A welcome harmonisation?

Only two years after introducing a new Solicitors’ Code of Conduct (the Code), the Solicitors Regulation Authority (SRA) is considering substantive changes to Rules 3 and 4 on conflicts of interest and duties of confidentiality and disclosure (the Rules).

In December 2008, the SRA issued a consultation paper on proposals to:

Extend the existing exceptions to allow firms to act with the informed consent of two or more sophisticated clients on non-litigation matters; and,
Allow a firm holding confidential information for one client to accept new instructions from another client in relation to which the first client’s information is material, as long as stringent information barriers are in place. This would be without the need for informed consent and even where there are adverse interests between the clients.

This brings the Rules back in line with common law and closer to the rules of other major legal markets.

The proposal results from issues and concerns brought to the SRA’s attention by the City of London Law Society (CLLS) and others, as well as the SRA’s own dialogue with sophisticated users of legal services. The consultation, which closed at the end of March, invited comments from practitioners, clients, academics, regulators and other professionals, as well as those with experience of the operation of conflict rules in other jurisdictions. Along with other interested parties, a number of law firms, foreign lawyers and the CLLS submitted responses to the consultation in support of the amendments (http://www.citysolicitors.org.uk/FileServer.aspx?oID=527&lID=0%20).

Solicitors must consider both the common law and the Code when analysing conflicts of interest. The introduction, in 2006, of a complete collection of rules governing business acceptance was welcomed by practitioners. At present, however, the Rules are stricter than the common law: the Privy Council in Clark Boyce v Mouat [1994] 1 AC 428 and the House of Lords in Bolkiah v KPMG [1999] 2 AC 222 took the position that a solicitor should be able to act for one client while his partner acts for another client with conflicting interests, as long as both clients consent. Clients are fettered in their choice of UK-qualified solicitors in niche areas and multi-party transactions, especially projects, asset finance and complex structured-finance work. When law firms are forced to turn away one or more clients, who have asked separate teams within a firm to act for them because of specialist legal and commercial expertise, transactions are slowed down and client costs increase as the clients attempt to get another law firm up to speed.

Proposed amendment to Rule 3

Rule 3 currently provides that a solicitor must not act if he or his firm owe separate duties to act in the best interests of two or more clients in relation to the same or related matter, and those duties conflict or there is a significant risk that they may do so. The exceptions to this rule allow the solicitor to act in a situation of conflict if:

The two clients are competing for the same asset that, if obtained by one, would become unobtainable by the other (commonly known as the ‘auction exception’, although increasingly used for competing creditor mandates); or,
Both clients have a “substantially common interest” in relation to the matter or a particular aspect of it.

Both exceptions require informed consent by the client in writing. The SRA has identified the main difficulty caused by Rule 3 as the application of the “substantially common interest” exception, the appropriate scope of which can be difficult to judge.

Amended rules would allow “sophisticated” clients greater freedom to make informed decisions about the terms on which they obtain legal advice and from whom. Such clients might include those with an in-house legal department or who have taken independent legal advice on the conflict issue – but this seems too limited. Private equity houses, for example, are undoubtedly sophisticated users of legal services, yet few have their own legal department, instead relying extensively on external firms. It seems burdensome and unnecessarily interventionist to require such clients, who understand the legal market extremely well and are well-placed to make decisions about the relative risks/benefits, to seek the opinion of outside counsel before instructing the lawyers of their choice.

As an alternative, the possibility of a self-certification approach, similar to that applied to sophisticated investors under the Financial Services and Markets Act 2000, has been mooted. Where a firm cannot share sufficient information with clients to allow the clients to give truly informed consent, it will not be in a position to seek to act for more than one client on a matter, not least because of the core duties in Rule 1 of the Code. Ensuring that clients are satisfied with the service provided and the way client relationships are handled is of critical importance to the business strategy of all law firms.

Some jurisdictions with conflicts rules similar to those under consideration by the SRA, such as New York, have not limited the use of conflict waivers to sophisticated clients. New York courts, however, when considering whether a client has given informed consent to a conflict waiver, have indicated that the amount of information the firm would need to provide to a client in order to obtain a waiver may vary according to the sophistication of each client.

Similarly in Germany, where informed consent is required, the amount of information to be provided varies according to the level of understanding of the consent-giver.

