Russell McVeagh McKenzie Bartleet & Co v Tower Corporation CA86/98 [1998] NZCA 158; [1998] 3 NZLR 641 (25 August 1998)

Last Updated: 25 March 2013

IN THE COURT OF APPEAL OF NEW ZEALAND CA 86/98

BETWEEN RUSSELL McVEAGH McKENZIE BARTLEET & CO

Appellant

AND TOWER CORPORATION Respondent

Coram: Richardson P Gault J

Henry J Thomas J Blanchard J

Hearing: 9 and 10 June 1998

Counsel: A R Galbraith QC and D M Connor for Appellant

M R Camp QC and A S McIntyre for Respondent

W M Wilson QC for Guiness Peat Group International Insurance Ltd

_{Judgment: 25 August 1998}

JUDGMENT OF RICHARDSON P, GAULT and HENRY JJ DELIVERED BY HENRY J

The law firm Russell McVeagh McKenzie Bartleet & Co (“Russell McVeagh”) appeals against an order made by Gallen J in the High Court at Wellington on 23 April 1988 disqualifying it from acting or continuing to act for any party against the respondent, Tower Corporation (“Tower”), in respect of

(a) any matter relating to or connected with any proposal or scheme for merger with or take-over of Tower,

(b) proceedings against Tower (CP277/97 Wellington Registry and CL49/97

Auckland Registry) and

(c) proceedings brought by Tower relating to its proposed demutualisation

(M464/97 Wellington Registry).

Background

Tower’s principal solicitors are Phillips Fox. Prior to 1995 Russell McVeagh had not acted for it. In September of that year Tower, in conjunction with a partner in Phillips Fox, Mr Strahl, sought expert advice from Mr Heenan, a partner in the Wellington office of Russell McVeagh specialising in taxation law. The advice concerned a particular transaction (“the tax dispute”) entered into by Tower in 1990 and affected its taxation position in that year only, although if tax was payable and inadequate provision had been made in Tower’s accounts, an adjustment would necessarily be required in the accounts for the year in which the tax dispute was resolved. That eventually occurred in April 1997. Russell McVeagh was thus working on this matter for more than 1½ years.

Russell McVeagh has 64 partners and a total of 190 fee earning personnel. While its practice extends throughout New Zealand and also overseas, its principal offices are in Auckland and Wellington. Taxation advice is one of its specialist areas of practice, with instructions being received from time to time from other firms of solicitors and from firms of chartered accountants. It operates an ethics committee, and has internal procedures designed to cover conflict of interest situations. The firm also operates a particular security system in respect of its taxation work.

After he had accepted this initial instruction Mr Heenan was also asked to advise Tower on four other questions of a specialist kind but none of them featured in the argument before this Court. They seem to have been very specific and relatively minor matters. In fact, we understand that even now no problem is seen by Tower in Russell

McVeagh’s continuing to act in respect of two of them notwithstanding the current controversy.

In May 1996, and thus while Russell McVeagh was still advising on the tax dispute, an Auckland partner in the firm, Mr Harmos, was asked by SBC Warburg Dillon Read (“Warburgs”) to give advice on a means whereby Tower could be acquired and demutualised. Essentially, as the matter has developed, what Warburgs had in mind, for a principal whose identity had not then been disclosed to Russell McVeagh but whom they later learnt to be Guinness Peat Group International Insurance Ltd (“GPG”), was a reverse take-over using a GPG subsidiary, Tyndall Australia Ltd, as the vehicle. As it happens and as must from the beginning have been anticipated to be a distinct possibility, Tower is strongly resistant to GPG’s designs.

Mr Harmos knew that Mr Heenan was advising Tower on the tax dispute. After consulting Mr Heenan he had earlier declined to accept an instruction from another party to that transaction. The two of them discussed whether the firm could advise Warburgs. Mr Heenan saw no reason preventing Russell McVeagh from doing so because it was a different matter and he believed that his function for Tower was specialised and narrow. He further considered that he was not in possession of any information about Tower likely to be of interest or use to Warburgs and their client. Of course, it was never in contemplation that Mr Heenan or anyone in his team would have an involvement in the Warburgs matter.

So Russell McVeagh’s Auckland office accepted the instruction and has since that time been working for Warburgs and GPG. The first Tower knew of this was some 16 months later in September 1997 when, with Mr Harmos present, GPG presented its proposal to Tower. It was immediately rejected. Hostilities have broken out between Tower and GPG. There is litigation on several fronts. Russell McVeagh is representing GPG or interests associated with it in those proceedings. (The disqualification order made in the High Court has been stayed pending the outcome of this appeal.)

Tower alleges that in acting for it on the tax matters, particularly the tax dispute, Russell McVeagh has obtained information valuable to a hostile bidder like GPG about Tower’s method of operations, its negotiating style, its corporate culture and structure and the personalities of members of its management team. It says the firm has also gained particular knowledge about Tower’s financial affairs. All this knowledge is said to be confidential to Tower and potentially useful to GPG in pursuing its planned acquisition.

The High Court Judgment

Gallen J accepted that the general knowledge gained by Mr Heenan and his team about Tower’s way of doing business and its people did have relevance, but only if and so far as Russell McVeagh had by acting for Tower as its legal adviser obtained insights not apparent to the ordinary public observer. The Judge however concluded that although there were

“special opportunities...to assess the mode of operation of those persons responsible for conducting the affairs of [Tower] and...this information would be valuable for someone planning a strategy of the kind in contemplation here...on its own it was not enough to justify the orders which [Tower] seeks.”

The Judge then turned to the specific information said to be sensitive and confidential. He did not think that knowledge of a particular approach to taxation obligations justified the intervention of a Court but remarked that taxation questions need to be considered against details of financial operations which may be sensitive and confidential. He referred to evidence given by Mr Taylor, Group General Manager of Tower, that possession of certain financial information in the hands of Russell McVeagh “would allow an astute accountant to extrapolate to the extent that it would be possible to arrive at figures which were at least approximate for the current accounts.” He also referred to Tower’s argument that particular items of such information might provide a basis for criticisms of Tower’s management and could be used to influence the attitude of its members.

The Judge concluded that even though the information was “historic in nature”, it could enable “at least a general assessment of such figures in current terms”, both in relation to Tower’s financial position and management style. There was also some significance in the way in which access had been gained to the material which “gave it a credibility and weight” it might not otherwise have. Gallen J was not persuaded that it would necessarily have the significance for which Tower contended but did not consider it could be ignored as of no consequence:

...Mr Heenan is possessed of information which it would be and would be seen by any informed observer to be to the advantage of the Guinness Peat Group to have in pursuing its intended course of action. Once that is accepted, then in principal[sic] there must be reason to at least consider whether the Court ought to intervene.

Later the Judge propounded the following test:

In the case of a direct conflict the Courts will disqualify persons involved in that conflict from participation. In all other cases the Courts will accept that it is inappropriate for a legal practitioner to have an involvement in proceedings where there is a reasonable perception that a reasonable person apprised of the relevant facts, would perceive a risk that the participation of the person concerned might result in a conflict of interests. If the disclosure advertently or inadvertently of confidential information of sufficient relevance to and significance for the matters in issue make it undesirable in the interests of justice that the person concerned should continue to participate, the Courts will also intervene.

Asking himself whether Mr Heenan personally could have accepted the instructions to act for GPG, the Judge said that there would be a “perception of undesirability”. The information which he had received from Tower could not be seen by a reasonable member of the public as so stale that it would cease to have any significance as far as GPG was concerned. It followed that if the only question in issue was whether Mr Heenan could act, the answer would have to be that he could not. Although that was not the situation, Tower maintained that because Mr Heenan and Mr Harmos were partners of the one firm, “the same conclusions must apply as would occur if the application were directed solely against Mr Heenan.” Importantly, finding as a fact that no confidential

information whether general or specific has been made available by Mr Heenan to anyone else within Russell McVeagh, the Judge expressed the view that knowledge of one member of a firm will not automatically be imputed to another member of that firm. But there was the further question:

Would a reasonable member of the public in possession of the full facts, perceive a risk that the information would become available to such members or employees of the firm as were engaged in conflicting causes?

The Judge took into account, in considering this question, proposals put forward by Russell McVeagh to ensure that there was no possibility of information obtained by it while acting for Tower becoming available to any persons connected with the GPG work (a so- called Chinese Wall). It had been suggested that there be appropriate undertakings from the partners, solicitors or team members working for GPG not to obtain any information whatsoever from the partners or solicitors who were involved in handling Tower’s instructions. There would also be undertakings from the latter group that they would not disclose directly or indirectly to any person without the prior consent of Tower any information or knowledge acquired in the course of or as the result of acting for Tower. The Judge was also aware that GPG has already given an undertaking that it will not seek to obtain any such information from Russell McVeagh. Those undertakings, the Judge said, must be looked at in the context that Russell McVeagh is a very large firm and that the information which may be regarded as sensitive is held separately and under “secure instructions” at the Wellington branch whilst those engaged for GPG are at Auckland.

After a consideration of case law on the subject of Chinese Walls the Judge opined that the concept was not ruled out but would only be acceptable to the Courts in an exceptional situation “where there is ample evidence to indicate not only that no possibility of leakage has already occurred, but that it could not occur in the future.” He concluded that once a situation is identified which could give rise to the perception by a reasonable member of the public fully informed of the facts that a situation exists which could lead to difficulties, the case law established on balance that, in the absence of exceptional

circumstances, the situation should not be allowed to continue even with the protection of precautions and undertakings.

The Judge took into account the hardship which might be occasioned to GPG by requiring them to obtain legal representation elsewhere after Russell McVeagh had carried out extensive work which would have to be done again if another firm were instructed. He also noted that a small number of national firms would be suitable to undertake work of this kind, making the situation different from in England and in Canada. But the hardship to GPG and the fact that there might be a limited number of competent practitioners in a position to do the work did not seem to Gallen J to amount to an exceptional circumstance. While accepting that Russell McVeagh had acted honourably and had successfully endeavoured to prevent any information held by one partner from permeating to the other, the Judge “with some hesitation” found that this was not an exceptional case.

The case for Tower

It is important at the outset to identify the true nature of the proceedings. The cause of action is pleaded in the following way in the amended statement of claim:

Conflict

12. BY virtue of (Russell McVeagh) having been and currently being solicitors instructed for Tower, and by virtue of their being privy to confidential information as set out in paragraph 5 above, Russell McVeagh have a conflict of interest in acting against Tower.

In submissions to this Court, Tower put its case on two bases. First, because Russell McVeagh acted for Tower during 1996 and through to April 1997 in a tax dispute with the Inland Revenue Department, and also from May 1996 acted for another party (for convenience referred to as GPG) in a proposed hostile takeover of Tower, Russell McVeagh should now be prohibited from continuing to act for GPG in respect of matters concerned with the takeover. Second, it was contended that Russell McVeagh’s

possession of confidential information obtained in the course of carrying out its tax dispute retainer also required such an order of prohibition.

Before embarking upon a consideration of those two issues it is appropriate to make some brief general observations. Tower’s entitlement to relief against Russell McVeagh must have as its basis a legal foundation, in the form of a recognised right which is likely to be breached. For Tower, Mr Camp did not attempt to invoke some wide inherent jurisdiction of the Court, empowering it generally to control the actions of solicitors or others. His argument centred on what was described as a breach of fiduciary duty owed to Tower, and on the possession of confidential information. Both therefore concern rights which can properly be seen as being vested in Tower. The pleading could be better expressed, but its intended coverage is made clear in the judgment under appeal and was apparent in the argument before this Court.

Breach of fiduciary duty of loyalty

This head of claim was referred to by Mr Camp as an instance of wrongful simultaneous representation by Russell McVeagh of two clients, and the consequential breach of a fiduciary duty of loyalty owed to Tower. Presumably a corresponding duty was also owed to GPG, and breached. Assuming but without deciding the existence of such a duty, that it is one enforceable by the Court, and that it was breached, there is an insurmountable hurdle in the way of Tower now being granted the relief sought.

