Blackstone Legal (‘Blackstone’) was retained by Molloy Finance (‘Molloy’) to provide advice in the areas of corporate and securities law. Molloy is in the business of providing financing to certain types of business ventures. During the engagement, Blackstone learned from Molloy that it intentionally failed to disclose the existence of a certain debt on a prospectus filed with the Australian Securities and Exchange Commission. The prospectus had been prepared in the course of a public offering of Molloy’s stock. Blackstone had no involvement in preparing the prospectus. The omitted debt was material and the omission is fraudulent. Blackstone advised Molloy to rectify the concealment but Molloy refused to do so. Blackstone terminated its retainer with Molloy.
MacKintosh Property Projects Ltd (‘MacKintosh’) has been a client of Blackstone for many years and has received various legal services. Some months after Blackstone withdraws from representing Molloy, MacKintosh informs Blackstone that it received from Molloy a proposal for the financing of one of Mackintosh’s projects and wants Blackstone to advise as to the proposal.
1. Can Blackstone represent MacKintosh in the proposed transaction with Molloy?
Rule 10 Australian Solicitors Conduct Rules 2012 (Qld) (‘ASCR’)
If Blackstone was to represent MacKintosh in connection with Molloy’s proposal to finance MacKintosh, then Blackstone’s engagement could be said to be adverse to its former client, Molloy, because:
- the fraudulent deception is confidential information;
- it would be material to the matter of MacKintosh’s involvement in the transaction; and
- would be detrimental to Molloy if disclosed.
The law practice must be in possession of confidential information - that is, information that could be used against the former client in the later representation. The information could be said to be material if it is information that could have relevance to the proposal and would tempt us to reveal or use it in circumstances where we shouldn’t. We should not accept an engagement with a prospective client where we cannot provide the fidelity and confidence such an engagement would require.
Thus, confidential information will be material for purposes of rule 10.2, if it is information that we would be obliged to impart to our client if we were not subject to our duty of confidentiality. In this case study, the information is material as it would impact upon whether the client would undertake the transaction.
It would also be ‘material’ if there is a likelihood that a client would think it is important with respect to activities connected to the representation and we would be obliged to disclose the information but for the duty of confidentiality.
2. If Blackstone could secure the written consent to act, could it do so without disclosing the prior act of fraud to MacKintosh?
If it is reasonable to conclude that the prior act of fraud is material to the prospective engagement, then Blackstone will not be in a position to serve the best interests of MacKintosh as required by rule 4.1.1 ASCR.
Without the prior client’s written consent to reveal the information to the prospective client, the legal practice would be conflicted, between preserving a confidence and service of their client. Knowing of the prior fraud, the firm would be tempted to put in place special precautions which could indirectly reveal the confidence it is required to keep secret.
As the Californian Court of Appeal noted in Goldstein v Lees:1
It is difficult to believe that a counsel who scrupulously attempts to avoid the revelation of former client confidences – i.e., who makes every effort to steer clear of the danger zone – can offer the kind of undivided loyalty that a client has every right to expect…
If Blackstone was to act for MacKintosh without revealing Molloy’s dishonesty, it would mean it was not serving the best interests of its client.
3. What if the proposed representation would not be such that the MacKintosh would be in direct relationship to Molloy (separate matter conflict)?
We have a duty to our client to provide all relevant information including confidential information: Spector v Ageda.2 If we cannot do so because of a duty to retain the confidence, then we should refuse to act.
Although Hilton v Barker Booth & Eastwood (a firm)3 is a case concerned with concurrent representation, it still offers guidance on the effect the possession of confidential information can have on us discharging our ethical and fiduciary duties to a prospective client. We should not put ourselves in a position of having irreconcilable duties4 and nor should we prefer one client over another.5 The acquiring of confidential information from one client engagement could be relevant and material to another client in a wholly unrelated transaction. Our primary duty is to avoid conflict (see rules 10.1, 11.1 and 12.1 ASCR).
An illustration of what can be described as a separate matter conflict is Black v Shearson, Hammill & Co6 where a broker permitted clients to acquire shares in a company on the basis of published material when he was aware from previous dealings with that company that it was in financial difficulty (the confidential information acquired through other representation). The broker was held liable for his client’s losses.
Blackstone should refuse to accept an engagement from MacKintosh, when the firm cannot disclose all relevant information to MacKintosh.
1 (1975) 46 Cal. App. 3d 614, 620.
2 [1973] Ch 30, 48.
3 [2005] 1 All ER 651.
4 Ibid [41] (Lord Walker).
5 Ibid [44] (Lord Walker).
6 72 Cal. Rptr. 157 (1968).