conflict of interest on the amalgamation of two firms of solicitors

by Roderick Ramage, solicitor, www.law-office.co.uk

first published in New Law Journal (newlaw.journal@butterworths.co.uk) on 24 and 31 January 1997


DISCLAIMER

This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.


This article contains precedents for three documents, which have been drafted to assist solicitors to address and deal with the problem of conflicts of interest which almost inevitably arise on the amalgamation of firms of solicitors. As a reminder of the basic issue, there are set out below the first three principles on conflicts of interest contained in Chapter 15 of the Law Society's Guide to the Professional Conduct of Solicitors (7th edition, 1996).

15.01 A solicitor or firm of solicitors should not accept instructions to act for two or more clients where there is a conflict or a significant risk of a conflict between the interests of those clients.

15.02 If a solicitor or firm of solicitors has acquired confidential information concerning a former client during the course of acting for that client, the solicitor or the firm must not accept the instructions to act against the client.

15.03 A solicitor or firm of solicitors must not continue to act for two or more clients where a conflict of interest arises between those clients.

Appendix 15A (the 7th edition version differs somewhat from that in the 6th edition, 1993) contains particular guidance about conflicts arising as a result of amalgamation of solicitors' firms. The normal prohibition against continuing to act and the possibility of an exception from it in exceptional circumstance are set out in the first few paragraphs of the following precedent letter to conflicted clients. The guidance in the Appendix requires the erection of an ethical wall (*) and that the following conditions must be satisfied before continuing to act:

3.1 both clients must have consented (if one does not, that must be an absolute bar to the firm from acting for either);

3.2 it must be in the client's best interests that the new firm continue acting despite the conflict of interest;

3.3 there must be no embarrassment to the solicitors, who must not favour one client to the detriment of the other; and

3.4 the client must have the risks fully explained.

Paragraph 3.4 in the 7th edition is the equivalent of paragraph (c) in the 6th, which read: "(c) both clients must have obtained full and frank independent advice, prior to the giving of consent". Although the Law Society's guidance no longer requires the conflicted client to obtain independent advice, there can be little doubt that it is prudent not just that the client obtains such advice but that the amalgamated firm for its own protection requires the client to obtain it.

The first precedent is intended to assist a firm to inform its clients of the conflict, its consequences and action to be taken. It is not intended to be used in its entirety but should be used as a guide to the matters that solicitors needs to consider and address.

The next two precedents are be a short form of consent by the client and a report by the independent solicitor (if any), who has advised the client before the latter's consent. Both, or all, parties to the amalgamation should co-operate closely in this matter and agree a standard set of letters to be used by both or all of them.

letter from one party to intended amalgamation of solicitors' firms to a conflicted client

[date]

you and [client-2] and subject matter

Dear [ ],

I write to inform you about the proposed amalgamation of my firm [firm-1], of whom your company [client-1] is a client, and [firm-2] to create the new firm [name]. The amalgamation will take effect on [date] and all correspondence with us from that date will be in our new name. [other relevant details about the amalgamation, unless explained in a previous letter].

One consequence of an amalgamation of this sort is that there are cases, in which both the former firms and therefore the amalgamated firm have clients involved in the same transaction or litigation. If this results in a conflict of interest, the usual rule is that the amalgamated firm must cease acting for both parties.

It is invariably the case that litigation involves a conflict of interest and the usual rule applies to litigation without exception. In other cases, where there is a conflict or significant risk of interest but no litigation, there may be exceptional circumstances, in which the best interests of the client may permit the amalgamated firm to continue acting for one or possible both clients.

Therefore both my firm and [firm-2] have examined our records in order to ascertain (first) the cases in which our respective clients are involved in the same litigation or transaction and (secondly) those in which of those cases there is a conflict or a significant risk of a conflict between the interests of our respective clients.

It does not follow as a matter of course that there is a conflict of interest in every case in which two or more parties are involved in the same transaction, but there can be a risk of a conflict in all such cases.

