Conflicts of Interest: A Challenge for Global Law Firms

International conflicts challenges will usually first become an issue when law firms operating in different jurisdictions/countries decide to combine/merge in order to become one global firm and service the needs of international clients.

The combined firm will need to decide on the application of different conflicts of interest rules by not only taking into account the different practice areas of the firm, but also local professional conduct rules.

One approach is to apply the more stringent ABA Model Rules of Professional Conduct (the “US Conflicts Rules”) to every client/matter in every jurisdiction where the global firm operates. However, standards under these rules can be in breach of local conflicts rules, which might not permit consents to a conflict of interest.

Another approach is to apply the local conflicts rules to local clients/matters. However, cross-border transactions might be problematic if it is unclear at the outset which conflict rules prevail. If a law firm adopts a combination/layering approach of the various conflicts rules, it should be done under careful consideration. While this approach may be more difficult at the outset, it may be the only viable way to avoid breaching local conflicts rules.

On top of considering the conflicts rules for each client/matter, firms also need to navigate commercial conflicts of interest either imposed by a contractual obligation or, generally, by the client relationship.

US Conflicts Rules in a Nutshell

The US Conflicts Rules are driven by loyalty to a client. This means that a US law firm cannot act adverse to its current client in any matter, unless the client consents. The duty of loyalty may extend to affiliates of the client. There is, however, no restriction on a client’s ability to waive a conflict, unlike in Hong Kong.

This duty of loyalty applies:

  • to contentious and non-contentious matters (ie, adversity not merely hostility); and
  • regardless of whether the adverse matter is the same or related to the current representation of the client.

If instructions are received in Hong Kong from a new client when the US law firm is already adverse to them in an unrelated matter, consent may be necessary from the existing client.

It is possible to take on multiple roles in the same matter with waivers from relevant clients, save that it is not permitted to represent adverse parties in the same litigation.

Under the US Conflicts Rules, it is not possible to represent a new client adverse to the interests of a former client in the same or a substantially related matter without a waiver (advance consent may be acceptable) from the former client and (usually) an information barrier (compare Rule 1.9 US Conflicts Rules).

Hong Kong Conflicts Rules in a Nutshell

The Hong Kong Conflicts Rules are matter orientated. A conflict of interest is defined in Principle 7.02 (Conflict of Interest between Solicitor and Client) and in Principle 9.01 (Avoiding Conflict).

There is a conflict of interests if:

  • a solicitor or the 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, or there is a significant risk that those duties may conflict; or
  • a solicitor’s duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with the solicitor’s own interests in relation to that or a related matter.

In addition to the other duties implied by a retainer, a solicitor owes a fiduciary duty to his client. He must act with absolute openness and fairness towards his client. He must act in the best interests of his client and he must not put himself in a position where his own interests conflict with his duty to his client (compare Principle 7.01).

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. It is also important to note that there need not be an existing conflict on the current facts; it is sufficient that there is a significant risk that duties may conflict.

UK Conflicts Rules in a Nutshell

The UK Conflicts Rules are similar to the Hong Kong Conflicts Rules and are driven by an involvement in the same or a related matter.

According to the SRA Code of Conduct 2011 a UK law firm and its individual solicitors owe a duty to act in each client’s best interests. If, in acting for two or more clients in the same or a related matter, those duties conflict, or there is a significant risk that those duties may conflict, Outcomes 3.6 and 3.7 provide that the UK law firm and its individual solicitors cannot proceed unless:

  • the clients have a substantially common interest (not just a desire for a common outcome) in which case a UK law firm and its individual solicitors can proceed with informed written consent, usually with full sharing of information between clients; or
  • there is a mutually exclusive competitive situation, in which case, a UK law firm and its individual solicitors can proceed with informed written consent, separate teams and an information barrier.

Unless one of the above exceptions applies, a UK law firm and its individual solicitors are not permitted to act for both/all the clients concerned even if the clients agree and want the UK law firm and its individual solicitors to act.

A conflict of interest will also arise if an individual solicitor’s duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with the solicitor’s own interests in relation to that or a related matter (a “related matter” will always include any other matter which involves the same asset or liability).

Commercial Conflicts of Interests

Clients want to manage and control the efficiency and cost effectiveness in the delivery of legal services provided by law firms and the way they achieve this is by trying to impose outside counsel guidelines onto the law firms (ie, their terms of business). If law firms agree to outside counsel guidelines with clients then they need to contractually comply with the terms and conditions stipulated by the clients.

