(1) NIGEL JAMES YOUNG (2) HENRY JOHN
YOUNG (3) PAUL ANTHONY IRBY (Plaintiffs) v (1) ROBSON RHODES (a firm) (2) FRANK
ATTWOOD (Defendants) (1999)
Ch.D (Laddie J)
30/3/99
FINANCIAL - CONTRACT -
PROFESSIONAL NEGLIGENCE - DAMAGES - LEGAL PROFESSION - CIVIL PROCEDURE -
COMMERCIAL
LLOYD'S SYNDICATE
LITIGATION : AUDITORS : ENTIRE RETAINER : AD HOC : EXPERTS : FORENSIC
ACCOUNTANTS : ANNOUNCEMENT OF PROPOSED MERGER : INVESTIGATED FIRM : CONFLICT OF
INTEREST : ENTIRE RETAINER : BREACH OF CONFIDENTIALITY : BREACH : UNDERTAKINGS
: INJUNCTION : SCOPE : CHINESE WALLS : INFORMATION BARRIER : PHYSICAL
SEPARATION : UNDERTAKINGS : FANCIFUL : THEORETICAL : NAMES : INJUNCTION
Where expert forensic
accountants retained for litigation by a Lloyd's syndicate were investigating
the syndicate's auditors, a proposed merger with the auditors constituted both
breach of retainer and breach of confidence. The former did not merit
injunctive relief, but for the latter injunctive orders were made, creating
Chinese Walls but not preventing the merger from proceeding.
Plaintiffs' application
for an injunction restraining the merger of two accountancy partnerships. The
plaintiffs ('P') were representative Names at Lloyd's and members of a
syndicate who commenced four actions against a firm of auditors, Pannell Kell
Forster ('PKF') alleging negligence and breach of contract. For those actions,
expert forensic accountancy services were required and P had contacted the
second defendant ('A'), a recognised expert and a partner in the first
defendant, a firm of accountants ('RR'). However, on 8 March 1999, P had been
informed that RR and PKF planned to merge, which led to demands for undertakings
not to merge until after the conclusion of the action against PKF. P issued
proceedings seeking injunctions which were brought to trial swiftly in view of
the planned merger date of 1 May 1999, to prevent the merger until such time as
the trial of the actions against PKF was completed. P relied on two causes of
action as follows: (i) breach of contract ('the retainer claim') where RR and A
had been retained to act for the syndicate for the purpose of the proceedings
against PKF and the merger would make that impossible; and (ii) breach of
confidence ('the confidentiality claim'), where RR and A had access to crucial
and confidential information relating to the litigation against PKF and there
was a risk that some of that information would pass to PKF to the detriment of
the Names. P relied on the recent House of Lords decision in Prince Jefri
Bolkiah v KPMG (1999) 2 WLR 215. In the retainer claim, the defendants denied
any ongoing obligation, claiming an ad hoc relationship. In the confidentiality
claim, the defendants accepted that they had had such access but sought to rely
on extensive undertakings which had been offered.
HELD: (1) The retainer
claim. (i) Retainer: despite the absence of an express contract, by the middle
of 1998 both parties clearly understood and acted on the basis that RR and A
were retained as the Names' expert. (ii) Type of retainer: this finding alone
did not determine the contractual part of the claim. However, the involvement
of RR went beyond that of the conventional role of expert witnesses; RR's role
was to assist in the presentation and advocacy of the actions as part of the
Names' legal team. Just as the solicitors were retained under an entire
retainer, so too, were RR and A engaged, and they could not back out as and when
they liked. RR and A accepted obligations to their clients by holding
themselves out as forensic accountants. The implication of an entire retainer
was that which every reasonable person would make. (Underwood, Son & Piper
v Lewis (1894) 2 QB 306 considered). (iii) Relief for repudiatory breach: the
repudiatory breach had not been accepted by the Names, who sought injunctive
relief not to compel co-operation but to prevent the merger until after the
main litigation was over. Although it would be difficult to find replacement
forensic accountants and significant losses might result, the whole purpose of
the injunction sought was to coerce RR and A into assisting the syndicate in
its litigation. Save in very exceptional circumstances, the court did not grant
injunctions which sought to enforce contracts of personal service and it would
not to do so here, not least because by doing so RR and A would not be
persuaded to return. The contractual claim must therefore only sound in
damages.
(2) The confidentiality
claim. (i) The question was whether the undertakings offered went far enough. P
claimed that in light of Prince Jefri (supra), the merger should be prevented
by injunction, but RR and A sought to distinguish the case. If there was even a
small increase in risk that the Names' confidential information would be
inadvertently transmitted to PKF, then P were entitled to further protection.
Following Prince Jefri, the risk had to be a real one and not merely fanciful
or theoretical. (ii) It was unrealistic to require examples where a harmful
inadvertent leak of information could take place. Rather, the court had to
ensure that even if there were mistakes, no additional risk of damage was
inflicted on the former client, which could occur when potential disclosers and
disclosees were in regular and working contact. That there were fewer potential
disclosers here than in Prince Jefri did not make the risk fanciful. The court
had to ensure that barriers to prevent disclosure of confidential information
would work. If those barriers did work, it did not matter whether they were
created before or after the problem arose. Dicta in Prince Jefri as to ad hoc
arrangements meant that "Chinese Walls", which had become part of the
fabric of an institution, were more likely to work than those artificially put
in place to meet a one-off problem. Furthermore, barriers which did not prevent
both direct and indirect contact, including social contact, could still be
effective, or else the requirement would extend into the realm of the fanciful
and theoretical.
(3) Conclusions: the
Names were at risk of inadvertent leakage of information if members of the team
were in regular professional contact with those members of PKF who were
connected with the litigation. An order against merger would force apart the
many members of the two firms, whose contact could have no adverse effect and
should be avoided if possible. However, the only way to ensure protection of
P's interests was to impose sufficient physical separation between the relevant
members of RR and those in PKF. Therefore: (a) PKF was to identify every
partner and member of staff, current and past, who had been involved in or
consulted in relation to the audits of the syndicate or in relation to any of
the four actions brought against PKF by the syndicate; (b) the merged firm
would identify every partner and member of staff whom it proposed to involve in
relation to any of the four actions; (c) until judgment in the actions, certain
persons were not to work in any premises in which the persons in (a) and (b)
above worked, nor to have any professional contact with them. There was no need
to make provision as to social contact.
Application dismissed
but damages and injunctive relief accordingly.
Gordon Pollock QC and
Brian Doctor instructed by Bracher Rawlins for the plaintiffs. Mr A Malek QC
and Mr D Quest instructed by Lovell White Durrant for the defendants.
LTL 31/3/99 : TLR
11/5/99 : (1999) 3 All ER 524
Judgment Approved - 25
pages
Document No.
AC7600224