Judgment - Prince Jefri Bolkiah v. K.P.M.G (A Firm) Generating Board and Others  continued

(back to preceding text)
 

    This evidence was challenged by Prince Jefri. It does appear that Arthur Andersen were already retained to carry out certain work for the Government of Brunei (though not for the B.I.A.), and that following the grant of the injunction by Pumfrey J. the scope of their instructions was extended to include some at least of the matters covered by Project Gemma.

    The judge found that K.P.M.G. had taken all the steps which could be expected to minimise or avoid disclosure of confidential information. He declined to impute to K.P.M.G. and their staff anything other than an honest intention not to disclose confidential information and said that he was satisfied that they would do their best to fulfil their obligations. These findings have not been challenged. But the judge took the view that he was bound by authority to approach any question of the adequacy of the protective measures which K.P.M.G. had adopted with a very critical eye. He said that the intrinsic difficulty with Chinese Walls was that, while they were well adapted to deal with foreseeable or deliberate disclosure of information, they were not well adapted to deal with disclosure which was accidental, inadvertent or negligent. He was firmly of the view that a former client should not be exposed to the risk of such disclosure unless there were powerful reasons for saying that he should. No such reasons existed in the present case. Accordingly he granted an injunction which restrained K.P.M.G. from continuing to carry out work on or covering the same subject matter as Project Gemma.

    In the Court of Appeal the majority (Lord Woolf M.R. and Otton L.J.) did not accept, at least in the case of accountants, that there was inevitably a risk of disclosure or that Chinese Walls were incapable of removing any real risk. Favouring the approach adopted by the Court of Appeal of New Zealand in Russell McVeagh Mckenzie Bartleet v. Tower Corporation (Unreported, 25 August 1998), Lord Woolf (with whose approach Otton L.J. agreed) identified three questions for consideration: (i) whether there was confidential information which if disclosed was likely to affect Prince Jefri's interests adversely; (ii) whether there was a "real or appreciable risk" that the confidential information would be disclosed; and (iii) whether the nature and importance of the former fiduciary relationship meant that the confidential information should be protected by an order of the kind sought. These questions were to be answered on the evidence, balancing the different interests involved and remembering that the issues would inevitably overlap. Taking into account the facts that as Chairman of the B.I.A. Prince Jefri was aware when he retained K.P.M.G. that they had a long standing relationship with the B.I.A. as their auditors and that this would involve them in providing related accountancy services, and that Prince Jefri would have been aware that the B.I.A. would be put to inconvenience and expense if his retainer were to interfere with their use of K.P.M.G.'s services, Lord Woolf considered that K.P.M.G.'s duty should be limited to making reasonable efforts to protect Prince Jefri's confidential information and that it was not reasonable for Prince Jefri to require K.P.M.G. to be dismissed unless he "really would suffer serious damage" if they were not. On the evidence Lord Woolf was not satisfied that Prince Jefri would suffer any "real prejudice" if the injunction were discharged. When the undertaking which K.P.M.G. had offered was also taken into account, he said, the balance was clear. The continuation of the injunction would "set an unrealistic standard for the protection of confidential information" which would create unjustified impediments in the way large international firms conduct their business.

The law

    The issues raised in these proceedings have not previously been considered by your Lordships' House. The controlling authority in England hitherto has been the decision of the Court of Appeal in Rakusen v. Ellis, Munday and Clarke [1912] 1 Ch. 831. The facts of that case were unusual. It concerned a small firm of solicitors with only two partners who carried on what amounted to separate practices, each with his own clients, without any knowledge of the other's clients and with the exclusive services of some of the clerks. The plaintiff consulted one of the partners in relation to a contentious matter. After he had terminated his retainer, the other partner, who had never met the plaintiff and was not aware that he had consulted his partner, was retained by the party opposite in the same matter. The judge granted an injunction to restrain the solicitor from acting. The Court of Appeal found that there was no risk of disclosure of confidential information and discharged the injunction.

