The Great Wall of China or the Walls of Jericho?

The House of Lords judgment in Prince Jefri Bolkaih v KPMG has caused a significant amount of discussion within the professional community. So what are the implications in relation to confidentiality and the use of Chinese walls? Should thick walls be constructed or are these just waiting to be blown down by one note from a judicial trumpet?

Prince Jefri, the Sultan of Brunei’s brother, had been a client of KPMG. Shortly after the end of this retainer, the government of Brunei appointed a task force, which included KPMG, to investigate the activities of the Brunei Investment Authority (BIA). The Prince was a former Chairman of the BIA. KPMG took the view that there was no conflict of interest between this new appointment and Prince Jefri's previous work as he was no longer a client. Although KPMG set up procedures to stop any flow of information relating to Prince Jefri's instruction, they did not seek the Prince’s consent to taking instructions from the BIA. On finding out about KPMG’s new instruction, the Prince applied to the High Court for an injunction to restrain KPMG from acting. The High Court granted the injunction, KPMG appealed and won. Prince Jefri then went to the House of Lords and, like the High Court, it granted the injunction.

The solicitors’ rules of conduct state, subject to very specific exceptions, that firms cannot act for two clients where there is a conflict. This is of course as it should be, but what about the ex-client who finds out that a firm is now representing a party it previously acted against on his behalf or that information the firm holds on him might be relevant in some other way? There can be no conflict as such, as the solicitor no longer acts for him, but what about the information held by the solicitor in relation to him? This was the question in the Jefri case.

In their Lordships’ judgment, two issues were identified for an ex-client seeking to injunct a solicitor from acting to establish:

• the solicitor is in possession of information which is confidential to the ex-client and there has been no consent to its release; and

• the confidential information in question is, or may be, relevant to the new instruction in the interest of the new client or adversely so to the old.

In addition, the duty to preserve confidentiality is unqualified: there is a duty to keep information confidential, not just to take reasonable steps to do so. However, their Lordships said the court would not intervene where it is satisfied that there is no risk of disclosure. It was also made clear that Chinese walls need to be an established part of the organisational structure of a firm not an ad hoc creation.

In deciding whether confidentiality has been maintained the starting point is that information moves within a firm and so it is for the firm to prove otherwise. This is a heavy burden of proof. In the Jefri case, although KPMG set up systems to prevent information flow, they did not discharge this burden of proof.

One judgment has already been handed down since the Jefri case. The interpretation was that the court should ensure that there is no additional risk to the former client. Further judgments are awaited, although it appears that the courts will adopt a stricter approach towards conflicts of interest and that Chinese walls may not always be enough.

For further information please contact Clare Joyner, Trinity Court , 16 John Dalton Street, Manchester M60 8HS, Tel: 0161 830 5000

This article was first published in the Summer 1999 issue of Hammond Suddards' Corporate Finance Newsletter.

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.