Codes of ethics for legal practice in a globalised world; is reform long overdue?

As markets became increasingly globalised, so did commercial and individual legal needs. Lawyers retrained and specialised in highly technical areas of law,[1] in international law or qualified in more than one jurisdiction. Law firms increased dramatically in size and international mergers created giant global law firms with the aim to cater global clients. These factors not only created a class of a firm that did not exist before but also mobilisation within the profession, with a significant number of foreign lawyers practising law in the UK and vice versa.

Whilst the globalisation of laws appears to be halting,[2] this does not hold true for the globalisation of the profession itself, especially when considering that corporate clients are many times conglomerates with hundreds of subsidiaries and significant bargaining power. This creates a regulatory gap in the current SRA Code of Conduct for Solicitors, RELs and RFLs and the SRA Code of Conduct for Firms (collectively ‘the Codes’), an issue that was raised with the SRA by the Hunt and Smedley Reviews.


The Codes contain ‘professional ethical rules are designed to protect […] particularly those clients who are not in any position to evaluate professional services.’[3] Such clients are generally considered to be ‘unsophisticated and rare users of legal services’ and therefore there is a large asymmetry of information in the client-lawyer relationship. Whilst such client-lawyer relationships are common in domestic settings and are well-covered by the SRA Codes, the opposite applies for global corporate law firms whose clients hold substantial power and benefit from knowledgeable in-house legal advice. Such clients define their needs to the firms, rather than vice versa, and have the bargaining power to ‘dictate operational matters to a firm.’[4] The asymmetry of information in the corporate client-lawyer relationship is non-existent, making the Codes, which assume otherwise, somewhat insufficient.


According to commentators, ‘the regulation of lawyers on the international stage is unnecessary’ because of the global legal market’s nature.[5] ‘Corporate clients are usually in a good position to evaluate the services they receive’[6] and ‘are moving much more in panels and playing firms off against each other for financial and other reasons.'[7] This has led to an economic equilibrium where legal advisory is a business that is guided by the objective of making profit – a situation that involves little scope for mishaps that could damage reputation. According to Boone, not observing either (potential conflicts of interest or confidentiality) would result in a ‘professional suicide’ considering the client’s knowledge and power to influence the law firm’s reputation.[8] However, is this enough?


Regulatory challenges and the corporate firm


Arguably, an international law firm has more common regulatory needs to a foreign-based international firm than with its local counterparts, indicating that the current ‘one-size-fits-all’ approach is inefficient, especially regarding Paragraph 6 (conflicts of interests) of the Codes.


- Conflict of Interest

Avoiding conflicts of interest is closely connected to client loyalty and acting in the client’s best interests.[9] There is no international settled definition of what constitutes a conflict of interest. The SRA Glossary defines ‘conflict of interest’ as ‘a situation where [the solicitor’s or firm’s] separate duties to act in the best interests of two or more clients in relation to the same or a related matters conflict.’[10] The Codes identify two types of conflicts; ‘own interest conflict or a significant risk of such a conflict,’ and a conflict where two or more of the firm’s clients have ‘a conflict of interest or a significant risk of such a conflict.’ Under either case, the outcome would be to not act on the client’s request.


For the Codes, avoiding the first type of conflict is an absolute rule with no exceptions, however, the latter can be managed if certain conditions are met. Other jurisdictions define conflicts differently. For instance, the American Bar Association (ABA) identifies four types of conflict, two being almost identical to the SRA’s, and adding rules on former client and imputation conflicts.[11]


For the global firm, the lack of a uniform international regulation of ‘conflict of interest’ results in double deontology and firms having to observe the rules of multiple jurisdictions. Due to the ethical underlining of what constitutes a client conflict, (inter)national definitions may clash, and a firm might be faced with the dilemma of complying with the rules of one state but defying the rules of another. Such a scenario is currently not covered by the Codes, even though legal services account for 10% of UK exports and the Codes apply extraterritorially.[12]


According to the Hunt Review, the lack of appropriate regulation leads to issues for English firms with offices abroad, to their ‘competitive disadvantage.’[13] This finding was reinforced in a more recent, extensive study by Coe and Vaughan, who found that for global firms the notion of client conflicts is ‘amorphous, and (..) and harder to define’ and pertains to ‘relationships between lawyers, their firms, their clients, opposite counsel and the regulators.’[14] This understanding of conflict is only partially covered by the Codes’ definition in Paragraph 6, leaving a lot to natural market regulation.


