A recent Court of Appeal decision (Russell McVeagh McKenzie Bartleet v Tower Corporation) provides a useful indication to New Zealand law firms of the judiciary's approach to Chinese walls in large firms.
The case reversed the High Court ruling that Russell McVeagh's corporate partners in Auckland were disqualified from acting for Guinness Peat Group (GPG) in relation to a hostile takeover of Tower because of knowledge of Tower's affairs gained from work done by a Wellington tax partner of the same firm.
The majority of the Court of Appeal held that Tower had not made a sufficient case (based on conflict of interest and breach of fiduciary duty) to justify disqualifying Russell McVeagh from acting for GPG because there was no real risk of Russell McVeagh disclosing confidential information about Tower to GPG. The Court examined whether in fact an unacceptable risk of disclosure of information had occurred. The main factors in the decision of the majority were that Russell McVeagh was advising Tower and GPG on different matters, and that the tax advice to Tower related to a 1990 transaction. The majority held that neither knowledge about Tower's culture and general business approach, nor knowledge of certain specific documents, amounted to a risk justifying disqualification.
In his lengthy dissenting judgment, Justice Thomas held that nothing less than full disclosure and informed consent on the part of the client concerned would suffice to discharge the fiduciary obligation. He stated that there is "an unacceptable arrogance in their assumption that the lawyers have the prerogative to make these decisions for their clients".
Although the majority judgment recognized that "Chinese walls and cones of silence leave much to be desired", the decision effectively condoned their use, based on the realities of the legal situation in New Zealand. As Justice Thomas pointed out, "there are in New Zealand five so-called megafirms consisting of 50 or more partners employing a large number of staff solicitors and three firms comprising more than 25 partners". The court accepted that conflicts would inevitably arise, especially in commercial law, and that these conflicts may often be appropriately addressed internally.
James Aitken and Vaughan Spurdle
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