FIDUCIARY DUTIES, CONFLICT OF DUTY, AND CHINESE WALLS: AN ANALYSIS OF THE CASE PRINCE JEFRI BOLKIAH V KPMG [1999] 2 AC 222    
Table of Contents

I.      Introduction.. 3


II.     The Case.. 3


A.    The Facts. 4


B.    The Issues. 5


C.    The Verdict. 6


III.        Legal Background.. 7


A.    Conflict of Interest and Conflict of Duty. 7


B.    Fiduciary Duties. 9


1.     No Conflict Rule. 9


2.     Duty of Confidence. 10


3.     Duty of Loyalty. 11


4.     No Profit Rule. 12


C.    Chinese Walls. 12


IV.       Case Analysis.. 13


A.    Rightly Decided?. 13


B.    Implications on Future Cases. 15


V.    Conclusion.. 17


VI.       References.. 18



 
I.              Introduction

The emergence of the case decision in Prince Jefri Bolkiah v KPMG has created considerable implications on the principles of confidentiality not only in the legal profession, but with actual organisations in existence. Basically, this paper intends to look into the contribution of the Prince Jefri case on the consideration of courts on legal principles surrounding confidentiality. Specifically, the obligations relating confidentiality will be taken into consideration. Along with this, a discussion on the issue of conflict and confidentiality as regarded by the decision of the court in the Prince Jefri case will be provided.  Moreover, a greater part of this paper will also focus on the application of the concept of Chinese walls into the picture. Primarily, past cases involving such concepts are going to be viewed to detect the development of the legal structure as the verdict in the Prince Jefri case was handed in the late 1990s. In the same regard, recent cases which have considered and cited the principles of the Prince Jefri case will be pointed out in this paper. The arguments and observations given in this paper are going to be supported by claims on past and existing case laws as well as legal literature directly related to the concepts of confidentiality, obligations, and the principle of Chinese walls.


II.            The Case

The focus of this case note is the Prince Jefri case held in 1999. The following parts of the paper will serve as an introductory part by presenting the basic attributes of the case before the actual analysis of the legal implications are given in the later part of the paper.


A.           The Facts

The defendant, KPMG was originally the firm taking on the yearly audit initiatives in the Brunei Investment Agency, an organisation on which the claimant Prince Jefri once served as chief. The relationship between KPMG and the BIA as in existence since 1983, eventually Prince Jefri’s ties with the BIA was severed in 1998. It must be emphasised at this point that KPMG also took on forensic accounting measures for the BIA with the request of Prince Jefri before his removal from his position in the said organisation. An issue thus has arisen on the part of Prince Jefri as KPMG being the company who had engaged in what was then coined as Project Lucy had access to all the major assets of Prince Jeri as well as the locations of these. The accounting firm also had access to the legal arrangements on which these assets were acquired and where the funds came for the Prince to purchase these possessions.


However, the Government of Brunei asked the audit partner of the BIA to help in an investigation in June of 1998. The problem emerged as the BIA audit partner was in KPMG. This is compounded a month later by the instruction from the Brunei government to take on further and more in-depth forensic accounting from KPMG regarding BIA. Specifically, the project was named Project Gemma and was tasked to carry out investigations on the alleged transfer of funds in the BIA along with the assets on which these funds were purchased. At this point, it appears that Prince Jefri is in a rather compromising position as Project Gemma and Project Lucy could hurt the interest of the prince as the KPMG is facing conflicting interests.


To deal with this, KPMG tried to install what was known as Chinese Walls in the operation of Project Gemma and Project Lucy. According to the case, KMPG was able to provide different partners for the two projects which involved Prince Jefri. They added particularly that Project Lucy was placed in an isolated area in the forensic department. Along with this, KPMG added that majority of the operations of Project Lucy took place in a separate level of the building providing the partners instruction to keep documents from being extracted off their portion of the building. In the same regard, the operations in Project Gemma tend to depend on Project Lucy particularly on the staffing of the former. The firm indicated that they have a strict measure of keeping those who are in Project Lucy from working in Project Gemma with exception of those who have no access whatsoever to the confidential information involving Prince Jefri himself.  


B.           The Issues

The House of Lords pointed out several issues on the case of Prince Jefri Bolkiah v KPMG. At the period where the case was being heard, the issue relating to duty of confidentiality were centred on issues on lawyer and client relationship as well as those between financial institutions. In the Prince Jefri case, the House of Lords tried to resolve the issue as to whether in the instance whether an individual is still subject to the duty of confidentiality even as the client relationship has ceased. That is to say, is this individual still bound by this duty not to reveal information that is considered confidential? In addition, issues as to whether this person still have the duty not to place a former client in jeopardy by using a information privy of both of them when the relationship was still in operation.  Other issues that were tested involved the effectiveness of the principle of Chinese Walls with regards to compliance and the factors that constitute what cold be considered legally stable and effective Chinese Wall.