Griffiths-Baker and Moore identify four pressure points between client conflicts and global law firms; the increasing demand for specialist legal advice, the globalisation of commerce, the ‘dramatic increase in size of law firms’ and the mobilisation of lawyers.[15] Cumulatively considered, these factors have led to the establishment of a handful of truly transnational firms that form part of an elite of advisors in certain industries. Clients of such a specialised industry might wish to utilise a single firm for the entire transaction/case or multiple firms for different parts of the transaction/case. In such circumstances, it is highly likely that a potential conflict of interest inevitably exists between clients or between former clients. Current regulations are of little use in preventing actual conflicts between international clients because they are used tactically to prevent one party from being represented by its chosen lawyer/firm.


This was confirmed by Coe and Vaughan who reported that powerful clients demand that firms and lawyers represent them and refrain from representing ‘competitors’ who might be a range of companies of the same sector. This raises a major access to justice concern because, if mega-clients are permitted under current rules to restrict who firms represent, then firms are incentivised to stop representing smaller-scale clients hoping that a mega-client will provide them with more work. Tomlinson refers to Banks, who generally impose in firm engagement terms that the firm cannot act against them.[16] Necessarily, the ‘pool of lawyers available to give advice [to opposing parties of Banks] and take their case is extremely limited,’ and classes clients according to their economic profile.[17]


- Confidentiality & disclosure


Rules on confidentiality, reflected in Paragraph 6.3-6.5 of the Codes, are separate to those of conflict of interest, demonstrating that for England & Wales, ‘the duty of loyalty comes to an end upon termination of the retainer’ and as long as confidentiality is not compromised, the firm may act for a client with competing interests.[18]


Firstly, the Codes do not address confidentiality concerns on a general level, which connects to the use of technology, especially in global firms and their legal technology providers, who arguably play an equally important role in international case management. According to Caserta and Madsen, ‘the challenge’ is that as firms rely increasingly on AI and third-party software, an analogous degree of confidentiality has to be given up.[19] This concern has been exacerbated during the Covid-19, when client meetings, communications and dispute resolution were shifted entirely to the online interface.


Even before the pandemic, the market’s response to managing IT threats has been client-auditing the firms’ IT systems.[20] The Coe-Vaughan investigation revealed that ‘audit provisions were indeed becoming more common,’ many times being intrusive and expansive.[21] Such extensive IT audits, which depend on the client’s requests and the willingness of the firm to facilitate those requests, can compromise the confidentiality of the firm’s other clients.[22] Arguably, safeguarding digital information is a topic that must be addressed by the SRA and relevant standards to be embedded in the Codes, since technology is more likely than not to remain a permanent aspect of, especially global, legal advisory.


At another level, similarly to concerns over client conflicts, confidentiality concerns emerge from client pressures for practices that do not exist in smaller or domestic firms. According to the Vaughan-Coe investigation, in the corporate environment, confidentiality issues arise mainly due to the demands of clients in engagement terms, which ‘signal a shift in the way in which law firms are engaged (…) not reflected in the [Codes]’.[23]


Confidentiality issues arise when secondees of firms are placed with clients. The normal practice has been to quarantine the secondee to ensure confidentiality. However, recently it has been reported that clients demand ‘virtual secondments’ – the secondee working at the physical office of the firm but be instructed by the client a good portion of their time. This compromises the quarantine technique and the confidentiality of both the client’s matters and other confidential information held by the firm. Client demands become more problematic where the secondment contract prevents the secondee from discussing the client’s matters with the firm, but the firm takes full responsibility for the secondee’s professional conduct. In such case, there is a clash between confidentiality and the firm’s interests, which, if not managed, could lead to disputes.


