Law Society Publishes New Conflicts Rules Following Marks & Spencer Decision

The Law Society of England and Wales has introduced, with the approval of the Lord Chancellor, the draft rules on conflicts of interest and confidentiality which were first published in June 2005. The rules were prepared as a response to the Freshfields / Marks & Spencer decision and other high profile conflict cases. The new rules came into effect as of 25th April 2006.

The Rules – Conflict of interest

The rules define what constitutes a conflict of interest. A conflict is said to exist where a firm 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. The Law Society’s guidance to the rules state that this will “encompass all situations where doing the best for one client in a matter will result in prejudice to another client in that matter or a related matter”. If the two matters concern the same asset or liability, this will be sufficient for them to be related.

There are two exceptions where a firm may continue to act where there is a conflict or potential conflict:

  1. Where the different clients have a “substantially common interest” in relation to the matter and if all of the clients have provided the firm with written informed consent. The guidance states that 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.

  2. Where the clients are competing for the same asset (as would be the case with auctions, for example) and provided that there is no other conflict, or significant risk of conflict between the clients, and the clients have provided written consent then the firm may act for two or more clients. In addition it must be reasonable in all the circumstances for the firm to act for all of the clients. The criteria against which reasonableness will be judged is whether one client is at risk of prejudice because of the lack of separate representation. The guidance therefore recognises that there are complex multi-party commercial transactions where sophisticated users of legal services, who have a common interest may expect a firm to act for two or more parties, because this will facilitate the efficient handling of the matter.
In-house lawyers

Where an employer wants advice on a course of action from an in-house lawyer which could create a conflict with the personal interests of the in-house lawyer as an employee and if the advice to be given so affects the lawyer that the lawyer feels his or her objectivity and independence are impaired, the guidance provides that the lawyer should ask the employer to seek alternative advice, either externally or internally. The guidance emphasises the importance of transparency as to the lawyer’s interests.

Unsurprisingly, an in-house lawyer should not act contrary to his or her professional obligations and should refuse to do so even if this would result in the lawyer losing his or her job.

Confidentiality and Information Barriers

The Law Society has also introduced separate rules on confidentiality and disclosure.  For the first time these rules recognise that confidential information can be protected by the use of information barriers. 

The primary rule is that a solicitor must keep the affairs of clients and former clients confidential except where disclosure is required or permitted by law or by the client. In addition, a solicitor must disclose to a client all information of which he or she is aware which is material to the matter on which the solicitor is advising the client regardless of the source of the information, but this duty of disclosure is over-ridden by the duty of confidentiality. It can also be expressly agreed with the client that no duty to disclose arises or that a different standard of disclosure arises.

The rules state that, if a firm holds confidential information in relation to a client or former client, it must not risk breaching its duty of confidentiality to that client/former client by acting or continuing to act for another client on a matter where the confidential information might reasonably be expected to be material and that client has an interest adverse to the other client or former client. The firm may, however, continue to act where both clients have given informed consent and it is reasonable in all the circumstances to do so. The guidance states that generally it will only be sophisticated clients who will have the expertise and ability to weigh up the issues and the risks of giving consent.

In addition, the rules provide that in limited circumstances a firm may continue to act for a client on an existing matter, or on a matter related to an existing matter, without consent if it is not possible to obtain informed consent and it is reasonable in all the circumstances to do so.

The rules do not contain detailed guidance on the setting up of information barriers. However, the guidance does set out some protections which might be appropriate, for example physical separation of the people within the firm working for each client, password protection of computer networks and introducing a system for the opening of post, receipt of faxes and distribution of email which will ensure that confidential information is not disclosed to anyone outside of the restricted group.

Dorsey & Whitney’s London office is hosting an ethics seminar on May 18 at which lead counsel on the Marks & Spencer / Freshfields case will be speaking.

The new rules along with the Law Society’s guidance can be found aon their website here.