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Was it worth the wait? The new solicitors? practice rules on conflicts of interest
The long-awaited new Law Society rules on conflicts of interest and confidentiality came into force on 25 April 2006. They replace the old rules as set out in the Guide to Professional Conduct of Solicitors (8th edition) 1999.
In this briefing we consider what was wrong with the old rules, what is in the new rules, the legal effect of the new rules, and what they mean for in-house lawyers.
WHAT WAS WRONG WITH THE OLD RULES?
The old rules (primarily paras 15.01, 15.02, 15.03 and 25 of the Guide, supplemented by various guidance notes and Annex 15A) were hard to understand. The fundamental problem was that the rules did not seem to follow the principles and concepts established by the common law1, in particular the difference between an existing client and a former client conflict. The rules were muddled on the relevance of confidentiality and the role of information barriers. For example:
- Rule 15.01 provided that a firm of solicitors could not accept instructions to act for two or more clients where there was a conflict, or a significant risk of a conflict, even with client consent. Rule 15.03 provided that solicitors should not continue acting for two or more clients where a conflict of interest arises. In fact, the courts had said that a firm of solicitors could act in the same matter for two or more clients with differing interests, provided that there was informed consent and provided that there was no breach of the ‘actual conflict' or ‘no inhibition' rules (see Bristol & West Building Society v Mothew).
- Rule 15.02 provided that a firm of solicitors could not act against a former client where the firm of solicitors had acquired relevant confidential information from that client, even where effective information barriers could be established. In fact, the courts had said that solicitors could act in such a situation provided that adequate information barriers were erected to ensure that there was no real risk of disclosure of the confidential information, although that might be rare (see Bolkiah v KPMG and later eg Koch Shipping v Richards Butler (a firm)).
As well as being hard to follow, the old rules were also hard to apply. Indeed, they were generally considered to be unrealistic in their apparent strictness, although it was not clear if the rules were intended to be stricter than the common law. Research in 20032 established that large City firms generally considered the rules to be out of touch with commercial reality and modern business practice. These firms took the view that the number of potential conflicts was so great that the City would grind to a halt if they were bound by the strict letter of the rules, and it was therefore in the interests of clients that solicitors be permitted to act in conflict situations with suitable safeguards.
The new rules divide into a new Rule 16D with regard to conflicts, and a new Rule 16E with regard to confidentiality and disclosure. Both have accompanying guidance that provides explanatory notes, but this does not form part of the rules. Separate rules continue to apply to conflicts in conveyancing cases.
New Rule 16D - Conflicts
Rule 16D provides that a solicitor must not act if there is a conflict of interests (except if one of the specified exceptions applies).
Definition of a conflict
A conflict of interests is defined as a situation where:
1) a solicitor owes, or a solicitor's practice owes, separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict; or
2) a solicitor's duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with the solicitor's own interests in relation to that or a related matter.
For the purposes of the above, a ‘related matter' will always include any other matter which involves the same asset or liability.
It will be observed from (1) above that an existing client conflict situation is limited to the scenario where there are two or more clients for whom a firm owes duties in relation to the same or related matters, and the duties to those clients conflict, or there is a significant risk that those duties may conflict. This would suggest that the rules do not consider there to be a conflict where a solicitor acts for a client on one matter and against it on another matter, as long as the two matters are not ‘related'. The guidance does, however, recognise that there may be some circumstances in which a solicitor should refuse instructions, even though there is no actual conflict of interests as defined above, where the solicitor feels unable to do the best job for the client because of some form of professional embarrassment.
The prohibition on acting in conflict situations is not, however, absolute. There are two permitted exceptions as follows:
The first exception is where there is a conflict as defined above but:
- the different clients have a substantially common interest in relation to the matter or a particular aspect of it; and
- all the clients have given their informed consent in writing.
The guidance indicates that in order for there to be a ‘common interest', there must be a clear common purpose and a strong consensus on how it is to be achieved. Any areas of conflict must be substantially less important to all the clients than the common purpose. This exception may apply, for example, when acting for members of a family in setting up a company or for different tiers of lenders in a financing transaction.
The second exception is where there is a conflict as defined above and:
- the clients are competing for the same asset which, if attained by one client, will make that asset unattainable to the other clients;
as long as:
- there is no other conflict, or significant risk of conflict, between the interests of any of the clients in relation to that matter;
- the clients have given their informed consent in writing; and
- unless there is specific agreement, no individual solicitor acts for or is responsible for the supervision of more than one of those clients.
For example, this exception may apply when acting for more than one creditor on an insolvency, competing bidders for a business being sold by auction, or competitors in a contract tender.
The guidance indicates that it may be possible to accept instructions on the basis of a retainer which is limited to the areas where there is no conflict, with the clients seeking separate advice on any areas of conflict.
In respect of both of the above exceptions, it must be reasonable in all the circumstances to act for all of the relevant clients. This includes being sure that the solicitor and firm are acting in the best interests of both clients. In deciding whether it is reasonable to act, a solicitor should take an objective view in light of everything that is known about the proposed instruction and about the clients.
Further, if proposing to act in a situation of conflict under one of the above exceptions, the solicitor and firm must consider whether they have relevant confidential information and whether there would be a real risk of disclosure by acting (see below).
Conflict when already acting
In a situation where a firm acts for more than one client in a matter and, during the course of the conduct of that matter, a conflict arises between the interests of two or more of those clients, the firm may only continue to act for one of the clients (or a group of clients between whom there is no conflict) provided that the duty of confidentiality to the other clients is not put at risk.
