Terms of Engagement

As clients become more sophisticated, law firms are challenged to keep up on client conflicts

It used to be when a lawyer was going to meet with general counsel, they were going to see a client. Today, it may just as easily be someone at their own firm.

With risk management increasingly fraught, avoiding client conflicts is key. Many law firms now have dedicated general counsel to review the terms of engagement letters, which include conflict provisions, and advise partners on negotiating waivers where appropriate.

“Client conflicts are probably one of the greatest risk-management issues for a law firm,” says Terry Burgoyne, general counsel at Osler Hoskin & Harcourt LLP. “We deal with it daily, and the vast majority are easily resolved. But if one gets it wrong, it can have a number of implications. It can have a real liability impact, and some firms have stumbled on that. And, more importantly, it can have an impact on client relations.”

There are two types of client conflicts, he says. One is where there is a straight legal conflict: The firm can’t act for both sides on an adversarial issue. The other is a business conflict where, for example, the firm takes on a new client who competes with an existing client, but to advise them in an entirely different practice area.

“While there’s no strict legal conflict, there’s an issue that would require us to choose between one engagement or the other, or turn down a new engagement because it may make a very good client unhappy.”

Those are hard decisions, he says, and not just because they involve difficult discussions with clients. They also cut to the heart of internal law firm politics.

“You can have two partners, each responsible for a client, and there’s some business issue where you have to choose between one of them,” says Burgoyne, a former managing partner. “That’s going to make not just one client unhappy but also one partner whose economic well-being derives from that client unhappy as well.”

The emergence of disruptive technology in law is not affecting how conflicts are handled per se, he says, “but it’s speeding everything up.” The bigger challenge is the contracting Canadian legal market combined with the consolidating business market, “which leads to us bumping into one another far more than in the old days. And Canadian clients are used to that.”

U.S. companies retaining Canadian counsel on cross-border matters are not.

Burgoyne says they will sometimes ask for an “issue-conflict” guarantee. “They’ll sometimes say you have to notify them before you take a position on behalf of another client — in a totally unrelated case — that be might contrary to the way they’d like that issue to be resolved. On those we push back almost universally.

“For one thing, you don’t know the issues they care about. And we have no way of searching for that, for issues we can’t identify later on.”

He says U.S. companies may also try to impose conflict strictures “that say: ‘If you do any little work for us you can’t work for any other entity in our broad group.’ And there may be 300 companies in this group, none of which you’ve dealt with before, and many of them having different names, making it difficult to identify them.”

Burgoyne says when they explain the dynamics of the Canadian market to U.S. in-house counsel, they generally back off the requirement.

That said, he says Osler walks away from “a not immaterial amount” of work, between 5% and 10% of potential engagements, for conflicts reasons.

WITH CONFLICT determinations becoming more complex and the push for speed on potential new matters, Kenneth Crofoot, general counsel of Goodmans LLP, says many law firms decided to “not rely on a litigator who may be in court that day to decide the issue. Most firms now have general counsel so that they have centralized policies and consistent decision-making in this sphere.”

Clients, too, are getting more and more sophisticated about conflicts and, “from the law firm’s point of view, both in a good and bad way.

“I find clients are more understanding in many cases that waiving conflicts is appropriate and that firms have systems to put up walls and insulate information, which means everyone on a matter can get the counsel of their choice. On the bad side, a lot of client terms of engagement we’re seeing from large international corporations are pretty onerous.”

When he talks about onerous, he’s talking about boilerplate that can be 40 pages long, “with conflicts expressed much more widely than under our law. They extend to every single entity that’s part of their empire; there can be 500 or more companies involved — which is a bit of a problem to put into your conflict system.”

U.S. and other international clients may also express conflicts as business conflicts rather than just legal interests.

“They provide that it can be a conflict for us to represent a party or take a stance in any proceeding that’s inconsistent with their business interests. When you consider that would cover all these 500 companies, how are we supposed to know what their current business interests would be in all those operations? We have no way of tracking that.”

He says a more homegrown challenge is the increasing number of proxy battles in Canada. “Before you take on the matter, you want to look at who’s on the board, who the individuals are, and determine whether the firm has a relationship with someone you’re going to end up fighting with. You may want to consider you may not want to get involved in it.”

