MCKENNA & CO. (a firm) v. JOHNSON, STOKES & MASTER (a firm)

HEADNOTE

Courts practice and procedure - solicitors - confidential information - conflict of interest - Law Society insurance scheme.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 5245 OF 1991

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JUDGMENT

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1. This is a dispute between two well-known and highly respected firms of Hong Kong Solicitors. The factual background to the issues raised in the summons for an injunction can be set out shortly.

2. In or about 1982, the plaintiffs acted for a company called Technic in a long arbitration against the Government over the construction of the Shatin Teaching Hospital. At the conclusion of the arbitration Technic were dissatisfied with the services of the plaintiffs and made allegations of negligence against them. Solicitors acting for Technic claimed that substantial damage, approximately 40 million dollars, had been suffered by Technic as a result of that negligence.

3. The Hong Kong Law Society operates on behalf of its members a Professional Indemnity Insurance Scheme. The plaintiffs, as a member of that scheme, is an "insured solicitor". In order to supervise the operation of that scheme on its behalf the Law Society has appointed a Claims Committee. The Claims Committee operates by virtue of terms of reference which are set out annexed to the affidavit which has been sworn by Mr. WRIGHT. The managers of the scheme are Essar Insurance Services Limited (ESSAR).

4. The chairman of the Claims Committee at all relevant times was Mr. McELNEY, a former senior partner of Johnson, Stokes & Master (JSM), and Mr. Robin PEARD, a former partner of JSM, who became chairman in December 1987. The role of the Claims Committee is an important one and is carried out according to the Terms of the reference.

5. Paragraph 4 states that the Claims Committee is empowered "to adjust, settle, submit to arbitration, compromise, initiate, prosecute or defend all claims in favour of or against any members of the society, etc." I do not set it out in full. It can be seen therefore its role is not only important but extremely wide.

6. The other important provision I make reference to is Clause 11 which says "No member of the Claims committee shall deliberate on or see papers concerning (1) claims against his firms, or (2) claims in which his firm is acting (otherwise than as panel solicitors) for any of the parties engaged in the claim including, but not limited to, the party making the claim against a solicitor in respect of which the papers have been prepared".

7. For nearly three years, two ex-partners of JSM have had before them the relevant material relating to the claim made by Technic against McKenna.

8. Technic issued a writ in early 1990. The Statement of Claim is a very lengthy document and contains detailed and substantial allegations of negligence. A Defence and Counterclaim was served in July 1990. This is also very lengthy. The issues raised on the pleadings are numerous and complex.

9. The meetings which either Mr. McELNEY or Mr. PEARD were present are set out in the affidavit, but it is clear, as I have said, for something approaching 3 years, those two gentlemen have been present and considering either as a member and/or as a chairman the information, provided as a result of the Law Society scheme through ESSAR, which is contained in reports and recommendations by ESSAR itself, various advices, correspondence, written advice of counsel and other relevant documents. In particular it must be remembered that the scheme is operated for the benefit of the public, and of course it is the insurance company who eventually has to pay if the claim is substantiated and therefore matters relating to the insurance company itself such as reserves and so on are also communicated to the Claims Committee.

10. In May 1991, JSM, having been approached by a member of Technic, wished to take over the role of Technic's former solicitors in their action against McKenna. They object to this, as a result of which they have issued the writ in this action and the injunction which I now have to determine. In essence the determination of the injunction is the determination of the action.

11. The basic legal principles involved in this important field of law have been established for some years. The leading decision is Rakusen v. Ellis Munday & Clarke (1912) 831, when the facts were somewhat unusual in that the two partners of the firm ran separate practices and it was held that there was no general rule that a solicitor who had acted for some person either before or after litigation began could in no case act for the opposite party.

12. The Hong Kong Court of Appeal recently considered these principles in Freshfield v. C.S. Low Investment Limited (1991) 1 HKLR 12 and upheld them. PENLINGTON J.A. neatly summarised the position at P29 when he said of-the fundamental principle in Rakusen "... if a solicitor has received confidential information from Client A he must not disclose it to any other person. If he then acts for client B, he also has a duty to him to disclose any relevant information he has. If he cannot maintain those two positions, he must not act for both clients. If he does so he may be restrained by a court order and runs the risk of being liable if one of the clients can show damage".