    The case is authority for two propositions: (i) that there is no absolute rule of law in England that a solicitor may not act in litigation against a former client; and (ii) that the solicitor may be restrained from acting if such a restriction is necessary to avoid a significant risk of the disclosure or misuse of confidential information belonging to the former client. Like most of the later authorities, the case was concerned with the duties of a solicitor. The duties of an accountant cannot be greater than those of a solicitor, and may be less, for information relating to his client's affairs which is in the possession of a solicitor is usually privileged as well as confidential. In the present case, however, some of the information obtained by K.P.M.G. is likely to have attracted litigation privilege, though not solicitor-client privilege, and it is conceded by K.P.M.G. that an accountant who provides litigation support services of the kind which they provided to Prince Jefri must be treated for present purposes in the same way as a solicitor.

The basis of the jurisdiction

    In Rakusen's case the Court of Appeal founded the jurisdiction on the right of the former client to the protection of his confidential information. This was challenged by counsel for Prince Jefri, who contended for an absolute rule, such as that adopted in the United States, which precludes a solicitor or his firm altogether from acting for a client with an interest adverse to that of the former client in the same or a connected matter. In the course of argument, however, he modified his position, accepting that there was no ground on which the court could properly intervene unless two conditions were satisfied: (i) that the solicitor was in possession of information which was confidential to the former client and (ii) that such information was or might be relevant to the matter on which he was instructed by the second client. This makes the possession of relevant confidential information the test of what is comprehended within the expression "the same or a connected matter." On this footing the Court's intervention is founded not on the avoidance of any perception of possible impropriety but on the protection of confidential information.

    My Lords, I would affirm this as the basis of the court's jurisdiction to intervene on behalf of a former client. 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 [1992] A.C. 205 in relation to estate agents.

    Where the court's intervention is sought by a former client, however, the position is entirely different. 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 former may readily be inferred; the latter will often be obvious. I do not think that it is necessary to introduce any presumptions, rebuttable or otherwise, in relation to these two matters. But given the basis on which the jurisdiction is exercised, there is no cause to impute or attribute the knowledge of one partner to his fellow partners. Whether a particular individual is in possession of confidential information is a question of fact which must be proved or inferred from the circumstances of the case. In this respect also we ought not in my opinion to follow the jurisprudence of the United States.

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 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 or inadvertent 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 follows that in the case of a former client there is no basis for granting relief if there is no risk of the disclosure or misuse of confidential information. This was the ground on which the Court of Appeal discharged the injunction in Rakusen's case [1912] 1 Ch. 831. The test for disqualification was expressed in different terms by each of the three members of the court, but the case has been taken to indicate that the Court will not intervene unless it is satisfied that there is a "reasonable probability of real mischief." This test has been the subject of criticism both in this country and overseas, particularly in relation to solicitors, and a more stringent test has frequently been advocated: (see for example Professor Finn Conflicts of Interest and Professionals published by the New Zealand Legal Research Foundation in the volume Professional Responsibility) cited with evident approval by Gummow J. in National Mutual Holdings Pty. Ltd. v. The Sentry Corporation (1989) 22 F.C.R. 209. It has been abandoned in Canada: see Macdonald Estates v. Martin (1990) 77 D.L.R. (4th) 249 where it has been replaced by two rebuttable presumptions: (i) that confidential information will have been communicated by the former client in the course of the retainer and (ii) that lawyers who work together share confidences. The clear trend of the authorities is towards a stricter approach.

    My Lords, I regard the criticisms which have been made of the test supposed to have been laid down by in Rakusen's case as well founded. It imposes an unfair burden on the former client, exposes him to a potential and avoidable risk to which he has not consented, and fails to give him a sufficient assurance that his confidence will be respected. It also exposes the solicitor to a degree of uncertainty which could inhibit him in his dealings with the second client when he cannot be sure that he has correctly identified the source of his information.

    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.

