Cases, matters and conflicts of interest

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Lexicon---Anti-dumping

In this column last month, I noted the close relationship between law and language. Law requires language for its expression. In turn, language cannot be interpreted without reference to the law. This point came up recently when I was researching the rules in China that govern conflicts of interest for PRC law firms.

The starting point for this enquiry was Article 39 of the PRC Lawyers Law, which provides as follows:

律师不得在同一案件中为双方当事人担任代理人, 不得代理与本人或者其近亲属有利益冲突的法律事务。

A lawyer may not act as the representative of both parties in the same case and may not represent a client in legal matters where the lawyer personally or a close relative has a conflict of interest.

I was interested to know whether the prohibition under Article 39 on lawyers (or law firms) acting for two or more parties applied just in contentious situations (i.e. litigation), or whether it extended to all matters, whether contentious or not. Further, if the answer were the latter, do any exceptions apply where no direct conflict of interest exists?

The answer to this question turns on the interpretation of “case” and whether it just refers to litigation or extends to any matter or transaction in which a lawyer might be instructed by a client. The question is important, since it would mean that PRC lawyers could not act for two or more parties in any matter, even if there were no direct conflict of interest between the parties. This would exclude PRC lawyers from acting in many circumstances in which foreign law firms would be able to act, such as where the law firm seeks to act for two or more lenders in a loan transaction or two or more shareholders in a corporate transaction. This would put PRC law firms at a competitive disadvantage to foreign law firms, many of which are subject to less restrictive rules on conflicts of interest. In certain situations, it could also require corporate counsel to engage additional law firms, potentially adding to complexity and cost. By way of comparison, the word “case” is more likely to be used by English speakers in colloquial language than in formal legal drafting. Although it appears in archaic legal phrases such as “action on the case” (used to describe proceedings to claim a remedy for a personal injury or damage to property), in modern colloquial English it can refer either to a court case (i.e. litigation proceedings) or to a non-contentious matter.

In England, solicitors and firms are prohibited from acting for two or more clients in circumstances where there is a conflict – or a significant risk of a conflict – between the duties to act in the best interests of each client. However, there are two exceptions to this rule. The exceptions permit a firm to act with the informed consent of the clients concerned if the clients (a) have a substantially common interest; or (b) are competing for the same asset, and it would be reasonable to act for both clients in the circumstances (an example of this is a competitive auction where two or more companies are bidding to acquire a business). The test of reasonableness depends on the circumstances and requires consideration of factors such as the sophistication of the clients and whether the law firm has sufficient resources and systems to act in the best interests of each client (such as by creating separate teams to act for each client, and by establishing internal information barriers to protect each client’s confidential information).

The language of the relevant rule in the UK Solicitors’ Code of Conduct uses the term “matter”, which is broad enough to capture both contentious and non-contentious matters.

In US jurisdictions such as the state of New York, the rules are stricter. Even where no direct conflict arises (e.g. a law firm is not acting for clients on different sides of a transaction), a lawyer must not represent a client in a matter that would be adverse to another current client, except where both clients have given written consent to waive the conflicts.

On one interpretation, the term “case” in Article 39 in the PRC Lawyers Law has a narrow meaning (i.e. one that is limited to litigation). This interpretation is supported by contrasting the term “case” with the broader term “legal matters”, which appears in the second half of the sentence.

On another interpretation, the term embraces both contentious and non-contentious matters. This is supported by Article 28 of the All China Law Association’s Professional Ethics and Conduct Rules for Lawyers, which provides as follows:

律师不得在同一案件中为双方当事人担任代理人。同一律师事务所不得代理诉讼案件的双方当事人, 偏远地区只有一律师事务所的除外。

A lawyer must not act as the representative of both parties in the same case. The same law firm must not act for both parties in litigation cases, except in remote areas where there is only one law firm.

Interestingly, this provision appears to distinguish between individual lawyers and law firms, suggesting that the reason why a law firm could act for both parties in a non-contentious matter is that separate lawyers could act for each party.

The PRC Lawyers Law does not clarify how the term ‘case’ should be interpreted in Article 39. Some guidance may be drawn from the various rules governing conflicts of interest issued by local bar associations in China, many of which distinguish between the situation where a law firm acts for both clients in contentious proceedings (generally prohibited) and the situation where a law firm acts for both clients in non-contentious proceedings. Similar to the position in England, the rules permit the latter in circumstances where the informed consent of both clients is obtained and firewalls are erected.

Take, for example, Articles 11 and 12 of Avoidance of Conflicts of Interest by the Legal Profession Rules (Trial Implementation) issued by the Beijing Bar Association in 2001. These avoid referring to “case” and instead refer generally to “matters”:

第十一条

同一律师在承办法律事务过程中, 从事下列利益冲突行为, 必须向拟委托的委托人说明, 并且取得相关委托人的书面同意:
一、在同一非诉讼法律事务中, 同时接受可能会有利益冲突的两方或者两方以上的委托, 办理无事实争议的具体性事务;

Article 11

Where the same lawyer, during the course of carrying out legal matters, undertakes the following activities involving a conflict of interest, an explanation must be provided to the proposed instructing parties and the written consent of the relevant instructing parties must be obtained:

(1) in the same non-contentious legal matter, concurrently accepting instructions from two or more parties who are likely to have a conflict of interest to deal with specific matters that do not involve a factual dispute …

第十二条

同一律师事务所的不同律师, 从事第十条和第十一条所列利益冲突行为, 必须向拟委托的委托人说明, 取得相关委托人的书面同意, 并且应当在相关律师之间设立防火墙, 以防止因利益冲突而给相关委托人造成损害。

Article 12

Where different lawyers in the same law firm undertake the activities involving a conflict of interest as listed in Articles 10 and 11, an explanation must be provided to the proposed instructing parties and the written consent of the relevant instructing parties must be obtained. In addition, firewalls must be erected between the relevant lawyers in order to guard against causing harm to the relevant instructing parties as a result of the conflict of interest.

Interestingly, a stricter position now appears to have been adopted in the Penalizing the Illegal Activities of Lawyers and Law Firms Measures, which were issued by the Ministry of Justice on 9 April 2010. These measures appear to prohibit lawyers and law firms from acting for clients with a conflict of interest in both contentious and non-contentious matters, and do not expressly recognize any exceptions, unlike the Beijing rules.

The question of when law firms can act in circumstances involving conflicts continues to be controversial in other countries. Under amendments that were recently considered in the UK, a third exception to the conflict prohibition would be recognized. Under this exception, firms would be permitted to act for sophisticated clients in any situation involving a conflict (excluding litigation in which there is a direct conflict of interest, and conveyancing matters), so long as the clients gave informed consent and it was in the best interests of each client for the firm to continue to act for them.

However, it was recently reported that these amendments had been abandoned as a result of the lack of support from the in-house legal community.

It will be interesting to see how the rules in China develop, particularly as PRC law firms grow larger and become more international.

葛安德 Andrew Godwin

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew Godwin is currently on secondment to the ALRC as Special Counsel to assist with its inquiry into corporations and financial services regulation. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com