Against a backdrop of the Appeal Court's ruling in Bowman, Rachel Rothwell explains how the case underlines the importance of client privilege and how it could have implications for the future of alternative dispute resolution

Solicitors were celebrating last week when the Court of Appeal ruled that they should no longer be forced to act as police officers when advising clients in the course of litigation.

The judgment in Bowman v Fels [2005] EWCA Civ 226 freed them of their duty to report suspicions of money laundering to the National Criminal Intelligence Service (NCIS) where litigation is concerned. The paramount importance of legal privilege and access to justice had effectively trumped their obligations under the Proceeds of Crime Act 2002 (POCA).

Family lawyers, who had been hit the hardest by the POCA legislation, were at the front of the queue to praise the appeal court judges. Thousands of cases have been delayed because family lawyers - fearing a prison sentence of up to 14 years - have had to halt proceedings while they report suspicions of minor tax evasion to NCIS.

Kim Beatson, chairwoman of Resolution, formerly the Solicitors Family Law Association, said the judgment would be met with 'huge relief' by family lawyers.

But while the judgment is being commended, one knock-on effect - in the family sphere and beyond - will be less popular. The ruling effectively creates an imbalance by affording a protection to parties in litigation, or in the run-up to litigation, that those who choose a different method of resolving their dispute will not enjoy. Could Bowman therefore undermine alternative dispute resolution (ADR) methods as a way of settling disputes?

Elizabeth Hicks, family law partner at City firm Kingsley Napley, is concerned about the impact of the judgment on collaborative law, a new method of resolving family disputes. She says: 'The whole point of collaborative law is that you don't issue any proceedings, but instead the parties sit down and try to find a pragmatic solution. There is no court order, and it seems that you would be in the same position as before Bowman v Fels, so you would still have to notify NCIS of your suspicions.'

She adds: 'Another issue is that this covers proceedings up to judgment - but what about after the judgment? If you believe there is criminal property involved in the divorce, which you do not have to report because of the protection [of the litigation exemption], but then afterwards the husband pays the wife through the solicitor's client account - that could be dirty money. Is the solicitor committing a money-laundering offence? Family lawyers will need some guidance on this.'

Law Society President Edward Nally says: 'In a sense, the judgment would imply that clients are better off if they have the shield of litigation in a dispute. But it would be an odd outcome if that was the only basis on which you could protect yourself from unwitting disclosure.

'That suggests to me that this is not the end of the story, and there are other ways to cut back the zeal of this legislation, so that it applies to the non-contentious sphere as well. If that involved further test cases, then that is one route we may have to go down. But hopefully a more appropriate way of solving this would be by making changes to POCA and other regulations. That is what our continuing lobbying efforts have to be directed towards.'

He adds: 'Bowman v Fels has to be limited to the facts of that case, and so to litigation. However, there are strong parallels with the ADR process, not least because that is the preferred means of resolving disputes being promoted by government. I expect anyone in this position involved in ADR would want to rely on the dicta in Bowman v Fels. That may well be something that has to be tested.'

Louise Delahunty, a partner at City firm Peters & Peters and a former chairwoman of the Law Society's money laundering task force, agrees. She says: 'The Court of Appeal liked the arguments put forward about access to justice in litigation. The same arguments could be made for ADR - how can an arbitrator resolve a dispute if they have to stop and start proceedings while reports are made?'

The impact on ADR aside, the judgment underlines the importance of client privilege, and the need for Parliament to legislate in the very clearest of terms if its intention is to undermine it.

Mr Nally says: 'I have always thought that legal privilege needs to be cherished and should not be eroded. Privilege is under attack from all sorts of arenas, which is worrying. There were the Three Rivers cases [in which legal advice privilege was eventually restored by the House of Lords], and now Bowman v Fels develops the story. The courts have indicated quite forcibly that they consider it a significant element of British justice.'

But while lawyers - in the context of litigation, at least - can be certain that their reporting obligations have diminished, Frank Maher, a partner at Liverpool law firm Legal Risk, sounds one note of caution. He says: 'Lawyers should not think they have now ticked the money laundering box and they don't have to think about that issue any more. Solicitors are still under a professional obligation to cease acting where clients are involved in criminal activity. The failure of solicitors to appreciate those obligations cost the profession millions in the 1990s and led to the demise of the Solicitors Indemnity Fund.'

There are other implications too, he warns. 'If duties under POCA can [now] be overridden by privilege and duty to the court in litigation, then you have to wonder whether the UK still satisfies its [anti-money-laundering] obligations under European law.'