    Many different tests have been proposed in the authorities. These include the avoidance of "an appreciable risk" or "an acceptable risk." I regard such expressions as unhelpful: the former because it is ambiguous, the latter because it is uninformative. I prefer simply to say that the court should intervene unless it is satisfied that there is no risk of disclosure. It goes without saying that the risk must be a real one, and not merely fanciful or theoretical. But it need not be substantial. This is in effect the test formulated by Lightman J. in Re a Firm of Solicitors [1997] Ch. 1, at p. 9 (possibly derived from the judgment of Drummond J. in Carindale Country Club Estate Pty. Ltd. v. Astill (1993) 115 A.L.R. 112) and adopted by Pumfrey J. in the present case.

    I would also reject the approach taken by the New Zealand Court of Appeal in Russell McVeagh McKenzie Bartleet v. Tower Corporation and adopted by the Court of Appeal in the present case. In my opinion the balancing exercise which was undertaken was inappropriate. This is not because the considerations which were thought to militate against the granting of injunctive relief were irrelevant: far from it. It is clearly relevant that Prince Jefri retained K.P.M.G. in the knowledge that they were the B.I.A.'s auditors, and that the B.I.A. would be put to inconvenience and expense if his retainer were to prevent it from employing K.P.M.G.'s services in future. But such considerations are relevant to a different question: whether in the circumstances Prince Jefri must be taken to have consented to K.P.M.G.'s undertaking the further assignment for the B.I.A. For the reasons I have given, he must be taken to have consented to the acceptance by K.P.M.G. of the instructions given to Mr. Harrison in June, for these were a natural extension of the audit. But Project Gemma was a very different matter. Absent such consent, the considerations which the Court of Appeal took into account cannot in my opinion affect the nature and extent of K.P.M.G.'s duty to protect confidentiality or convert it into a duty do no more than take reasonable steps to protect it. This would run counter to the fundamental principle of equity that a fiduciary may not put his own interest or those of another client before those of his principal. In my view no solicitor should, without the consent of his former client, accept instructions unless, viewed objectively, his doing so will not increase the risk that information which is confidential to the former client may come into the possession of a party with an adverse interest.

The adequacy of the protective measures taken by K.P.M.G.

    Once the former client has established that the defendant firm is in possession of information which was imparted in confidence and that the firm is proposing to act for another party with an interest adverse to his in a matter to which the information is or may be relevant, the evidential burden shifts to the defendant firm to show that even so there is no risk that the information will come into the possession of those now acting for the other party. There is no rule of law that Chinese Walls or other arrangements of a similar kind are insufficient to eliminate the risk. But the starting point must be that, unless special measures are taken, information moves within a firm. In MacDonald Estates v. Martin 77 D.L.R. (4th) 249, Sopinka J. said at p. 269 that the court should restrain the firm from acting for the second client "unless satisfied on the basis of clear and convincing evidence that all reasonable measures have been taken to ensure that no disclosure will occur." With the substitution of the word "effective" for the words "all reasonable" I would respectfully adopt that formulation.

Application to the facts of the present case

    Chinese Walls are widely used by financial institutions in the City of London and elsewhere. They are the favoured technique for managing the conflicts of interest which arise when financial business is carried on by a conglomerate. The Core Conduct of Business Rules published by the Financial Services Authority recognise the effectiveness of Chinese Walls as a means of restricting the movement of information between different departments of the same organisation. They contemplate the existence of established organisational arrangements which preclude the passing of information in the possession of one part of the business to other parts of the business. In their Consultation Paper on Fiduciary Duties and Regulatory Rules the Law Commission (1992) (Law. Com. No. 124) describe Chinese Walls as normally involving some combination of the following organisational arrangements:

    (i) the physical separation of the various departments in order to insulate them from each other - this often extends to such matters of detail as dining arrangements;

    (ii) an educational programme, normally recurring, to emphasis the importance of not improperly or inadvertently divulging confidential information;

    (iii) strict and carefully defined procedures for dealing with a situation where it is felt that the wall should be crossed and the maintaining of proper records where this occurs;

    (iv) monitoring by compliance officers of the effectiveness of the wall;

    (v) disciplinary sanctions where there has been a breach of the wall.