The very basis of the claim is the existence of concurrent retainers from separate clients in a matter, or possibly in different matters, where the interests of the respective clients may be in conflict, either actual or potential. That is the underlying basis or foundation for giving relief, which is sought here in the form of an injunction restraining future conduct. But the very conduct which it is now sought to restrain has ceased, and there is of course in the circumstances no suggestion it is likely to re-occur. The alleged fiduciary duty of loyalty while acting for one client not to act for another client whose interests under that instruction are or may be adverse to the first client is no longer in danger of being breached.

Even on the assumptions earlier noted, on the admitted facts what is on analysis the cause of action relied upon, simply does not exist.

Mr Camp endeavoured to overcome this problem by submitting that the appearance of justice in the circumstances required Court disqualification. Although that phrase is used from time to time in cases which are concerned with a solicitor or a firm of solicitors acting against a client or former client, such a broad proposition, which is not defined or principled and is not accompanied by some other basis calling for Court intervention, would appear to be unjustifiable as well as unsupported by authority. Mr Camp placed reliance on a contention that a solicitor’s fiduciary duty of loyalty to a client does not terminate on cessation of the retainer, citing Burchett J in the Australian case of Wan v McDonald [1992] FCA 4; (1991) 33 FCR 491 at p513:

But there are at least two other aspects of the problem [in solicitor conflict cases] to which attention has more recently been drawn; a solicitor’s duty of loyalty, which cannot be treated as extinguished by the mere termination of the period of his retainer, and the important consideration of public policy which gives a special quality to the relationship of solicitor and client that the law will not generally permit to be stained by the appearance of disloyalty.

That observation must be placed in the context of the case itself, which concerned a solicitor acting against a former client for a preferred client in litigation arising out of a matter in which the solicitor had earlier acted for both parties. Whether or not there is such a rule of law when disclosure of confidential information is not at issue, the proposition cannot support the present injunction. There is no suggestion that the taxation dispute, which did not involve GPG, and the proposed takeover, which does not involve Tower are in any way related. Reference was also made to Carindale Country Club Estate Pty Ltd v Astill [1993] FCA 218; (1993) 115 ALR 112. That however, in common with most of the authorities on this topic, was directly concerned with possession of confidential information. Those, and the authorities where there was simultaneous representation either of parties to the same transaction, or of parties involved in the same litigation, are of little assistance on this

particular head of claim. Care must be taken in attempting to apply dicta relevant to the circumstances of a particular case to other circumstances raising different questions.

We turn to the facts. In his submissions under this head, Mr Camp relied heavily on the concept of a conflict of interest, either real or perceived. It is difficult to identify where the conflict arises, other than in the realm of possession of confidential information. What is now under discussion is frequently described as a separate matter situation, namely one where the retainers cover quite distinct and unrelated issues. There is nothing incompatible between the interests of Tower which were concerned with the taxation dispute, and the interests of GPG which were or are concerned with the takeover procedure. Separate matter conflicts will generally arise, and probably only arise, where possible problems resulting from possession of confidential information exist. This was recognised by Mr Camp, who in the course of argument accepted that in the present case possession of confidential information was a necessary component, and at the heart of the claim being made under this head. It is also clear that this was the real thrust of the complaint in the High Court. That is understandable. When a conflict of interest situation is claimed, the first enquiry must be to determine the duties owed by the solicitor to the respective clients and then to see whether they are likely to come into conflict. Absent the risk of disclosure of Tower’s confidential information to GPG (possible disclosure of GPG’s confidential information to Tower no longer being in question), it is difficult to see where any conflict could arise. No other continuing duty owed to Tower was identified.

To classify the duty as one to disclose to Tower the proposal to accept instructions from GPG, as Thomas J has done in the course of his judgment which we have read in draft, cannot in our view assist Tower for two reasons. First, Tower’s right to prohibit Russell McVeagh from acting can only arise if there would be an unacceptable conflict of interest, which again in this case turns on the risk of disclosure of confidential information. If that disappears, the right to prohibit future representation also disappears. Secondly, injunctive relief restraining further conduct which is not in itself in breach of a plaintiff’s continuing right cannot be justified in principle. Past breaches sound in damages, or declaratory relief, not in a future continuing restraint which has no proper legal basis.

It is important to keep in mind that moral and ethical obligations do not necessarily equate legal, including fiduciary, duties which are enforceable by the Courts. Professional bodies properly undertake supervisory functions over their members, and lay down codes of conduct which can be enforced under their own jurisdictions. The Court has a separate and independent function, and will provide a remedy when there has been a breach of duty recognised by law. The inherent jurisdiction to control its own processes was not invoked and is not at issue in this case, which was pleaded and argued on the basis of a breach of Tower’s rights at law. Whether or not Russell McVeagh has breached or is in breach of its ethical responsibilities is a matter for the appropriate professional body.

We do not see Black v Taylor [1993] 3 NZLR 403 as being of relevance to the present issues. It concerned the propriety of a barrister acting in a family dispute when the barrister had previously acted as solicitor over a period of years for the family members generally, and their interests had become conflicting. The Court’s inherent jurisdiction to control the conduct of proceedings, and those who appear before it, was the basis of the decision. The factual situation, and the legal implications, are far removed from the present case.

Disclosure of confidential information

The primary argument for Tower was that while carrying out the tax dispute instructions, Russell McVeagh obtained information confidential to Tower, material to GPG’s takeover intentions, which was at risk of being disclosed to GPG notwithstanding the Tower retainer was concluded in April 1997.

What is to be the Court’s approach to such a case, when intervention will impinge on GPG’s right to instruct solicitors of its choice and Russell McVeagh’s right to offer its specialist services to the general public? In our judgment the rationale behind intervention must lie, not in some perception of disloyalty or impropriety, but in principle - namely the reasonable protection of confidential information. It has been said (Sopinka J,

MacDonald v Martin (1991) 77 DLR (4th) 249,257) that two basic approaches have been adopted in the various jurisdictions in determining whether grounds for disqualification exist. First, if there is a probability of real mischief (misuse of confidential information); and second, if there is a possibility of real mischief. Such a clearcut distinction however is not always readily discernible from the cases.

In England the Court of Appeal judgment in Rakusen v Ellis Munday & Clarke [1912] 1 Ch 831 is regarded as the starting authority. The defendant firm comprised two partners, whose custom was to do business entirely separately. The plaintiff instructed one partner concerning possible proceedings for wrongful dismissal from his employer company. He then changed his solicitors, and instituted proceedings. The defendant firm was later appointed solicitors to the company, which dealt solely with the other partner. The Court of Appeal accepted the efficacy of undertakings which had been given, and discharged the injunction ordered at trial. The test for disqualification was expressed in different terms by each of the three Judges, later said by Sir Nicolas Browne-Wilkinson V-C as being “not easy to equate” (Supersave Retail Ltd v Coward Chance (a firm, David Lee & Co (Lincoln) Ltd v Coward Chance (a firm) [1991] Ch 259). The Vice-Chancellor described the test as he elicited it as being whether mischief was rightly appreciated. In the earlier case of Re a Solicitor (1987) 131 SJ 1063, Hoffmann J appears to have considered the issue on the basis of whether a real risk of prejudice resulted, if the solicitors continued to act against a client for whom they held an existing retainer in a matter quite unrelated to that under challenge. He held there was not. In Re a firm of solicitors [1992] 1 All ER 353, the Court of Appeal considered Rakusen, but again without a completely uniform result. Parker LJ and Sir David Croom-Johnson said the Court would act if danger of a breach of duty (disclosure) may reasonably be anticipated. Staughton LJ looked for a reasonable anticipation of mischief. Re a firm of solicitors [1995] 3 All ER

482, was a case involving the transfer of a partner in one firm, which had been retained by companies involved as plaintiffs in patent litigation, to another firm which was some time later retained for a defendant in the same litigation. Lightman J considered the earlier authorities, and recognising the need to afford the fullest protection to confidential

information passing between solicitor and client, reached the following conclusions (at p489):

Accordingly (a) a solicitor at one time retained by a client, but not in possession of relevant confidential information, is not by reason of the fact of such past retainer precluded from subsequently acting against him (see Rakusen v Ellis Munday & Clarke); (b) a solicitor possessed of relevant confidential information is precluded from acting against his former client (see Re a firm of solicitors); (c) in the case of a firm previously retained by a client - (i) the members of that firm, whether partners or employees, who are in possession of relevant confidential information are likewise subject to such a constraint, whether they remain with the firm or practise elsewhere, (ii) the members who are not in possession of such information (a) are free from such restraint once they have left the firm and are practising elsewhere (b) so long as they remain with the firm are undoubtedly precluded from so acting if the court considers there is a real (as opposed to fanciful) risk of a communication to them of any such relevant confidential information by those within the firm possessed of it.

Lightman J accordingly adopted the “real risk” approach.

Other jurisdictions have applied a more stringent test or approach than Rakusen. In National Mutual Holdings Pty Ltd v Sentry Corporation (1989) 87 ALR 539

Gummow J made such an observation as to Australian law. He found it unnecessary to state the relevant principles. In Mallesons Stephen Jaques v KPMG Peat Marwick [1991] 4 WAR 357 Ipp J adopted as a test whether there was a real and sensible possibility that the solicitor’s duty to keep information confidential may be breached. In Carindale Country Club Estate Pty Ltd v Astill [1993] FCA 218; (1993) 115 ALR 112 Drummond J held:

A solicitor was liable to be restrained from acting for a new client against a former client if a reasonable observer, aware of the relevant facts, would think that there was a real, as opposed to a theoretical, possibility that confidential information given to the solicitor by the former client might be used by the solicitor to advance the interests of a new client to the detriment of the former client.

The leading authority in Canada is MacDonald Estate v Martin (1991) 77 DLR (4th) 249. The headnote captures the view of the majority, which is set out in the judgment of Sopinka J:

The test is that a reasonably informed person must be satisfied that no use of confidential information would occur. Two questions must be answered in applying the test: (1) did the solicitor receive confidential information attributable to a solicitor-and-client relationship relevant to the matter at hand; and (2) is there a risk that it will be used to the client’s prejudice? In answering the first question, once it is shown that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no relevant information was imparted. In answering the second question, the court should automatically disqualify a solicitor who has relevant confidential information; and in other cases it should draw the inference that confidential information will be disclosed, unless satisfied of the basis of clear and convincing evidence that all reasonable measures have been taken to ensure that no disclosure will occur.

The minority preferred the United States approach, and would have applied an irrebuttable presumption that knowledge of one member of a firm will be imparted to the other members of that firm, with a resulting automatic disqualification of all.

It is necessary to go back to the basic issue, which is the protection of confidential information from disclosure. In our view this issue should be addressed by the Court applying a principled approach, for which it is neither necessary nor desirable to lay down a series of propositions covering a variety of different hypothetical situations, which are likely some time later to be found non-exhaustive. Three questions emerge. The first is whether confidential information is held which if disclosed is likely to affect the concerned (former) client’s interests adversely. The second is whether in the particular factual circumstances, viewed objectively there is a real or appreciable risk that the confidential information will be disclosed. The third, which arises if the first two questions are answered affirmatively, is whether recognising the significance and importance of the special fiduciary relationship which gives rise to the duty of protection, the Court’s discretionary power to disqualify should be exercised.

All three questions will frequently overlap. The nature and sensitivity of the information, the extent of the risk, and the adverse effect of possible disclosure are likely to affect all three enquiries. In making a final determination as to whether enjoinder in the nature of disqualification is appropriate, the Court will also need to take into account the competing factors of a person’s right to the services of a solicitor of choice, and the corresponding right of the solicitor to offer his or her services to the public generally. Mobility within the profession, as it is sometimes termed, is relevant. Access to specialist services and market competition are also matters relevant to the public interest. A balancing exercise of this kind, which is mindful of the interests of all directly concerned, but does not undermine the integrity of the fiduciary relationship, is more likely to meet the overall ends of justice than rigid rules imposed by the Court.

We would therefore reject the notion of an irrebuttable presumption, and also that of a rebuttable presumption. The preferable approach is the common sense practical one of assessing the evidence. The circumstances will dictate whether there is an unacceptable risk of disclosure of information. Where there is possession of relevant information, in the absence of negating evidence of protection the Court will readily infer there is a risk of disclosure.

