Solicitors’ conflict of interest reaches the Lords: On 3 Feb. the House of Lords published three particularly interesting judgments. R. v. Hayter is on the admissibility of the confession where it may prejudice a co-defendant. Moy v Pettman Smith is on the duties owed by counsel when advising on court-door settlement. I may return to those topics in future weeks. This week I write about a case on a firm of solicitors which became entangled in a conflict of interest between two if its clients, and improperly continued to act for both. This case – Hilton v. Barker Booth Eastwood [2005] UKHL 8 – deserves attention for several reasons. For one, it deals with a perennial problem in practice. For another, this is one of those cases where, owing to series of ‘accidents’ and breakdowns in the system over the fifteen years since the initial problem, the Claimant’s situation went from bad to catastrophic. We are not told about the emotional stress he must have suffered. Not only would that not be compensated: any irretrievable consequences of his bankruptcy would not be compensated. Perhaps they should be, and given their Lordships' critical comments some would argue that this is a case where the fine old English tradition of penal damages, which, unlike the Americans, we have largely lost, would be appropriate. This is also striking as a case where the judge at first instance and a unanimous Court of Appeal had rejected the claim. A unanimous House of Lords upheld the Claimant’s appeal, and the two reasoned judgments include expressions of shock at the facts, and the way they reflect on the profession.

The practical point Above all, Hilton v. BBE is important for the light it sheds on the correct approach to solicitor’s conflict of interest claims. Although there is not much theoretical discussion in the judgments, it is possible the case will give rise to some interesting academic comment. The practical point which the case makes, in a nutshell, is this. The Court of Appeal said that if a firm continues to act where there is a conflict of interest, and therefore is constrained to withhold information a client needs to know, the breach of contract consists in not ceasing to act for the prejudiced client. By contrast, the House of Lords said that the breach of contract consists in failing to protect that client by giving him the information he needs – regardless of that fact that to do so would be a breach of duty to the other, conflicting client.

The facts of the problem: although the facts are slightly complex, essentially the firm had two clients in the same deal. B was a crook. Claimant, Mr. Hilton, was an honest small businessman, a bricklayer turned small-time property developer, who wanted to enter into contractual arrangements with B. In fact Mr. Hilton was selling land to B (it was more complicated than a straight case of acting for vendor and purchaser, but that does not affect the principle). Mr Hilton would not have touched B with bargepole if he knew he was a crook. He did not know that. His solicitors knew, but of course they could not tell him, because B was also their client. B was their client for the contract work, and had been their client in the past when he was prosecuted. Although B’s prosecution was in the public domain, it would not have been right for B’s solicitors to mention it to anybody, certainly not a potential business associate.

Of course, acting for B, the crook, was no problem because the solicitors had nothing to hide from him about Mr Hilton. The solicitors did act in B’s interest. (In fact the persuasive B had strong support from BBE: in the words of Lord Walker, para. 20, ‘Mr Hilton was not told that his own solicitors were advancing the entire deposit to a convicted fraudster so as to clothe him with the appearance of being a man of substance.’). However, the firm should have stopped acting for Mr. Hilton.

A literalist might suggest that in the ten seconds between the conflict of interest emerging, and the termination of the retainer, the solicitor is in breach of contract. No doubt the courts would find an implied term to ensure that this insoluble situation could not arise. However, in Mr. Hilton’s case, BBE continued to act for much longer than they should. They only stopped acting when B failed to complete a purchase of land from Mr. Hilton, who demanded rescission. At that point, in words Lord Walker quoted from Mr. Hilton’s witness statement, ‘When I asked Barry Scott [Mr. Hilton’s solicitor at BBE] to rescind the contract, he told me to sit where I was and he called on the internal telephone to Kevin Gorman [B’s solicitor at BBE], who came into his room and told me that the firm should not have acted because there was a conflict of interest. He told me that I would have to go to a different firm of solicitors to take advice. He told me to get out of the office. I left.’

