, the idea of a firm acting for more than one client in a case that involves both of them is a conflict of interest, and as financial institutions and major companies spread more and more of their work across the sector, it is an area in need of action.

'I'm not saying it's easy, I'm just saying it's deserving of examination,' he argues.

'I do not think the City firms should do it but I do think the Law Society should take the initiative.'

Ms Still is confident the Law Society will be able to tackle the concerns of some over the increased potential for conflicts of interest.

'I'm hoping that, when the rules are revised, they will deal with the problems and provide a regulatory framework that will be workable for the City firms,' she says.

'What we have at the moment are not really rules but a set of principles.

The review will change that into statutory rules.'

She feels a code of conduct could well provide a useful tool in the meantime 'as the problem is becoming more and more acute', but she adds a note of caution: 'I don't see the problem in having a code in the interim but it will be likely to conflict with the rules when they do come out.'

Mr Taylor agrees.

'I don't know whether it makes any sense for the City firms to come up with their own code of conduct when we will be stuck with what the Law Society comes up with anyway,' he says.

In the meantime, until the rules come in, firms should keep an eye on any potential conflicts that could catapult them unwittingly into the spotlight and, even worse, court.

Chris Baker is a freelance journalist