Actual disclosure of confidential information

Mr Camp challenged Gallen J’s finding that “in fact no confidential information whether general or specific has been made available by Mr Heenan to anyone else within (Russell McVeagh)”. Mr Heenan had given evidence to this effect, on which he was not cross-examined. The challenge had two bases. First, reliance was placed on the fact that two affidavits by Mr Taylor of Tower filed in this proceeding were seen by partners of Russell McVeagh (Mr Harmos and Mr Dunning), both of whom were concerned with the GPG retainer. Following commencement of this proceeding, it was arranged that Mr Taylor’s first affidavit of 14 November 1997 should be sent to Mr A’Court of Russell McVeagh for consideration by the firm’s ethics committee. The affidavit was sent to Mr

Harmos, who read it. That affidavit contains allegations supporting the claim that Mr Heenan had received confidential information, but does not in any way detail the information in a way which could be of any possible benefit to GPG. Mr Taylor’s second affidavit of

20 November 1997 was received by Mr Dunning in error. Again that affidavit contains no detailed information. It confirms the first affidavit, and refers to Mr Heenan having information as to Tower’s policy on group taxation and its position on tax issues, not being information available from published accounts. Nothing more specific of possible detriment to Tower in the hands of GPG is listed.

Mr Camp’s second basis of challenge was a submission that the Judge should have applied a presumption that there had been disclosure, particularly during the period before November 1997 when the issue was raised, and gone on to hold that the presumption had not been rebutted. For the reasons earlier discussed, we do not think the presumptive approach is appropriate. What was required was an assessment of the relevant evidence, as was undertaken by the Judge. Mr Heenan’s evidence as to non-disclosure was not challenged. He had been concerned with a specific tax dispute of a limited nature, taxation being his sole area of practice. There is nothing in the evidence which could support an inference, or indeed even a reasonably based suspicion, that there had been disclosure of any information relevant to GPG’s activities down to November 1997. Thereafter, as the Judge accepted, procedures were in force to ensure protection and there is nothing to suggest those were inappropriate or ineffective for that purpose. Gallen J’s finding must stand.

The confidential information - general

Tower’s complaint is that in the course of undertaking the tax dispute retainer, Mr Heenan obtained from the documentation and information made available to him important insights into:

(a) the way it operates its business affairs, (b) the way it approaches negotiations,

(c) its management mores and corporate culture,

(d) the management personnel themselves and their particular interests, propensities or foibles,

(e) the management structure,

(f) its interface with its other advisors.

Gallen J concluded that although the general material may have given some insight into these matters and could be seen to be relevant to the global dispute between Tower and GPG, it was insufficient to warrant disqualification. We agree. The nature of those insights, obtained in the course of the specific instruction including the 1990-1991 tax years is so general as to be of little real significance to the GPG position. The assertions of Mr Taylor which were no more specific, take the matter no further, and did not assist to demonstrate materiality. Importantly, deliberate or inadvertent disclosure of that general information could not now reasonably be apprehended.

The confidential information - specific

The specific information identified in submissions was that referred to by Mr Taylor in his affidavit of 30 January 1998 at paragraph 42 (g)(h)(i) and (j), summarised as being:

“g” - handwritten notes of a meeting which is said to indicate Tower’s

particular approach to tax driven investments and tax provisioning;

“h” - a Tower letter of 2 November 1995 said to indicate a particular

approach to tax provisioning.

“i” - three pages of 1990 financial figures which include figures for direct and indirect costs and illustrate three alternative tax scenarios.

“j” - a Tower memorandum also illustrating alternative tax provisioning options.

Those documents were held on the completed Russell McVeagh tax file, they have now been delivered up to the High Court, and are the subject of a suppression order. No question of release or availability of the documents themselves therefore arises.

The first category is classed as information which demonstrates Tower’s conservative attitude to taxation issues and taxation provisioning generally. This was claimed as not being publicly available, and to have a possible relevance to Tower’s present true worth. It is not clear what weight Gallen J placed on this information. He did not think knowledge of a particular approach to taxation as such was sensitive information, but said it could perhaps be relevant in some overall consideration of a company’s financial operation. We have some difficulty in seeing how knowledge of Tower’s policy in this area in its 1990 accounting practices, even assuming some continuation of those, could warrant disqualification from acting in a matter where Tower’s 1998 worth may have relevance. The possibility of Mr Heenan having or needing knowledge of current accounting matters, although raised in the course of argument, has no basis.

The second category concerned Tower’s investment management and new business expenses. It was contended that some detailed information, contained particularly in three pages of figures prepared in respect of the 1990 accounts, could be used in conjunction with the published accounts and some significant conclusions then drawn as to the level of particular expenses in Tower’s overall operations. Gallen J reached the following conclusion:

When the material concerned is looked at in combination even although it is historic in nature, there is evidence to suggest that it could provide the basis for at least a general assessment of such figures in current terms, both as aspects of the financial position and as indicating a responsibility of the management and its style of management for the results which are indicated. Such information would therefore have some relevance in assessing the advantages or otherwise of proceeding with a scheme. It might also provide some assistance in devising a particular strategy or approach and would clearly have relevance if the matter descends to an overall attempt to influence individual members.

After discussing the authorities, the Judge went on to hold:

Once a situation is identified which could give rise to the perception by a reasonable member of the public fully informed of the facts that a situation exists which could lead to difficulties, the cases establish on balance that in the absence of exceptional circumstances the situation should not be allowed to continue even with the protection of precautions and undertakings.

The Judge referred to the likely accuracy of the information and to GPG’s underlying purpose to acquire Tower. He concluded that Mr Heenan was possessed of information which would be seen by an informed observer to be to the advantage of GPG.

Mr Galbraith submitted that on analysis the conclusion could not be supported as founding a sufficient basis for disqualification. Gallen J’s expressed hesitation in reaching it is readily understandable. Notwithstanding Mr Camp’s submissions to the contrary, and his own exercise of extrapolating some of the figures in the documentation, and then applying those to current published accounts, we are persuaded that the evidence is insufficient to warrant Court intervention. The figures are historic - 1990 costs have little realistic present application. Mr Galbraith’s exercise in taking the Court through the figures in question was compelling and demonstrated that Mr Taylor’s assertions as to what may be gleaned from the documents lacked adequate foundation. Whether sensible use could be made of the material must be extremely doubtful, and no more than speculation. Again, and importantly in the present context, there is the absence of a risk of disclosure of this material. It is not now held by Russell McVeagh in any available documentary form. Retention in Mr Heenan’s memory of these particular figures and their real significance, would seem as a matter of commonsense to be extremely remote. As a matter of reality inadvertent disclosure would seem to disappear as a reasonable possibility.

There is a further difficulty for Tower. With respect to the Judge, for the reasons earlier expressed we do not think the second passage we have quoted above is the correct approach to be adopted. Possible difficulties perceived by the public, and the need for exceptional circumstances are not appropriate standards. The enquiry is whether, on the established facts, there is objectively a real risk that Tower’s confidential information,

material to GPG’s takeover interests or adverse to the interests of Tower, may be disclosed to GPG. A conclusion to that effect was not open on the evidence. It does not assist Tower’s argument to suggest that because the risk of disclosure was arguably significant before the protective measures were put in place, its position is somehow stronger under this head. Once it is suggested that there was in fact no disclosure over that period, the argument that there is a risk of further disclosure is, if anything, even less tenable.

Conclusion

For the reasons expressed we do not consider Tower has made out a sufficient case to justify disqualifying Russell McVeagh from acting for GPG. Although the concepts of Chinese walls and cones of silence leave much to be desired, and cannot be allowed to obscure the realities of life and the ordinary behaviour and incidents of relationships where individuals practice together in a firm, internal control measures may nevertheless in some circumstances be both appropriate and sufficient to ensure protection. Other aspects of today’s conditions must also be kept in mind. New Zealand is still comparatively small, and in some professional areas the availability of expert advice is limited. That availability should not be unduly restricted by Court imposed control or sanctions which are not required in the overall interests of justice to protect individual rights. This particular area of concern is not, in our view, one capable of being controlled by the Courts in terms of absolutes, which although they may provide a measure of certainty, would do so at the expense of possible, indeed likely, undue interference with rights and interests other than those being protected. As is so often the case when there are competing interests it becomes a matter of balance, which is achieved by the application of principle to particular facts. In that way the overall public interest is best served.

In accordance with the judgments of the majority the appeal is allowed and Tower’s application for injunctive relief is dismissed. The cross appeal is dismissed. The appellant is entitled to costs in this Court which are fixed at $10,000 together with disbursements including reasonable travelling and accommodation expenses for one counsel as approved by the Registrar.

Solicitors

Hesketh Henry, Auckland, for Appellant

Phillips Fox, Wellington, for Respondent

IN THE COURT OF APPEAL OF NEW ZEALAND CA 86/98

BETWEEN RUSSELL McVEAGH McKENZIE BARTLEET & CO

Appellant

AND TOWER CORPORATION Respondent

Coram: Richardson P Gault J

Henry J Thomas J Blanchard J

Hearing: 9 and 10 June 1998

Counsel: A R Galbraith QC and D M Connor for Appellant

M R Camp QC and A S McIntyre for Respondent

W M Wilson QC for Guinness Peat Group International Insurance Ltd

_{Judgment: 25 August 1998}

_{JUDGMENT OF THOMAS J}

Introduction

The issue to be determined in this appeal is whether a law firm, Russell McVeagh McKenzie & Bartleet (RMMB) should be restrained from acting for the Guinness Peat Group (GPG), which is seeking to acquire a life insurance company, Tower Corporation (Tower), for whom RMMB was also acting at the time its instructions were received in relation to the acquisition of Tower.

This general issue gives rise to a number of critical questions:

Was RMMB in breach of its duty of loyalty to Tower in failing to inform Tower that it intended to act for GPG?

If the answer to that question is in the affirmative, is the breach “spent” for the purpose of Tower’s application to restrain RMMB from acting for GPG?

What was the scope of RMMB’s duty to Tower in relation to information imparted to it by the corporation, and did the firm meet its obligations in respect of the duty as so defined?

Was there a risk that information relating to Tower would be disclosed during the period following RMMB’s acceptance of instructions from GPG until 18 months later when Tower objected to those instructions, and is there a risk at the present time?

(For the purpose of this judgment I use the acronym, “GPG”, to include the merchant bank which acted as a financial intermediary).

Gallen J issued an injunction restraining RMMB from acting for GPG. The majority in this Court would reverse his decision. With respect, I would not do so.

I should say at once that, in reaching this view, I am not holding that the particular partners concerned, Mr Harmos and Mr Heenan, have acted other than in accord with their perception of the requisite ethical requirements of the legal profession. Both lawyers are of established integrity and honour. To a significant extent their action simply reflects the approach of the large law firms in this country and the difficulties which they experience in ensuring that the lawyers’ fiduciary obligation to their clients is properly discharged when conflicts or potential conflicts arise in practice.

I consider that this case provides a prime example of the tendency to seek to make the law applicable to one factual situation applicable to another and different factual

situation. This case is not simply a case of successive instructions, that is, a case where the law firm is instructed to act in a matter and has, or is alleged to have, information relating to the client’s adversary as a result of having acted for that person or company in the past. At the time RMMB accepted instructions from GPG, it was acting for Tower in a number of matters, including a proceeding against the Inland Revenue Department involving

$30 million. It did not disclose to Tower that it was proposing to act for GPG. Once it began acting for GPG it worked up an aggressive take-over strategy against Tower while also continuing to act for Tower. The period of time when RMMB simultaneously acted for GPG and Tower in the major taxation proceeding was 11 months. Throughout that time the safeguards which were subsequently adopted to preclude the possibility of information relating to Tower being exchanged or disclosed within the law firm were not, for the most part, in place.

To my mind, these facts can be neither brushed aside nor relegated to the status of background information. The factual situation is to be accepted. Not being solely a case of successive instructions it is not sufficient to take the legal test applicable to that type of situation and apply it without modification to the facts as they exist.