13. Even more recently, the Vice-Chancellor in England in Supasave Retail Limited v. Coward Chance (1991) 1 AER. 668 held that where firms of solicitors had merged there was no absolute bar against "the newly-merged firm continuing to act for one party in litigation even though a partner in that firm had formerly represented the other party in the same litigation, unless the circumstances of the particular case were such that the continued representation of the client against the former client of the newly-merged firm could be rightly anticipated to cause mischief or real prejudice to the former client, in which case the court would intervene to prevent the firm continuing to represent the client;" and of the risk of dissipation of confidential information he said "when one has sensitive information in a firm or in any other group of people, there is the element of seepage of that information through casual chatter and discussion, the letting slip of some information which is not thought to be relevant but may make the link in a chain of causation or reasoning".

14. On May 25 1991, the Court of Appeal in England in Re a firm of Solicitors (as yet unreported) analysed the principles set out in Rakusen and postulated the test as follows "some help is in my view to be gained from Buckley L.J.'s test "whether there may reasonably be anticipated to exist a danger" of breach of the duty not to communicate confidential information. This appears to me to suggest that the proper approach is to consider whether a  reasonable man informed of the facts might reasonably anticipate such a danger.

15. To approach the matter in this way has the advantages, in my judgment, that an over sensitivity on the part of the objector would be excluded and that public confidence in the process of litigation would not be underminded. If a reasonable man with knowledge of the facts would say "If I were in the position of the objector I would be concerned that, however unwittingly or innocently, information gained while the solicitor was acting for me, might be used against me", the court in my judgment can and should intervene. Were it not to do the court would be permitting to exist a situation of apparent unfairness and injustice. That this should be avoided is in my view every bit as much a matter of public interest as the public interest in not unnecessarily restricting parties from retaining the solicitor of their choice.

16. The general principles of Rakusen are still good law but the later authorities are specific examples of the court's role and the protection of confidential information. The test which I must apply and it is not really dissented to by Mr. CHING is as follows: Would a reasonable man informed of the facts reasonably anticipate a danger that confidential information provided to solicitors might be used to damage the interests of those who provided it.

17. Although Mr. PEARD and Mr. McELNEY were not solicitors acting for McKenna when they received the information, nevertheless the role they played in the reception of the information relating to the claim and their supervision of the claim, make McKenna's their quasi-clients. The importance of Clause 11 can be appreciated.

18. Mr. CHING submits that there is no evidence that confidential information has passed. He says the affidavits which have been filed state that there has been no disclosure and that in the future there cannot be any disclosure.

19. I wish to make it clear that no criticism is to be made of the personal integrity of Mr. PEARD and Mr. McELNEY. In particular, Mr. PEARD is a highly respected, able solicitor who is very experienced in construction litigation and arbitration. They are however in a difficult position which was recognised by Mr. Justice PENLINGTON in the passage I have just cited. The "fundamental principles" are found in The Law Society, the Guide to the Professional Conduct of Solicitors, 11.02: "If a solicitor or firm of solicitors has acquired relevant knowledge concerning a former client during the course of acting for him, he or it must not accept instructions to act against him"; and 12.07: "A solicitor is usually under a duty to pass on to his client and use all information which is material to his client's business regardless of the source of that information. There are, however, exceptional circumstances where such duty does not apply".

20. It must be recognised that the action by Technic against McKenna involves serious charges of professional negligence with a huge claim for damages over an arbitration which must be well known in legal and construction circles.

21. Mr. CHING submits also that these two gentlemen are consultants. I confess I have found this submission difficult to follow. They are solicitors of JSM. The important personality here really is Mr. PEARD. Mr. PEARD has been, for the last 2 years or so, actively involved in litigation for JSM in the mammoth litigation over the Tin Shui wai development currently being heard before Mr. Justice GODFREY.

22. In a recent affidavit filed by Mr. LIM, (Mr. PEARD being out of. the country) his position as consultant is set out as follows: "He is paid a monthly salary and not entitled to any other financial payment. He makes no capital contribution to JSM, nor is he entitled to attend partners meeting, etc. His principal responsibility has been "the conduct along with others in my firm of the Tin Shui Wai case".

