UK: Conflicts Of Interest - Disclosure Of Information

Last Updated: 30 April 2001
Article by Simon Salzedo

"Chinese Walls of the Mind"

Introduction

1. Conflicts of interest have come to the fore recently as a result of the House of Lords decision in Bolkiah v KPMG. This decision has imposed very strict rules on advisors who face a former client conflict. Paradoxically, in one important type of case, the rules as to existing client conflicts appear at first glance to have been getting looser.1

2. The developments with which this paper is concerned do not concern the most obvious areas of conflict: where two clients have directly conflicting interests in a particular transaction, or where the advisor has an interest contrary to that of his client. Instead, recent cases on existing client conflicts have at their heart an advisor or agent who legitimately comes into possession of confidential information belonging to one client (client B) which turns out to be material to the interests of another client (client A).2 That is, of course, very similar to the position in former client conflicts. The only difference is that both A and B are clients at the same time.

3. These are cases where client A knows and consents to the advisor acting for Client B, but does not realise that the advisor will thereby obtain relevant information which he cannot divulge. The relevant general principle at first blush is the ‘no inhibition’ rule – where a fiduciary obtains consent to act despite a conflict, but is then inhibited from acting properly owing to the conflict, he must cease to act.3 However, by three different routes, the Courts have recently reached the opposite conclusion:

    1. An implied term that the advisor/fiduciary will not disclose confidential information obtained from other clients;
    2. Implied consent to non-disclosure of information where it is confidential to other clients;
    3. Lack of obligation to disclose information acquired other than for the particular client in the particular transaction.

The Three Cases

4. The starting point for a discussion of recent developments in existing client conflicts is the decision of the Privy Council in Kelly v Cooper [1993] AC 205. P had a beachside property in Bermuda which he wished to sell, for which purpose he appointed D as his estate agent. D eventually introduced to P one H Ross Perot who purchased the property. D also acted as agent for the vendor of the neighbouring property, which shared the same inaccessible beach. Unknown to P, the neighbouring property was sold through D to the same Mr Perot with exchange of contracts taking place a few weeks before P’s own exchange. The Privy Council accepted P’s assertion that the fact that Mr Perot was seeking to buy the two adjacent properties was a material fact for P to know which might have enabled P to negotiate a higher price. However, the Privy Council dismissed P’s claim for damages and allowed D’s counterclaim for commission. Although in the ordinary way an agent owes a duty to his principal to pass on relevant information, that situation is varied where the agent, to the knowledge of the principal, acts for competing principals whose interests may conflict. In such a case, which includes estate agents and also stockbrokers, "there must be an implied term of the contract with such an agent that he is entitled to act for other principals selling competing properties and to keep confidential the information obtained from each of his principals." Earlier cases in which estate agents had been found liable for failing to pass on relevant information to vendors "related to information received by the estate agents in their capacity as agents of the principal who was complaining and was therefore not subject to any duty of confidentiality owed by the agents to other persons."

5. Next, there are two paragraphs of Lord Millett’s judgment in Bolkiah v KPMG [1999] 2 WLR 215 which deal with existing client conflict situations. He said:

It is otherwise where the court’s intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation.

This is not to say that such consent is not sometimes forthcoming, or that in some situations it may not be inferred. There is a clear distinction between the position of a solicitor and an auditor. The large accountancy firms commonly carry out the audit of clients who are in competition with one another. The identity of their audit clients is publicly acknowledged. Their clients are taken to consent to their auditors acting for competing clients, though they must of course keep confidential the information obtained from their respective clients. This was the basis on which the Privy Council decided Kelly v Cooper [1993] AC 205 in relation to estate agents.

6. Finally, there is a series of cases dealing with the position of solicitors acting in a property mortgage transaction for both mortgagor and mortgagee. The relevant principle was first made explicit in Bristol & West v Baden Barnes Groves, unreported, 22/11/96, in which Chadwick J held that where a solicitor acting for borrower and lender has information by virtue of previously acting for the borrower, he has no obligation to disclose the same to the lender. His obligation to disclose information is restricted to information obtained in the course of doing the work he is instructed to do (save for cases where the information discloses a fraud by the borrower on the lender or a serious crime).4

Comment On The Three Cases

7. In Kelly v Cooper there was no analysis of the way in which the implied term found by the Privy Council arose. The most apt category of implied terms would be terms implied by custom. But custom must be clearly alleged and strictly proved. It does not seem to have been in Kelly v Cooper. Perhaps the term was necessary for business efficacy, but the advice of the Board does not say so. It is also notable that the phrase "implied term" does not appear in the summary of counsel’s arguments in the Law Reports.

8. Lord Millett in Bolkiah also notably avoids the phrase "implied term". He says that the basis of the decision in Kelly v Cooper was the consent of the first client to his agent acting for others and respecting those others’ confidences. This situation, then, is an example of informed consent to a conflict.