Having close regard to the factual situation, I have been brought to the following conclusions:

RMMB failed to inform Tower that it was proposing to accept instructions from GPG. The obligation for RMMB to inform Tower of their intention arises out of the duty of loyalty, trust and confidence which is integral to the fiduciary relationship between solicitor and client. The firm was under a recognised duty to disclose all material information in its possession to its client, and it failed to do so. If RMMB could not advise Tower of its intention (and it is accepted that it could not do so without imparting confidential information relating to GPG’s proposal to Tower), it could not accept instructions from GPG. This breach is not “spent” for the purpose of Tower’s application to disqualify RMMB from acting for GPG.

RMMB were under a duty not to disclose information relating to Tower. To avoid a breach of that duty, it was obliged to take such steps as were reasonably necessary to avoid creating a risk that the information would be disclosed. For a period of 18 months RMMB undoubtedly failed to take those or any sufficient steps and, as a result, a situation arose in which there was a risk that information provided by Tower would be communicated to the particular solicitors acting for GPG. The fact Gallen J held that no information, whether general or specific, had been made available by Mr Heenan to anyone else in RMMB does not alter the conclusion that this risk existed. Following an objection from Tower, RMMB then took steps to isolate information relating to the corporation within the firm. Notwithstanding those steps, however, the onus was on RMMB to negate the inference that a risk of disclosure remains. Having regard to all the circumstances, RMMB has failed to refute that inference.

I should add that I do not accept that an injunction restraining RMMB acting for GPG in the hostile take-over of Tower would leave GPG without competent legal representation. The evidence indicated that, apart from Australasian resources, there are at least three major law firms in this country with experience and expertise in this area of activity able to act in the matter. While it is to be acknowledged there would be significant inconvenience to GPG in being deprived of RMMB’s services, that inconvenience cannot impinge upon the breach of the firm’s fiduciary obligation nor outweigh the other considerations which are canvassed in this judgment.

Some points of departure

In pursuing the above views, my thinking differs from that of the majority in a number of respects. It is convenient to list the various points of departure:

The majority perceive the essential question to be whether or not there is a real or appreciable risk that information relating to Tower will be disclosed within the firm. I consider that this question is far too restricted and does not fit the facts. In my

view, it is essential to have regard to the whole picture, and that means beginning with RMMB’s decision to act for GPG without telling Tower of its intention to do so.

I consider that little is gained by attaching adjectives such as “real” or “appreciable” to the word “risk” in assessing whether the risk is such as to warrant an injunction. Surely it should be enough that there is a risk that a client’s private information will be disclosed? What is added by the use of the words “real” or “appreciable”? Are clients to be expected to bear the risk that their confidential information may be disclosed if it is not a “real” or “appreciable” risk? Of course, the risk cannot be fanciful or imaginary, but that qualification can be made without adopting restrictive adjectives. In my view, the Court has moved too far from the mainstream of international jurisprudence on this question which invariably places a heavy burden on the solicitors to show that there is no likelihood of information being exchanged within a law firm. Tower are entitled to the protection of an injunction if there is a risk that information which it imparted to RMMB in good faith and in reliance on the fiduciary relationship between solicitor and client will be disclosed or misused in that firm’s pursuit of the interests of GPG.

I acknowledge that the Court’s decision in Black v Taylor [1993] 3 NZLR 403 is readily distinguishable on the facts. Nevertheless, I consider that the underlying or basic principles articulated in that judgment have some relevance in the circumstances of the present case, especially as court proceedings are involved. I refer to the fundamental concern that justice should not only be done but should manifestly and undoubtedly be seen to be done. The integrity of our system of justice depends on it meeting those standards. See Richardson J at 408. But I do not need to rely upon that decision.

The majority perceive the Court’s function as being to provide a remedy where there has been a breach of duty recognised by law and view any wider inquiry as being part of the Court’s inherent jurisdiction to control its own processes. I make

two comments. First, I do not rely upon the Court’s inherent jurisdiction, although, if need be, I would be prepared to invoke it. Secondly, if the Court’s function is to provide a remedy where there has been a breach of a legal duty, presumably a remedy would never lie until confidential information had been in fact disclosed. Rather, as I apprehend it, if the majority were persuaded to issue an injunction in this case, it would be on the basis that there was a real or appreciable risk that there would be a breach of that duty.

Approaching the case on the basis that the information in issue must be confidential information and shown to be of value or assistance to GPG is, I believe, to belittle the nature and scope of the fiduciary obligation owed by RMMB to Tower. A client’s information does not have to be confidential per se to be protected from disclosure. The duty of confidence relates to the whole of a client’s affairs. In other words, the client’s right is to have his or her private information imparted to a solicitor in the course of an instruction kept strictly confidential. No fine inquiry is required as to whether the information disclosed to a third party is of value or assistance to that party before a breach is committed.

There is a suggestion implicit in the majority’s judgment, perhaps more overtly insinuated in Blanchard J’s separate judgment, to the effect that Tower’s objection to RMMB acting for GPG may be a tactical manoeuvre in the take-over dispute. Of course, the possibility that Tower may have objected for tactical reasons cannot be discounted. But I prefer to accept that, in the circumstances of this case, Tower had good reason to be genuinely surprised and resentful to find that RMMB was acting for GPG. Noting that Tower’s instructions to RMMB involved significant issues of policy, provisioning and corporate attitude, Mr Beyer, the Chairman of the Tower board, records in his affidavit that he and the board were most concerned to learn that RMMB accepted instructions to develop a merger proposal in respect of Tower during the currency of the corporation’s instructions to that firm. He attests that he and the board took, and continue to take, strong exception to RMMB acting

against Tower, particularly in a hostile merger/take-over situation.

Nor do I accept that the fact RMMB continued to act on two of the four matters in which it was acting for Tower at the time it was discovered acting for GPG indicates that Tower is not genuine. The Court knows nothing of those matters or the reasons which may have led Tower to permit RMMB to continue to act. If anything, the fact that Tower immediately directed RMMB to discontinue work on the other two matters would tend to confirm that its chagrin was unfeigned.

I resist fitting taxation matters into a special category because of their specialist nature. The substance of the particular instruction must be examined. I agree with the trial Judge’s view that taxation questions can rarely be resolved in isolation and must be considered against details of the financial operation of the entity concerned. This information may be sensitive and confidential.

Finally, I seek to give greater emphasis to the “rights” of clients. Decisions as to whether there is or will be a breach of the obligation of loyalty, or whether there is a conflict or potential conflict of interest, or whether there is a risk its information will be disclosed are decisions which are of critical concern to the particular client. Yet, by and large, they are decisions made by the lawyers. It is only if and when the lawyers decide that there is or may be a breach of the obligation of loyalty, or a conflict or potential conflict of interest, or a risk confidential information will be disclosed that the matter is referred to the client. There is an unacceptable arrogance in the assumption that the lawyers have the prerogative to make these decisions for their clients. It should not be endorsed by the courts. Nothing less than full disclosure and informed consent on the part of the client concerned should suffice to discharge the fiduciary obligation.

The megafirms

Practicing mainly in Auckland and Wellington, there are in New Zealand five so- called megafirms consisting of 50 or more partners employing a large number of staff solicitors and three firms comprising more than 25 partners. RMMB, itself, as at the time of the hearing, had 64 partners and 190 fee earning staff. The increase in the size of law firms occurred as a result of a number of factors. Large corporate clients required a wide range of services and the major law firms responded by expanding their numbers and acquiring the requisite expertise to provide those services. The major companies tended to look to a particular firm for all or most of their legal work. The law firm regarded them as “clients” of the firm, and there was a strong drive to provide such clients with comprehensive legal services, particularly in the area of commercial law. Mergers of law firms followed reducing the numbers of moderately large firms and ultimately leading to the limited number of megafirms in practise today.

The megafirms in New Zealand are larger per head of population than their overseas counterparts. For example, RMMB has 64 partners in a country with a population of 3.6 million (1 partner per 56,250) compared with Mallesons Stephen Jacques in Australia which has 181 partners in a country with a population of 17.9 million (1 partner per 98,895) or Clifford Chance in the United Kingdom which has 171 partners in a nation of 58.1 million (1 partner per 339,776). Mr Wilson, appearing briefly for GPG, commented on this phenomenon in the course of his submission. In the result, the influence of the megafirms in the delivery of legal services in New Zealand is immense, especially in the area of commercial law. They are pictured by some as bestriding the legal profession dominating, in oligarchical fashion, the practice of law in this country.

With the passage of time, the large corporations became less dedicated to particular law firms and began to spread their work among a number of firms. A firm or partner or partners within a firm might be instructed according to the company’s perception of the expertise of that firm or partner or partners. “Horses for courses” became the received wisdom in the commercial market-place. Both the instruction of Mr Heenan for specialist tax work and the engagement of Mr Harmos for his expertise in the area of company acquisitions in this case are illustrations of this trend.

Notwithstanding this trend, however, the megafirms continue to offer a comprehensive range of legal services, including specialist services, directed to the commercial community. Without doubt, the quality of these services is generally of the highest standard. To achieve this standard of service in a large organisation, and at the same time obtain the maximum level of profitability, the firm’s operation and management structure has become commercial in character. However much it adheres to its professional obligations a law firm is still a business, and the megafirms are the market leaders in that regard. They operate in a highly competitive environment. Client acquisition is vigorously pursued as a matter of practice development and, once instructions are received, the client’s interests are represented with skill and vigour. The aggressiveness with which a client’s interests have been pursued is at times apparent in the background to cases coming before this Court. Ironically, the sense of fierce loyalty which such firms demonstrate in pursuit of their client’s interests can increase the risk that the firm’s fiduciary obligation to another client will be slighted or overlooked. Loyalty to one client by one partner or set of partners may blind them to the need to meet the firm’s obligation of loyalty to another client for whom another partner or partners act. The risk of a conflict or potential conflict may not be perceived or, if perceived, not be freely acknowledged, or the possibility that material information which should be disclosed to a client will not be disclosed, or the risk that confidential information will be exchanged without necessarily being recognised as such, become perceptible risks.

Because, then, of their size and limited number, the custom of the major corporations to disperse their legal work between a number of firms, and the competitive environment in which they operate, the megafirms frequently confront questions of loyalty, conflicts or potential conflicts, and the risk of disclosing confidential information. Indeed, in the present case, RMMB twice had to address the prospect of a conflict. When Mr Heenan was asked to accept the main tax instruction which arose out of an earlier financial transaction between Tower and Telecom, he learned that there was an issue between Tower and Telecom as to whether Telecom would be required to indemnify Tower if the tax dispute was not resolved in a way which was favourable to the corporation. As

Telecom was an existing client of RMMB in respect of some of its work and one of its partners was a director of that company, Mr Heenan recognised the possibility of a conflict of interest. After discussions with the respective parties, RMMB continued to act for Tower with the qualification that, should direct litigation against Telecom arise, the firm would need to review the extent of its involvement. Tower’s regular solicitors, Phillips Fox, would act for Tower in relation to any points Tower raised in relation to the indemnity and any claim.

Shortly afterwards, another conflict arose. A litigation partner in the Auckland office of RMMB accepted instructions to act for Bankers Trust in a claim Tower had brought against that company unaware that Mr Heenan was already acting for Tower in the Wellington office. Initial meetings had taken place between the litigation partner and Bankers Trust during which its executives had discussed the company’s position with the partner. RMMB accepted it could not continue to act for Bankers Trust, and that company accepted that other counsel would need to be instructed to represent it. But Banker’s Trust pointed out that, as its position had been discussed with a partner in RMMB, it took the view that the firm could not act against it. It agreed, however, that RMMB could continue acting for Tower in respect of taxation issues. RMMB then continued to act for Tower on the basis that it would not be required by Tower to act against Bankers Trust or to give advice adverse to that company’s interests.

In both these cases, of course, the conflict or potential conflict was discussed with the clients and the basis on which RMMB would continue to act for Tower was agreed to by all parties.

The size and limited number of large law firms offering comprehensive and specialist legal services to the large corporations necessarily exacerbates the difficulties experienced in ensuring that the lawyer’s fiduciary obligation is discharged when the inevitable conflicts or potential conflicts arise. There are, as was pointed out in argument, not enough firms to meet the commercial demand for such services. While accepting that this represents the reality of the situation, however, I do not consider that the fiduciary obligation of solicitors to

their clients should be diluted in order to ameliorate the difficulties. Courts always strive to be realistic in their approach, but nothing in that commendable approach should impel them to depart from established principles designed to protect beneficiaries in a fiduciary relationship. Any erosion of the fiduciary obligation of solicitors to their clients can only react to the disadvantage of the public and the profession as a whole, as well as to the individual law firm and clients involved.

