UK: Effectiveness of Chinese Walls

Last Updated: 29 January 1999
Effectiveness of Chinese Walls

In the case of Bolkiah v KPMG (judgement given 18 December 1998) the House of Lords held that Prince Jefri, a former client of KPMG, was entitled to an injunction restraining KPMG from acting for the Brunei Investment Agency ("BIA") on the grounds that KPMG were in possession of confidential information obtained while acting for Prince Jefri, which was relevant to the new matter in which the BIA had an adverse interest, notwithstanding that KPMG had gone to great lengths to insulate the team working for BIA from the firm's knowledge gained while acting for him.

KPMG had acted for Prince Jefri in an investigation of his financial affairs in connection with litigation with which he was concerned (Project Lucy). That project having finished, KPMG were subsequently instructed by the BIA, for whom Prince Jefri had been chairman, to investigate the activities of the BIA in respect of "special transfers" which had been made at the time when Prince Jefri had been chairman (Project Gemma). It was clear that confidential information obtained by KPMG for Project Lucy might be relevant to Project Gemma and therefore might be prejudicial to the interests of Prince Jefri. KPMG put in place "Chinese Walls" to prevent information obtained in Project Lucy reaching Project Gemma personnel. Prince Jefri sought an injunction preventing KPMG from acting on Project Gemma for the BIA.

Lord Millet, giving the main judgement, accepted the concession made by KPMG that an accountant who provides litigation support services of the kind provided in this case must be treated for the purposes of the issues in question in the same way as a solicitor.

Lord Millet gave judgement on three main issues as follows:

The basis of jurisdiction

Where the Court's intervention is sought by a former client, the Court's jurisdiction cannot be based on any conflict of interest, real or perceived, for there is none. The fiduciary relationship which subsists between solicitor and client comes to an end with the termination of the retainer. Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence.

Accordingly, it is incumbent on a plaintiff who seeks to restrain his former solicitor from acting in a matter for another client to establish (i) that the solicitor is in possession of information which is confidential to him and to the disclosure of which he has not consented and (ii) that the information is or may be relevant to the new matter in which the interest of the other client is or may be adverse to his own. Although the burden of proof is on the plaintiff, it is not a heavy one.

The extent of the solicitor's duty

Whether founded on contract or equity, the duty to preserve confidentiality is unqualified. It is a duty to keep the information confidential, not merely to take all reasonable steps to do so. Moreover, it is not merely a duty not to communicate the information to a third party. It is a duty not to misuse it, that is to say, without the consent of the former client not to make any use of it or to cause any use to be made of it by others otherwise than for his benefit. The former client cannot be protected completely from accidental orinadvertent disclosure. But he is entitled to prevent his former solicitor from exposing him to any avoidable risk; and this includes the increased risk of the use of the information to his prejudice arising from the acceptance of instructions to act for another client with an adverse interest in a matter to which the information is or may be relevant.

Degree of risk

It is in any case difficult to discern any justification in principle for a rule which exposes a former client without his consent to any avoidable risk, however slight, that information which he has imparted in confidence in the course of a fiduciary relationship may come into the possession of a third party and be used to his disadvantage. Where in addition the information in question is not only confidential but also privileged, the case for a strict approach is unanswerable. Anything less fails to give effect to the policy on which legal professional privilege is based. It is of overriding importance for the proper administration of justice that a client should be able to have complete confidence that what he tells his lawyer will remain secret. This is a matter of perception as well as substance.

It is of the highest importance to the administration of justice that a solicitor or other person in possession of confidential and privileged information should not act in any way that might appear to put that information at risk of coming into the hands of someone with an adverse interest.

Lord Millet determined that while there is no rule of law that Chinese Walls or other arrangements of a similar kind are insufficient to eliminate the risk that confidential information will pass within a firm, the starting point must be that, unless special measures are taken, information moves within a firm. To be effective Chinese Walls need to be an established part of the organisational structure of the firm, not created ad hoc.

Comment

This case provides a salutary message to both firms of solicitors and accountants in a time of increasing globalisation and rationalisation of services. While the case in question applied to a firm of accountants, the standards for which it is authority apply directly to any professional holding confidential information. Because KPMG had been providing litigation support services to Prince Jefri (including those services normally undertaken by solicitors) KPMG conceded, and the court agreed, that the standard to be applied should be that relating to solicitors.

The case makes it clear that a person in the position of KPMG has an absolute duty to preserve the confidentiality of information provided to it by a former client, not an obligation to take all reasonable steps to do so. The Court will intervene to prevent the possibility of confidential information of a former client becoming available to a new client if there is a risk of disclosure. The risk must be real but it need not be substantial. Where Chinese Walls exist the courts will take a close look at the actual structure of the Chinese Walls and determine the risk of information passing between the two sides.

In the case in question, KPMG had housed the people working on Project Gemma in a different building with restricted access; staff were appointed to Project Gemma only after they had confirmed on affidavit that they were not in possession of any confidential information relating to Project Lucy; a separate computer server was set up for Project Gemma and all electronic information relating to Project Lucy was deleted from KPMG's servers.

However, the court felt that this was not sufficient, as a real risk of disclosure continued to exist. Of particular importance to the Court in assessing whether there was a real risk was the fact that the Chinese Walls were not an organisational part of the firm but rather were created on an ad hoc basis within one department with constantly rotating staff. In particular, staff movements between the various sides of the wall and circumstances where individuals on each side of the wall are accustomed to working with each other were viewed by the Court as evidence that there was a risk of disclosure.

Physical segregation will not necessarily overcome these objections. The judgement suggests that Chinese Walls temporarily constructed within the same department may well fail the test.

This article was first published in a Marcfarlanes' Banking and Insolvency Practice Note on 29 January 1999.

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

If you would like further information or specific advice, please contact Tony Evans at Macfarlanes London Office.

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