Conflicts of interest

Are law firms riding roughshod over their clients’ best interests, or are the Law Society’s rules concerning conflicts of interest hopelessly out of touch? Husnara Begum reports

Lawyers should be the last people to breach professional ethics, but the truth is that many City firms pay only lip service to the Law Society’s conflict of interest rules and regularly advise multiple parties on the same deal.

Magic circle firm Allen & Overy (A&O) has been the latest to come under fire for its conduct. In May, ABN Amro, the Dutch investment bank advising WM Morrison, ditched the magic circle firm as its adviser on the battle to take over Safeway after it emerged that the firm was also acting for Dresdner Kleinwort Wasserstein, the investment bank representing rival bidder Wal-Mart (The Lawyer, 19 May).

Then, in June, A&O became embroiled in another conflict, with its lawyers sitting on both sides of the negotiating table. This time the firm advised advertising giant WPP, the company that bought troubled rival Cordiant Group, as well as Cordiant’s lending banks (The Lawyer, 23 June).

A complaint was made, subsequently withdrawn, to the Law Society in July about A&O taking instructions from the two banks working for competing bidders on the Safeway takeover battle. The Law Society, through the Office for the Supervision of Solicitors, has started its own investigation and assigned a caseworker to pursue the matter.

Not that the firm stands accused of failing to take conflict issues seriously. As revealed by The Lawyer in September, the firm is investing millions in launching a sophisticated automated global conflicts checking system. The 24-hour clearing system, which has been under construction for 18 months, will be rolled out in November.

A&O conflicts partner Mark Welling defended the firm’s position on conflicts during an interview with The Lawyer last month. “None of the situations that have been reported are ones that have slipped through the net,” he said.

A&O is certainly not the only firm that has flouted the Law Society conflict rules, according to Janine Griffiths-Baker, a lecturer at the Bristol University School of Law. Griffiths-Baker says that while researching her new book, Serving Two Masters: Conflicts of Interest in the Modern Law Firm, she discovered that only 30 per cent of the 100 firms she spoke to complied with the rules.

“I found that large City firms were prepared to act in a wide range of conflict situations, sometimes without the consent of the clients involved,” she says. “They justified their failure to comply with the Law Society rules on the grounds that [the society is] out of touch with commercial reality. The firms maintained that the number of potential conflicts is so great that the City would grind to a halt if they were bound by the rules.”

Kenneth MacRitchie, the managing partner of Shearman & Sterling‘s London office, agrees. “Look at The Lawyer 100,” he says. “The big four magic circle firms accounted for 35 per cent of The Lawyer 100 revenue. The only way they could have achieved this is to act in cases where there are potential conflicts. This isn’t just an ethical issue, it’s also a business issue. If firms apply the conflict rules strictly their businesses will be hit.”

However, Michael Madden, the head of Ashurst Morris Crisp’s property litigation group, argues that most major City firms will not put financial gain ahead of compliance with professional conduct rules. “Law firms are businesses, so there’s always pressure to get work in,” he says. “However, this cannot be allowed to jeopardise professional integrity. Any decision must be taken having regard to the law, the practice guidance and the best interests of the client.”

Ashursts has an internal conflicts checking system, under which any partner who is approached by a potential new client must notify the other partners at the firm. Ashursts also has a conflicts committee, which has the final say as to whether the firm should accept instructions from a new or existing client.

A&O’s new multimillion-pound conflicts regime will create an online virtual filing system. Analysts in three different time zones will implement the initial checks and pass on the more contentious issues to a group of partners.

The term ‘conflict of interest’ has several meanings and covers a number of different scenarios. The Law Society conflict rules are set out in Chapter 15 of the Guide to Professional Conduct.

Chapter 15 splits conflicts into two categories: personal conflicts – ie where there is a conflict, or a significant risk of conflict, between the interests of the client and the solicitor’s own interests; and solicitors acting for multiple clients if there is a conflict, or a significant risk of conflict.

Additionally, Principle 15.02 of the Law Society’s rules state: “If a solicitor or firm of solicitors has acquired relevant confidential information about an existing or former client during the course of acting for that client, the solicitor or the firm must not accept instructions to act against that client.”

A relevant confidential information conflict may arise where a firm acts for competitors in the same sector on different matters simultaneously or in the future. It could also arise when a lawyer moves from one firm to another. In that case, the Law Society rules preclude the solicitor from acting against any clients of their former firm.

