Steven Vaughan and Claire Coe have conducted a study of senior commercial lawyers for – but independent of – the Solicitors Regulation Authority. The study concentrated on ‘high impact’ [i.e. high risk in SRA terms] commercial firms working.
The essential concern addressed by the research was whether institutional clients were exercising too much influence over the firms they instructed, to the detriment of the public interest and/or the interests of other clients.
The central finding was that all respondents, ‘discussed a shift in the balance of power from law firms to clients…[with] major corporates and financial institutions seek[ing] to impose their own terms of engagement on law firms.’ Most interviewees it seemed felt forced to accept terms of engagement dictated inflexibly by the client although some reported routinely and successfully pushing back on unacceptable terms.
It is customary to see growing client power as redressing an historical imbalance that favoured complacent firms in their dash for cash at the expense of client interests. After all, a key plank of the case for innovation is that client demands have changed and firms must adapt. Whilst generally the resurgent client is seen as a positive, this report suggests some negatives. Similarly, one might be tempted, unwisely if taken too far, to discount general grumbles that client procurement practices discourage lawyers from viewing themselves as professionals. Allied with the concern that lawyers are increasingly thinking of themselves as mere ‘service providers’, the report raises more specific concerns which it seems to me do require careful thought and a considered response.
The first of these is the familiar concern that institutional clients deliberately seek to conflict certain large firms out of litigating against them, whether that conflicting out is merited or not. Partly this seems to be institutional clients, not entirely unreasonably, taking a broader view of conflicts of interest than law firms would like to take. There may also be a degree of seeking to transport tougher US rules to UK firms. Partly though there is the often complained of tactical implication of firms deliberately: as the report states.
a minority of our interviewees [said] that law firms may be appointed to those panels, and made to sign ‘no sue’ clauses, where the client has little or no intention of giving that firm work.
It would be interesting, as the report notes, to look in a more rounded fashion at the practice and institutional client views on this approach. It is also worth contrasting this view of the conflict of interest rules with the view that was offered by City lawyers at the time the conflict rules were reconsidered. The tenor of their response at the time was that clients were relaxed about more liberal rules, whereas the pressure this report identifies suggests rather the reverse.
A more worrying problem is that (some) clients appear to be seeking terms which (some) firms accept that may affect duties it owes to other or future clients. This raises two interesting questions:
- should firms be able to enter into such terms at all (presumably the answer may be yes for limitations on future clients but no for current clients); and,
- should those terms be disclosed to future clients so they can decide whether to instruct lawyers who’s hands are somewhat tied by other (more powerful) clients.
The most interesting and concerning example of institutional pressure came not from clients but from ‘shadow clients’. This is how Vaughan and Coe define shadow clients:
third-party payers seeking in some contexts to influence the behaviour of advisers to other parties on a transaction…[that have] the power…to choose which law firms act for other parties on their deals, and to dictate their roles.
They describe such clients as potentially having:
significant influence over its appointment, remuneration, and potentially the scope of its work, but without directly instructing it.
And their respondents suggest this is becoming increasingly common practice:
…critically, we were told that it is becoming increasingly common practice for the sponsor on a private equity transaction to appoint the law firm that will advise the lender before that lender bank has been chosen. As a consequence, the scope of that law firm’s role and the terms of its engagement are agreed with the sponsor, instead of with the bank that will ultimately be the law firm’s client.
Whilst we might expect that banks could look after themselves in this kind of transaction, some of the respondents disagreed:
basically the lender and the sponsor clients are not actually getting the best advice because one or the other of the lawyers is concerned about a view that the sponsor or lender client will have of them in taking particular positions on points. So, actually on both sides of the table I’ve had sponsor clients saying to me and I’ve had lender clients saying into me, ‘Hang on, what on earth is this lawyer doing? These are points that I do not want to give’. But it’s because – cahoots is an emotive word – but it’s almost like they’re in cahoots because they’re frightened to damage their reputation with someone who might be on the other side of the table who they perceive is perhaps a better work bringer. So, actually their advice is being coloured. In that particular situation I mentioned it was the lender who in their view was being prejudiced because the sponsor was calling the shots.
Another said:
I think there is a genuine potential, I only say a potential, for ethical conflict if your fees are being paid by a third party.
Concerningly, a third puts the blame on the banks. One can sympathise with the sentiment, but it is the lawyer who has the professional obligation not to act in a conflict situation:
I think its unfortunate banks have allowed themselves to get into a situation where this happened. …Their argument to the banks is, if they’re a strong borrower they’ll say, ‘If you want to use lawyers, if you expect us to pay for them, then we want to have a say. We want to choose them or have a strong say in who you choose, because it’s our problem; it’s our fees.’ It can give rise to challenging pressures for an individual partner or a law firm’s deal flow and income to be determined by whether the people on the other side of the table, whose interests aren’t aligned with their own client’s, like them. There’s always a suspicion or the fear that some lawyers in the market will gain market share by not really doing the best job for their client but by being over-accommodating to the borrower’s side.
