14 June 2006

Confidential Information - More Chinese Walls: Gus Consulting GmbH v Leboeuf Lamb Greene & Macrae

In Bolkiah v. KPMG [1998] UKHL 52, [1999] 2 AC 222, [1999] 1 All ER 517, [1999] 2 WLR 215 (16 Dec, 1998) the House of Lords considered for the first time some of the problems of confidentiality and conflict that have arisen with the development of multinational, multi-service professional firms. The question in that case was whether, and, if so how far, a firm of accountants that had acted in one capacity for one party to a law suit could properly act for that party's opponents in another. There was never any question of impropriety. The professionals involved were not part of the same team. Steps were taken to minimize the already small risk of misuse of confidential information, But despite all those measures, the House were not satisfied that the accountants had discharged the burden of showing that there was no risk of confidential information in their possession that they had obtained in the course of a former client relationship unwittingly or inadvertently coming to the notice of those working for the former client's opponents. It injuncted the accountants from acting further in the litigation.

The issue was considered again by the Court of Appeal in Koch Shipping Inc v Richard Butler [2002] EWCA Civ 1280 (22 July 2002). In that case, at paragraph [24] Lord Justice Clarke distilled the following principles:
"(1) The court's jurisdiction to intervene is founded on the right of the former client to the protection of his confidential information (per Lord Millett in Bolkiah at p.234).
(2) 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 (per Lord Millett ibid at p.235).
(3) 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 (per Lord Millett ibid at p.235).
(4) 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. 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 may be relevant (per Lord Millett ibid at pp.235-236).
(5) The former client must establish that the defendant solicitors possess confidential information which is or might be relevant to the matter and to the disclosure of which he has not consented (per Lord Millett ibid at pp.234-235).
(6) The burden then passes to the defendant solicitors to show that there is no risk of disclosure. The court should intervene unless it is satisfied that there is no risk of disclosure. The risk must be a real one, and not merely fanciful or theoretical, but it need not be substantial (per Lord Millett ibid at p.237).
(7) It is wrong in principle to conduct a balancing exercise. If the former client establishes the facts in (5) above, the former client is entitled to an injunction unless the defendant solicitors show that there is no risk of disclosure.
(8) In considering whether the solicitors have shown that there is no risk of disclosure, the starting point must be that, unless special measures are taken, information moves within a firm (per Lord Millett ibid at p.237). However, that is only the starting point. The Prince Jefri case does not establish a rule of law that special measures have to be taken to prevent the information passing within a firm: see also Young v Robson Rhodes [1999] 3 All ER 524, per Laddie J at p.538. On the other hand, the courts should restrain the solicitors from acting unless satisfied on the basis of clear and
convincing evidence that all effective measures have been taken to ensure that no disclosure will occur (per Lord Millett at pp.237-238, where he adapted the test identified by Sopinka J in MacDonald Estate v Martin (1991) 77 DLR (4th) 249 at p.269). This is a heavy burden (per Lord Millett at p.239)."

It may be anticipated that questions of this kind will arise with ever increased frequency should the draft Legal Services Bill published on 24 May 2006 by the Department of Constitutional Affairs (and in particular Part 5 which provides for "Alternative Business Structures" to offer legal services) ever see the light of day.

The latest case to address those issues is Gus Consulting GmbH v Leboeuf Lamb Greene & Macrae [2006] EWCA Civ 683 (26 May 2006). This was an appeal from Judge Mackie's refusal to injunct Le Boeuf, Lamb, Greene & MacRae from acting for, advising or otherwise assisting DCL-KF Corporation in relation to arbitration proceedings brought by that company against Gus and others in the London Court of International Arbitration which are due to be heard in October of this year. The application was made on the ground that Le Boeuf had previously advised or acted for Gus and related entities in respect of their business in Russia between 1996 and 1999 which involved transactions that were in issue to some extent in the arbitration. The advice was on such matters as the use of powers of attorney, guarantees and the formation of subsidiaries. Le Boeuf had offered a number of undertakings which when combined with the facts of the case persuaded the judge that all effective measures had been taken to ensure that there was no real risk of disclosure or misuse of confidential information within paragraph (8) of Lord Justice Clarke's distillation of principles.

Dismissing the appeal, the Court held that the judge had been entitled to reach the above conclusion. As Lord Justice Mummery put it at paragraph [30], the burden on a defendant law firm to show that there is no real risk of disclosure or misuse of the former client's confidential information is a heavy one, but it is not an impossible one to discharge. A "bright line" rule that a law firm can never act against a former client would be easier to apply, produce more predictable outcomes and give the former client comprehensive protection against the risk of unwitting disclosure or misuse of his confidential information but the law does not go as wide as a blanket rule of that kind. The law is that there is no need for a restraining order against acting or advising in an adverse interest, if the court is " satisfied on the basis of clear and convincing evidence that all effective measures have been taken to ensure that no disclosure will occur..." as Lord Justice Clarke observed in Koch at paragraph (8) of his principles. Each case turns on a careful judicial analysis and assessment of the quality of the evidence about the effectiveness of the precautions taken to protect the confidentiality of the former client's information from the risk of disclosure and misuse. If there is clear and convincing evidence that the precautions taken will provide effective protection, there will be no real risk to justify the grant of an injunction.

In this case detailed undertakings had been offered to the court to minimize the risk of disclosure or misuse of confidential information. There was every reason to believe that the undertakings would be observed in the spirit and in the letter. All those concerned appreciate the seriousness of undertakings to the court and that a breach of any of the undertakings would be an extremely grave matter. The combined effect of those undertakings, the conscientious and sophisticated ethical wall system erected by Le Boeuf in accordance with established procedures, the unchallenged evidence of the members of the arbitration team about their ignorance of and lack of access to the relevant information or access to the partners who had acted for Gus and the unquestioned professional integrity of all those involved in the law firm was sufficient to entitle the judge to conclude that the evidence established that the various precautions taken would effectively protect Gus from disclosure or misuse of their confidential information.

Though this decision is not unreasonable, I for one would still be concerned at the involvement against me of my former legal advisors notwithstanding the safeguards. A bright line rule would be easy to implement. It would in most cases require nothing more than a quick search of the client database. The Legal Services bill would be a lot more acceptable to folk like me were such a provision to be inserted.

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