The not-so-great wall of China

With the government’s efficiency agenda playing on the sector’s minds, doubling up on consultants, accountants and solicitors to save the shillings is tempting. But it could prove to be an expensive decision. A House of Lords case, Hilton v Barker Booth, was an extreme example of the dangers of one firm of solicitors acting on both sides of a transaction.

The unfortunate Mr Hilton agreed to buy land and develop it to sell to Mr Bromage. Mr Hilton’s solicitor knew Mr Bromage had a criminal record for fraud and was only just out of jail, yet it negotiated a reduced deposit, then lent it to Mr Bromage. Mr Bromage defaulted, causing Mr Hilton serious loss.

The House of Lords required the solicitor to pay compensation “on a generous scale without further delay”. An extreme case and anyway in breach of all the current Solicitors’ Practice rules, but a salutary reminder that the solicitor’s duty is to act in the best interest of the client and not to do anything likely to damage the client’s interest.

Often the client is relying on the lawyer to advise on their best interest – so when one lawyer acts for both sides how are those best interests to be determined? There is the “Chinese Wall” procedure: one lawyer in the firm acts for one client and another lawyer for the other, but the last thing the lawyers want is a dispute between these clients – a conflict of interest which would mean that their firm could no longer act for either party – so the temptation to fudge issues can arise.

The Law Society is amending the Solicitors’ Practice Rules 1990 in an attempt to address the problem. The new rules, likely to come into force in May, extend conflict of interest beyond conveyancing and defines conflict to “encompass all situations where doing the best for one’s client in a matter will result in prejudice to another client in that matter or a related matter”. It recognises that there are circumstances where clients’ best interests are served by their solicitor acting for others.

One situation where a solicitor can act for both clients is where the clients have a common interest and instructing separate solicitors would be disproportionate and disruptive. But there has to be a clear common purpose and a strong consensus on how the common purpose is to be achieved.

The last thing lawyers want is a dispute between their clients – a conflict of interest which would mean that their firm can no longer act for either party

The common interest rule is sensible where two clients are dealing with a third party who has their own solicitor, provided the solicitor acting for the two clients sets out potential conflict areas and the clients agree. But if a conflict does arise, then the solicitor must immediately quit.

The other situation is in specialised areas of legal services where the clients are “sophisticated users” of such services (meaning that the client has a good understanding of the law in this area). The “sophisticated user” exception is far more difficult than the common interest rule. At first sight one would expect a major registered social landlord or a local authority to be “sophisticated”, but turnover of officers is such that all too often the lead officer is heavily reliant on the adviser. No two transactions are ever the same and merely doing what was done somewhere else may not be in the client’s best interest.

Both exceptions have the caveats that it must be reasonable for the firm to act and that the client gives an “informed consent”.

Another protection for clients is the “properly informed” safeguard. If anything goes wrong, the burden is on the solicitor to prove the clients were warned. It is important that there be clear written terms of engagement, as shown by another House of Lords case, Jackson v Royal Bank of Scotland. Mr Jackson had a deal importing goods from Thailand and selling them on at a mark-up in UK. The bank handled the finances and the formalities. Unfortunately the bank by mistake told the Thai supplier the “turn” that Mr Jackson was making on the deal and the supplier then ended the contract with a disastrous loss of business for Mr Jackson. The bank tried to claim that there was a limit to the amount of damages it should pay for its mistake, but the court said that any limit had to be stated in the contract between the bank and Mr Jackson, and it would not accept any later attempt by the bank to impose an arbitrary limit on its liability.

Consultants, lawyers and accountants often try to impose liability limits in their terms of engagement and RSLs and public service users should be wary of accepting them. A sector can become too “cosy”, increasing the danger of an adviser acting for both sides. So you ought to think twice before you agree to walk on the Chinese Wall.