The difference in reasoning between the Court of Appeal and the House of Lords was formulated very simply. In the Court of Appeal the Vice Chancellor said (at para. 32). ‘The retainer of BBE by Mr Hilton must be subject to an implied exclusion from any general duty of disclosure of that which they are legally obliged to treat as confidential. In my view such an exclusion satisfies all the well-known tests for the implication of contractual terms.’

Per contra, Lord Scott says (para. 6) :‘I agree with Lord Walker that the proposed implied term cannot be justified by any of the various tests for the implication of terms into a contract. If, when instructing the respondent firm to act for him, the proposed implied term had been put to the appellant, it is inconceivable that he would have responded "Yes, of course", or with words to that effect...He would surely have asked for guidance as to whether his assent to the proposed term would be prejudicial to his interests.’

The point was this. If the solicitors had merely breached a contractual obligation to determine the retainer once the conflict of interest occurred or came to light, then Mr. Hilton’s remedy was to be put in the position he would have been in had the contract been performed. He would have gone to another solicitor, been none the wiser about the problems with B, and would have suffered the same disastrous outcome. That is why he recovered no damages at first instance or on in the Court of Appeal. On the other hand, if the solicitors breached a contractual duty to tell Mr. Hilton what they knew, and what he needed to know, about B, then their breach deprived him of the knowledge which would have protected him from contracting with B in the first place, and he would have avoided the disasters that flowed from that deal. On that construction of the contract, he could recover his financial losses which, in effect, resulted from his not being warned that B was a crook.

Fiduciary duties were used to construe the contract: The case is interesting because, according the approach of Lord Walker the scope of the contractual duty could be determined by considering the scope of the solicitor’s fiduciary duty to his client, ‘the content of the contractual duty of full disclosure being rooted in the fiduciary relationship between solicitor and client.’ (para 42). It is a commonplace that a contract can create, and can restrict, fiduciary duties. It is more novel to turn the proposition round and suggest that the scope of a contractual duty can be determined by considering the scope of a parallel fiduciary duty. The method is comparable the way in which the House of Lords used the concept of a solicitor’s fiduciary duty, as set out Nocton v Lord Ashburton [1914] AC 932, to create the principle of liability for negligent misstatement in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. There is an interesting discussion of this blurring of the line between fiduciary and common law duties in the short speech of Lord Browne-Wilkinson in Henderson v Merret Syndicates Ltd [1995] 2 AC 245, where he warns against the 'clanking chains' of causes of action replacing the problems caused by the split between courts of equity and common law.

Conflicts are avoided where the retainer for conveyancing clients is expressly restricted: It appears from the judgements that if BBE had told Mr. Hilton that the retainer did not extend beyond the conveyancing work, there would have been no breach. Presumably if BBE had been licensed conveyancers rather than solicitors they would not have been liable. Readers who have bought property in Spain, and perhaps other civil law countries, may have come across lawyers who act for both purchaser and vendor, and will cheerfully tell the purchaser that the property is overpriced. Spanish property lawyers seem to take the view that they are employed to make sure the paper work is in order, and the price paid, and to do no more. In England and Wales, the mortgage cases (where solicitors acted for mortgagor and mortgagee, and should have warned the lender that the mortgage application was less than frank) show that a solicitor can enter a contract which enables him to pass information damaging to one client (there the borrower) to the other client (there the lender). However, Hilton v BBE shows that firms must be careful and clear if with any client (and it is probably likely to arise most often in conveyancing clients) they wish to enter a retainer under which they have no general duty to look after the client’s interest by disclosing relevant information to that client, (or indeed a duty to refrain from passing information about that client to another client whose interests are affected by it).

There is perhaps also a moral to be drawn. B was persuasive, and BBE believed in him to the extent of risking their own money. BBE may have genuinely believed that the deal was good for everyone involved, including Mr. Hilton. The case is a reminder that it is never safe for solicitor to 'bend' the rules concerning conflict of interest on the basis of their personal judgements.