All three conflicts are prohibited under the Law Society rules even if the client gives consent.

The application of the relevant confidential information conflict remains blurred. Indeed, firms have adopted a mixed approach to the rule – for instance, Madden says that Ashursts will not take on any tobacco companies as a client because of its longstanding relationship with Imperial Tobacco.

On the other hand, Linklaters appears to have taken a more relaxed approach, with the magic circle firm being retained by three major high street banks – the Royal Bank of Scotland, HBOS and Lloyds TSB. It also acts for telecoms clients Vodafone and BT.

Clients’ attitudes towards conflicts also vary. For example, London Underground Ltd (LUL) applies the conflict rules rigorously. During its recent legal panel review, LUL excluded firms that had advised any of the parties on the LUL public-private partnership from pitching for a place on its law firm panel. LUL adopted this stance because those firms may have acquired confidential information from their former clients.

If a firm decides to act for more than one party on a deal it can erect a ‘Chinese wall’ (or information barrier) to segregate teams advising the different parties and to prevent the flow of information between them. Chinese walls are a common feature in investment banks, where traders and corporate financiers are separated. Now, though, City firms are relying increasingly on Chinese walls so they can act for more than one party on a deal.

For example, last November Clifford Chance built a Chinese wall to enable it to act for multiple parties on the sale of Homebase to retail giant GUS. The firm acted for private equity house Primera, the Homebase management and those banks lending money to GUS, which in turn was being represented by Linklaters, which also acted for the original owner and stakeholder J Sainsbury when it sold its share in the group.

Nevertheless, the Law Society conflict rules only allow the use of Chinese walls when two firms merge. This is in stark contrast to the stance adopted by the Commercial Court in the recent TXU Europe insolvency.

In March, A&O and leading US-based firm Cadwalader Wickersham & Taft created a Chinese wall because they were advising multiple parties on the TXU Europe insolvency. A&O is acting for TXU’s joint administrator KPMG, TXU’s banks, TXU creditor Barking Power and the bankers for another creditor, AEX Drax. Cadwalader is also advising KPMG as well as TXU’s bondholders, which are owed more than 2bn by the troubled energy company. However, in that case the Commercial Court sanctioned the use of Chinese walls – apparently in direct contravention of a strict interpretation of the Law Society’s rules.

The Law Society argues that it is hard to determine exactly how many firms are bending the conflict of interest rules. However, it accepts that its rules are at odds with the modern economy and do not accommodate certain corporate transactions.

Austin O’Malley, the Law Society’s head of guidance in professional ethics, says: “There’s a recognition that the commercial position has moved on, and obviously we don’t want to find that solicitors are precluded from advising on a deal when their foreign counterparts aren’t. But the public interest also needs to be protected.”

Consequently, the Law Society has produced draft rules which will be put before the Law Society Council next February. These allow solicitors to act for multiple clients who have a common interest in the matter or who are competing for the the same outcome (for example, two more consortia bidding for a contract).

When a firm advises clients that are competing for the same outcome, it will need to obtain the clients’ informed consent. Additionally, the firm will also have to set up properly managed information barriers.

The draft Law Society conflict rules are more consistent with those from across the Atlantic, where standards are higher. In the US, firms are prohibited from taking on any work that conflicts with their clients’ interests, and although firms can waive this rule with the clients’ consent, the post-Enron environment clients are less likely to give lawyers the green light to act for more than one party.

It seems that so long as the Law Society conflict rules remain unchanged, firms will continue to stretch them to the limit.

And even if the rules are relaxed, MacRitchie at Shearman concludes: “Lawyers are swimming against the tide. The whole issue of whether UK firms can get their own way is questionable.”

Personal conflict
A personal conflict may arise where there is a conflict, or a significant risk of conflict, between the interests of the client and the solicitor’s own interests.

Multiple client conflict
A multiple client conflict may arise when a solicitor or firm acts for multiple clients with conflicting interests or competing goals (ie buyer/seller, borrower/lender)

Relevant confidential information conflict
This may arise when a firm acts for competitors in the same sector on different matters simultaneously or in the future. It could also arise when a lawyer moves from one firm to another. In that case, the Law Society rules preclude the solicitor from acting against any clients of their former firm.

All three conflicts are prohibited by the Law Society even if the client gives consent.