                (My underlining)

23. Throughout his involvement with that case he has been under the charge of an Equity Partner although Mr. PEARD, presently along with Mr. PLUNKETT, deals with the day-to-day conduct. Mr. PEARD, as I have said, works with staff of the litigation department of JSM; he works from a floor occcupied by the litigation department in the offices of JSM; he has received a few faxes, but his papers relating to McKenna's claim are kept in the offices of JSM. There is, apparently, no legal definition of the word 'consultant'. The partners of the firm, of course, are responsible for the running of the firm, but in my judgment there is no distinction at all between a person who is a consultant, a partner or an associate solicitor for the purposes of this matter; they are all solicitors.

24. At the end of the day, the issue which I must resolve is whether a reasonable man would consider that there has been a seepage or inadvertent disclosure of sensitive and confidential information relating to McKenna's defence. The reasonable man here is not the man on top of the Kowloon bus, but a reasonably-informed man knowing the role of solicitors in itigation or arbitration and something about the construction industry.

25. McKenna and Lovell, White and Durrant, their current solicitors, object and have set out their objection in clear terms on affidavit. It is submitted that they are not objective parties in that they are directly involved in this matter. Nevertheless in my judgment, I should give weight to their objections.

26. ESSAR, the managers of the insurance scheme also object. In my judgment they are well equipped to judge the sensitivity of the material which goes to the Claims Committee. It is said that they are also not objective. Nevertheless I consider I should give weight to their views; both of these groups of persons, in my judgment, are responsible people.

27. Although the Law Society gave their consent to JSM acting in substitution for Technic's original solicitors, they later asserted that they were not in full possession of all the relevant facts.

28. In a letter dated July 16 to JSM they say, inter alia, After careful consideraton, the Council has come to the conclusion that had it been aware of all the material facts now available at the relevant time, consent would not have been given. The reason is because there appears to be a real possibility of a conflict of interest arising as a result of your Messrs. Robin Peard and Brian McElney's membership of the Claims committee and the fact that both of them had participated in deliberations on the Plaintiff's claim for a lengthy period of time. Among other things, McKenna & Co.'s objections to your acting for the Plaintiff (of which the Counsel was also not aware) would have been an important factor in deciding whether or not to grant consent".

29. I consider the Law Society's views both relevant and objective.  It would appear that the body of solicitors, whom they represent, recognise the potential conflict of interest.

30. Mr. CHING submits that nothing in the future will happen. Mr. PEARD and Mr. McELNEY will no longer serve on the Claims Committee. Rule 11 presupposes that they would not initially have served if JSM had originally been acting in the matter and their withdrawal now inferentially supports the likely damage caused by a conflict of interest. It seems to me unarguable that over the last 2 or so years, there has been a real risk that some chat or inadvertent remark has occurred which may now stir memories in those who are in JSM and would be dealing with this matter. It would never have occurred to Mr. PEARD that he would be speaking to someone who would be acting for Technic because (a) JSM were not acting; (b) there was no apparent likelihood that they would be acting; and (c) rule 11 at any rate would have precluded that happening.

31. I wish to stress that the information going into the Claims Committee was more than the factual information relating to the general conduct of litigation which normally goes to solicitors. It would have involved, in my judgment, tactical decisions, settlement strategies and opinions on the cash reserves to be made available by the insurance company.

32. McKenna who had to allow the Claims Committee to monitor and supervise the substantial claim made against them, a committee chaired by an experienced construction solicitor employed by JSM, now find JSM acting against them. In my judgment, any reasonable man, appraised of the relevant facts, would be shocked at this situation.

33. I have had regard to all the evidence filed and the submissions made. In particular I have had regard to the undertakings offered by JSM in their affidavits, also the wish, which I must take into account, of Technic to be represented by JSM and JSM's wish to represent Technic.

34. Having considered all those matters, I am in no doubt that I should grant the injunction which is sought. However, as this is a discretionary remedy, I have also examined all the evidence to see whether there is anything which would disentitle the plaintiffs to the relief they seek. Having done that exercise, I can find nothing. I therefore grant the order which is sought subject to any further submissions which would have to be made as to the form of the order and I will, if necessary, at a later date, unless the order is agreed, hear further submissions on this. I also make an order nisi that the defendants pay the costs of this hearing, to be taxed if not agreed, with a certificate for two counsel.