Seeking a pragmatic solution

Two recent High Court decisions in connection with jurisdiction in stakeholder claims and conflicts of interest demonstrate how the courts may be called upon to resolve irreconcilable compliance questions.

Compliance decisions are often complex, involving multifaceted consideration of competing interests. Risk assessment and taking appropriate steps to manage that risk are nuanced skills and may, as with these cases, require firms to recognise that an issue needs to be determined by the court.  

Most such cases in which the court gets involved will involve competing interests by clients who are willing to incur the costs and risk of litigation. Stakeholder claims where ownership of funds are in issue and conflicts/confidentiality cases where ownership of documents or rights of confidence are in issue are probably the most litigated examples of courts getting involved in issues of compliance. 

Stakeholder claims

On 14 July 2020, the court handed down judgment in the case of Stephenson Harwood LLP and (1) Medien Patentverwaltung AG and (2) Michael Kagan (as administrator of the estate of Irving Kagan) [2020] EWHC 1889 Ch. The case concerned the interaction between stakeholder claims and jurisdictional challenges. 

Stakeholder claims are, essentially, a form of trustee claim where a person in possession of funds in which they claim no personal interest can apply to the court for a direction as to how those funds should be disposed of. Made under CPR 86, such claims are designed to allow competing claimants to argue about the distribution of the funds. 

Stakeholder claims can be an invaluable tool for a solicitor who is uncertain as to what to do with disputed funds held in client account and offer a very low risk remedy. They are, of course, litigation which the firm has to manage and it is important to recognise the limitations of the regime. In this particular case, one of the parties claiming the right to funds sought to argue that the court should not have jurisdiction to determine the counterclaim raised by the other party. 

While recognising that, in the event of a jurisdictional challenge to such an application, the applicant would have to demonstrate proper grounds for jurisdiction within – in this case – the remit of the Lugano Convention, the court found that there had been acquiescence to the jurisdiction on the facts.

The court was, unfortunately, unable to reach a view on whether jurisdiction would have been established under the Convention since this was not argued. The judge merely commented that it would be unsatisfactory if Stephenson Harwood had been unable to have the issue adjudicated as a result of a successful jurisdictional challenge. 

The decision is an interesting review of the jurisdictional considerations which may arise on such applications. It is also a timely reminder that the jurisdiction is there for a reason, especially in a world where the alleged misuse of client funds can have extremely serious and far reaching consequences. 

It is easy to imagine how a situation in which multiple parties claiming ownership of funds held in client account may result in a complaint to the Solicitors Regulation Authority (SRA) by an aggrieved claimant if any attempt is made by the firm to resolve the issue without an application to court. Should that occur, it’s a pretty safe bet that you may be called upon to explain your position to the regulator. 

Transform

Questions concerning the use of client money account for the largest proportion of cases before the Solicitors Disciplinary Tribunal (SDT). However, issues arising from confidentiality, privilege and the management of conflicts of interest are also quite common. 

Solicitors ought, of course, to be fully aware of the numerous cases in recent years determining the nature and extent of claims to privilege in various circumstances. 

July 2020 brought us the case of Armstrong & Patchett (as joint administrators of the above-named company) v Berrymans Lace Mawer LLP and Travelers Insurance Company Limited to add to that list. The case essentially turns on the extent of the rights of administrators to require production of files which are the subject of a joint retainer (in this case, jointly with Travelers) without consent. 

Anyone familiar with the long running Transform saga, may be aware that the case involved group litigation against the Transform group arising out of defective breast implants. 

Attempts to make Travelers liable for costs of the entire group litigation, including those claims which were not insured under Travelers’ policies failed in the Supreme Court. This meant that large numbers of claimants were liable to pay costs to their solicitors despite not being able to recover damages since Transform went into administration. 

This particular case arose out of the administrators’ request for access to files held by Berrymans Lace Mawer (BLM) which were the subject of a joint retainer involving Transform and Travelers. 

The difficulty arose because Travelers raised concerns about the future use of those files in circumstances where the administrators had assigned causes of action against BLM and/or counsel to Hugh James Involegal LLP (HJI), an entity wholly owned by the partners of Hugh James, the solicitors for the claimants in the original group litigation. 

The terms of the assignment required the administrators to provide HJI with reasonable access to all files within their possession. Provision was also made for Hugh James to be instructed by HJI for the purposes of advising on any possible assigned claims. The Administrators sought the files from BLM under statutory powers, intending to hand them to HJI.

The scenario is somewhat unusual but the analysis conducted by the court and, in particular, the confirmation that the administrators’ right to the files did not override the joint privilege in the absence of consent is further confirmation – if it is needed – of the importance of preserving privilege. 

The court confirmed that it was relying on section 234 of the Insolvency Act and was not treating HJI as a third party as it was the direct assignee of the cause of action. The application was simply therefore treated as a step to get in property belonging to the company rather than as part of an inquiry into the company’s affairs. 

The court’s approach to the issue of whether or not the possibility of a conflict of interest could be managed by appropriate undertakings was incomplete in the absence of an application to restrain the instruction of Hugh James although the judge expressed the view that the issues relied upon to found the possibility of a conflict of interest were somewhat remote. 

This was a case which turned very much on its facts but it should be a worthwhile study for those considering questions of joint privilege and conflicts of interest. My own impression was the court’s view on these questions was rather more pragmatic than might have been expected if left to the interpretation of the SRA. 

It will be interesting to see what the next steps in this long running saga will be.  

Susanna Heley is a partner at RadcliffesLeBrasseur rlb-law.com

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