Avoiding conflicts: How to manage conflicts of interest

Chris Perrin, executive partner and general counsel at Clifford Chance, discusses how law firms can effectively manage conflicts of interest

Four things you will learn from this Masterclass:  

1. How to establish a reliable process which has the support and respect of partners

2. How to develop databases which enable checks against potential conflicts

3. How to decide who should have responsibility for conflict compliance

4. How to ensure compliance with international conflict rules

I strongly believe that there is no ‘right’ way to manage conflicts. Firms will want to – and should – go about it in different ways, depending on their size, where they practice, who regulates them and, to some extent, the culture of the partnership. But there are a number of common factors which all firms are going to need to think about – and some particular pitfalls to be avoided.

For those readers who are English solicitors, I should draw attention at the outset to a new regulatory requirement being introduced by the Solicitors Regulatory Authority (SRA). October this year sees the introduction of outcomes-focused regulation.

By and large, the conflict rules themselves are not changed, but it will no longer be the case that you/your firm must simply not act when there is a conflict; from October, your firm must also “have effective systems and controls in place to enable [it] to identify and assess potential conflicts of interest”.

A further outcome requires the systems/controls to be “appropriate to the size and complexity of the firm and the nature of the work undertaken and enable you to assess all relevant circumstances, including whether:

• the clients’ interests are different;

• your ability to give independent advice to the clients may be fettered;

• there is a need to negotiate between the clients;

• there is an imbalance in bargaining power between the clients; or

• any client is vulnerable”.

So, it follows that your actual processes are as important as your success in avoiding any conflicts. Needless to say, the SRA does not give any guidance on what amounts to “appropriate” systems and controls. Notwithstanding, the points mentioned below should cover all the main issues you need to consider.

Matter databases

First of all, a good database is needed which contains, at the minimum, details of each matter (current and closed) taken on by your firm worldwide. For each matter, the name of the client, a brief matter description and a list of all the other parties involved (and a description of the part played by each) should be captured. This will be the database against which the names in each new proposed instruction will be searched.

I have found it remarkable that, at least until recent times, quite a few good-sized firms have lacked this basic database. Some small firms still manage without a database of this type and rely instead simply on sending an email around to everyone in the firm when a new proposed job comes in to see if any of the names cause concern. Such an approach is unlikely to pass muster with the SRA from October.

I would also recommend a separate database in which you/your firm can record other relevant information. This might include the identity of entities which you might have agreed with one client that you would not act for. It might also record that your firm has pitched for a particular job and is awaiting the outcome of that so that another member of your firm does not unwittingly take on another conflicting role.

Who inputs data into your systems and who carries out the conflict searches also need to be considered. Depending on the size of your firm and the complexity of the work you do, the options range from an experienced secretary to a paralegal to a trained conflicts analyst. Moreover, it is a role which some firms might now consider off-shoring to a lower cost environment, but outsourcing is not an option given confidentiality concerns.

Analysis and decision making

Tied to the question of who carries out the database searches is who analyses the results and makes the decision. This is likely to be the most emotive issue for your firm and the answer will, to an extent, depend on the culture of the firm.

Coming from a large international firm, I have a strong belief that the analysis and decision-making has to be the responsibility of someone independent, that is to say it cannot be done by the partner seeking to take on the work. This is essential for three reasons:

1. the partner seeking to take on the work is not going to be dispassionate: he/she has a personal conflict of interest when making any decision;

2. where the conflict rules of more than just the partner’s home country are concerned, he/she cannot be expected to have the necessary expertise; and

3. for any conflict management system to work, it has to have the respect of partners and that won’t happen if there are issues under (1) and/or (2) above.

At Clifford Chance, the analysis and decision making is done by trained conflicts analysts who form our ‘clearance centre’. Particularly difficult issues are elevated to the head of the centre and/or to myself.

Some firms have the final decision on complex cases referred to a conflicts committee; this is not something we do because we have never found the need for it and because it can simply take too long to convene a committee and brief its members on the issues. By the time that is done, the work may well be lost. However, some firms might prefer a committee where the firm is still establishing confidence in a centralised conflict management process.

