Conflicts: the letter of the bore

Taking the decision to let the dust settle before weighing in on the latest controversy over alleged conflicts of interest is something of a double-edged sword. On the one hand, it gave us the chance in today’s issue of Legal Week to take a considered view on the much-debated position of Freshfields Bruckhaus Deringer and Allen & Overy (A&O) in the Northern Rock saga. On the other hand, it means we’ve had time to read the conflicts rules again, which is about as stimulating as watching paint dry. Grey paint.

But what do those rules say to illuminate the situation with the Rock? As a starting point it should be noted that despite being widely regarded to be more concise and easier to apply in their updated form, the rules still require a fair amount of interpretation. The section titled ‘Determining whether you have a conflict of interests’ gives a series of examples of potential situations to assess, a bit like a multiple choice in an exam paper. Even for journalists who have covered this debate for a while, separating the rule breaches from the all-clears is difficult. Presumably, since the Solicitors’ Regulatory Authority (SRA) maintains a helpline to advise on the rules, some solicitors also find it a challenge.

Back to the rules. The SRA states a firm is in conflict if it has to act in the best interest of clients whose duties conflict, or if there is a significant risk that they will conflict. This means “acting in the best interests of one client will result in prejudice to the other client, either in that matter or a related matter”. The rules continue: “Two matters will always be related if they involve the same asset or liability.”

What this means for Freshfields and A&O is a matter of debate, though the former firm essentially argues that its position became risky thanks to genuinely exceptional shifts in corporate markets. At this point, Clifford Chance was swiftly instructed to take over for the Bank of England, leaving Freshfields to advise Northern Rock.

Meanwhile, A&O advised Northern Rock on the emergency funding and is also advising one of the bidders. A&O critics will point out that all the bidders for Northern Rock will be very interested in the emergency funding arrangement, of which some lawyers in A&O have intimate knowledge. For its part, the firm is adamant the facts of the case show there is no conflict.

Both firms also stress their clients remain happy and have given consent. True, law firms sometimes treat the notion of consent as a panacea, though it is only relevant in very defined circumstances. In theory, the SRA can investigate, client consent or not, though in reality the chances of that happening would be greatly reduced.

There are only two exceptions – when clients are competing for the same asset; and when there is a common interest. Even there, the rules make it explicit that advisers must consider whether the two parties have unequal bargaining positions to enforce their interests. Likewise, separate matters can easily become related.

It’s not as if Freshfields and A&O are strangers to these rules. Both have already been subject to conflict investigations by the solicitors’ regulator - after Freshfields accepted a mandate to bid for former client M&S in 2004; and when A&O advised the financiers to separate bidders on the auction for Safeway in 2003.

Freshfields was clearly so intent on avoiding a repeat that it called in conflicts specialist Charles Hollander QC this time around.

Ultimately, however, the biggest danger for the firms – indeed, to any City firm in that situation – is not another conflicts investigation. The reputational damage would be far worse. Remember how insignificant the punishment on Freshfields’ M&S investigation was compared with the negative publicity the firm received. (Former corporate head Barry O’Brien’s £9,000 fine was hardly going to hurt his bank balance). It is also worth remembering that client confidentiality rules mean firms that get into positions that could be perceived as a conflict will have very little scope to defend themselves.

The SRA rules actually include a section on professional embarrassment, in which firms are advised to treat potential dishonour in the eyes of onlookers as they would a straightforward conflict. On the plus side, this section is much easier to read and many City firms would find it to be a good deal more relevant.

paul.hodkinson@legalweek.com