Sopinka J, delivering the judgment of the majority in the Supreme Court of Canada, made the same point in MacDonald Estates v Martin (1991) 77 DLR (4th) 249, at 255. The learned Judge commented on the trend towards the formation of larger and larger firms and observed that it had led to increased demands for them to be managed in accordance with the corporate model. Conflicts of interest had become familiar features of the modern practice of law requiring consideration of the consequences which flow from loss of clients through such conflicts. Sopinka J then stated:

To facilitate this process some would urge a slackening of the standard with respect to what constitutes a conflict of interest. In my view, to do so at the present time would serve the interest of neither the public nor the profession. The legal profession has historically struggled to maintain the respect of the public. This has been so notwithstanding the high standards that, generally, have been maintained. When the management, size of law firms and many of the practices of the legal profession are indistinguishable from those of business, it is important that the fundamental professional standards be maintained and indeed improved. This is essential if the confidence of the public that the law is a profession is to be preserved and hopefully strengthened.

To my mind, the added difficulties which arise as a result of the emergence of the megafirms should be left to the free play of the market. If the existing structure of the profession cannot cope with the responsibilities and standards required of a fiduciary, it is the structure of the profession which must adjust. Legal services of the kind under discussion are profitable areas of legal activity. Consequently, the market can be expected to dictate another structure. Existing firms may reduce their size, more large firms may emerge, smaller specialist or niche firms may increase in number, or the legal services offered by accountancy practices may be enlarged. Whatever the solution, it rests with the market.

The concurrent instructions

The relevant dates may be set out as follows:

Date Tower GPG

September 1995 Tower instructs RMMB

in taxation dispute

May 1996 GPG (the financial intermediary) approach RMMB in relation to proposal to acquire Tower

August 1996 Proposal discussed with potential investors

November 1996 GPG involved

April 1997 Dispute with IRD settled

September 1997 Meeting between GPG and Tower at which RMMB represent GPG

October 1997 Tower issue proceedings

November 1997 Tower object to RMMB

acting for GPG

In my opinion, RMMB’s default in its fiduciary obligation to Tower derive from its simultaneous representation of both GPG and Tower.

Because he had been involved in resolving the conflict between Tower and Bankers Trust, Mr Harmos knew that Mr Heenan had acted for Tower. He contacted Mr Heenan and advised him of the proposal which could involve a third party obtaining control, or a controlling interest, in Tower. Mr Heenan confirmed that he had acted for Tower on a narrow specialist basis only and that he was not aware of any information in his possession, or any other reason, which would prevent RMMB from being able to accept the instruction.

Mr Harmos then accepted the instruction and did not communicate with Mr Heenan in connection with it until the alleged conflict was raised by Tower on 7 November 1997. Mr Harmos’ narrative in his affidavit speaks in the past sense of Mr Heenan having confirmed that “he had acted” for Tower. It is not clear that Mr Harmos was actually made aware that Mr Heenan was still acting for Tower.

Mr Heenan did not consider that any information which he had received from Tower in connection with the taxation instruction created a conflict of interest which would have prevented Mr Harmos from providing advice to a merchant bank in relation to the instruction which he described. He concluded that it was not necessary to tell Tower of the fact or nature of the instruction received by RMMB to act for a third party in the acquisition of Tower. But the trial Judge entertained no doubt that consent would not have been forthcoming had Mr Heenan sought the informed consent of Tower to act in the take-over.

A breach of the duty of loyalty?

The duty of a solicitor to disclose to a client all material information in the solicitor’s possession relevant to the client’s affairs has long been recognised as an essential element of the solicitor’s fiduciary obligation to their clients. Loyalty lies at the heart of the fiduciary concept, and the duty of loyalty, and the trust and confidence which it engenders, is integral to the fiduciary relationship between solicitor and client. It demands nothing less than full and open disclosure of all matters germane to the client and his or her affairs.

In this case I believe RMMB were obliged to advise Tower of its intention to accept instructions from GPG. Because it could not do so without being in breach of its obligation of confidence to that company, it had to accept that it could not act for GPG. The firm’s failure to disclose the information to Tower is to be seen as disloyal and constitutes a breach of its fiduciary obligation to the corporation.

The contract of retainer between the law firm and client defines the professional services required of the law firm. In a taxation matter, for example, the professional services

which are required will be such legal services as are necessary to properly perform that retainer. While the scope of the fiduciary obligation is also to be determined by reference to the contract of retainer, it is imposed as a matter of law. The obligation of loyalty is not narrowed or limited simply because the contract of retainer may relate to a narrow or limited specialist instruction. While the nature of the instruction may bear on the question of what is required to discharge the obligation of loyalty, once it is applicable the obligation of loyalty loses none of its force. Consequently, from the time RMMB accepted instructions to act for Tower in the taxation matters in question and, in particular, the major dispute with the Inland Revenue Department, it owed Tower a duty of loyalty. That duty is not discharged by the proper performance of the requisite professional services, the avoidance of any direct or potential conflict, or the non-disclosure of confidential information. It also required RMMB to inform Tower of all material matters known to the firm.

What, then, is material? In my view the answer to that question is clear. Material matters are matters which would or might bear on the retainer or the continuation of the retainer. The client has a right to be informed of any matter which would influence its decision to retain a law firm or to continue with the services of that firm. Hence, the firm cannot act or continue to act without making full disclosure of any material matter relevant to the client’s decision, which is the client’s right, to retain the firm or to continue to retain the firm. The questions which the law firm must address in such circumstances are not solely whether there is a direct or potential conflict of interest or a risk of the client’s information being disclosed, but whether the instruction is such that the client would or might object to the new instruction, wish to discontinue its retainer or to modify or adjust that retainer. If the law firm does not or cannot disclose such a matter and accepts the new instruction, it is acting surreptitiously in relation to the existing client and in breach of its duty of loyalty to that client knowing that it might well protest the instruction or wish to withdraw or modify its own retainer if it knew the truth. The law firm is in effect holding the client against its will. This lack of transparency and accountability transcends any question of ethics and constitutes a breach of the solicitor’s fundamental duty of loyalty.

I acknowledge that there would be any number of circumstances where the law firm would not be obliged to tell a client it was proposing to act for another client. Obviously, there must be a nexus between the instructions of the existing client and the proposed client before it can be said that the duty of loyalty requires disclosure of the proposed instructions. That nexus will be clear where the two matters are related and the possibility of a conflict is real. But the law firm’s intention to act for another company will also be material if, although not necessarily closely related matters, the second instruction would be, in the eyes of the existing client, incompatible with the continuation of its retainer. In the present case, that incompatibility arises from the nature of GPG’s instructions to RMMB, the certainty that Tower would have objected strongly and, if necessary, discontinued its instructions with RMMB, the impairment of Tower’s right to disclose its affairs to its solicitors freely and fully, and the disadvantage it will suffer resulting from its reasonable apprehension that GPG, through RMMB, know too much about it. Information that RMMB proposed to act for GPG was therefore material to Tower’s contract of retainer with the firm and directly relevant to any decision it might wish to make to continue with or discontinue that retainer. These considerations may be examined in greater detail.

First, regard is to be had to the nature of GPG’s instruction to RMMB. From the outset, the acquisition of Tower was fraught with potential hostility, a hostility which duly eventuated. It was readily foreseeable. So, too, court proceedings were bound to eventuate, as has also happened, and it would be naive to think that further proceedings are not likely to transpire. An acquisition, especially a hostile take-over, is directed at the very existence of the target company. The company’s reaction is highly likely to be bitter and acrimonious. In this case Tower’s reaction is inflamed by the knowledge that the strategies and legal manoeuvres which it is confronting have been developed by the very law firm in which it reposed its trust and confidence. In such circumstances, it is difficult to see how RMMB’s decision to act for GPG would not have led to an immediate objection from Tower and, if necessary, the cessation of its instructions.

Secondly, suppose that GPG’s instructions had come first in time and Tower had been informed by RMMB that it was acting for that group when it approached Tower.

Would Tower then have instructed RMMB? It is certain that it would not. Or suppose that Mr Heenan, and not Mr Harmos, had been the partner acting in the acquisition, would Tower have given RMMB a second thought? These questions and the obvious answers they prompt indicate the materiality of the information to Tower. Yet, the information does not lose its materiality simply because RMMB’s instructions from GPG were received after Tower’s retainer had been accepted. The information remained relevant to the decision Tower had the right to make as to whether to continue with RMMB or withdraw its instructions.

Thirdly, the information is material because it relates directly to the trust and confidence Tower reposed in RMMB pursuant to the fiduciary relationship between them. Tower was entitled to feel free to disclose to its solicitors all relevant information, including financial, commercial, or management details, without fear that there was a risk of the information being disclosed to others, especially those hostile to its interests. Gallen J made this point admirably in the following terms:

...it is essential that people should be unconstrained in disclosing material to their legal advisers which has a bearing on whatever problem they have taken to those advisers. The interests of justice require that there should be no feeling of restraint occasioned by the fear that at some future date that material might be used against them on behalf of some other person or organisation.

The freedom for a client to divulge its affairs to its solicitors in confidence is an important factor in the public interest and underlies the fiduciary relationship of solicitor and client. Knowledge that information which is imparted will be kept confidential and not placed at risk of disclosure to others reassures the client and leads to the free and full exchange of information essential for the conduct of legal affairs. It is therefore only part of the picture to inquire whether there is a real or appreciable risk that confidential information will be disclosed when determining the materiality of the information. The reaction of the client to the proposed instruction and the question whether it would be inhibited in divulging information and discussing matters it regarded as private and confidential must be taken into account.

In practical terms, the disadvantage to Tower is real enough. I do not doubt that, in this case, Tower’s senior executives would have been disinclined to divulge the company’s financial, commercial, and managerial affairs to solicitors acting in a hostile or potentially hostile take-over of the corporation. Experience in commercial litigation confirms the exceptional sensitivity commercial bodies attach to their financial and commercial material. Knowledge that the financial and commercial details being conveyed to their solicitors for the purpose of the tax dispute could be misused would necessarily inhibit them in freely disclosing those details. They could not know or be able to foresee how the details might be used in the take-over bid. Nor could they know or foresee how the information might eventually be used against Tower in litigation.

Further, when attention is directed at the court proceedings which are likely to ensue, the importance of Tower being advised of RMMB’s proposal to act for GPG is reinforced. The form of the proceedings which will eventuate cannot be foreseen. It may well be that, in the conduct of one or more of those proceedings, Tower will be less confident in its decisions than would otherwise be the case. Will Tower’s representatives, for example, pause before calling Mr Taylor, the Group General Manager who dealt with Mr Heenan, to give evidence, apprehensive that GPG’s counsel may know too much about him? There is no sound reason why Tower and its advisers should be diverted from the substantive issues in the proceeding by a reasonable apprehension that the solicitors acting for GPG may have an advantage arising from their knowledge of the corporation. Again, it is not the fact GPG and its advisers might or might not utilise confidential information but Tower’s reasonable apprehension that this may be the case which is critical and which makes advice of RMMB’s intention to act for GPG material to the continuation of its retainer.

For these reasons, I entertain no doubt that the fact RMMB intended to act for GPG was material information which should have been disclosed to Tower. Had this been done, Tower would have had the opportunity to object to RMMB acting for GPG. If necessary, it could have withdrawn or modified its retainer with that firm. The fact RMMB were not able to divulge the nature of GPG’s instruction simply means that it was not open

to the firm to accept that retainer. In the result, RMMB is in breach of its duty of loyalty to

Tower.

But is the breach of duty “spent”?

Having held that RMMB is in breach of its fiduciary duty to Tower in failing to inform Tower of its intention to act for GPG, the question arises whether the breach remains relevant to the corporation’s application for an injunction to restrain RMMB from continuing to act for GPG at the present time. In my view, it does, and I proffer the following reasons.

