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Di Maio, Antonia --- "The McCaw Lewis Chapman Advocacy Contest" [1999] WkoLawRw 8; (1999) 7 Waikato Law Review 195


THE MCCAW LEWIS CHAPMAN ADVOCACY CONTEST

SUBMISSIONS OF COUNSEL FOR TOWER CORPORATION

IN RUSSELL MCVEAGH MCKENZIE BARTLEET

V TOWER CORPORATION

BY ANTONIA DI MAIO[*]

The issue at stake here is whether Russell McVeagh McKenzie Bartleet (“Russell McVeagh”) must be disqualified from acting for Guinness Peat Group (“GPG”). This proceeding arises out of the concurrent retainers of Tower Corporation (“Tower”) and GPG by Russell McVeagh. Tower's retainer concerned a dispute with the Inland Revenue Dept, regarding the 1990 tax year. GPG required Russell McVeagh's assistance in preparing a hostile takeover strategy against Tower. Russell McVeagh did not inform Tower of its proposal to act for GPG. It did not gain Tower's consent to do so. It continued to act for GPG for a period of 18 months, without putting in place any effective safeguards against the disclosure of confidential information.

May it please your honours, the submissions for Tower are as follows:

1. The court may, as an incident of its inherent jurisdiction, disqualify a practitioner from representing a client.

2. Russell McVeagh must be disqualified in order to:

2.1 Prevent a continuing breach of fiduciary duty; and

2.2 Protect confidential information relating to Tower:

2.2.1 Russell McVeagh holds confidential information relevant to GPG's retainer.

2.2.2 There is a risk that this information will be disclosed to the detriment of Tower.

3. The balance of public interest weighs in favour of disqualification.

Submission 1: The court has the power, as an incident of its inherent jurisdiction, to disqualify a practitioner from representing a client.

Lord Morris in R v Connelly recognised that courts endowed with a particular jurisdiction have the powers necessary to enable them to act effectively within that jurisdiction.[1] These include a power to disqualify a practitioner from representing a client. This power must be exercised where it is necessary to protect the parties, and where it is demanded by the wider interests of justice.[2] This power is not dependent on the Rules of Professional Conduct for Barristers and Solicitors. It is not in any way diminished by the fact that a practitioner might be subject to disciplinary proceedings by the relevant professional body.[3]

Submission 2:

2.1: Russell-McVeagh must be disqualified to prevent a continuing breach of fiduciary duty.

The contract of retainer between Tower and Russell McVeagh created a fiduciary relationship. Rule 1.01 of the Rules of Professional Conduct for Barristers and Solicitors states that “the relationship between practitioner and client is one of confidence and trust which must never be abused”.[4] This rule is stated in absolute terms, it is unequivocal. As an incident of this fiduciary duty, lawyers must avoid conflicts of interest. They must avoid divided loyalties. The commentary to Rule 1.01 states that “the professional judgment of a practitioner should at all times be exercised within the bounds of the law solely for the benefit of the client and free of compromising influences and loyalties”.[5] Where a conflict of interests develops, nonetheless, the lawyer must disclose it to the client. In McKaskell v Benseman, Jeffries J recognised that “[a] primary obligation of the fiduciary is to reveal all material information that comes into his [or her] possession concerned with [a] client's affairs”.[6] Only material information, not trifling or insignificant detail, must be passed on.

Russell McVeagh allowed a conflict of interest to arise when it accepted the concurrent retainers of both Tower and GPG. Russell McVeagh owed Tower a duty of loyalty. It undertook to owe the same duty of loyalty to a company which planned a hostile takeover of Tower. GPG's interests, which Russell McVeagh undertook to further, were a direct threat to Tower's structure and management. Russell McVeagh allowed its loyalties to be divided, when a solicitor's loyalty to his or her client must never be divided.[7]

Russell McVeagh then breached its duty to disclose this conflict of interest. It was obliged to inform Tower that it intended to accept instructions from GPG. This was material information. While not directly related to the tax dispute, it would clearly affect Tower's decision on whether or not to continue the retainer. By not disclosing this information Russell McVeagh effectively denied Tower the right to make an informed choice about its representation. The duty of loyalty was owed to Tower, and its view of the materiality of this information cannot be disregarded. Tower did not consider Russell McVeagh's intention to act for a company intending a hostile takeover, to be “trifling” or “insignificant” detail. Russell McVeagh breached its fiduciary duty when it accepted GPG's retainer, and did not disclose that it had.

