Marks and Spencer Group Plc & Anor v Freshfields Bruckhaus Deringer [2004] EWCA Civ 741

[2004] EWCA Civ 741
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION ADMINISTRATIVE COURT
(MR JUSTICE LAWRENCE COLLINS)
Venue Royal Courts of JusticeDate Thursday, 3 June 2004
The Strand
London, WC2A 2LL
B E F O R E:
LORD JUSTICE PILL
LORD JUSTICE KAY
(1) MARKS AND SPENCER GROUP PLC
(2) MARKS AND SPENCER PLC
Proposed Respondents
-v-
FRESHFIELDS BRUCKHAUS DERINGER
Applicants
(Computer-Aided Transcript of the Stenograph Notes of
Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR M BRINDLE QC AND MR E LEVEY (instructed by Freshfields Bruckhaus Deringer, London EC4Y 1HS) appeared on behalf of the Applicants
MR K MacLEAN QC AND MR J GOLDSMITH (instructed by Slaughter and May, London EC1Y 8YY) Appeared on behalf of the Proposed Respondents
J U D G M E N T
Thursday, 3 June 2004
Between
Marks and Spencer Group Plc & AnorAppellantFreshfields Bruckhaus DeringerRespondent

LORD JUSTICE PILL:

This

[1]is an application for permission to appeal against an order made yesterday by Lawrence Collins J as vacation judge. Having regard to the circumstances, I give judgment this afternoon. I do not propose to recite the facts in detail, adopting as I gratefully do, the statement of the background in the judgment of Lawrence Collins J. We do not have a transcript approved by him but we do have a draft note which has been the subject of discussion between the parties and, if I may say so, it is a careful note and I would be surprised if the learned judge had any significant corrections which he needed to make to it.[2]This is a dispute between Marks and Spencer Group Plc and Freshfields Bruckhaus Deringer, a firm of City solicitors. They seek to act for a group of organisations who are making an offer for Marks and Spencer, that offer to be made on behalf of a consortium. Those who heard the 8.00 news this morning will have heard that an offer has now been made. It was not made at the time when Lawrence Collins J heard submissions on the day before yesterday. I understand he heard further submissions yesterday and then gave the judgment to which I have referred. His order was that:
"The Defendant [Freshfields], be restrained whether acting by its partners, employees or agents or otherwise howsoever from acting for or advising or otherwise assisting in Revival Acquisitions Limited and/or Philip Green and/or any other person or entity owned and/or controlled by them and/or acting in concert with them in connection with any acquisition or potential acquisition of the shares, assets or business of the Claimants [Marks and Spencer]. 2. The injunction referred to in paragraph 1 above be stayed until 10.30 am on 3 June 2004."
The judge ordered Freshfields to pay the costs of Marks and Spencer and refused permission to appeal.[3]The papers arrived with Kay LJ and I as vacation duty judges in the Court of Appeal this morning and we agreed to hear at 2.00 pm the application for permission to appeal with the appeal to follow if permission was granted. We have over a period of something over two hours heard helpful submissions from Mr Brindle QC on behalf of the applicants and on some of the points Mr MacLean QC on behalf of the proposed respondents. As I have indicated, I take the judgment of Lawrence Collins J, as stated in the note agreed between the parties, as read and refer to the submissions which have been made this afternoon.[4]Mr Brindle refers to the two points, on both of which Freshfields lost yesterday, first as to whether there was a conflict of interest by reason of the fact that in certain matters they had acted for Marks and Spencer, and secondly, whether they were in possession of information confidential as between them and Marks and Spencer as a result of their having acted in a number of matters for Marks and Spencer which meant that, quite apart from the question of conflict of interest, whether they could not properly act for the consortium referred to in the order made by the judge.[5]The judge pointed out that Freshfields, by reason of their acting in previous years for Marks and Spencer, have charged £1 million to £1.5 million in fees. Mr Brindle points out that most of the cases in this area of the law are on the confidential information aspect. There are many fewer cases on that of conflict of interest. He has referred to the double employment rule and submits that the cases there, by reference to the leading textbook on the subject, that of Messrs Hollander and Salzedo, "Conflicts of Interest & Chinese Walls" (2000), deal with single transaction cases. He challenges the application of the rule to cases such as the present where it is in a different matter that the solicitors have acted for the client who is challenging their ability to act in the disputed matter.[6]The leading case in this branch of the law is now the decision of the House of Lords in Bolkiah v KPMG [1999] 2 AC 222, the main speech being given by Lord Millett. Parts of the judgment were cited by Lawrence Collins J. The entire passage from page 234-238 is relevant in present circumstances, but I will limit the amount of citation I make. At page 234H:
"My Lords, I would affirm this as the basis of the court's jurisdiction to intervene on behalf of a former client. It is otherwise where the court's intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation."
Under the heading "The extent of the solicitor's duty" and "Degree of risk", Lord Millett considered Rakusen's case [1912] 1 Ch 831, and continued at page 236E:
"My Lords, I regard the criticisms which have been made of the test supposed to have been laid down in Rakusen's case [1912] 1 Ch 831 as well founded. It imposes an unfair burden on the former client, exposes him to a potential and avoidable risk to which he has not consented, and fails to give him a sufficient assurance that his confidence will be respected. It also exposes the solicitor to a degree of uncertainty which could inhibit him in his dealings with the second client when he cannot be sure that he has correctly identified the source of his information. It is in any case difficult to discern any justification in principle for a rule which exposes a former client without his consent to any avoidable risk, however slight, that information which he has imparted in confidence in the course of a fiduciary relationship may come into the possession of a third party and be used to his disadvantage. Where in addition the information in question is not only confidential but also privileged, the case for a strict approach is unanswerable. Anything less fails to give effect to the policy on which legal professional privilege is based. It is of overriding importance for the proper administration of justice that a client should be able to have complete confidence that what he tells his lawyer will remain secret. This is a matter of perception as well as substance. It is of the highest importance to the administration of justice that a solicitor or other person in possession of confidential and privileged information should not act in any way that might appear to put that information at risk of coming into the hands of someone with an adverse interest."
[7]Having considered possible ways of putting the test, Lord Millett added at page 237A:
"I prefer simply to say that the court should intervene unless it is satisfied that there is no risk of disclosure. It goes without saying that the risk must be a real one, and not merely fanciful or theoretical. But it need not be substantial."
[8]Having considered a decision of the New Zealand Court of Appeal, Lord Millett stated at page 237F:
"This would run counter to the fundamental principle of equity that a fiduciary may not put his own interest or those of another client before those of his principal. In my view no solicitor should, without the consent of his former client, accept instructions unless, viewed objectively, his doing so will not increase the risk that information which is confidential to the former client may come into the possession of a party with an adverse interest."
[9]Mr Brindle submits that Bolkiah, despite the generality of Lord Millett's terminology, was a "same transaction" case, as was an earlier case Bristol and West Building Society vMothew [1998] Ch 1 where Millett LJ (as he then was) had made a general statement to the same effect as that I have cited from Bolkiah at 234H.[10]Mr Brindle submits that the principle cannot extend beyond the same transaction situation. He gave examples which indicate situations with no possible conflict of interest arising from the fact that a solicitor's firm, which may of course have a number of branches spread around the country and abroad, is in one transaction acting contrary to a client for whom it acts on another. I would accept that there must be a degree of relationship between the two transactions, but I am quite unable to accept the submission that the language used by Lord Millett in Bolkiah and the comparative strictness, with respect, with which he has stated the principles in this area of the law is confined to same transaction cases.[11]Moreover, while there must be limits upon the application of the principle, it is, in my judgment, a sound one and I accept the submission of Mr MacLean on that point. The court must consider what the relationship is between the two transactions concerned. As stated in the judgment of Lawrence Collins J, the transaction, which was the subject of submissions before him and before this court and upon which the his judgment was mainly based, was the retention of Freshfields to advise in relation to Marks and Spencer's contractual arrangements with Mr George Davies in relation to Per Una, a project which is known as "Project George".

The judge stated:

