The conflict debate continues to divide clients and advisers. Leigh Jackson finds that upfront communication goes a long way

It is a cliche to say that in-house lawyers and their private practice counterparts see things differently, but anyone who believes that the modern profession is overcoming the client/adviser divide should simply discuss conflicts.

A reminder of how great the gap is on this sensitive matter comes from a recent decision by JPMorgan to stop instructing Linklaters, one of its key firms, over a piece of litigation.

The reason for this drastic step was that Linklaters was already acting for Barclays Bank in a piece of litigation against Bear Stearns, the Wall Street investment bank acquired by JPMorgan in March this year.

Although lawyers have fallen foul of banking clients due to litigation-related conflicts – notably Freshfields Bruckhaus Deringer and Citibank and Slaughter and May and Merrill Lynch – what made this case so unusual was that Linklaters was acting against Bear Stearns before JPMorgan had any reasonable intention of acquiring it.

As such, there was no question of the firm attempting to aggressively 'push the envelope' in terms of taking a lucrative instruction against a client's interest, which is what typically triggers such a strong negative reaction.

But what has been interesting from the client perspective is the gulf between how the fate of Linklaters has been viewed by private practice on one hand and in-house lawyers on the other.

While the law firm's peer group has expressed widespread sympathy with its position, most in-house lawyers still see this type of stance from a client as entirely understandable.

Michael Ellis, director and associate general counsel of GlobeOp Financial Services – an independent financial technology specialist – argues that litigating against a client would represent a conflict of interest and could cause untold damage to the relationship between the firm and the company.

Claiming that such actions should result in a company severing ties with an adviser, he says: "[The firm] should pass it on to another firm. Some do not want to give away business but it could end up ruining a relationship. In such an instance, the law firm should be fired. It is not acceptable."

Julia Chain, of H4 legal consultancy, which advises both law firms and in-house legal departments, agrees that firms should refrain from litigating against clients even if the initial action did not seem sufficiently serious.

"It is unacceptable, in any circumstance. You never know where it will end. Litigation has a habit of spreading out," she says. "It is strange for a firm that is litigating against one of its clients to say it is working in its best interests."

GE European general counsel Mark Elborne takes a pragmatic view of such a situation but stresses that ultimately the responsibility lies with external advisers to manage tensions between two clients' different positions, which could see them lose business.

"Firms have to weigh up the conflict of interest rules with their own commercial interests," says Elborne. "The firm has to make a judgement call about information it holds in relation to its clients. The duty of confidentiality to an existing client always overrides the duty of disclosure to a new client."

Such episodes also illustrate the differing ways in which clients and advisers view potential conflicts. While the vast majority of City partners regard a case such as the Linklaters and Bear Stearns as not constituting a legal conflict of interest, many clients take a more-wide ranging view of a potential conflict.

However, Brick Court Chambers' Charles Hollander QC, a specialist on conflict issues, argues that general counsel should make a clear distinction between a commercial and legal conflict of interest when discussing these issues with advisers. He believes that while Linklaters' position might not have pleased the parties, it did not represent a serious conflict of interests. "I do not think it is a real issue. It is a commercial conflict and banks don't like it. There is no real legal issue here," says Hollander.

Disney European general counsel, Peter Wiley, is another who falls in the pragmatic camp. He says: "Sometimes you realise you are not your firm's biggest clients and on softer issues without legal conflict it can be uncomfortable. But clients do have to be realistic how important they and other clients are."

He adds: "With specialist advice in relation to an industry issue, competitors may be seeking the same advice from only a small group of lawyers that are usable and it is a race to book them."

It is also notable that despite 10 years of debate regarding the ethics of conflicts and business acceptance and a major overhaul of the UK's conflict rules, so little consensus exists on what a conflict is, let alone how to handle it.

But while views differ widely on the issue, a growing number of general counsel are turning to more formalised terms of engagement to address this risk.

Elborne says GE requires its firms to agree to a number of terms and conditions before they are instructed, setting out their position in such cases. "We have a GE outside counsel policy (OCP) which requires a firm to seek a waiver if they wish to act against us," he says.

"Whenever we instruct a firm they have to sign our OCP, which imposes a set of conditions. Firms we may instruct may act against us but we have conditions in place."

Wiley agrees that the terms of the relationship should be formally decided before instruction.

"It should be spelt out in an engagement document and the parties should be upfront about it," he says. "If the company shares internal perceptions with the law firm there is no misunderstanding. If not, it is a lot of work."

He adds: "There is plenty of technology and other ways to ensure that larger firms do not inadvertently act against clients. However, some companies may not mind and in some instances it may be unavoidable."

On the most basic level, most in-house counsel agree that the most effective way to avoid a conflict is simply by improving communication.

Nicolas Taylor, European general counsel of Jones Lang La Salle, says: "Co-operative relationships are crucial – firms and companies must confer and consult. Most times it is possible to find compromises to manage conflicts."

Taylor's view is echoed by a number of in-house counsel, who also believe that closer links between firms and clients is the most logical way to ensure better relations.

GlobeOp's Ellis claims that time spent communicating helps build successful partnerships. He adds: "Communication is vital, the reason things break down is the lack of communication. The relationship partners need to spend more quality time with all their clients."

Given the obvious potential for resentment between client and advisers on this issue, such advice is hard to quibble with.