The fiduciary duty to Tower remains operative. This is for two reasons. First, Russell McVeagh's duty of loyalty to Tower was not extinguished when it stopped acting for Tower in the tax dispute. As established in the Australian case Wan v McDonald, “... a solicitor's duty of loyalty ... cannot be treated as extinguished by the mere termination of the period of his [or her] retainer”.[8] Secondly, a duty of loyalty is still owed because Russell McVeagh continues to represent Tower in a number of other matters. Therefore, for as long as Russell McVeagh continues to represent GPG, it is breaching its fiduciary duty to Tower.

The relationship between practitioner and client is one of confidence and trust which must never be abused. It must be free of compromising loyalties. For Russell McVeagh's fiduciary duty to Tower to be fulfilled, its loyalties must be undivided. For as long as Russell McVeagh continues to represent GPG, they will be in breach of this duty.

2.2: Russell McVeagh must be disqualified in order to protect confidential information relating to Tower.

The court must disqualify Russell McVeagh if it is satisfied that relevant confidential information is held, and that there is a risk that it could be disclosed.

This test is less stringent than that adopted by the English Court of Appeal in Rakusen v Ellis, Munday & Clarke.[9] Here the court demanded a probability of mischief before disqualification was justified. However, recent cases have recognised that this strict test is unsuitable in modern conditions.[10] The law privileges confidential information from disclosure in order to encourage free and frank communication between solicitors and their clients. It would be inconsistent for it readily to allow a solicitor to act in circumstances which could create a perception that confidences might not be kept.[11] Such a circumstance is where a solicitor acts for a new client in matters adverse to a current client's interests.

2.2.1: Russell McVeagh holds confidential information relevant to GPG's retainer.

While representing Tower, Russell McVeagh gained a general knowledge of its management culture, negotiating style and method of operation. This may not be confidential information in a strict sense, as it was not gained from express verbal or written communications. However, it must be recognised as confidential information because it was derived from the professional relationship between Tower and Russell McVeagh.[12] In addition, Russell McVeagh was entrusted with more specific information and documentation, relating to Tower's financial and taxation position.

This information is relevant to GPG's attempt to acquire Tower. The general information could aid GPG and its advisors in developing a takeover strategy. It would also give GPG an advantage, real or perceived, in any future litigation. The specific information is undeniably relevant to a company intending a takeover. It could provide indications of Tower's present true worth, its investment management, and its operating expenses. It could also be used to criticise current management, so as to influence Tower's members.

2.2.2: There is a risk that this information will be disclosed to the detriment of Tower.

It cannot conclusively be said that confidential information has not already been disclosed. For 18 months, no effective steps were taken to protect Tower's information from disclosure. More importantly, however, it cannot conclusively be said that there will be no future disclosure.

The “Chinese wall” erected by Russell McVeagh has not removed the risk of disclosure. This device is considered to offer little in resolving conflict of interest situations.[13] The English Court of Appeal has declared that only in very special circumstances would a Chinese wall “... provide an impregnable barrier against the leakage of confidential information”.[14] The risk is that confidential information will be inadvertently disclosed. This arises because of the necessarily close relationships between partners in a firm.[15] This risk is not decreased because the representatives of Tower and GPG worked in separate offices. Mobility of labour and modern communication techniques mean that distance is no bar to communication.

Furthermore, a Chinese wall is especially inappropriate in this case. It is submitted that it is only appropriate for use in successive conflicts. There, a lawyer's duties to a current client conflict with those owed to a former client. The only concern is the confidentiality of the former client's information. However, in concurrent conflicts, the issue of loyalty looms large. Even if it were accepted that Chinese walls adequately prevent disclosure of information, they do not cure divided loyalties. Therefore, their use must be restricted to successive conflicts.

The risk of disclosure is not lessened because different partners dealt with the Tower and GPG retainers. Knowledge of the individual lawyer can be imputed to the firm.[16] Furthermore, the honour and integrity of the professionals involved does not reduce this risk. Courts no longer imbue professionals with an implicit trust.[17] The court should have regard to the considered assessment of experienced lawyers. However if it is clear, as it is here, that they have misjudged the situation, the court must intervene.