First and foremost, I do not consider that RMMB should be able to obtain an advantage or profit from committing a breach of its fiduciary duty to Tower. The advantage it has obtained is in acting as solicitors for GPG. Yet, but for its default, RMMB would not be acting for that company because it would not have been open to it to do so without informing Tower of GPG’s acquisitive intentions. To permit it to act now would be to condone or overlook the breach as a matter of convenience or expediency.

Secondly, while such a breach could sound in damages in a civil proceeding brought by Tower, damages would be an inadequate or ineffective remedy. What is Tower’s loss (leaving to one side the question of equitable damages) flowing from RMMB’s breach of its fiduciary duty? The breach, by virtue of its very nature, cannot properly be treated as historic for so long as RMMB is acting for GPG. The sanction, if there is to be an effective sanction, must lie in the injunctive remedy which equity has introduced to supplement the common law. Short of restraining RMMB from continuing to act for that company, the wrong is incapable of effective rectification. In particular, the confidence with which Tower conducts critical Court proceedings involving GPG may be impaired by its reasonable apprehension that information which it has disclosed to RMMB may be utilised by that firm in the service of GPG.

There is also considerable force in Mr Camp’s observation that to treat the breaches as historic and as having little or no relevance to the situation today, would be to

render the solicitor’s duty of loyalty of no account. It would reward those law firms who, in breach of their duty of loyalty, manage to keep their acceptance of instructions to which the existing client would object from becoming known to that client. Indeed, the longer the law firm acted surreptitiously the more “historic” the breach would become.

Thirdly, breach of fiduciary duty is an equitable cause of action. Equity was historically a Court of conscience. The supplicant’s task was to invoke that conscience, and he or she did so by seeking to demonstrate how unjust or unconscionable it would be to be denied an effective remedy. In such a case the applicant was doing no more than appealing in aid equity’s conscience. In this case, I believe, equity’s conscience would be troubled by RMMB’s decision to act for GPG without advising Tower, and I prefer the one remedy which can effectively assuage that conscience.

Fourthly, there is scope in this area to have regard to policy considerations underlying the imposition of the fiduciary obligation. Although it is not on all fours with this case, it is instructive to examine the approach in MacDonald Estates v Martin, supra, at

254 and 271-272. The Supreme Court of Canada identified three competing values; concern to maintain the high standards of the legal profession and the integrity of the system of justice, the right of litigants not to be lightly deprived of their chosen counsel, and the desirability of permitting reasonable mobility in the legal profession. The integrity of the judicial system was perceived to be of such fundamental importance to the country and, indeed, to all free and democratic societies, that it was regarded as the predominant consideration in balancing these three factors. The majority observed that lawyers are an integral and vitally important part of the system of justice: “The client’s most secret devices and desires, the client’s most frightening fears will often, of necessity, be revealed.” As a result, the client must be secure in the knowledge that the lawyer will neither disclose nor take advantage of such revelations.

MacDonald Estates v Martin related to a case where a lawyer had changed firms as a result of which a possible conflict of interest arose. Being a case of successive instructions it was concerned solely with the risk of confidential information being used

against a former client. But, as I have already sought to stress, the present case presents a different factual situation going beyond the risk of confidential information being disclosed. Involving a serious breach of RMMB’s fiduciary obligation to Tower, the fundamental value must be the importance of preserving the integrity of the fiduciary relationship between solicitor and client. As the solicitor’s fiduciary obligation of loyalty, with its concomitants of trust and confidence, has frequently been described as essential to serve the public interest the values which led the Courts to impose a fiduciary obligation on solicitors cannot be lightly set to one side. The fundamental importance of the fiduciary relationship between solicitor and client requires solicitors to honour their fiduciary obligation and, if and when they fail to do so, the fiduciary relationship itself will be undermined unless the breach is met with a firm response from the Courts.

There are no doubt occasions when a law firm’s default becomes irrelevant or insignificant with the passage of time, but this is not such a case. Had it been informed, Tower would never have accepted that RMMB could act for GPG in a hostile or potentially hostile take-over. It was not informed. RMMB then continued to act for GPG for a period of 11 months while still acting for Tower. Throughout that time senior executives of Tower reposed their trust and confidence in RMMB and freely and fully disclosed to it details of the company’s financial, commercial and managerial position. In such circumstances, RMMB cannot now be permitted to obtain an advantage as a result of its earlier breach of its fiduciary duty. The law should not seemingly condone such a serious breach by allowing RMMB to continue to act for GPG.

Although I am able to reach the conclusion that an injunction should issue on this ground alone, I will proceed to discuss the risk of information relating to Tower being disclosed or misused.

The risk of disclosure?

Before considering whether there is a risk that information relating to Tower may be disclosed within the firm, it is necessary to define the scope of the duty resting upon

RMMB. The fact, of course, that it was under a duty not to disclose such information cannot be called in question. But it could also be argued that RMMB were under a duty not to create a situation in which there was a risk of information relating to Tower being disclosed.

A duty formulated along these lines would be wholly consistent with the fiduciary obligation of a solicitor to a client. The fiduciary obligation of solicitors is directed to potential conflicts, as well as actual conflicts. It is and always has been prescriptive in its purport. In the same way, it could be argued, the duty in respect of a client’s information should be directed at the potential or risk of disclosure and not just the actual fact of disclosure. Indeed, it would enfeeble the fiduciary obligation of solicitors to their clients if the duty did not embrace a duty not to create or permit a situation in which there is a real risk of disclosure. That is the substance of the solicitor’s obligation. Policy considerations underlying the solicitors’ fiduciary obligation to their clients could also be said to require the broader duty. To permit solicitors to plead that they are not in breach of that duty because it had not been proved that any information was actually disclosed would permit solicitors too great a latitude in interpreting their fiduciary obligation. The public’s confidence in the integrity and standards of the legal profession, which the imposition of the fiduciary relationship between solicitors and clients is designed to serve, would not be maintained by such a benign perception of the solicitor’s obligation.

On balance, however, I have decided to leave this question open and not to press for a duty formulated in such terms. For present purposes, it can be accepted that the duty is a duty not to disclose or misuse a client’s information. That obligation, however, can only be discharged by the law firm taking reasonable steps in the circumstances of a given case to avoid a situation in which there is a risk (or real or appreciable risk) that such information will be disclosed. The firm’s duty not to disclose information merges into a duty to take reasonable care to ensure that the risk of such a disclosure is eliminated or minimised.

Lord Browne-Wilkinson in Henderson v Merrett Syndicates Ltd (1994) 3 WLR

761, and White v Jones (1995) 3 All ER 691, drew attention to the close connection

between tortious obligations and equitable obligations. In the latter case, in particular, the distinguished Law Lord identified the remedial similarities between the two heads of liability. In the past, he said, the historical development of the rules of law and equity have caused different labels to be stuck on different manifestations of the duty. Yet, the duty arises from the circumstances in which the defendants were acting, not from their status or description, and it is the fact they have all assumed responsibility for the property or affairs of others which render them liable for the careless performance of what they have undertaken to do. Consequently, a duty of care can be said to exist in equity to ensure that the beneficiary’s interests are protected. Such a duty can be perceived as being part of or arising out of the essential duty of loyalty, for true loyalty demands that the fiduciary should exercise care in discharging his or her responsibility for the property or affairs of the other. It would be an odd perception of loyalty to suggest that the fiduciary must subordinate his or her own interests to those of their charge, but that they can do so negligently. It is in this respect that RMMB’s actions fall short of any tolerably acceptable standard.

Up to the time Tower objected to RMMB acting for GPG in November 1997, there was undoubtedly a risk that Tower’s information might be disclosed. After that date RMMB sought to put in place various mechanisms designed to isolate information relating to Tower within the firm. Positive steps were taken to reduce the risk of disclosure. Nevertheless, I have reached the view that RMMB has failed to discharge the onus on it to negate the inference that there is a risk information relating to Tower will be disclosed in the course of a bitter and hostile take-over battle.

I turn first to the initial situation from May 1996 to November 1997. The certainty and positiveness which might be expected of a law firm faced with the possibility of a significant conflict is lacking. While Mr Harmos knew from an earlier experience that Mr Heenan had acted for Tower, it is not clear he was told by Mr Heenan that the work on the taxation dispute was in progress. Apparently, no reliance was placed on the firm’s new business register which, presumably, might have revealed that this matter, and a number of other matters in which the firm was acting for Tower, were still current. Mr Heenan then seems uncertain as to his recollection. Initially he deposed that he first learned RMMB was

acting for GPG in respect of the take-over when he read of it in “The Dominion”. It later became apparent in a subsequent affidavit that he knew in May 1996 of RMMB’s role in accepting an instruction in respect of a proposal which might lead to a possible acquisition or demutualisation of Tower.

Nor does it appear that the firm’s Ethics Committee was involved. Certainly, the Ethics Committee cleared RMMB to act for Tower on the tax instruction after considering the conflict with Telecom, but there is no suggestion that Mr Harmos or Mr Heenan referred Mr Harmos’s proposal to accept instructions from GPG to the Ethics Committee. It was not until November 1997, following the protest by Tower on 7 November, that the Ethics Committee appears to have addressed the matter. By letter dated 11 November 1997, the Committee advised that there was no basis for RMMB not continuing to perform its obligations to GPG or ceasing to act for that company. Later that month it seems that the Ethics Committee put in place the mechanisms to insulate the exchange of information from one partner to another and restrict access to files and the computer network. But even then, the mechanisms were not effective to prevent Mr Harmos from reading the first affidavit of Mr Taylor, or Mr Dunning, the litigation partner in RMMB, reading the second of Mr Taylor’s affidavits.

Overall, the safeguards in place at this time were not adequate to combat the risk that information would be disclosed within the firm. The initial procedure was unduly informal and lax largely, no doubt, because no problem or conflict or potential conflict was recognised, and contrasts with the safeguards which were ultimately adopted. A “Chinese wall”, for what it is worth, is in place; information which may be sensitive is held separately under secure instructions not to be released; the contentious documents have been deposited in the High Court; and a range of undertakings have been given. The partners and staff acting for Tower have undertaken that they will not disclose information, and the partners and solicitors acting for GPG have undertaken that they will not seek any knowledge or information acquired by them in the course of acting for Tower. But the adoption of adequate safeguards to prevent the exchange of information did not eventuate

until RMMB were forced to focus on the problem by Tower’s letter of protest on 7

November 1997, a focus now reinforced by this proceeding.

The fact that I have adverted to a “Chinese wall” in this context is not to be taken as an endorsement of that device. I consider that the cautious approach for the most part adopted by the courts in the various jurisdictions is appropriate. See, for example, Supasave Retail Ltd v Coward Chance (a firm) [1991] 1 All ER 668, at 675; Mallesons Stephen Jacques v KMPG Peat Marwick [1991] 4 WAR 357, at 255; MacDonald Estates v Martin, supra, at 269-270; Re a Firm of Solicitors [1992] 1 All ER 353, at 363 and 369; Equiticorp Holdings v Hawkins [1993] 2 NZLR 737, at 741; and D & J Constructions Pty Ltd v Clayton Utz [1987] 9 NSWLR 118, at 122. A “Chinese wall” is inherently insecure and prone to leak. In line with the weight of authority, the concept should only be used in exceptional circumstances where there is an overriding and compelling need. Two particular points may be made.

First, there is a common misapprehension that the “Chinese wall” can be utilised where the law firm faces a conflict or potential conflict in its obligation of loyalty to two different clients. A law firm, as a firm, owes a client its undivided loyalty. The notion that, in the absence of express and informed consent, one section of a firm can act for one client and another group in the firm act for another client where the interests of those clients are in conflict, or potentially so, providing that no information is exchanged, is fundamentally wrong. In such circumstances the firm is in breach of its fiduciary obligation of loyalty to both clients, irrespective that information may not be disclosed. It is the firm, and not the particular partners, which is retained by the client and which is subject to the obligation of undivided loyalty. Scope for a “Chinese wall”, to the extent that there is scope for such a device, exists only in respect of the obligation not to disclose the information of a client to another. It is for that reason that the concept should be restricted to situations such as cases of successive representation where the issue of confidentiality and information only is involved. As I have sought to stress above, this case is not simply a case of successive instructions.