9. While the Bolkiah approach avoids the difficulties of establishing implied terms in each case, it brings in unrealities of its own. Lord Millett insists that advisers from estate agents to auditors cannot, without consent, act for one party while acting for another in the opposite interest and that this has nothing to do with confidential information. But does the auditor of Sainsbury’s act "in the opposite interest" to Tesco’s? In other words, does Tesco have a legitimate interest that could be affected by the way in which Sainsbury’s is audited? I would suggest that in general, the answer is "no".5

10. The Bolkiah test does not even fit comfortably the facts of Kelly v Cooper itself. In that case, the interests of the two vendors were not opposed. The whole point was that unusually, the buyer wanted to buy both properties because they were next door. The properties were complementary to each other, not substitutes. The only basis for the agent’s decision not to disclose the information to the P was that the information was confidential to his other client. There was no inherent conflict between the interests of the two clients.

11. Both the actual approach adopted in Kelly v Cooper (implied term) and the revised formulation in Bolkiah (informed consent) are unsatisfactory in many cases where there is not really an underlying conflict between the interests of the parties, but only a conflict between the fiduciary’s duty to client A loyally to deploy all the information he has or can get for the benefit of client A and his duty to client B to keep confidential the information disclosed to him by client B. In these cases, client A cannot give fully informed consent, because he does not know what information is being withheld. It is by no means clear in a situation like that of Kelly v Cooper that P did in fact understand and consent to the withholding of relevant information by his estate agent or that he would have consented if he had been asked.

12. The Baden Barnes Grove principle suggests a more radical resolution of the same problems. If it is right and of general application, then no implied term was needed in Kelly v Cooper. The estate agent had no duty to disclose information which he obtained while dealing with another client in another transaction. Indeed, the Privy Council hinted at something like this in Kelly v Cooper itself, distinguishing two earlier estate agents cases on the ground that the information came to the agent in his capacity as agent for a different principal. That is not quite the same as the test whether the information came to the agent in the course of his work on this transaction as proposed in the Baden Barnes Groves line of cases.

Future Developments

13. On the basis of the three cases discussed here, an adviser might feel able to take on such problems on the basis that the client has consented to the adviser making the decisions required. However, this may not be a safe course; a re-assertion of the importance of the no inhibition rule could well emerge from some future case of this type.

14. Whichever of the rationalisations so far put forward is the right explanation for the decision in Kelly v Cooper, further problems may arise. On whatever basis, it seems clear that an agent or advisor does not generally have to disclose to his principal information obtained from other clients in the context of other transactions. If he has no obligation to do so, then the agent will not want to risk an action for breach of confidence by disclosing such information. In short, the agent or adviser will be expected to erect a Chinese wall in his own mind.

15. The strictures in Bolkiah about the possibility of inadvertent leakage through a Chinese wall within a firm or department are as nothing to the difficulties of the advisor with such a wall in his head. How can the lawyer who knows the extent of one client’s insurance cover through acting for him advise another client in litigation against the first without having in mind the extent of the insurance cover he has learnt? In Kelly v Cooper itself, P asked the estate agent whether he thought that Mr Perot would go above his initial offer – how could the agent give a full answer without disclosing the neighbouring vendor’s information?

16. This kind of problem arose for decision in Omega Trust v Wright Son and Pepper (No 2,6 where the defendant solicitors ("WSP") had acted for a Mr Sharif. He had financial difficulties and did not pay WSP’s fees. WSP were later asked to act for the Claimant lender, who was about to lend money to a company controlled by Mr Sharif, with a guarantee from Mr Sharif himself. At almost the same time, Mr Sharif agreed to discharge the old fees by instalments and instructed WSP to act for him on some other transactions.

17. On 16th October 1991, a bankruptcy petition was presented against Mr Sharif and the loan was completed on 28th October. The loan was never repaid. The Claimant alleged that WSP had caused the loss by failing to disclose the information they had about Mr Sharif’s finances and by failing to conduct a bankruptcy search.

18. Douglas Brown J applied the Baden Barnes Groves principle and held that the solicitors were not obliged to disclose to the lender the confidential information they possessed about the Mr Sharif’s poor payment record. On expert evidence, he held that the lender’s solicitor has no general duty to conduct a bankruptcy search on a guarantor. However, he also held that WSP were negligent for not conducting a bankruptcy search on the Mr Sharif BECAUSE of the confidential information that WSP had about his financial circumstances.

19. This is not a satisfactory resolution of the problem. The advisor has information which he cannot disclose, but which he ought to act upon in the service of his client. What if he is later asked to justify the expense of the bankruptcy search?7 Does the solicitor have to say to his own client that he cannot explain it, because he did it for confidential reasons?

20. If information is confidential to client B, it cannot be right that the advisor should deploy it in the service of client A, especially in a way inimical to the interests of Client B. That is to misunderstand what confidentiality is about. If WSP had erected a Chinese Wall to protect Mr Sharif’s information from disclosure to the Claimants, then there would have been no question of the information being used in the way that Douglas Brown J held it should be.