Russell McVeagh holds confidential information relevant to GPG's retainer. There is a risk that this confidential information could be disclosed. If it were, this could be, or could be perceived to be, to Tower's detriment. The court must prevent this by disqualifying Russell McVeagh.

Submission 3: The balance of public interest weighs in favour of disqualification.

In deciding whether to disqualify a practitioner, competing interests must be balanced, to determine where the overall public interest lies. A fundamental consideration is the appearance of justice.[18] This must be maintained to preserve the integrity of the legal system. Allowing Russell McVeagh to continue to represent GPG will only create the perception that lawyers can readily change sides. This subverts the appearance of justice.[19] I acknowledge Russell McVeagh's duty to be available to the public, as contained in Rule 1.02 of the Rules of Professional Conduct.[20] However, this duty is not absolute. A qualification is contained within the rule itself. A solicitor may refuse to represent a client if he or she has good cause to do so. A potential conflict of interest is good cause. The last consideration is the right of GPG to be represented by the solicitor of their choice. The court in Black v Taylor recognised that this right is not absolute.[21] Therefore the appearance of justice should take precedence. It is imperative that justice be seen to be done.

In summary, the submissions for Tower are as follows:

1. The court must use its inherent jurisdiction to disqualify Russell McVeagh from further representing GPG.

2. This is necessary to prevent a continuing breach of their fiduciary duty to Tower, and to protect confidential information relating to Tower.

3. Disqualification is in the public interest.

Any lesser sanction risks condoning departures from the high standards of professional responsibility expected of practitioners. The court must not allow its rules to be broken with impunity.


[*] Third year LLB Hons student, University of Waikato, and winner of the 1999 McCaw Lewis Chapman Contest. Students were asked to analyse the judgments of the Court of Appeal in Russell McVeagh v Tower Corp [1998] NZCA 158; [1998] 3 NZLR 641. They were asked to place themselves in the shoes of either counsel for the appellant or counsel for the respondent, as at the date of the Court of Appeal hearing. They were asked to prepare a persuasive argument on whether the High Court should in this case have made an order disqualifying Russell McVeagh from acting for GPG.

[1] [1964] AC 1254, 1301.

[2] Black v Taylor [1993] 3 NZLR 403, 412.

[3] At 418.

[4] Rule 1.01, Rules of Professional Conduct for Barristers and Solicitors (5th ed, 1998).

[5] Ibid.

[6] [1989] NZHC 225; [1989] 3 NZLR 75, 87.

[7] Farrington v Rowe McBride & Partners [1985] NZCA 21; [1985] 1 NZLR 83, 90.

[8] [1992] FCA 4; (1992) 105 ALR 473, 494.

[9] [1912] 1 Ch 831.

[10] National Mutual Holding Pty Ltd v Sentry Corporation (1989) 22 FCR 209, 229-30; Murray v Macquarie Bank Ltd (1991) 33 FCR 46, 49; MacDonald Estate v Martin (1990) 77 DLR (4th) 249; Carindale Country Club Estate Pty Ltd v Astill [1993] FCA 218; (1993) 115 ALR 112, 118; Equiticorp Holdings Ltd v Hawkins [1993] 2 NZLR 737.

[11] Carindale Country Club Estate Pty Ltd v Astill [1993] FCA 218; (1993) 115 ALR 112, 118.

[12] The court in Black v Taylor, supra note 2, at 418 considered such information to be “confidential”.

[13] Equiticorp Holdings v Hawkins [1993] 2 NZLR 737, 741.

[14] Re a Firm of Solicitors [1992] 1 All ER 353, 354.

[15] Equiticorp Holdings v Hawkins, supra note 13, at 740.

[16] Mallesons Stephen Jaques v KPMG Peat Marwick (1990) 4 WAR 357, 375.

[17] For an example of this trust, see Rakusen v Ellis Munday & Clarke, supra note 9, at 838.

[18] Eg D & J Constructions Pty Ltd v Head (1987) 9 NSWLR 118, 123; Mallesons Stephen Jaques v KPMG Peat Marwick, supra note 16; Thavenaz v Thavenaz (1986) FLC 91, 98; McDonald Estate v Martin (1991) 77 DLR (4th) 249, 267.

[19] D & J Constructions Pty Ltd v Head, supra note 18, at 124.

[20] Supra note 4.

[21] Supra note 2, at 408.


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