Business Law International Conflicts of Interest, Chinese Walls and the Changing Business of the Law R. S. G. Chester, J. W. Rowley and Brett Harrison Sweet & Maxwell ....... WFSf •GROUP Conflicts of Interest, ·Chinese Walls and the Changing Business of the Law R. 5. G. Chester, J. W Rowley, o. c. and Brett Harrison 7 Mcmillan Binch, Toronto The Legal Profession in Flux As the waves of consolidation and globalisation wash upon the legal system, old . traditions crumble. The business structure of the sophisticated law firm has gone through major changes in the last 30 years. Starting in the United States, but now spreading to many countries, law firms have grown in size and sophistication. Law firms have also spread across jurisdictions through alliances and mergers. A law firm of even 100 lawyers would have been considered large in the 1960s. Now a handful of firms exceed 1,000 lawyers. In firms like these, growth changes not merely the economic presence of the entity-it changes the professional structure too. Specialisation and fragmentation occurs, as firms recognise that effective strategic leadership needs sharper focus-thus the rise of practice groups. The nature of partnership changes too. Firms that grew on strong professional relationships built upon personal friendships, shared visions and common experi~nces have had to institutionalise and professionalise management and adapt to changes in the business milieu in which their clients thrive. Changes in the business law firm have spurred change in other, less obvious areas. The pressures facing the legal profession worldwide challenge old rules and long-standing patterns of behaviour. In a world in which law firms grow in size, power and revenue and as other professions converge into areas previously reserved for the legal profession, it is not surprising that ethical rules face reassessment. This article examines how economic and professional change has affected one of the fundamental ethical rules on which the legal profession is based-the avoidance of conflict of interest. It is regarded as axiomatic that a lawyer cannot let his, or her, professional performance be compromised by competing loyalties-either a conflict between client and personal interests, or between two clients. A body of ethical and legal rules has grown up to define and channel acceptable behaviour when confronted by conflicts. We are grateful to Ward Bower (Altman Weil, Newton Square), William J.L. Calkoen and R.A.L.H.M. Bouwman (Nauta Dutilh, Rotterdam), Anthony E. Davis (Fox Horan Camerini, New York), Thomas Federspiel (Gorrissen Federspiel Kierkegaard, Copenhagen), Michael Friedmann (Joint LL.B./MBA Programme, University of Toronto), Ross Harper (Harper Macleod Glasgow), Hans-JOrgen Hellwig (Hengeler Mueller Weitzel Wirtz, Frankfurt), Stuart Morgan and Paul Doris (Freshfields, london}, Ram6n Mullerat, (Bufete Mullerat, Barcelona}, Ainhoa Pinilla and Bernado M. Cremades (Cremades y Asociadas, Madrid), Donald Robertson (Freehill, Hollingdale Page, Sydney), Michael Simmons (Finers, london), Christine Sohar (University of Denver College of Law), Rudolf Tschani (Lenz & Staehelin, Zurich), Sven Unger (Mannheimer Swartling Advokatbyrfl, Stockholm), lvo Van Bael (Van Bael & Bellis, Brussels), Yasuhide Watanabe (Nagashima & Ohno, Tokyo) and David A.R. Williams, Q.C. (Auckland), for their invaluable assistance in providing research material for this article. Responsibility for any errors rests with the authors. (2000] B.L.I.Issue 2: © International Bar Association 36 Conflicts of Interest The issue is an important one for both law firms and clients, and is recognised as such in all jurisdictions. This article reviews the transformation of conflicts rules over recent years, as traditional approaches have been tested by th~ rise of sophisticated bus~ ness law firms and by other changes in the market for legal serv1ces. Old ~ules wer~ pre.mlse~ on the notion that lawyers would likely practice by themselves or 1n small f1rms 1n wh1ch lawyers were intimately involved in the practice, collaborating closely arid sharing common knowledge and experience. While that model still dominates the profession in pure numbers-the majority of lawyers work in firms of under ten lawyers-the market for .legal services has resulted in economically powerful and professionally sophisticated large firms. Ethical rules that presented few problems for solo practitioners or small firms now fit uncomfortably into the larger legal landscape .. Our primary focus Is on how the ethical rules have been changed to address the larger changes in the business and professional operations of large law firms. This article adopts a comparative approach, since it has been fascinating to see how different jurisdictions have followed each other in fashioning new, and more nuanced, rules. Its primary focus will be on common-law jurisdictions, but it will contrast these developments with similar rules in civil-law jurisdictions. It attempts to draw conclusions from these parallel developments about how the profession is developing and what the future holds. Since recent case law