"I think it is well-known that since it was introduced it is one of Marks and Spencer's most successful and profitable lines."
[12]Mr Brindle referred to the judgment of Upjohn LJ in Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606, where reference is made to the fact that there must be a real conflict and not a theoretical conflict. He referred also to the judgment of Pumfrey J in Re Baron [2000] 1 BCLC 272 where the learned judge referred to the need for a reasonable apprehension of potential conflict on the part of the former client and not a "mere theoretical possibility."[13]It is important, as Pumfrey J recognised, to analyse the facts of the particular case. Mr Brindle points out that his clients were never the main corporate advisers of Marks and Spencer. He says they could not now act for Marks and Spencer, but we were not told why they could not so act - whether it was for commercial reasons or reasons connected with professional conduct. He has emphasised what he submits would be the adverse effect of a judgment against his clients in this case by way of preventing those involved in situations such as the present from obtaining advice from the lawyers of their choice, this being a comparatively restricted field and a field which is a specialist one. The Davies instructions which his clients had had were not general instructions but instructions to deal with a specific situation. There was no general duty on his clients to advise Marks and Spencer. The Davies arrangements were not interlinked with the present takeover bid.[14]He points out that the matter about Marks and Spencer complain is the information in possession of his clients. There was no duty upon his clients to notify Marks and Spencer that they were involved in an offer for the takeover of the company. Mr Brindle relies upon the judgment of Chadwick LJ, to which reference is made in Hollander & Salzedo at paragraph 5-06, the reference being to Bristol andWest Building Society v Baden Barnes Groves, November 22, 1996 (unreported):
"In my view, the words 'if in the course of doing the work he is instructed to do' reflect an important and significant qualification to the solicitor's duty to disclose information relevant to the lending risk. A solicitor is obliged to disclose information which comes into his possession in the course of doing the work which the lender has instructed him to do; but he is not obliged to disclose information which has come into his possession independently of any work which the lender has instructed him to do - including, for example, information which has come into his possession as a result of earlier transactions in which he has been retained by the borrower."
That, in my view, is only one aspect of the present case: whether there was an obligation on the applicants to notify Marks and Spencer of the proposed offer. What has to be considered is whether in the circumstances as a whole there was in the light of the authorities a conflict of interest which prevented the applicants from acting for the consortium who were to bid for Marks and Spencer.[15]Mr Brindle submits that the applicants were not acting against Marks and Spencer; that in a takeover situation there is not necessarily a confrontation. There may be a friendly arrangement, and he emphasises the duty upon a Board of Directors to act in the interest of the shareholders so that they may be obliged to make a certain recommendation, a recommendation which may accord with the advice which is given by the applicants to the consortium.[16]I reject that submission entirely. It is suggested this raises a novel point which may distinguish the case from an application of the principles stated by Lord Millett. In my judgment, there is plainly a potential conflict of interest involved. This is in no sense an indication of what may happen, as to which I have no idea whatever, but it cannot be assumed that the arrangements between the parties involved will be on a friendly basis. It is not right that a solicitor is entitled to wait in a takeover situation until it is clear whether the bid is going to be a friendly or a hostile one before he decides whether or not to act. It is said against the judge that he was speculating as to what might happen in the future. While I accept that the situation is not, to adopt Mr Brindle's terminology, necessarily one of "we against them" there is certainly a potential that a situation of conflict may arise; and the applicants are not entitled to assume that it would not.[17]Since the hearing before Lawrence Collins J a second witness statement has been made by Mr Barry John O'Brien on behalf of the applicants. That includes an offer on behalf of the applicants "expressly to undertake not to advise the Revival Consortium on any aspect of the Davies Contractual Arrangements. The Revival Consortium has agreed not to seek such advice from Freshfields."[18]In my judgment, the preparedness to give such an undertaking at this stage cannot resolve the question whether a conflict of interest has existed and still exists on the basis of the applicant's past services to Marks and Spencer. The conflict is not avoided by the offer of an undertaking such as that.[19]Submissions have been made as to the present position of the applicants in relation to their clients or, as it may be argued, former clients, Marks and Spencer, in relation to the Davies arrangements. Mr Brindle accepts that the applicants have not resigned from their position as advisers on that matter to Marks and Spencer. The point is made on Marks and Spencer's behalf that the retainer has not come to an end.[20]It is not necessary for present purposes to resolve the present position as to the status of the applicants as Marks and Spencer solicitors with respect to those transactions. Nor is it necessary to consider the rights which the parties may exercise following the judgment of the court in this case. But it is for the court to analyse, as it was for Lawrence Collins J to analyse, the nature of the transactions in which advice has been given and whether within the meaning of the authorities a conflict of interest exists.

The judge dealt with the matter at paragraph 25 of his judgment:

"I am satisfied that there is a real or serious risk of conflict. The Davies contract is one of Marks and Spencer's most important contracts and I accept that it is of considerable significance to Marks and Spencer. It will also form part of the deliberations undertaken by the Consortium as part of their bid tactics and it does seem likely that Freshfields will find themselves putting their name to a document which may well be critical of current Marks and Spencer management and the Davies contractual arrangements, which will be in conflict with their duties to Marks and Spencer, particularly as I was told (although it is not in evidence) that steps could be taken by Marks and Spencer to ensure the contract continues irrespective of the bid."
[22]Mr Brindle submits, and there is force in this submission, that the question of whether there is a conflict of interest does not necessarily turn upon the possibility that the solicitors may have to give advice which "may well be critical of current Marks and Spencer management". He accepts that the example given in paragraph 25 to demonstrate the existence of a conflict of interest, if not a good example, does not defeat the underlying point on the judge's underlying conclusion that there is a conflict of interest. Mr Brindle submits, however, that it is examples such as these which reveal whether there is a conflict of interest, and that the absence of a conflict of interest is demonstrated by the fact that, when one looks for examples, they do not fully stand examination as demonstrating the existence of a conflict. The question which must be asked, he submits, is how real the risk is; it will have a very general detrimental effect on the market place if in situations such as the present the applicants are not entitled to act in a takeover situation.[23]In my judgment, the judge was correct in the conclusion which he reached. I said that I do not propose to set out the full background of the advice given with respect to the Davies arrangements. It is clear from the evidence before the court that advice for which £200,000 was charged was given and advice has, since 2001 when the arrangement was made, been given in relation to a possible rearrangement with the Davies interest. The judge has dealt with this. There is considerable amount of evidence about it. Applying the principles stated by Lord Millett the judge was correct, in my view, to consider that there was a conflict of interest such that it is not appropriate for the applicants to appear for the consortium in the takeover bid. Moreover, it is not arguable that this court will reach a different conclusion.[24]As to the question of confidence, Mr Brindle makes the submission that a broader approach should be taken in takeover cases: the concept of confidentiality should be given a more limited operation. He relies upon statements made by Lord Denning MR in Dunford & Elliot Ltd v Johnson &Firth Brown Ltd [1977] 1 Lloyd's LR 505. I do not find that judgment in the circumstances of the present case as furthering the submissions of the applicants. A report which had been prepared confidentially was disclosed to 43 per cent of shareholders of a company (the institutional shareholders); and it was held that the other 57 per cent were entitled to the information. Lord Denning said:
"This widespread use of the information drives a hole into the blanket of confidence; especially when that information is being used - or, shall I say misused - for the benefit some potential shareholders, and not for the benefit of the others. So much so that it would not be reasonable that the stipulation for confidence should be enforced."
Referring to the decision of Laddie J in Young and Others vRobson Rhodes and Another [1999] 3 All ER 524, Mr Brindle has submitted that the courts have shown a willingness when questions of confidence do arise to accept Chinese Wall arrangements which the applicants are prepared to claim to have put into effect in the present case. He submits that Chinese Walls can be created ad hoc; the question is a pragmatic one. In a further statement Mr O'Brien is prepared to go to great lengths, he submits, to create walls which would meet the confidentiality problem, including relocating staff working on the rival consortium bid to office facilities "which are physically separate from our main London office facilities." Other proposals are also made. A document has been signed by all involved saying that they will not receive information confidential to Marks and Spencer from the applicants and have not done so. Mr MacLean has made the point that it is at a very late stage that the Chinese Walls have been set up. Clearly it is not easy for lay people such as those who have received information from Freshfields to know whether or not it is confidential, but Mr Brindlepoints out that that is a situation which will arise in every such case and there are cases, and he submits this is one of them, where the undertaking given on behalf of the applicants, and those to whom advice has been given, can be relied upon.[25]The submission has been made that it is in the applicant's favour that, as soon as they became aware of the fact that the consortium made known that the "Davies Contractual arrangements would be likely to be the subject of a due diligence question by Mr Green when seeking a recommendation from the M&S board in respect of any proposed offer", steps were immediately taken to take appropriate remedial action.[26]The point can, in my judgment, be made with some force in the opposite direction, that had the applicants had a sufficient system for preventing conflicts of interest from arising and legitimate allegations of breach of confidence arising, the fact that they had advised in a substantial way about the Davies arrangements would have alerted them at any rate to the possibility that a conflict of interest had arisen. They submit, and they stand on their submission, that there is no conflict of interest, that there is no possibility of breach of confidence in the particular circumstances of this case. In my judgment that submission fails, and having considered the evidence I have to say that I find it surprising that it took the due diligence application on behalf of the Consortium to alert the applicants of the problem which Marks and Spencer say is present. In my judgment, there is a conflict of interest here. Moreover, I agree with the conclusion of the judge that a breach of confidence situation arises. The judge dealt with this point at paragraph 27 of his judgment:
"So far as confidential information is concerned, it is obviously a huge amount of confidential information within Freshfields in relation to Marks and Spencer's affairs through acting for it over the years, some of which may be material to the bid, if only to be discarded. I cannot see, even with a firm the size of Freshfields, that effective information barriers can be put in place given the very large number of people involved, even on the two matters. There must be very many Freshfields people with knowledge of Marks and Spencer's confidential information. In those circumstances I am satisfied that the Chinese Walls cannot be or be seen to be sufficient."
[27]The criticism has been made that there is no reasoning to support that conclusion. There is no detail to demonstrate where the breach of confidentiality arises. It may be that the judge was to some extent constrained by the confidentiality of some of the information involved. The applicants agree that there is material relevant to the present issue which Marks and Spencer are entitled to say should not be publicly revealed. At the request of Marks and Spencer without objection from Mr Brindle for the applicants, the court heard certain matters in private session. This court has not been invited, and neither was Lawrence Collins J, to make a separate confidential judgment. It is agreed that judgment can be given publicly.[28]In my judgment, upon the material before him Lawrence Collins J was entitled to reach the conclusion which he spelt out in his paragraph 27. Moreover, he does at paragraph 10 indicate by way of headings the points made by Marks and Spencer on the confidentiality issue:
"Freshfields have dealt with the majority of Marks and Spencer's high-end and complex litigation and other commercial and employment matters. They are therefore in possession of confidential information relating to pricing, supply chains, including the terms of Marks and Spencer's supplier contracts, Marks and Spencer's pricing policies, supply volumes and their attitude to termination and renewal. They acquired information on logistical information, dependency on food supply lines at peak trading periods and the Per Una contractual terms and senior management terms."
Almost all that is generally stated. The learned judge then goes on to deal with a particular matter which was the subject of evidence, and that is the Baird litigation.[29]Mr Brindle has accepted that there is no detailed evidence on behalf of the applicants to defeat that part of Marks and Spencer's case, though he makes the point (and I have seen the force of it) that at the hearing before Lawrence Collins J the emphasis was very much upon the Davies issue rather than upon the second limb to which reference has been made. In my judgment, Lawrence Collins J was entitled to reach the conclusion he did on the confidential information issue, as he was entitled to reach the conclusion he did in paragraph 25 on the conflict of interest; and it is not arguable that this court would reach a different conclusion. Lawrence Collins J's experience of matters such as this is unequalled amongst the judges of the higher courts, and it is not, in my judgment, arguable on the facts that this court would reach a different conclusion from that reached by him. Nor is it arguable that this court would find a lack of reasoning which justified a reconsideration of the issues. Also, this court would find that the evidence had been understood.[30]For the reasons I have given I would refuse this application.

