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10 July, 2007  

Heaven forbid that the earnings of large law firms should ever be imperilled by the ambidexterity principle. Lawyers must be able to act like investment banks. As the Citibank case showed, Chinese walls and client consent are the way to go. Otherwise, big law firms will never properly be able to grow bigger

imageAn eighteenth century English cartoon depicted a lawyer as “Open to all Parties” with one hand extended to the plaintiff and the other to the defendant to receive each of their fees. The lawyer was apparently Fletcher Norton, a prominent barrister and crown lawyer, whose nickname was “Sir Bull Face Double Fee”.

Sir Bull Face was an ambidexter. Professor Jonathan Rose of Arizona State University has traced lawyerly “ambidexterity” in England back to the late 1200s, and through the following centuries. He says that “conflict of interest” was commonly known as “ambidexterity”. Literally, it referred to lawyers – “ambidexters, who took money with each hand from different parties to a dispute”.

Clients worry when they see their own lawyer being friendly with the lawyer on the other side, but the sight of the one law firm acting, for example, for both an alleged rape victim and the alleged rapist, is inconceivable to them.

The legal profession tends to depict rules of modern “legal ethics” as voluntarily adopted codes of “higher ethical standards” than the general law would impose. However, a more accurate view might be that ethics codes were created to take the heat off lawyers, allowing them to “self-regulate their ethics” instead of being controlled by legislation imposed on them.

Professor Rose refers to The London Ordinance of 1280:

“The Ordinance prohibited a significant number of specific types of lawyer misconduct, making it perhaps the earliest antecedent of modern lawyer ethics codes. Permanent suspension was the penalty for the most serious violations and imprisonment ‘according to the statute of the King’ was the penalty for losing a client’s case due to negligence or default… Among the enumerated prohibitions were two directed specifically at conflicts of interest… The Ordinance banned representing both sides of a dispute simultaneously … [and] it imposed punishment ‘where one takes [money], and then leaves his client, and leagues himself with the other party’.”

By the late 1300s lawyers no longer needed to fear independent legislative oversight. Although it was realised that they in particular were using the parliaments of that time to advance their own and their clients’ interests, nothing could be done about it. While it is true that in 1372 an ordinance was passed prohibiting currently practicing lawyers from serving as members of parliament, the lawyers ignored it. Another unsuccessful attempt to exclude lawyers was made in the 1600s at the time of the civil war, because “the great number of lawyers in parliament prevented law reform measures being enacted” (see Donald Veall’s book, The Popular Movement for Law Reform).

imageA few decades ago we entered the era of the large law firm. These firms have a lot of clout within the profession. As law firms get bigger, they end up with more clients, or bigger clients. All law firms hate to send work away, even on a “one off” basis, and as transactions get bigger, the fees at stake get bigger. The ambidexterity rules (by now long confined to “codes of ethics” written by lawyer unions) would need to be slackened off some more.

In 1997 US Professor Lester Brickman (Cardozo Law School, pic) gave a lecture entitled, “What Drives Legal Ethics?” He concluded:

“When the ethics rules are written by those whose financial interests are at stake, no one can doubt the outcome.”

One solution was to permit invisible “Chinese walls” to be “built” in law firms. A group of lawyers in the firm would act for one client, but they would be walled off from another group in the firm who would act for the other client. Everyone would agree that there was to be no peeking through the invisible wall.

Phillips Fox is a large Australian law firm. In Western Australia in 1979 it asked Justice Christopher Steytler to give a stamp of approval to a Chinese wall it had erected. Justice Steytler said no.

Another approach is to allow law firms to obtain client consent to ambidexterity: I done wrong, but they said I could. (Incidentally don’t try that in criminal courts, except perhaps for contact sports injuries.) In 2001 the New York Bar Association (Citibar) opined that clients have the right to waive conflict issues in order to be represented by the lawyer of their choice.

imageAccording to Lawrence J. Fox (pic), a partner in US law firm Drinker Biddle, this ethics opinion was…

“the culmination of a campaign that has been led by the same major New York firms – who make up so much of the membership of the Citibar – to negotiate around so many of our profession’s rules governing professional conduct. They assert these rules are outdated, antiquated and unnecessary in this era of globegirdling law firms and sophisticated clients for whom the protections of loyalty and confidentiality are simply annoying impediments to law firm growth and prosperity that can and should be waived to accomplish these desirable ends.”

Fox’s comments can be found in an article entitled, “Forgeddabout Conflicts – If Citibar Has Its Way, We Can Have Just One Big Law Firm”.

In Australia clients cannot “consent” to an actual conflict, but they can consent to the risk of one. For example, the NSW Law Society ethical rules say:

“9.2 A practitioner who intends to accept instructions from more than one party to any proceedings or transactions must be satisfied, before accepting a retainer to act, that each of the parties is aware that the practitioner is intending to act for the others and consents to the practitioner so acting…” etc.

But back to Chinese walls. Investment banks are like large law firms, insofar as they too want to be able to do lots of things for lots of clients. They can find themselves trading in shares and assisting in takeovers in respect of the same clients. Obviously, the members of share trading departments must not know what the takeover departments are up to.

On June 28 Justice Peter Jacobsen of the Federal Court ruled that a Chinese wall erected by investment bank Citigroup worked to prevent peeking. This was very fortunate, because if he hadn’t ruled that way then, according to News Ltd financial commentator Terry McCrann, “he would have made the entire financial services sector literally unworkable”.

Heaven forbid that the earnings of the large law firms should ever be imperilled by the ambidexterity principle. Lawyers must be able to act like investment banks. It is only a matter of time. Chinese walls and client consent are the way to go. Large law firms (which already double the fee) must be allowed to double the number of clients as well.

“Sir Bull Face” would be impressed.