During a recession when there is even greater pressure on fee earners to achieve targets and where transactional work has reduced, law firms need to be alert to the possibility of their lawyers becoming more reluctant to turn work away, and more tempted to bend the rules and take on a client who in busier times might have been turned down because of a conflict of interest.
Rule 3 of the Code of Conduct, set out by the Solicitors Regulation Authority (SRA), which regulates solicitors in England and Wales, provides that, except in the very limited circumstances set out in sub-rule 3.02, a solicitor must not act if there is a conflict of interest. It covers situations where the solicitor’s own interests conflict with those of the client and where the solicitor or firm owes separate duties to act in the best interests of two or more clients in relation to the same or related matters.
As with many of the rules of conduct, there is an element of judgement which a solicitor has to exercise in deciding whether there is a conflict situation or whether the situation falls within the very limited exceptions. If the decision to act is one that no reasonably competent solicitor would have made, it is likely to be inferred that the solicitor did not properly address the issue and will be in breach.
What is clear is that conflict situations, and the exceptions providing for when a solicitor can act, should be approached with caution. After all, the exceptions are there for the benefit of the clients and not the solicitor, and strict conditions need to be fulfilled (including ensuring that each client gives informed consent and that the terms of the arrangement are properly set out in writing).
This makes the retainer letter of paramount importance and solicitors will also need to exercise extreme caution in relation to their duties of confidentiality contained in Rule 4 of the Code.
Consulting on change
The SRA is presently considering responses to a consultation proposing amendments to Rules 3 and 4. The proposals would increase the exceptions under which firms would be able to act for clients with conflicting interests where the clients give informed consent so that, for example, two teams within the same firm could act for two different clients and could conduct negotiations with each other.
The driving force behind these proposals comes from the Law Society, which argues that the rules need to be brought in line with conflict rules in other jurisdictions where firms are allowed to act in conflict situations as long as the clients concerned are able to give informed consent.
‘Sophisticated clients’ should not be prejudiced, they argue, by being unnecessarily restricted in terms of their choice of lawyer. The amendments will therefore be of most relevance to firms with ‘sophisticated clients’ (yet to be defined but likely to be those that have their own in-house legal department or have obtained separate legal advice on the issue). Any amendments will need to have tightcontrols in place but, provided that solicitors bear in mind their core duty to act in their clients’ best interests, the risks should be capable of being managed effectively.
The consultation has only just closed so the outcome is awaited but, given the recent review carried out by Nick Smedley which identified concerns about the SRA’s approach to regulation of corporate firms, I would be very surprised if the SRA did not bow to the pressure exerted here.
Furthermore, the introduction of firm-based regulation means that the SRA will be able to discipline law firms, not just the individual in breach. Therefore, all firms, not just the corporates, will need to ensure compliance in this area. A comprehensive system for conflict checking is clearly a must, together with suitable in-house training of staff.
Michelle Garlick is partner in the Professional Risk Team at UK law firm Weightmans LLP
This article first appeared in Legal Strategy Review, Issue 4