Most times, says Crofoot, negotiation can lead to more manageable conflict terms, adding that Goodmans walks away from only “1% to 2%” of thousands of potential matters it deals with each year because conflict issues can’t be resolved.

IF CONFLICTS are a headache for national firms in Canada, you’d think they’d be a migraine for Norton Rose Fulbright LLP, which has roughly 4,000 lawyers in more than 50 offices around the world. Global chair Walied Soliman is adamant they’re not.

“I’ve been in London in global meetings for the last two days,” he says from the U.K. capital. “I can tell you the topic of a client conflict came up exactly once.”

One of the benefits of being a large international firm, he says, is the up-close access to best practices in areas like conflicts in so many different jurisdictions.

The model Norton Rose uses is not a GC, but five regional compliance offices with teams that oversee regional and global conflicts as well as other risk-management issues. In addition, the firm has a section that does nothing but look at the reputational risk of potential new clients.

The teams are constantly in touch with another, Soliman says, and potential new intake matters are examined both objectively and subjectively — objectively for any possible legal conflict, and subjectively for business ramifications.

The regulations on conflicts can be different in different countries, he acknowledges, but when differing standards apply, “you work through it.

“Where you have an issue with a jurisdiction, you’re respectful of it. It doesn’t necessarily have to be a different standard in the law; it could be just a sensitive business-type issue. We engage very constructively with our clients. I can assure you it [conflicts] is not a top issue internally.

“We know who we are, we know what practice areas we’re good at, we know what business we want, and we’re very mindful that new matters we take not disturb our existing clients. You don’t want to do something that’s going to hurt your partner, whether that partner is in Toronto, Sydney or London.”

Soliman, who’s also chair of Norton Rose Fulbright Canada LLP and co-chair of the Canadian special situations team, says even he has had to let things go. “I had an interesting opportunity in my practice area that I had to turn away last week because it presented a business conflict. We’re very careful about bringing in new files.”

NO ONE likes to give up work. So, when it comes to setting out expectations around client conflicts, engagement letters are “really important,” says Sue Grundy, general counsel at Blake Cassels & Graydon LLP.

Conflicts are really a two-part process she says. Not legal and business. Legal and relationships. “Conflicts are about relationships. Very, very commonly, even if there is a conflict, the solution in almost all cases is to get a waiver from the client who says: ‘That’s fine.’”

Best practice dictates that the potential client be told as quickly as possible that the firm does some work in a different area and on different matters for the client on the other side, she says, and request permission to contact them to make sure it’s OK.

“The reason for that is it’s confidential, the client has asked us to take on the proposed mandate for them. We need to respect our responsibilities not just with respect to conflicts but also with respect to confidentiality.”

One trend that’s developing is clients are asking more questions, she says. Through outside counsel guidelines or Requests for Proposals, some companies are trying to find out whether the law firm acts for any of its competitors “or saying they don’t want us to take on matters that would be taking legal positions they don’t like.

“That one’s a very difficult one to monitor because we can have a data base of who the clients are, but we don’t know the details of all the work or all the issues that have come up in the different cases or that may come up in the future.”

The firm doesn’t want to take legal positions harmful to the business interests of longstanding good clients, she says, nor does it want to tie its hands and prevent its lawyers from taking the strongest possible stance for another client in the future.

“It’s very difficult to promise that in every single case we would do that. We’ve found that’s a difficult one to deal with, and we try to explain why.”

Grundy helps out the lawyer negotiating the terms of engagement, but usually it’s behind the scenes rather than across the table. “What I find is the conversation works the best when the lawyer the client knows is the one talking to them about conflict issues, rather than someone they haven’t met like me.

Like Goodmans, she says Blakes walks away from some business over conflict demands that can’t be negotiated — although she says it’s very difficult to quantify how much.

The cost of failure to handle this properly was seen last fall when a firm in Toronto was ordered to pay multi-million in a conflicts case.

Crofoot of Goodmans says the decision sent a ripple through the profession. “I think what the community took away was the importance of defining who your client is. The conflict was created because there was a conflict over who the firm was actually representing.”

The terms of engagement: Like a diamond, it seems, for law firms, clarity is essential.

Sandra Rubin is a writer and consultant based in Toronto

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