According to our records we [firm-1] are currently acting for you and [firm-2] are acting for the other party in the following matters:

reference transaction or litigation other party

[mm]

[nn]

[oo]

[pp]

[qq]

[litigation in which the amalgamated firm ceases acting for either party]

Case reference [mm] is a litigation matter, and I regret therefore that the amalgamated firm [name] may not continue acting for either you or [client-2]. Therefore it will be necessary for both you and [client-2] to instruct new solicitors.

[non-litigation but conflict of interest: proposal that the amalgamated firm continues acting for [client-1] but not [client-2]]

In case [nn] the other party [client-2] is a client of [firm-2]. Both my firm and [firm-2] think that there is a conflict or significant risk of a conflict between your interests and those of [client-2] in this matter, but both firms believe that this is one of the exceptional cases in which the amalgamated firm [name] may continue acting. The proposal, which I have discussed tentatively with my colleague in [firm-2] is that the amalgamated firm [name] will continue acting for you in this matter but not for [client-2], who will instruct new solicitors.

This proposal can be implemented only if both clients consent to it [after taking independent advice], and, if either you or [client-2] objects, the amalgamated firm [name] will cease acting for both you and [client-2].

[non-litigation but conflict of interest: proposal that amalgamated firm continues acting for [client-2] but not [client-1]]

In case [oo] the other party [client-2] is a client of [firm-2]. Both my firm and [firm-2] think that there is a conflict or significant risk of a conflict between your interests and those of [client-2] in this matter, but both firms believe that this is one of the exceptional cases in which the amalgamated firm [name] may continue acting. The proposal, which I have discussed tentatively with my colleague in [firm-2] is that the amalgamated firm [name] will continue acting for [client-2] in this matter but not, I regret to say, for you, with the result that you will need to instruct new solicitors.

This proposal can be implemented only if both clients consent to it [after taking independent advice], and, if either you or [client-2] objects, the amalgamated firm [name] will cease acting for both you and [client-2].

[non-litigation but conflict of interest: proposal that amalgamated firms continue acting for both parties]

In case [pp] the other party [client-2] is a client of [firm-2]. Both my firm and [firm-2] think that there is a conflict or significant risk of a conflict between your interests and those of [client-2] in this matter, but both firms believe that this is one of the exceptional cases in which the amalgamated firm [name] may continue acting. The proposal, which I have discussed tentatively with my colleague in [firm-2] is that the amalgamated firm [name] will continue acting for both clients in this matter.

This proposal can be implemented only if both clients consent to it [after taking independent advice], and, if either you or [client-2] objects, the amalgamated firm [name] will cease acting for both you and [client-2].

[non-litigation and no apparent conflict of interest]

In case [qq] the other party [client-2] is a client of [firm-2]. Neither my firm nor [firm-2] think that there is a conflict or significant risk of a conflict between your interests and those of [client-2] in this matter [because in this case the issues and objectives are well defined and agreed clearly between the parties and the work to be done by my firm and [firm-2] is essentially the preparation of the necessary documents to implement the transaction or as the case may be]. Nevertheless if either you or [client-2] think that there is a conflict or significant risk of a conflict of interest, both my firm and [firm-2] would treat it as a case of conflict. The amalgamated firm will continue acting only if both clients agree that there is no conflict or significant risk of a conflict of interest or they both consent to our acting despite the conflict.

[ethical wall and confidentiality]

The overriding factor, which governs the decision to continue or cease acting in any case and the arrangements in cases, in which we make if the amalgamated firm [name] continues acting for either or both of you and [client-2] despite the existence of a conflict of interest, is the best interest of the client. In the exceptional cases, where we continue acting for one or both of the parties despite the conflict, we (ie the amalgamated firm [name]] will erect an "ethical wall" as a means of dealing with the conflict. The effect of this will be to ensure that information which is confidential to you will not be disclosed to [client-2] and vice versa and that we will advise and act for each of you with the same degree of impartiality and same efforts to advance your respective interests as would have been the case if my firm and [firm-2] had remained independent and separate firms and not amalgamated.