has explicitly probed the question of whether the same rules· apply to accountants working on legal file engagements, conflicts rules have implications for the phenomenon of multi-disciplinary partnerships. As the rise of global law firms gathers speed, so large accounting firms have diversified away from the staples of audit and accounting advice, transforming themselves into professional service firms with partners drawn from many disciplines. The challenge to law firms started in Europe, but is now becoming global. Leaders of the legal profession argue that the economic forces are not inexorable and that ethical and professional imperatives must be addressed. Old issues of conflict of interest and duty have asserted themselves into that debate. In the process, we are beginning to see the emergence of a global law of conflicts of interest. All these developments were brought sharply into focus in late 1998 when England's highest court-the House of Lords-decided its most important conflicts case ever. Although the case focussed on forensic accountants, its largest implications are for the legal profession. In its decision, the Court transformed English law, set higher standards for conduct, and challenged both law firms and professional regulators to adapt. The Lords decision was explicitly comparative in its analysis, and .also sensitive to the professional context of sophisticated markets for legal services. This article finishes with a critical examination of the opportunities for the effective use of screening devices or ethical walls to neutralise such conflicts. It concludes that such screening devices, while plausible and attractive, are only intermittently effective. In numerous jurisdictions around the world, such devices have crumbled under challenge and scrutiny by the courts. Traditional Approaches to Conflicts In looking at conflicts~ a number of professional interests and values are at stake. Of primary importance is the need to protect clients, and to ensure the .undivided loyalty of their legal advisors. Even if the lawyer-client relationship has come to an end, the 12000] B.L.I. Issue 2: © International Bar Association R.S.G. Chester, J.W. Rowley Q.c. and Brett Harrison 37 confidentiality of any information that the lawyer possesses must be scrupulously respected. The high standards of the legal profession depend on the integrity of the justice system. Next in priority comes the desirability of enabling consumer choice­ litigants should not be deprived of their counsel of choice without good reason. A third interest relates to a respect for market forces within the market for legal services. As we shall see later, there is a resistance to inter-jurisdictional and interdisciplinary consolidation within the market for legal services, which is being felt in the conflicts jurisprudence. These market forces have manifested themselves both at firm and individual levels. Mergers of law firms started in the 1980s within national markets. The phenomenon of the 1990s has been mergers of firms in different countries and continents. The next decade will almost certainly see a series of cross-profession mergers, as major accounting firms broaden their professional services into legal domains and recruit lawyers to handle these matters. In the slightly longer run, we are likely to see the emergence of true multidisciplinary service firms, in which legal, accounting, financial and engineering professionals work as required on projects which span many disciplines. The stakes are high, not merely in terms of embarrassment and damage to client relations, but also in monetary terms. In the United States, the consequences of botched conflicts include lawsuits. 2 One Oklahoma firm was reportedly hit with a $120 million claim for attempting to switch sides in an oil industry dispute. In 1996, Louisiana's appellate court upheld a $5.5 million judgment against a lawyer who had tried to act for both sides in a corporate merger. Firms have also had to forfeit fees, with Milbank Tweed reportedly losing a $1.9 million fee award in 1997, 3 and Willkie Farr4 almost $3 million the following year. 5 ,, Competing Professional Valui=s The sources of conflict rules are found in both case law and in local rules of professional conduct. 6 While common law courts are attentive to professional rules, they have made it clear that the various rules of professional conduCt are not necessarily congruent with rules that the court will apply/ "The codes of professional conduct governing lawyers do not govern common law courts, which must follow the law governing fiduciaries and confidences, not rules of professional ethics. But that theoretical distinction weakens in practice, for the law and the ethics are similar-as are the problems. So professional ethics codes are suggestive, even persuasive, in court. "8 Since a conflict of interest is a Michael Chambers, Matthew Jones and Patrick Wilkins, Conflicts of Interest-The Growing Climate of Distrust 33 Commercial Lawyer (April 1999), at p.27. Matthew Goldstein, "Grand Jury Subpoenas issued in Inquiry on the Milbank Conflict", N.Y.