The final arbiter

Another factor in choosing between an individual or a committee as the final arbiter is the structure of the firm. In England, the SRA’s proposed new handbook requires all law firms (through authorisation rules) to appoint a compliance officer for legal practice (COLP). The COLP has to be a member or an employee of the authorised body and must take “all reasonable steps to ensure compliance with the terms and conditions of the authorised body’s authorisation”, which include any “regulatory arrangements”, which in turn include all “rules and regulations of the SRA”.

Where firms have established a general counsel role (and they are increasingly common in large English firms, as they are in the US), the general counsel is the obvious person to be the COLP. But some firms have expressed the view that where the general counsel’s role is advisory and separate from the firm’s management, it is inappropriate for him/her to have personal responsibility for issues which can only ultimately be enforced through the firm’s management.

Moreover, one way in which experience shows conflict management can go wrong is where a rainmaking partner seeks to take on a very significant new job and puts considerable pressure on the responsible person to agree that there is not a problem in the context of conflicts or confidential information. Whoever has the job of dealing with this sort of situation, and therefore responsibility for conflict decisions, has to have the internal authority to do so.

At Clifford Chance, the general counsel role is very much part of the firm’s management function so this concern does not arise. However, some firms may feel that ultimate responsibility for conflict compliance does not sit easily with a partner who has a more advisory role and they may wish to reconfigure the role to satisfy the COLP requirements rather than have two separate roles.

Whether the COLP in England is, however, the right person to have global responsibility for conflicts in an international firm is another issue; for a US-based firm, probably not.

A centralised clearance process

I suggested above that an international firm should clear conflicts through a centralised unit. The main reason for this is that conflicts rules differ from country to country. Something which may not be a conflict in England may well be in New York, with the result that a partner deciding to accept a purely domestic job in London could have serious consequences for the firm in the US.

Partners in one country cannot be expected to be alive to risks arising under the rules of other jurisdictions. Lying behind these concerns is another fundamental policy decision which any international firm needs to take, namely by reference to which conflict rules is it going to make conflict decisions?

In a number of respects, the conflict rules of many US states (and they do vary from state to state) are the most restrictive in the world. In particular, it is typically the case that a firm cannot act adversely to an existing client without its consent, even on something unrelated to the work done for that client.

This contrasts with the general approach throughout, say, Europe. So while a New York-based firm with a few small offices in Europe might decide it is easier to apply New York rules everywhere, it is very unlikely that a Europe-based firm with a small US presence would want to do so; it would simply be too restrictive. In my view, the best solution is to apply the conflict rules of the country where your firm is going to be acting.

On cross-border work, you will have to apply more than one set of rules, selecting and applying the harshest elements of each. You will also need to bear in mind that lawyers working abroad (i.e. outside the country where they are admitted) may personally still be subject to the rules of their home country (as is currently the case with English solicitors). And, of course, you need to take account of the terms of any engagement letter your firm may have agreed.

All this mounts up to quite a complex analysis, again militating in favour of a centralised clearance process. But it also requires a further level of detail: where a job develops in a manner not anticipated at the outset, your systems have to be able to prevent, for example, a lawyer in New York working on a job which was only originally cleared under rules applicable in England or some continental European country.

A question of judgment

Ultimately, conflict decisions often come down to a question of judgment which, as with everything else, comes easier with experience. It follows that your firm should try to avoid appointing a series of people (COLPs or otherwise) with short-term responsibility.

If you are regulated by the SRA and your firm is therefore going to have to appoint a COLP, it is worth also bearing in mind that he/she will also have an obligation “to record any failure to comply [with the SRA Code, and therefore the conflict rules]... and make such records available to the SRA on request”. And there is a further obligation to “report to the SRA any [breach] which is material either taken on its own or as a pattern of failures”.

No firm (or, personally, COLP) is going to want to be in a position of having to record numerous breaches of conflict rules (even where they might have been resolved through discussions with clients). So it is more than ever in a firm’s interests to make sure it has established a process which is very reliable and which also has the support and respect of its partners.