Amongst other steps, the ethical wall will include the following. Different personnel will represent the two parties. So far as is practicable these will be the same as have been involved with you and [client-2] to date. Although there may be some changes in staff, as there could have been if the two firms had remained separate, no one in my present firm who has worked on the matter for you will be allocated to work on it in the future for [client-2] and correspondingly no one in [firm-2] who has worked on the matter for [client-2] will be allocated to work on it in the future for you.

All staff involved in the matter, for both you and [client-2] will be required to undertake personally to respect complete confidentiality about the matter over and above the normal duty of confidentiality owed to clients. [Further as the amalgamated firm [name] will retain offices in different locations, the personnel allocated to each of you and [client-2] will be in geographically separate offices.]

[consent and independent advice]

I mentioned above that the amalgamated firm [name] will not continue acting if either of you and [client-2] objects and we will continue to act only if both you and [client-2] consent in writing [after obtaining full and frank independent advice].

Both my firm and [firm-2] will require consent from you and [client-2] in similar form [and confirmation that you and [client-2] have obtained independent advice]. Therefore we have prepared standard drafts of a consent by both clients [and a report from the respective solicitors, from whom each of you and [client-2] separately obtain independent advice], and I enclose a copy [or] copies of each. [Both you and [client-2] must make your own choice of solicitors to advise you, who must of course be independent of each other. If you wish I would be happy to discuss with you solicitors who might be suitable to advise you. Naturally my colleague in [firm-2] and I wish to be satisfied that the respective solicitors, from whom you and [client-2] obtain advice have the experience and ability to advise fully and frankly on the issues.]

[transfer to new firm]

Both my firm and [firm-2] are conscious of the trouble and inconvenience that our ceasing to act in any matter may cause to both parties and we will do whatever is reasonably practicable to effect a swift and trouble-free transfer to the new solicitors, whom you and the [client-2] instruct to act for you in the future.

I apologise for the length and formality of this letter, but am sure that you will understand the importance of dealing with this matter thoroughly and carefully at this stage in order to avoid any risk of misunderstanding or problems in the future.

Yours sincerely,

The Law Society guidance (Appendix 15A), of which extracts were copied in the introduction to this article, expressly requires that both clients must consent to the amalgamated firm continuing to act for one or both of them, as an exception to the usual rule that it must cease acting for both of them, but it does not require the consent to be in writing. It would be a foolhardy solicitor who relies on an oral consent in these circumstances and so it may be assumed that written consent is the norm. If the amalgamated firm has explained the issues in full, as suggested in the previous precedent, the consent can be a relatively short and simple document.

Whilst the guidance in the previous version of Appendix 15A (6th edition 1993) also requires that "both clients have obtained full and frank independent advice, prior to the giving of consent", the requirement in the current version (7th edition 1996) is that "the clients must have the risks fully explained": see the comment on this point in the introduction. If independent advice is obtained, the form in which the advice is given is for the conflicted client and the independent solicitor to decide, but it is very much in the interests of the amalgamated firm to have written confirmation from the independent solicitor, that he or she has advised the conflicted client on the matter and therefore a written report should be insisted on. The advice in confidential to the conflicted client, so it is necessary that the independent solicitor obtains the client's consent to the disclosure, which he or she can do be having a draft of the report signed by the client as approved for disclosure.

After the two following precedents are some notes on ethical walls taken in part from the Law Society's guidance in appendix 15 and in part from the Ethics and Disciplinary Opinion No. 95-3 of the National Federation of Paralegal Associations (USA).

draft consent by conflicted client to amalgamated firm continuing to act

[date]

[matter]

Dear [ ],

Thank you for your letter of [date]. [On behalf of my company, [client-1]] I have [obtained advice from [independent solicitor] about and] considered the issues raised in it and in particular the conflict [or possible conflict] in the above matter between my [company's] interests and those of [client-2] and consent that your amalgamated firm [name] continues

[either]

acting for me [or] my company but not for [client-2].