LORD JUSTICE KAY: I agree. It seems to me that the judge was entitled to conclude that any such bid as might be made for the shareholding of the claimant company was one that potentially might be a hostile bid since there could be no sort of guarantee that the directors of the claimant company would recommend any such bid to its shareholders.

[32]Further, there was evidence before the judge that entitled him to conclude that the Davies contractual arrangements might well become one of the significant battle grounds if any such hostility was joined. That being so, I have little difficulty in concluding that there was a clear potential conflict of interest in the defendant acting for those concerned with the bid at a time when it was instructed to advise and act for the claimant company on the subject matter of the Davies contractual arrangement.[33]Mr Brindle argues that all attempts to define the circumstances in which conflict might arise have failed and as such any potential risk is no more than a theoretical one. That argument, in my judgment, fails to recognise the reality of the situation. If the defendant is to act for those making the bid its partners may be called upon at various stages to give advice as to the tactical approach to be adopted by the bidders in the circumstances of the bid becoming hostile. The claimant company is entitled to know that any such advice cannot possibly be influenced in any way by the knowledge that the defendant has of its affairs as a result of its relationship with the defendant as its client, even if the defendant does not directly reveal the information to the bidders. Where there is a matter which may feature prominently in any attempt to win over the shareholders of the claimant company, it seems to me wholly impossible to have the necessary degree of confidence that the claimant company will not be adversely affected by the bidders having the benefit of the defendant as their solicitors with the solicitors having previously acted for the claimant company on the very subject matter which may come to prominence in the bid. This, in my judgment, precludes the defendant from acting for the bidders.[34]As to the issue of breach of confidence, it was an issue for the judge to resolve whether such arrangements as had been made by the defendant provided an adequate protection for the claimant company. I can see no reason to conclude that the judge was not entitled to reach the decision in this regard that he did.[35]As to the proposed further arrangements that could be made, and that the defendant is now willing to make, the obligation was on the defendant to put in place adequate safeguards before acting for the bidders. I view it as far too late in the day for proposed further measures. The reality is that the spread of information within the firm may already have taken place and it is impossible to conclude that if the arrangements were inadequate until now that fresh arrangements made at this stage will prevent the consequences of the earlier inadequate arrangements.[36]For this reason I, too, can see no prospect that the judge's conclusions might be overturned on an appeal and I, too, would refuse leave. (Application dismissed with costs).

Cited in 4 later judgments