Conflicts of interest and confidentiality must be discussed together as they can be interdependent.[24] For example, unaddressed conflict and confidentiality concerns exist in a common global firm structure, the Verein, where strands of the same firm are independently established in various states. It is disputable whether the different strands, set up as different legal entities, but operating under the same brand, are subject to the client conflicts rules of the Codes as a unit.


Contradictorily, such firms, represent themselves to be a global, unified firm but are providing legal, informational, and financial separation between strands.[25] In an international case between RevoLaze and The Gap, two different strands of Dentons represented the opposing parties.[26] Despite Dentons’ claims that the strands are independent, the administrative judge found a conflict of interest. Indeed, despite such firms’ claims, blindly relying on its internal IT walls without publicly available checks and balances might be frustrating the outcomes put forward in the Codes.





Endnotes

[1] For instance, most cross-border cases require specialist knowledge on cross-border jurisdiction and applicable law. [2] In the recent years, we have seen several political acts aiming at the de-harmonisation of the law such as Brexit but also the denunciation of fundamental international conventions such as ICSID. [3] Andrew Boon and John Flood, 'Globalization of Professional Ethics - The Significance of Lawyers' International Codes of Conduct' (1999) 2 Legal Ethics 29, 42. [4] Joanne Bagust, 'The Legal Profession and the Business of Law' (2013) 35 Sydney L Rev 27, 43. [5] Boon and Flood (n3) 29, 41. [6] Ibid 29, 42. [7] Joanne Bagust, 'The Legal Profession and the Business of Law' (2013) 35 Sydney L Rev 27, 44. [8] Boon and Flood (n3) 29, 42. [9] Andrew Boon, Lawyers’ Ethics and Professional Responsibility (2nd edn, Hart Publishing, 2015), 168. [10] ‘Conflict of interest’ (SRA Glossary, 2021) accessed 4 May 2021. [11] ‘Rule 1.7: Conflict of Interest: Current Clients’ (American Bar Association, 2021) accessed 4 May 2021. [12] Mark Humphries ‘Ethics and the Legal Profession’ (The Law Society Gazette, 2009) accessed 5 May 2021; Chris Perrin (ed), ‘Hunt Review’ (City of London Law Society, 2009) at [24] accessed 5 May 2021; Rule 1.6, SRA Overseas Rules 2013. [13] Perrin (n12) at [24]. [14] Claire Coe and Steven Vaughan, ‘Independence, Representation and Risk: An Empirical Exploration of the Management of Client Relationships by Large Law Firms’ (SRA, 2015) 30 accessed 5 May 2021. [15] Janine Griffiths-Baker and Nancy J. Moor, ‘Regulating Conflicts of Interest in Global Law Firms: Peace in Our Time?’ (2012) 60(8) Fordham Law Review 2541, 2543. [16] Lawrence Tomlinson, ‘Banks’ Lending Practices: Treatment of Businesses in Distress’ (November 2013) 16 accessed 5 May 2021. [17] Ibid. [18] Joan Loughrey, 'Large Law Firms, Sophisticated Clients, and the Regulation of Conflicts of Interest in England and Wales' (2011) 14 Legal Ethics 215, 217. [19] Salvatore Caserta and Mikael Rask Madsen, 'The Legal Profession in the Era of Digital Capitalism: Disruption or New Dawn' (2019) 8 Laws 1, 6. [20] Coe and Vaughan (n14) 25. [21] Coe and Vaughan (n14) 30. [22] Coe and Vaughan (n14) 26. [23] Coe and Vaughan (n14) 28. [24] Coe and Vaughan (n14) 30. [25] In re Certain Laser Abraded Denim Garments, Inv. No. 337-TA-930, USITC Pub. 43 (May 7, 2015) (Preliminary) as reported in Cassandra Burke Robertson, ‘Conflicts of Interest and Law-Firm Structure’ (2019) Case Western Reserve School of Law Scholarly Commons, 78 accessed 4 May 2021. [26] Ibid; Victor Li, ‘Is popular verein structure jeopardizing big firms? Dentons challenges conflict-of-interest ruling’ (ABA Journal, 2015) accessed 4 May 2021.

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