Most of the time, the client’s terms of business do contradict the terms of business of law firms. The following issues are the ones where the interests between clients and law firms differs the most:

  • Everyone is the client: representation of the whole corporate family. Clients want to define the client in the matter as everyone in the corporate family, including both subsidiaries and affiliates. However, this broadens the application of the fiduciary duties owed by a solicitor to a client. Including all affiliates is much too broad and might be difficult to comply with. Hence, law firms should try to define the client as narrow as possible.
  • No adversity: cannot be adverse to a client without consent. Clients want to impose the duty of loyalty under the US Conflicts Rules to jurisdictions where local conflicts rules do not require it. This could put a law firm at a competitive disadvantage as waivers would need to be sought which would not be required under the local conflicts rules, slowing down matter acceptance or even rejecting matters if a waiver cannot be obtained.
  • Best rates: most favoured nation clause. Clients want to obtain the same low rate that a law firm offers to its long-term clients, who deserve this rate due to its relationship and volume of work it gives to the law firm. This arrangement can be unfair to the law firm and other clients. Furthermore, it might even be impossible to measure due to the different types of services law firms provide to different client.

Hence, law firms need to be careful not to contractually incorporate the US Conflicts Rules into engagement terms which would need to be considered additionally when resolving conflicts of interest issues for local matters.

Consequences of Breaching Conflicts Rules

Consequences for breaching conflicts rules can range from disciplinary proceedings by the regulator, disqualification of the law firm from the current representation of a client, actions for damages and punitive damages brought by the client against the law firm, fee forfeitures and reputational issues for the law firm.

Managing Conflicts of Interest

In order to manage the application of which conflict rules apply to different types of matters/clients, a clear policy needs to be set from the outset in order to manage expectations of solicitors and clients.

Local Matters

Local conflicts rules should apply to all local matters. A conflict of interest would exist if a law firm were to act simultaneously for opposing parties in the same matter (eg, acting for the borrower and the lender in the same financing matter), as the fiduciary duty of loyalty would clash. This direct conflict of interest is a conflict of the entire firm. Under the Hong Kong Conflicts Rules, the clients cannot waive this conflict of interest.

A confidential information conflict exists if the firm is in possession of materially relevant confidential information from an existing or former client and the firm is under a duty to disclose this materially relevant confidential information to another client. In this instance, the duty of confidentiality and the duty of disclosure clash. A waiver from the former or existing client will not cure this conflict under the Hong Kong Conflicts Rules.

A commercial conflict of interest is not a legal conflict of interest but for commercial/contractual reasons the firm agrees not to act against a client.

Usually, direct conflicts of interest need to be considered first, then confidential information conflicts and, lastly, commercial conflicts. However, sometimes commercial conflicts should be considered at the outset, as the terms of business of a client could contractually require the firm not to act against it in a contentious matter.

Cross-Border Matters

To analyse conflicts of interest issues for cross-border matters, the local conflicts rules in each jurisdiction should be considered first and then the more stringent conflicts rules should be applied. It needs to be stressed that by applying this “layered approach” the risk of breaching any conflicts rules would be avoided as due regard is paid to each set of conflicts rules of the applicable jurisdictions to a matter/client.

Instruments for Managing Conflicts of Interest

It is of utmost importance to define who the client is in each matter. Including subsidiaries and affiliates of the client should be avoided, as this broadens the application of the fiduciary duties owed by a solicitor to a client.

The scope of services should also be clearly defined, as this should avoid triggering related matter conflicts (eg, providing general legal advice to a client makes it nearly impossible to resolve conflicts issues in related matter conflicts situations).

Trying to reject onerous provisions in outside counsel guidelines which could impose the duty of loyalty under the US Conflicts Rules to jurisdictions where local conflicts rules do not require it.

Conclusion

A firm needs to establish a clear conflicts policy in order to ensure a consistent approach in resolving conflicts of interest issues and to manage client’s expectations. This is not an easy undertaking and it remains a challenge for all global law firms. 

Jurisdictions: 

Senior Associate, Head of Compliance
Mayer Brown JSM

Carolin Rost is a member of Mayer Brown JSM’s risk management team and serves as the firm’s Compliance Officer in Hong Kong. She advises her internal clients on all aspects of professional ethics and practice as well as other legal matters affecting the firm. She manages the firm’s conflict, anti-money laundering and other compliance procedures in Asia. Carolin is the conflicts attorney for Asia and the Head of Compliance of Mayer Brown JSM.