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‘Shadow clients’ are threatening corporate lawyers’ professional independence

Law firms need to provide regular ethics training to mitigate the risks, research finds

19 October 2015

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By Manju Manglani, Editor (@ManjuManglani)

Corporate law firms in the UK are increasingly being put at risk by clients mandating challenging terms of engagement.

That's according to a study commissioned by the Solicitors Regulation Authority (SRA) on lawyer-client relationships in large law firms.

Dr Steven Vaughan at University of Birmingham and Claire Coe Smith at Claire Legal interviewed senior corporate and finance lawyers from 20 of the largest corporate law firms in England and Wales.

Around three quarters of interviewees said they had been forced to accept increasingly-challenging terms of engagement with little room for discussion.

The researchers warned against firms accepting client-imposed terms without considering the broader implications.

"By agreeing to accept the terms imposed by clients who seek to restrict or control a firm via contract, a firm may be taking on obligations that have the potential to affect duties it owes or could owe to other or future clients. This may create an information asymmetry between the firm and its less dominant or powerful clients," the researchers said in their report.

"Accepting that clients and their law firms are generally free to engage on terms they see fit, we would question whether firms should be required to seek consent to disclose these terms, as appropriate."

Worryingly, the research found that third-party 'shadow clients' are seeking to influence the behaviour of some legal advisers to other parties on a transaction.

These third parties (commonly borrowers) have the power to choose which law firms act for other parties on their deals and to dictate their roles.

"While we were not given any specific examples by our interviewees of this practice resulting in tangible violations of the [SRA] Handbook, many of our interviewees were concerned by the potential for lawyers appointed by third parties to possibly act, in ways subtle and refined, in the interests of those third parties over the interests of their clients," the researchers said.

"Given the findings in this report we recommend that firms and their professional bodies give serious consideration to developing ethics training as part of their ongoing training programmes."

The researchers noted that firms which do push back on proposed terms of engagement which they consider to be unacceptable still get instructions.

"Crucially, these firms continued to receive instructions, including where they refused to accept positions on panels because of terms that they could not get comfortable with," they said.

Firms are responding to the pressures in different way, with some using a risk committee, opinion committee and/or pricing committee to manage client engagements.

In some firms, partners appear to have "almost total discretion" on the terms they sign up to, while others have formal processes in place to review and sign-off terms. However, these are not always followed by individual partners.

"We were struck by the apparent lack of sophistication on risk management in some of the world's largest law firms that we spoke with. This echoes other empirical work on legal risk management by in-house lawyer teams," the researchers said.

The research found no correlation between a firm's size or heritage and its ability to resist more challenging terms of engagement.

However, the researchers noted that "US practices are having a significant influence on client requests, especially as regards commercial conflicts, liability caps, individual liability and reliance letters".

Legal Risk consultant Frank Maher previously warned that "it is becoming increasingly common for clients to require the firm to contact them for consent regarding any 'actual or potential conflict of interest', including 'business conflicts' as if they were true legal conflicts".

His Managing Partner article 'Reputations at risk: Navigate client guidelines on conflicts of interest' suggests 10 steps which law firms can follow to avoid getting caught out by client-imposed conflict rules.

Subscribe to Managing Partner today to read Maher’s insights.

 

 

 

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