Rule 16D also addresses solicitors accepting gifts from clients and public office or appointments leading to conflict.
New Rule 16E - Confidentiality and Disclosure
Duty of confidentiality
Rule 16E provides that a solicitor and their firm must keep the affairs of clients and former clients confidential except where disclosure is required or permitted by law or by the client or former client.
Duty of disclosure
A solicitor must disclose to a client all information of which that solicitor is aware which is material to that client's matter, regardless of the source of the information, unless:
- there is a duty of confidentiality as referred to above; or
ii) certain other circumstances exist as a result of which the duty does not apply, eg disclosure is prohibited by law.
As is apparent from (i) above, where there is both a duty of confidentiality and a duty of disclosure, the duty of confidentiality is the overriding duty.
Duty not to put confidentiality at risk by acting
If a solicitor or a solicitor's practice holds confidential information in relation to a client or former client, the solicitor must not risk breaching confidentiality by taking on a new instruction or continuing to act for another client on a matter where:
- that information might reasonably be expected to be material; and
- that client has an adverse interest to the first mentioned client or former client
except where proper arrangements can be made to protect that information. Those proper arrangements must include obtaining the informed consent of the client for whom the firm is proposing to act, that the matter has been brought to the attention of both of the relevant clients and that it is reasonable in all the circumstances to act.
If the firm is already acting and it discovers that it has, or it comes to possess, relevant confidential information from another client or former client, the firm can continue to act for the client, even if the party for whom the firm possesses the confidential information has not consented, but only if:
- it is not possible to obtain informed consent from that party, eg because making the request would itself breach confidentiality;
- the client has agreed to the firm acting in the knowledge that the practice, or a member of the practice, holds or might hold information material to the matter which cannot be disclosed;
- safeguards that comply with the standards required by law at the time they are implemented are put in place; and
- it is reasonable in all the circumstances to do so.
The ‘standards required by law' are, of course, the arrangements for information barriers which are dealt with in Bolkiah v KPMG and subsequent cases. The details of these arrangements are not enshrined in Rule 16E. However, the guidance sets out examples of arrangements that may be appropriate, including physical separation, separate computer networks or password protection and appropriate disciplinary arrangements.
A firm will be liable if confidential information does leak. In these days of common movement between firms and mergers, firms must be extra vigilant.
LEGAL EFFECT OF THE NEW RULES
The new rules have been brought in by statutory instrument. This means that, unlike the old rules, they will be enforced by the courts. Accordingly, the sanctions for non-observance now go beyond purely professional sanctions (enforced via the Office for the Supervision of Solicitors) to the possibility of injunctions in appropriate circumstances.
As to the relationship between the new rules and the common law, to the extent that the rules are more onerous than the common law, solicitors must comply with the rules. To the extent that the rules are less onerous than the common law, solicitors must comply with the law. The Law Society has expressed the hope that the courts will now follow the new rules, but there is no reason to believe that they will treat them as anything more than a minimum level of obligation.
Although the detail of the new rules is aimed at solicitors in private practice, the principles behind the rules are, of course, applicable to in-house lawyers. In-house lawyers must therefore be alert to potential conflicts in their own role. This would include being aware of who their client is in any given situation, and considering the potential for conflict (and obtaining consent if appropriate) when asked to act, for instance, for more than one group company. It may be sensible to nominate an individual or committee in-house to whom any questions of potential conflict would be referred in the first instance.
In-house lawyers should also maintain a system for recording instructions to external lawyers so that any situation of potential conflict that arises involving external lawyers can be readily identified.
The guidance on conflicts has dedicated a section to conflicts for in-house lawyers, which deals primarily with personal conflict. The guidance states that in situations where the in-house lawyer's personal interests may conflict with a course of action proposed by the employer, this does not necessarily exclude the in-house lawyer from advising the employer. The employer will usually be aware of the potential conflict and if the in-house lawyer is able to give objective advice on the legal issues then they would normally be free to do so.
There may, however, be situations where the in-house lawyer feels unable to give objective and independent advice. In those situations they would have to ask the employer to seek other advice, either internally or externally. What is important in these situations is that there is transparency with regard to the in-house lawyer's interests. Beyond that, they would have to make a judgement about whether they feel they have the necessary objectivity to advise.
The guidance3 makes it explicit that in situations where the in-house lawyer is asked to act contrary to their professional obligations, they should not compromise their position and must refuse to carry out instructions, even if this leads to the loss of their job!
The new rules have come a long way towards meeting the criticisms of City lawyers and commentators. They are clearer and now permit law firms to act in a number of conflict and confidentiality scenarios that were arguably prohibited. Equally, they are more forceful in other areas, in ways designed to protect a client's best interests.
However, the rules do not sit in a vacuum. Common law principles continue to apply, and will be particularly relevant in the context of establishing just what amounts to ‘informed consent', when an information barrier can be considered effective and appropriate, and what amounts to a ‘potential' conflict. It remains important to ensure that the facts of each case are examined thoroughly to ensure compliance with both the rules and/or common law.
Bristol & West Building Society v Mothew  Ch 1
Bolkiah v KPMG  2 WLR 215
Koch Shipping v Richards Butler (a firm)  EWCA Civ 1280
1) See Lewis Silkin's review of the common law rules, p42.
2) Conflict over conflicts, by Janine Griffiths-Baker, New Law Journal, 21 February 2003.
3) Para 21 of the Conflict Guidance.
Written by Tamar Halevy, solicitor, commercial litigation.