    K.P.M.G. insist that, like other large firms of accountants, they are accustomed to maintaining client confidentiality not just within the firm but also within a particular team. They stress that it is common for a large firm of accountants to provide a comprehensive range of professional services including audit, corporate finance advice, corporate tax advice and management consultancy to clients with competing commercial interests. Such firms are very experienced in the erection and operation of information barriers to protect the confidential information of each client, and staff are constantly instructed in the importance of respecting client confidentiality. This is, K.P.M.G. assert, part of the professional culture in which staff work and becomes second nature to them. Forensic projects are treated as exceptionally confidential and are usually given code names. In the present case K.P.M.G. engaged different people, different servers, and ensured that the work was done in a secure office in a different building. K.P.M.G. maintain that these arrangements satisfy the most stringent test, and that there is no risk that information obtained by K.P.M.G. in the course of Project Lucy has or will become available to anyone engaged on Project Gemma.

    I am not persuaded that this is so. Even in the financial services industry, good practice requires there to be established institutional arrangements designed to prevent the flow of information between separate departments. Where effective arrangements are in place, they produce a modern equivalent of the circumstances which prevailed in Rakusen's case [1912] 1 Ch. 831. The Chinese Walls which feature in the present case, however, were established ad hoc and were erected within a single department. When the number of personnel involved is taken into account, together with the fact that the teams engaged on Project Lucy and Project Gemma each had a rotating membership, involving far more personnel than were working on the project at any one time, so that individuals may have joined from and returned to other projects, the difficulty of enforcing confidentiality or preventing the unwitting disclosure of information is very great. It is one thing, for example, to separate the insolvency, audit, taxation and forensic departments from one another and erect Chinese Walls between them. Such departments often work from different offices and there may be relatively little movement of personnel between them. But it is quite another to attempt to place an information barrier between members all of whom are drawn from the same department and have been accustomed to work with each other. I would expect this to be particularly difficult where the department concerned is engaged in the provision of litigation support services, and there is evidence to confirm this. Forensic accountancy is said to be an area in which new and unusual problems frequently arise and partners and managers are accustomed to share information and expertise. Furthermore, there is evidence that physical segregation is not necessarily adequate, especially where it is erected within a single department.

    In my opinion an effective Chinese Wall needs to be an established part of the organisational structure of the firm, not created ad hoc and dependent on the acceptance of evidence sworn for the purpose by members of staff engaged on the relevant work.

How should the discretion be exercised?

    In the course of his submissions before your Lordships, Counsel for K.P.M.G. submitted that, whether the special transfers were proper or improper, Prince Jefri was an accounting party in respect of them, and could not properly refuse to provide the B.I.A. with the information which it was seeking. This may or may not be true, for the information which the B.I.A. is seeking to obtain would appear to go far beyond what a recipient of proper payments would be bound to disclose. But even if true, it does not follow, as Counsel for K.P.M.G. submitted, that K.P.M.G. can discharge themselves from their duty of confidentiality to their former client, acting as judges of the question between him and their present client. The information was imparted to K.P.M.G. in confidence, and they are bound to maintain that confidence unless and until they are relieved of that duty by Prince Jefri's consent or an order of the Court obtained at the suit of the B.I.A.

Conclusion

    I am not satisfied on the evidence that K.P.M.G. have discharged the heavy burden of showing that there is no risk that information in their possession which is confidential to Prince Jefri and which they obtained in the course of a former client relationship may unwittingly or inadvertently come to the notice of those working on Project Gemma. It was for this reason that I was in favour of allowing the appeal and granting the injunction in the terms proposed.

 
previous

Lords Parliament Commons Search Contact Us Index

© Parliamentary copyright 1998
Prepared 18 December 1998