[or]

acting for [client-2] but not for me [or] my company.

[or]

acting for both me [or] my company and [client-2].

I look forward to an early meeting to discuss and agree the arrangements to be made and what steps are to be taken.

Yours sincerely,

draft report by independent solicitor of advice to conflicted client of amalgamated firm

[date]

[clients and subject matter]

Dear Sirs,

Thank you for referring [client-1] to us and for the summary of the transaction, in which you, as the [prospectively] amalgamated firm resulting from the merger between the firms [firm-1] and [firm-2] will have a conflict of interest. The parties to the transaction are [client-1], who is a client of [firm-1], and [client-2], who is a client of [firm-2]. The general rule is that you must cease acting for both clients, but in exception circumstances the best interests of the client may permit you to continue acting for one or possibly both clients. You wish to continue acting for [only [client-1] / [client-2]] [or] [both [client-1] and [client-2]] and have informed us of the grounds for your belief that you may do so. You have referred [client-1] to us for advice on the issue before it consents that you continue acting for [it] / [it and [client-2]] / [[client-2]]. [Client-2] has been referred to [independent solicitor-2] for advice on the same issue, and we have spoken to [and corresponded with] [independent solicitor-2] so far as we have considered necessary to deal with the issue. With the consent of [client-1], we report to you as follows:

There is no matter or circumstance which prevented us from giving the above advice on an independent basis.

[We enclose [[client-1]'s consent signed by it] / [a draft of the consent which [client-1] is in principle prepared to sign after approval by its board of directors.]

Yours faithfully,

ethical walls

The existence of an ethical wall is an exception to the normal rule that a solicitor has a duty to pass to his or her client all information relevant to the retainer by that client irrespective of the source of the information. This would include, in those exceptional cases in which a firm of solicitors acts for two or more clients despite a conflict between their interests, information about or belonging to the client with the conflicting interest. In these circumstances the amalgamated firm must erect an ethical wall, whose purpose is to protect the confidential information of the other conflicted client or clients. Thus the exception to the normal conflict rule, which can permit a firm of solicitors to continue acting, necessarily requires an exception to another rule of a solicitor's conduct, that for the disclosure of relevant information.

Appendix 15A to Chapter 15 of the Law Society's Guide to the Professional Conduct of Solicitors contains some guidance on the erection and maintenance of an ethical wall (described there by the more familiar expression "Chinese wall").

4. The purpose of the wall is to preserve confidentiality in relation to the affairs of each client. There will be a heavy onus on the firm to show the wall is effective, which will require the following minimum safeguards:

4.1 If acting for one or both clients, the relevant personnel must adopt appropriate guidelines.

4.2 If acting for both clients, complete physical separation into different rooms (which should be as far apart as can reasonably be achieved) of:

4.2.1 all papers relating to each client; and

4.2.2 all property of or relating to each client; and

4.2.3 all personnel dealing with each client.

5. If, once set up, the wall cannot be maintained effectively, the client(s) must be told to instruct other solicitors and the firm must stop acting.

The 6th edition counselled "ideally there will be a geographical separation those members of staff ... ."

The opinion mentioned above of the (American) National Federation of Paralegal Associations was given in relation to a particular question about the employment of a paralegal, but the following advice in it about ethical walls can be applied here to all of a firm's staff involved in a conflict;

The following steps should be taken to erect and adhere to the ethical wall.

(a) prohibit the paralegal from having any connection with the matter;

(b) ban discussions with or the transfer of documents to or from the paralegal;

(c) restrict access to files; and

(d) educate all members of the firm, corporation or entity as to the separation of the paralegal (both organisationally and physically) from the pending matter.

While the responsibility to create the ethical wall is that of the attorney to whom the paralegal is accountable or by whom s/he is supervised, the paralegal should take reasonable measures to ensure that the ethical wall has been erected and, thereafter, comply with its implementation and maintenance.

Roderick Ramage

 

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