The case for harmonisation

Amended Rules would permit England & Wales to compete on more equal terms with countries operating under less restrictive conflicts rules – see table one. For example, in New York (as in the other 47 US states that have adopted rules based on the American Bar Association’s Model Rules 2009), conflicts are defined broadly to prohibit representation of clients with differing interests. Clients can, however, waive conflicts by giving informed consent, confirmed in writing, as long as the firm reasonably believes that it will be able to provide competent and diligent representation to each affected client.

Likewise, German Bar Rules 2006 allow different teams in the same firm to act for clients with conflicting interests in the same matter (with informed written consent) provided that such representation would not be regarded as “opposed to the interests of justice”. The rules in most other Western European countries are framed in terms of very broad duties. They are generally interpreted as permitting reasonable multiple representations along the same lines as the German rules, except in litigation.

The Canadian Bar Rules 2006 provide that a “lawyer shall not advise or represent both sides of a dispute and, except after adequate disclosure to and with the consent of the clients or prospective clients concerned, shall not act or continue to act in a matter when there is or is likely to be a conflicting interest”. The Supreme Court of Canada held that a lawyer may represent one client whose interests are directly adverse to the immediate interests of another current client when both clients consent after receiving full disclosure (and preferably independent legal advice) and the lawyer reasonably believes that he or she can represent each client without adversely affecting the other (R v Neil [2002] 3 SCR 631).

The Law Council of Australia’s Model Rules of Professional Conduct and Practice 2002 prohibit practitioners from acting in circumstances of conflict, but do contemplate situations in which a practitioner may act for multiple clients with competing interests, if the practitioner can meet criteria including the informed consent of the clients.

In New Zealand, a lawyer can act for more than one client, with the prior consent of each, unless there is a “more than negligible risk that the lawyer may be unable to discharge the obligations owed to one or more of the clients” (Chapter 6 of the Rules of Conduct and Client Care for Lawyers of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (SR 2008/214) (published pursuant to the Lawyers and Conveyancers Act 2006).

All of these approaches provide practitioners with some flexibility to act in circumstances where clients may have competing or conflicting interests but where, as a practical matter, those differing interests will not result in either client’s interests being prejudiced. Additionally, they empower clients – whether “sophisticated” or not – to make decisions as to their representation on a fully informed basis having regard to their own circumstances and their relationship with their solicitors.

By bringing the Rules more in line with the conflicts rules of other more permissive jurisdictions, the SRA’s proposed changes will improve the competitive position of England & Wales. Differences in the New York and England & Wales conflicts rules, for example, frequently create practical problems for international law firms and their clients. Rule 15 of the Code applies Rule 3 to a firm’s overseas practice. If a New York office is a branch of a partnership, matters on which both New York and English law advice is required may be governed by inconsistent conflicts provisions of both jurisdictions, with the English provisions limiting what a client could otherwise agree to. This is confusing and frustrating for clients who expect to be free to choose their legal services provider.

Proposed amendment to Rule 4

Rule 4 currently restricts a firm holding confidential information in relation to one client from acting for a new client with adverse interests, where the first client’s information would be material. Consent is required, unless the firm has already started acting for the new client when the issue arises.

The proposed change would allow a firm to accept instructions without client consent where the present Rule 4 requires it, provided a rigorous common-law standard information barrier was erected to protect the information. This is a logical and low-risk extension of the existing Rule 4.05, given the strength of the protection stipulated by the common law. Indeed, to the extent that a client is already able to give a general advance waiver to a firm to act in such circumstances (for example, by agreeing to a law firm’s terms of business), an amendment would not substantially change the way in which clients’ interests are protected. As the SRA reasons in its consultation, it would also make it less likely that clients would tactically instruct law firms to prevent their competitors accessing specialist legal advice.

It would also bring the rules in line with other jurisdictions and with what other professional advisers are permitted to do. Practice in large firms has demonstrated that information barriers are successful in protecting clients’ confidential information and clients repeatedly agree to their solicitors taking on multiple roles in competitive situations because they have confidence in their firm’s confidentiality arrangements.

In summary

The proposed amendments to Rules 3 and 4 would make conflicts management easier by bringing the Code more closely in line with both the common law and the rules of many other jurisdictions. The real benefit will be for the clients, with increased transparency and freedom of choice of counsel. We hope that the SRA will conclude that any risks posed by the amendments are far outweighed by the benefits that they would afford.

Eleni Pavlopoulos is global head of conflicts and Kay Lee Fordham is a risk lawyer specialising in conflicts management at Linklaters. They can be contacted at eleni.pavlopoulos@linklaters.com and kaylee.fordham@linklaters.com