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Recent ruling highlights different disclosure requirements for accountants and solicitors

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Question: what is the extent of solicitors’ duty of disclosure, and in particular is there a duty to disclose information gained from acting for one client to another?

The decision in Harlequin Property (SVG) Limited v Wilkins Kennedy (a Firm) [2016] EWHC 3188 (TCC) held that accountants do not owe such a duty and in his finding the judge noted, “a solicitor acts in a different professional, regulatory and ethical context to an accountant.”  Before we turn to the solicitor’s duty, let us briefly look at the facts of this suitably dramatic case.

The claimants, Harlequin Property (SVG) Limited and Harlequin Hotels and Resorts Limited, the developer and operator of luxury Caribbean resorts (“Harlequin”), engaged the defendant firm of accountants and business advisors, Wilkins Kennedy (“WK”), in relation to a new resort. Allegedly relying on WK’s advice, Harlequin entered into a “very loose” arrangement with contractors, ICE Group (“ICE”), to complete the first phase of the project.  It so happens that WK acted for both Harlequin and ICE, not only on other projects, but specifically in relation to the current project which in the judge’s words, “ran completely out of control”. Meanwhile, Harlequin was being investigated by the Serious Fraud Office, there were serious fraud findings against ICE’s owner and a defamation suit was brought by Harlequin’s director against a senior employee of WK who worked for Harlequin whilst being the chief financial advisor to ICE.

Harlequin ultimately sought US$60 million in damages against WK for failing to advise them to enter into a contract with ICE and for omitting to share with them confidential information that ICE’s owner had misappropriated funds. The judge found for the claimants on the first point but on the second held there had not been a breach of disclosure duty as no such duty exists.

So what is the nature of the solicitor’s duty and how does it differ to that of the accountant? The SRA Code of Conduct, the solicitor’s ethical bible, states that the solicitor’s duty of disclosure applies to “information of which the solicitor is aware and which is material to a client’s matter”. The duty is not absolute and must be weighed against the duty to maintain client confidentiality and the need to avoid conflicts of interest. Where duties of confidentiality and disclosure conflict, confidentiality will always trump disclosure.

Does this mean that a solicitor could be required to disclose confidential information he holds about one client to another? Generally not, as the duty to maintain confidentiality will normally displace the duty to disclose but it does not eliminate the duty altogether. This is key.

In setting out the accountant’s duty, the judge in Harlequin compared the cases of Kelly v Cooper [1993] AC 206, which involves defendant estate agents, and Hilton v Barker, Booth & Eastwood [2005] UKHL 8, where the defendants were solicitors. The judge concludes that the accountant’s duty of disclosure is akin to that of an estate agent who in the normal course of business is privy to confidential information from a variety of sellers and would not be expected to disclose that information to a buyer. In Hilton, the House of Lords held that a solicitor who puts himself in a position of having “two irreconcilable duties” (of confidentiality and disclosure), will be required to perform both duties as best he can and that this might involve performing one duty fully and paying compensation for failure to perform the other.

The lesson from Harlequin (and Hilton) is that a solicitor who acts for two clients with a conflict of interest, despite the regulatory prohibition on doing so (the only exceptions being where clients have a “substantially common interest” or are “competing for the same objective”), cannot escape his disclosure duty to one client by arguing it conflicts with his duty to protect the other client’s confidentiality. Hopefully by following the Code and maintaining robust due diligence procedures law firms should be able to identify potential conflict situations before accepting instructions and in so doing avoid unpleasant and potentially embarrassing face-offs between confidentiality and disclosure down the line.

To view the judgment in full visit: http://www.bailii.org/ew/cases/EWHC/TCC/2016/3188.html

This article was written by Paul Webb, Partner, Corporate, with assistance from Morgan Wolfe, Trainee Solicitor.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.