Secondly, the effectiveness of “Chinese walls” should not be overstated. “Chinese walls” and “cones of silence”, that is, solemn undertakings not to divulge information, as observed by Sopinka J in MacDonald Estates v Martin, supra, at 270, amount to no more than the lawyers saying, “trust me”. As the learned Judge points out, this puts the Court in the invidious position of deciding which lawyers are to be trusted and which are not. Furthermore, even if the courts found these assurances acceptable, the public is not likely to be satisfied without some additional guarantee that confidential information will under no circumstances be used. Affidavits of lawyers, he states, which are difficult to verify objectively, will fail to assure the public.

The respects in which a risk exists that information will be exchanged within a law firm has been widely recognised. Discussions, both formally and informally at partner level are inevitable and it must be accepted that confidences will from time to time be exchanged. I have already described the environment and culture of the large law firms and the climate in which partners work. Camaraderie between partners may also be high. As stated in MacDonald Estates v Martin, at 269, there is a strong inference that lawyers who work together share confidences. Nor should the ever-present danger that disclosures will be made by staff solicitors to other members or staff solicitors elsewhere within the firm be neglected. In the large law firms there is generally a high ratio of staff to partners, many of whom, although under the supervision of a partner or partners, are fully involved in any significant matter. But that supervision cannot preclude the possibility of inappropriate internal discussions or idle chat. Staff solicitors may be individually responsible and alert to the fiduciary duties of a lawyer to his or her client, but they do not share responsibility for the firm and the stimulus it adds to ensure the need for strict confidentiality within a firm. Then, again, disclosure by a partner or staff solicitor may be inadvertent. In Equiticorp Holdings Ltd v Hawkins [1993] 2 NZLR 737, at 740, Henry J refers to the risk of inadvertent disclosure and observes that there is necessarily a close relationship amongst partners of a legal firm even when its membership is large and that, with continuing contact on a business and, to an extent, a social basis, it cannot sensibly be avoided. No doubt the risk of inadvertent disclosure is greater when, as is the case here, no problem or conflict or potential conflict was perceived to exist.

I am not impressed by the emphasis given in argument to the fact that Mr Harmos works in the Auckland office of RMMB while Mr Heenan is in the Wellington office. It is a factor, but only a weak factor. It ignores the interchange at partner level, both professional and social, which takes place between intercity offices and the technological and electronic advances which make distance largely irrelevant to communication. Certainly, Mr Galbraith qualified this point by saying that there was no “day to day contact”, but the reality is that the disclosure of information only takes a moment of one day. The interchange between the city offices is illustrated by Mr Green’s involvement in the present case. Mr Green is the senior tax partner in RMMB and is domiciled in Auckland. At Mr Heenan’s request he became involved in October 1995 in an advisory role in relation to the handling of the dispute with the Inland Revenue Department. He initially received from Mr Heenan a copy of the documentation relevant to the dispute and correspondence with the Inland Revenue Department. He maintained a satellite file of Mr Heenan’s main file at his office in Auckland. During the course of his involvement he received copies of the ongoing correspondence with the Inland Revenue Department and copies of notes of some of the meetings and discussions which took place between Mr Heenan and other solicitors and executives of Tower in the Wellington office. He also proposed drafts of letters to be sent to the Inland Revenue Department. He reviewed the material and provided comments to Mr Heenan as and when appropriate. He jointly took responsibility for the major letter of advice sent to Tower, although it was signed only by Mr Heenan, but did not otherwise have direct contact with the executives of Tower. His role concluded when the dispute with Inland Revenue Department was settled in April 1997. In such circumstances, it seems almost unreal to place any relevance upon the geographical separation of the offices in the present case - or indeed in any case.

When Tower objected to the situation which had continued for 18 months, RMMB bluntly advised that it did not hold information which was relevant to the acquisition of Tower. It denied that information on Tower’s affairs, its attitude to litigation, its corporate culture and its financial and taxation position were relevant to the firm’s role or the issues in question.

Although it has no necessary validity, the information in issue seems to have been dealt with by the parties and the Judge in the Court below in two parts; general information relevant to Tower’s operation and more specific information relating to its financial, commercial and managerial position. For convenience, I will follow the same division.

Mr Taylor summarised the general information as being information about Tower’s financial affairs, corporate culture, management’s approach, litigation strategies adopted by senior executives, the approach of Tower’s senior executives to the image of the Tower group, and its attitude to publicity and concerns with its image in financial and insurance market places. I share Gallen J’s view that this general information, particularly that relating to Tower’s financial affairs and its corporate approach and culture, would have been relevant to GPG’s instructions relating to the acquisition of Tower. Indeed, I believe that, if utilised by GPG’s advisers, it would be of greater value than that accepted by the Judge. It could, for example, assist in the formation of strategy. It could also assist in the preparation of cross-examination in litigation. It could also assist GPG’s cause in that Tower will or could be uncertain whether to call particular witnesses, such as Mr Taylor. To hold that the general information is of no value is to make a mockery of the lengths counsel go to in gathering “intelligence” about the strengths and weaknesses of their client’s opponent in the preparation of a case. Although the circumstances were entirely different, the value of general information of this kind was recognised in Black v Taylor, supra, per Cooke P at

406.

At the outset Mr Taylor was reluctant to provide a detailed description of the specific information imparted to RMMB for fear of further disseminating it to others. Subsequently, however, he provided considerable detail of the information involved in Tower’s instructions. It is not possible, because of its length, to set the specific information out in this judgment. Mr Taylor observed that Mr Heenan had regular and detailed meetings with him and senior executives of Tower during which financial information was freely tabled and discussed. Fees paid to RMMB over 18 months exceeded $200,000. A number of partners and solicitors in RMMB had, he deposed, intimate knowledge of Tower’s financial

and taxation position, including knowledge of certain provisions which directly impacted on the value of the Tower group and which, he claimed, had a material impact on the ability of any party to assess the true value of the group. Mr Taylor was particularly concerned about this information because it is pertinent to GPG’s criticism of Tower’s performance and a supposed rationale for the take-over.

Gallen J held that, when this material was looked at in combination, even though it is historic in nature, there was evidence to suggest that it could provide the basis for at least a general assessment of the figures in current terms. Such information, he believed, would have some relevance in assessing the advantages or otherwise of proceeding with a scheme. It might also, he said, provide some assistance in devising a particular strategy or approach and would clearly have relevance if the matter descended to an overall attempt to influence individual members of Tower. Credibility and weight, he thought, could be given to this information because of the way it had been obtained. It was gained in direct and official engagement with top management and official sources and was intended to be used in a dispute with the Inland Revenue Department where accuracy would be of significance. While the information might not have the significance for which Tower contended, he did not consider it could be ignored as being of no consequence. In the result, the learned Judge concluded that Mr Heenan possessed information which would be, and would be seen by any informed observer to be, to the advantage of GPG in pursuing its intended course of action. Elsewhere the Judge postulated that if Mr Heenan had been acting for GPG it would have been extremely unlikely that he would have felt able to accept instructions from Tower as a consideration of its tax liability would make available to him information which would be of assistance to GPG in the project it was mounting.

It would be true to say that this specific information became the focus of much of the oral argument in this Court. To the extent that it is necessary to enter upon this question, I am not convinced that the Judge of first instance was wrong in his assessment. Nor am I persuaded to the majority’s viewpoint that the information would not be relevant and of value. More particularly, I cannot accept that RMMB have discharged the onus upon it to negate the inference that there is a risk information will be exchanged.

In the first place, I consider that the courts confront formidable difficulties in seeking to evaluate the nature and relevance of specific commercial information of this kind. The courts are entering upon an area in which they are not expert. Indeed, I cannot see why the courts’ established reluctance to second-guess business decisions should not apply where the question is essentially one relating to the commercial significance of detailed financial, corporate and management information. Put succinctly, the courts cannot reliably foresee or assess the possible advantage of such information in all the possible situations which may develop.

In the second place, I do not accept that RMMB has demonstrated that the information is of no relevance to the dispute between GPG and Tower. Apart from a general denial, RMMB have not sought to refute the specific claims in evidence. Nor was there any effective cross-examination on the topic. It was not until the hearing of the appeal in this Court that a serious attempt was made to deal systematically with the specific information which came into RMMB’s possession as a result of acting for Tower. With his customary skill, Mr Galbraith advanced a comprehensive argument directed to showing that the information was of no significance in the context of GPG’s intended acquisition of Tower. Unquestionably, he cast some doubt on the value of the information. But I consider that the matter should have been traversed in evidence by RMMB. Bare denials are not enough. If need be, expert opinion evidence would be required. When faced with the detailed allegations made on oath by Mr Taylor, RMMB must shoulder the onus of resisting those allegations in some detail in evidence given on oath and subject to cross-examination.

For these reasons, I am of the view that it cannot be said that the information imparted to RMMB by Tower was not relevant and of some value to GPG and its advisers. This conclusion can be tested by taking the situation envisaged by the trial Judge and supposing that it was Mr Heenan who had received instructions to act for GPG. It would be repugnant to common-sense to suggest that the information which he had acquired in the course of acting for Tower would not be of value to him in pursuing GPG’s hostile

acquisition of Tower. The information should not be held to be of any lesser relevance or value simply because it is conveyed to another partner.

The final question under this heading is whether the risk which undoubtedly existed up to November 1997 has been removed by the subsequent safeguards adopted by RMMB. Clearly, the risk has been greatly reduced. RMMB’s resolve to avoid disclosure will also be reinforced by these proceedings. But, to my mind, I do not believe it can be fairly said that, in all the circumstances, the firm had displaced the inference that, in situations such as the present, a risk exists that information will be disclosed.

Overseas jurisdictions are at one in concluding that the lawyers must shoulder the burden of demonstrating there is no risk information will be disclosed. Once certain circumstances are established, various formula have found favour; an irrebuttable presumption, a rebuttable presumption, or an adverse inference requiring clear and convincing evidence before it will be displaced. See the discussion in MacDonald Estates v Martin, supra, at 258-270. Some such formula have been thought to be necessary because of the sheer difficulty faced by a client in establishing that information it has imparted has been communicated within the law firm. Indeed, other than in exceptional cases, it would be impossible for an aggrieved client to prove that any such information has been disclosed or misused. The majority in this case have held that where a law firm is in possession of relevant information, the Court will readily infer that there is a real or appreciable risk of disclosure in the absence of negating evidence of protection. Having regard to the difficulty a client faces, that standard must be the minimum standard which the law should insist upon. In my view, therefore, it becomes important that RMMB should properly discharge the onus resting on it to introduce evidence to negate the inference.

In this connection, Mr Galbraith thrust the trial Judge’s finding of fact that no confidential information had been made available by Mr Heenan to anyone else within RMMB to the forefront of his argument. It is to be noted, however, that the Judge’s finding relates to Mr Heenan only. In fact, two other partners and a number of staff solicitors were also involved in acting for Tower. The risk that staff solicitors will inadvertently or otherwise

discuss a confidential matter has been emphasised above. Nor does the Judge’s exoneration of Mr Heenan in the past address the question of the ongoing risk. That risk is to be assessed, as I have sought to demonstrate above, by making a realistic assessment of the potential for confidential information to be communicated within a law firm. I am unable to accept that, when that is done, RMMB have displaced the inference that there is a risk. Moreover, in this context it is directly relevant to have regard to the argument which I have advanced above to the effect that RMMB has failed to adduce sufficient evidence to negate Mr Taylor’s evidence relating to the specific information which he states was made available to RMMB.

The background is also relevant. For a period of 18 months no positive steps were taken to isolate Tower’s information simply because RMMB did not recognise any problem. Had such steps been taken immediately it might be possible to view RMMB’s attempt to displace the inference more favourably. But that is not the case. Not being advised that RMMB were acting for GPG, Tower continued to fully and freely impart its financial, commercial and management details to the firm, and RMMB then proceeded to act for both clients without any definite steps being taken to isolate Tower’s information from the risk of disclosure. Against this background, it is difficult to hold that the inference has been displaced. It taints any assessment of the present risk. As stated by the Supreme Court of Canada, the question ultimately comes down to a “trust me” plea, and, by any standards, the background in this case provides a significant barrier to the ready acceptance of that plea.