Equally, ‘Many of the partners that we spoke to were at pains to point out that the phenomena of third-party payers, and by extension shadow clients, was not a new one, and that firms behave reputably in the vast majority of circumstances.’ Whether such firms are really well placed to judge how or whether their advice is influenced is more moot. There are a raft of studies pointing to unconscious bias effects forged by client loyalties which suggest there may be a problem without the lawyers being aware of it. That respondents referred to the growing power of shadow clients and repeatedly worried about ‘the next guy’ being less ethical than them should give everyone engaged in the practice significant pause for thought. Any good student of ethics will tell you that situations where there is opportunity, even more so pressure – overt or subtly – to behave inappropriately is likely to lead to ethical problems. The report provides only limited comfort on this, if it provides any at all:
While we were not given any specific examples by our interviewees of this practice resulting in tangible violations of the Handbook, many of our interviewees were concerned by the potential for lawyers appointed by third parties to possibly act, in ways subtle and refined, in the interests of those third parties over the interests of their clients. We would agree, and this point was also raised (unprompted) by one of the in-house lawyers to whom we presented our interim findings.
It is possible that these views are the lawyers way of pushing back at a competition problem: we don’t like that clients (or sponsors) are so strong and this gives us a way of hitting back. Yet, the report is littered with anxiety about the problem and in fact the clients are not doing anything improper but lawyers acting in situations of actual or potential conflict are. One final quote on the practice illustrates the concerns:
[It] creates some very odd dynamics because [the shadow client is] never going to choose a law firm that’s going to give them a bloody nose. So who really is your client? And anecdotally, there are lots of stories where the banks feel pretty hacked off that the people that are meant to be batting for them seem to be conceding much more to the sponsor than you would expect. And I don’t think that’s good for the profession.
The researchers’ view is clear, ‘we would suggest that these arrangements do appear to put the independence of lawyers at risk and therefore raise challenges for the legal profession and the SRA.’
The report considers a second set of potential problems including the attempts of clients and firms to ‘add value’ to their mutual relationships through secondments and the like. As the report puts it there are:
potential for breaches of confidentiality to arise from client terms – via inbound secondments, IT and data protection audits, most favoured nation clauses etc – struck us as being high, but our interviewees seemed confident that this risk was being managed appropriately.
Similarly, there is a question as to how firms are managing the risks associated with increasingly strong clients. The report finds a diversity of approach which suggests concerns:
Firms have responded to changes in their engagement in different ways. Some use Risk Committees, Opinion Committees and/or Pricing Committees. In some firms, partners appear to have almost total discretion as to the terms they sign up to. Other firms have formal processes in place for the review and sign off of these terms (even if, as we were told, those processes are not always followed by individual partners).
In this context, the research notes work that Steven Vaughan and I did which also found varied and sometimes ad hoc approaches to risk management by in-house lawyers. Similarly echoing work we did there and work I have done on commercial lawyers there is an apparently poor grasp of core professional principles by senior practitioners. If one is concerned about shadow clients one would also expect lawyers to have a good grasp of the key principles, in particular, independence. Yet:
Our interviewees’ understanding of the concept of independence was generally poor. Some respondents suggested that they are not independent, nor do clients expect them to be so. This may be because lawyer independence is a complex and nuanced concept, or may be for other reasons. It is our view that the current definition of independence in the SRA Handbook does not necessarily account for many of the complexities and nuances of independence in today’s large legal practices.
Furthermore the researchers had doubts about the extent to which training within law firms adequately reflected on professional obligations (something my own work also suggests) and about the way COLPs now influence professional cultures. In some firms there is the suggestion that the role of the COLP in some firms is, ‘as the ‘holder’ of professional values for the firm’ and that this encourages (unintentionally), ‘individual lawyers to become less aware of, and less interested in, their own professionalism, professional identity and professional obligations.’ If the researchers are right, law firms – especially those with a less than firm grip on the terms that their partners are agreeing to – may be putting themselves at significant risk.
* I was part of the external reference group, which contained an interesting mixture of SRA staff, City practitioners with compliance and risk backgrounds, and academics.
Richard Moorhead is Professor of Law and Professional Ethics at UCL, you can read his blog here.
Read the study ‘Research on lawyer-client relationships in large firms: Impact on independence, risk and representation’ here.