21. What this example shows is that while the law is evolving in a direction which seems to be beneficial to advisors, it is so uncertain at present, reliance upon it can be dangerous.8

22. Other problems will concern the precise scope of the information which the adviser does not have to disclose. Is it one of the following, or some combination of them?

    1. Information received from another client;9
    2. Information obtained while acting on a different transaction, even if for the same client;10
    3. Information obtained while acting in a capacity other than as agent for client A;
    4. Information which would not have been received were it not for the adviser acting for the other client.11
    5. When does information received from other clients become general knowledge of a particular market place?

23. Still further problems will arise in respect of partnerships. Is there a different rule when the particular partner within a firm acting for client A does not have the knowledge that causes the difficulty? Although the whole firm may be fixed with the knowledge (Partnership Act 1890 section 16), if there is no obligation to disclose it, and the particular partner does not actually know it, then it may be that no actual conflict arises.

24. If client B ceases to be a client, then, under Bolkiah, the Court may restrain the firm from acting even though no actual conflict arises, on the ground that the information may leak out unintentionally. The cases suggest that there may be a more relaxed approach where B remains a client than where he does not, because the former will turn on actual conflicts as and when they arise rather than the protection of confidential information which is inherent in the latter situation from the start.

25. The dichotomy between existing and former client conflicts set out by Lord Millett in Bolkiah is unhelpful. There is, or at least should be, a single set of rules for determining the rights of clients where the conflict consists in the fact that client B has an interest in protecting information which client A has an interest in receiving. To split such cases into two categories depending upon whether client B remains a client creates unnecessary complications. As ever, the facts of Kelly v Cooper provide the perfect illustration: the neighbour’s property was sold a few weeks before C’s, thus turning an existing client conflict into a past client conflict. Lord Millett treats Kelly v Cooper as concerning existing client conflicts only, but if his distinction between existing and past client conflicts were right, then two different analyses would have to be applied to determine that one case.

Footnotes

1 For the classification of terms like ‘existing client conflict’ and ‘former client conflict’ see Hollander & Salzedo, Conflicts of Interest and Chinese Walls at pages 3-4.

2 Strictly, all that matters are the interests of client A which the advisor is retained to serve, not client A’s interests at large: see National Home Loans Corp v Giffen Couch& Archer [1997] 3 All ER 808.

3 See Hollander & Salzedo, Conflicts of Interest and Chinese Walls at pages 34-45.

4 Millett LJ refused leave to appeal from Baden Barnes Groves itself. The relevant passage from Chadwick J’s judgment has been cited without criticism in several first instance decisions including Nationwide v Balmer Radmore (Introductory Sections) [1999] Lloyd’s PN 241 (Blackburne J), Omega Trust v Wright Son & Pepper [1998] PNLR 337 (Douglas Brown J), Maes Finance Ltd and another v Sharp & Partners (a firm), Lexis, 27/7/99 (Judge Bowsher QC).

The Baden Barnes Groves principle was affirmed by the Court of Appeal in Darlington v O’Rourke James Scourfield & McCarthy [1999] Lloyd’s Rep PN 33 (also relying upon dicta of Sir Thomas Bingham MR in Mortgage Express v Bowerman [1996] 1 All ER 836). It was also referred to with apparent approval by Lord Woolf MR and Waller LJ in Bolkiah in the Court of Appeal [1999] 1 BCLC 1 at 21 and 46. Both of them treated Baden Barnes Groves as authority that a client of large firm of solicitors does not have a right to expect disclosure of relevant information in the hands of partners not dealing with that client. Lord Woolf also said "There is nothing to suggest that accountants owe a duty to disclose to a client confidential information received from a different client."

5 For more on the position of auditors, see Hollander & Salzedo, Conflicts of Interest and Chinese Walls at pages 188-190.

6 [1998] PNLR 337.

7 In fact the search would cost only £1, but can that fact be determinative of the solicitor’s duty?

8 It is respectfully submitted that Omega Trust v Wright Son & Pepper was wrongly decided on this point, but the fact that such a decision was reached indicates the treacherous and difficult nature of the area.

9 Such information is normally confidential because of the relationship between solicitor (or other advisor) and client.

10 If this is the right test, where are the boundaries of a transaction to be drawn? What may be two transactions for, say two sellers, could be one transaction for the single buyer of both properties (as in Kelly v Cooper).

11 This suggestion is implicit in the judgment of Blackburne J in Nationwide v Littlestone & Cowan [1999] Lloyd’s PN 625. In that case, the information was that the borrower had very recently purchased the property for a far lower sum than the valuation upon which the lender proposed to rely. Although the solicitor had this information by virtue of having acted on the previous purchase, Blackburne J held that it was disclosable to the lender because it was information that the solicitor would have obtained in the course of his retainer for the lender had he not been acting for the borrower as well. This was so only by accident: the borrower would have had to disclose the transfer in order to prove his title because at the time of the advance his title had not yet been registered.

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