Nor is the present and ongoing disadvantage to Tower restricted to the risk information will be disclosed. Tower’s belief that information may have been disclosed, or might yet be disclosed, may well have an adverse effect on the corporation’s conduct in resisting the take-over. Its decision-making may be dogged by the persistent concern that it must allow for the possibility its previous free and full disclosure of all its internal workings and thinking may be utilised against it. I have already referred to this aspect. Although not restricted to Court proceedings, it is likely to be particularly acute in respect of proceedings which bear directly on the success or failure of the take-over. I have also elaborated this

point above. In those proceedings RMMB will appear, whether as solicitors or counsel, as officers of the Court. The judicial system cannot function properly if a party may gain an advantage, or the other party be put at a disadvantage, as a result of the actions of the lawyers acting in the matter. Nor is the reaction of the unsuccessful party irrelevant. As Speight J said in Turners and Growers Export Ltd v P & O Containers Ltd (14 September 1995, CP 628/86, at 3); “...there is a real danger that even a sensibly minded litigant, especially if it is to lose, would not be free from [the] pervasive thought that disadvantage or misfortune befell its case, possibly through disclosure of information which should not have occurred”. So, too, in this case, it is difficult to avoid the conclusion that Tower would, if unsuccessful in any critical proceedings relating to the take-over, harbour the suspicion that its fortunes never fell to be tried on a level playing field.

And the public perception?

Beginning with RMMB’s fundamental breach of loyalty to Tower I have pursued the matter to its inexorable conclusion. RMMB should not be acting for GPG and, failing of its own initiative to terminate its instructions with that company, it should be restrained by this Court from proceeding further. I have reached this view without resorting to the perception of the fair-minded or reasonable observer or informed public, concepts which were invoked by Gallen J on the basis of considerable authority. Had recourse to that concept been necessary, it would surely be thought to be beyond dispute that any fair-minded or reasonable observer, fully apprised of RMMB’s breach of its fiduciary duty of loyalty to Tower, its failure to take any or sufficient steps to avoid a situation in which there was an undoubted risk Tower’s private information could be communicated within the firm for a period of 18 months, and its failure to negate the inference of a present risk of disclosure with clear and convincing evidence, would consider an injunction imperative. An informed public would be askance if RMMB were free to take advantage of its earlier wrongdoing.

For the reasons which I have traversed earlier in this judgment, however, I would dismiss the appeal and affirm Gallen J’s decision that an injunction should issue to restrain RMMB from acting for GPG.

Solicitors

Hesketh Henry, Auckland for Appellant

Phillips Fox, Wellington for Respondent

IN THE COURT OF APPEAL OF NEW ZEALAND CA86/98

BETWEEN RUSSELL McVEAGH McKENZIE BARTLEET & CO

Appellant

AND TOWER CORPORATION Respondent

Coram: Richardson P Gault J

Henry J Thomas J Blanchard J

Hearing: 9 and 10 June 1998

Counsel: A R Galbraith QC and D M Connor for Appellant

M R Camp QC and A S McIntyre for Respondent

_{W M Wilson QC for Guinness Peat Group International Insurance}

Ltd

_{Judgment: 25 August 1998}

_{JUDGMENT OF BLANCHARD J}

I am in agreement with the judgment of Henry J and concur in the disposition of the appeal and cross-appeal in accordance with it.

The argument for Tower appears in part to have changed its focus in this Court. Tower asserts that Russell McVeagh accepted simultaneous and incompatible instructions from two parties whose interests were, and remain, adverse. It says there was a breach of

the fiduciary duty of loyalty which lawyers owe to their clients. The first client in time, here Tower, has the right to expect that unless there was an express limitation in the retainer freeing the law firm to do work for a party against the first client’s interests or in a particular instance the first client consents to acceptance by the lawyers of such a retainer for the second client, the firm will not do so. This duty of loyalty is said to exist notwithstanding

that there may be no risk at all of an escape via the law firm to the second client of information confidential to the first client and capable of assisting the second client against it and no danger of misuse by the law firm of its knowledge about the first client.

Mr Camp adopted a suggestion made by a member of the Court that it was of concern that Russell McVeagh, as they had to do in the circumstances, kept Tower in ignorance of their instructions from Warburgs/GPG. If informed, Tower might have chosen not to continue with Russell McVeagh even in the absence of any danger of leakage of information - simply because they would feel uncomfortable dealing with a firm prepared in such circumstances to act against them. They might, for example, feel unsure about being candid with Mr Heenan when consulting him on tax matters. If Russell McVeagh needed

to tell Tower of Warburgs’ approach and were unable to do so, it was said, they should have declined to act for Warburgs/GPG.

I consider that the constraints which the law imposes upon barristers and solicitors concerning acceptance of simultaneous instructions are not to be determined in this subjective manner and without adequate regard for the other considerations mentioned by Henry J in his penultimate paragraph. It is not difficult to conceive of situations in which a client’s interest will not in the least be affected by the fact that someone else in the law firm is at that moment acting for another party in a matter concerning the client and in respect of which the law firm is not acting for the client. The two matters on which Russell McVeagh presently continues to act for Tower provide a good example. Tower

apparently does not contend that they provide any basis for disqualifying Russell McVeagh from acting for GPG and has not seen fit to take the instructions elsewhere.

The Court has also to be alert to tactical objections made for an ulterior purpose. It is not to be assumed that the client’s expression of concern is necessarily well founded or to be taken at face value.

The ethical position is found in the Rules of Professional Conduct For Barristers and Solicitors adopted by the New Zealand Law Society. In the 4th Edition, published in 1996, there are the following rules:

1.01 The relationship between practitioner and client is one of confidence and trust which must never be abused.

1.02 A practitioner as a professional person must be available to the public and must not, without good cause, refuse to accept instructions for services within the practitioner’s fields of practice from any particular client or prospective client.

1.03 A practitioner must not act or continue to act for any person where there

is a conflict of interest between the practitioner on the one hand, and an existing or prospective client on the other hand.

1.04 A practitioner shall not act for more than one party in the same transaction or matter without the prior informed consent of both or all parties.

1.05 A practitioner must not act for a client against a former client of the practitioner when through prior knowledge of the former client or of his or her affairs which may be relevant to the matter, to so act would be or would have the potential to be to the detriment of the former client or could reasonably be expected to be objectionable to the former client.

These rules balance the requirement that practitioners be available to advise and appear in their chosen fields (the “cab rank” principle) against a restriction on their doing so when that might be antithetical to the legitimate interests of an existing or former client. If a case of simultaneous representation were to be referred to the Law Society it would consider whether the first client’s confidence and trust was being abused (r1.01) and whether there was truly a conflict of interest (r1.03). The Society might by way of analogy look at r1.05, which literally does not apply to simultaneous retainers, and ask whether through prior knowledge of the first client or its affairs, acting for the second client in a

particular matter was actually or potentially to the detriment of the first client or could thereby reasonably be expected to be objectionable to that client.

It is to be noted, however, that the concern of r1.05 is not with loyalty in the abstract but with the possibility that in acting for the second client the lawyer may use or disclose information and thereby harm the first client’s interests or that, if the lawyer so acted, the first client could reasonably find that action objectionable because of the lawyer’s knowledge of the first client. Stating what I understand to be the substance of the rule more briefly, acting for the second client is forbidden where the lawyer’s knowledge may endanger the first client’s interests or reasonably give rise to objection by the first client.

In my view a duty of loyalty depends upon the scope of the retainer and can arise only from the lawyer’s knowledge of the client and the client’s affairs. If that knowledge is and will be limited there may be no reasonable possibility of detrimental disclosure or misuse by the lawyer. If there is in fact no such possibility the client will have no good reason to raise objection. The client’s trust and confidence are not being abused.

In a situation of simultaneous representation on separate matters of clients who are unfriendly to one another, there is a need to consider not merely the information and knowledge of the first client which the lawyer already possesses but also that which may be gained in the future course of the retainer from that client. It may be very limited, so that

the information is of no particular or general value to an unfriendly party, perhaps because it is of historical significance only. Any glimpses which the lawyer is likely to have of the philosophy and procedures of the first client and its business and personnel may reveal only information so generalised as to be of no assistance to an adverse party, or may be nothing more than any intelligent observer could see from the outside.

The Court is not of course acting as an arbiter of ethics or morals. Ethical questions are for the Law Society. Nevertheless, they may inform the judgment of the Court and on my analysis the relevant ethical rules are broadly the same as the legal

obligations which the Court will enforce against lawyers by ordering a disqualification. Breach of the obligation may give rise also to a monetary sanction if provable loss is caused to the first client. However, because of the difficulty in proving loss, and, perhaps more importantly, because of the need to maintain public confidence in the integrity of officers of the Court, the Court will tend to favour the objecting client. It will take the view that the client should not be exposed to any real risk of disclosure of confidential information or of misuse of knowledge about the client gained by the law firm by reason of acting for the client. In law, therefore, a law firm has a duty to its client not to put itself in a position which, viewed cautiously but objectively, presents a real risk of such disclosure or misuse. In the absence of any such risk there can be no basis for objection by the client and no reason for the public to lose confidence in the profession because of the law firm’s

conduct.

One way of testing the matter in a particular case is to ask whether the law firm has acquired or is likely to acquire from the first client information which might be of value to the second client and which the second client would therefore, in the absence of any confidential obligation to the first client, be entitled to receive from the law firm. If the law firm’s information or knowledge of the affairs of the first client is and will remain irrelevant to the subject matter of the retainer for the second client or so generalised as to be of no consequence, then there is no need for the intervention of the Court.

If the Court finds that the law firm is by reason of its retainer for the first client privy to confidential information the disclosure of which to the second client has the potential to be detrimental, it will infer that disclosure has actually occurred or is likely to occur unless on a balance of probabilities the law firm negatives that concern. This does

not involve any presumption against the law firm; merely that if, in the Court’s judgment, the question is evenly balanced, the Court will err on the side of caution, conclude there is a

real risk and disqualify the law firm from acting for the second client. Proof by the law firm that disclosure has not occurred and is not likely to occur may be assisted by the existence of an operating system like a Chinese Wall but its existence will by no means be determinative. What the law firm will need to show will be substantially influenced by the

significance of the confidential information - how relevant might it be to the second client, and how detrimental would disclosure be to the first client?

The Court is very likely to find that there is a real risk of disclosure of any confidential information where, simultaneously or successively, either one individual lawyer acts or seeks to act for both clients or the individual lawyers separately acting within the firm for the clients usually work closely together, either physically or in the sense that they frequently co-operate on retainers.

Gallen J found, and was entitled to find, that Mr Heenan’s general knowledge about Tower, including its attitude towards tax matters, would not by itself justify the intervention of the Court. As to the knowledge of particular matters, Gallen J concluded that there was “evidence to suggest that it could provide the basis for at least a general assessment” of the comparable figures in current terms “both as aspects of the financial position and as indicating a responsibility of the management and its style of management for the results which are indicated.” He was not persuaded that it would necessarily have the significance for which Tower contended but did not consider it could be ignored as of no consequence.

In argument in this Court the particular information came down to three sheets of figures relating to 1990. There is nothing other than an unsupported assertion by Mr Taylor to prove that they have any current significance at all. I found Mr Galbraith’s argument to the contrary to be consistent with commonsense and entirely convincing. I have reached the conclusion that the Judge was wrong to find that disclosure of this material has any potential for detriment to Tower. The tax dispute was historical and quite unrelated to the activities of Warburgs/GPG.

I accept the Judge’s finding that to date there has been no actual disclosure.

Even if I am wrong to take the view that none of the information is properly to be regarded as having potential to harm Tower’s interest if disclosed, I am of the opinion that actual disclosure is now most unlikely to occur. Russell McVeagh no longer has access to the

three sheets, has given undertakings that there will be no disclosure, and has put in place means to ensure that the undertakings will be honoured.

Since preparing this judgment I have had the opportunity of reading and considering the views of Thomas J which have not led me to change my opinion.

Solicitors

Hesketh Henry, Auckland, for Appellant

Phillips Fox, Wellington, for Respondent