C.           The Verdict

The House of Lords held that the KPMG has the duty to keep the information to be confidential. This means that KPMG’s attempts to keep the information from leaking by taking on some measures to ensure that this will never happen will never suffice legally. The House of Lords even pointed out that the issue of preserving confidentiality is not even a qualified duty at this case considering there was an apparent conflict in of interest on the part of KPMG even before Project Gemma was accepted. The court held that KPMG should have considered that accepting such a commission on the Brunei Government essentially places the confidential data that they have of Prince Jefri at risk. The court further pointed out that risk at which KMPG placed Prince Jefri in was essentially avoidable to begin with. Nevertheless, the courts also mentioned that the use of Chinese Walls may have worked “in some instances” particularly in instances where this concept is plainly established, unlike that provided by the KPMG. The problem, according to the courts, is that the arrangements involving the case of Prince Jefri and KPMG are confined within one department of the firm. Though steps, according to KPMG, were acquired to limit interaction between the “projects” the House of Lords deemed that physical separation will simply not suffice. This is because the interaction between the staff and management in this department is essentially inevitable which also places unwarranted risk of confidential information leaking. At this point, the House of Lords approved the request for injunction forwarded by Prince Jefri in taking the commission of the Brunei Government regarding the BIA investigation.    


III.           Legal Background

The facts presented above on the Prince Jefri case presented certain elements that require review of former cases and legal principles. In this part of the paper, a close examination of the established principles on conflict of interest, fiduciary duties, and the Chinese Walls will be given.


A.           Conflict of Interest and Conflict of Duty

In the legal context, conflict of interest and conflict of duty are based on a common element, the fiduciary duty of the parties involved. Basically this duty is held closely to a relationship bound by good faith, loyalty, and trust. This thus places this legal relationship among the most highly held relationships in law. Any presence of conflict, or the possibility of being in a situation that makes it susceptible for such to take place, is distinctly proscribed for any person having fiduciary duty.[1] (1992) This is also stated in the Woolworths Ltd v Kelly case mentioning the duty of a fiduciary to avoid any set of circumstances where their individual interests and their fiduciary duty to another are in conflict.[2] This means that the interest of their principal, or client in the Prince Jefri case, prevails over the interests of the one holding the fiduciary duty.


The Prince Jefri case also emphasises a           close consideration on the issue of, aside from the conflict of interest, conflict of duty. This is normally seen in fiduciary relationships among lawyers and clients.[3] The fiduciary relationship between accountants and their clients has yet to be established in any legal case law. This means that the case between Prince Jefri and KPMG similarly established this precedent. However, an English case indicated that a fiduciary relationship exist with the presence of “intimate and confidential relations” and with the dependence of an individual to another based on “infinite trust.”[4] In considering the facts of the Prince Jefri case, his relationship with KPMG appears to be comparable to fiduciary relationship as the KPMG is privy to confidential information that could compromise the interest of its client. Having such a conflict is dangerous as indicated in the Alexander v Perpetual Trustees WA Ltd case as this makes the duty of care of those in the fiduciary relationship indistinct.[5] It is thus imperative to take on an examination on the existing and established fiduciary duties held in law, especially those directly related to the issues held in the Prince Jefri case. The status of the fiduciary duties before the judgment is given to the said case tends to display the established principles consulted by the courts in dealing with such legal issues.


 


B.           Fiduciary Duties

The propriety of fiduciary duties appears as among the top elements in cindering legal relationship among individuals. Early case laws on the subject even noted that the proper implementation and regard on these duties are required for the protection of mankind.[6] It has been established in the past cases that the element of trust has to be considered as one of the most important factors in determining the existence of a fiduciary duty.[7] This means a reliance on this trust of one of the parties involved in the relationship holds the key as to whether an individual is in breach of such duties or not. In UK, the Law Commission summarised these duties into four separate elements pertaining generally to the obligation of the parties to a fiduciary relationship.[8] These duties are discussed separately in this part of the paper.


1.    No Conflict Rule

This rule is essentially based on the opinion of Lord Upjohn in the Boardman v Phipps case.[9] The rule basically covers what has been discussed in the earlier part regarding the issues of conflict: conflict of interest and conflict of duty. Moreover, the Law Commission have indicated that a condition of sensibility regarding the occurrence of conflict has to be apparent. This implies that the parties to a fiduciary relationship should be able to take sensible actions meant to avert any possible position where conflict of interest or conflict of duty may emerge.


2.    Duty of Confidence

The legal connotation of duty of confidentiality is not limited to those considered to be in a fiduciary relationship. There are instances where duty of confidence is given in the context of contractual relationships.[10] Moreover, this duty of confidence is also bestowed to financial institutions like KPMG. The Tournier v. National Provincial and Union Bank of England is the original case law that provides commercial and financial organisation a duty to keep the information acquired from its clients in confidence for the benefit of any other individual.[11]


In any case, the rule on this matter is that no party shall be permitted to use such information acquired in confidence to employ it and acquire an “unfair advantage of it.”[12] In the case of Seaver v Copydex, breach of confidentiality has become one of the major claims against the defendant. At this point, the possibility of breach in confidentiality tends to imply that the parties involved were not able to address thief fiduciary duties effectively and in a sensible manner. Particularly, they allowed themselves to be in a position where the confidential information given. This applied greatly in the Prince Jefri case considering that confidentiality of the information was the main issue.   


  


3.    Duty of Loyalty

The UK Law Commission mentioned the duty of loyalty on their report and even pushed it further to denote the “undivided loyalty rule.”[13]  This means that there is an inherent assumption among those in a fiduciary relationship that they will look on the interest of the other exclusively. It is mentioned in an English case that the presence of loyalty is the defining element in any fiduciary relationship.[14] In the Spincode v Look Software case, it mentioned that the effect of loyalty in a case is dual:


“First, if the fiduciary is being remunerated by either or both of the parties, the `conflict of duty interest’ theme in the fiduciary’s obligation requires him to disclose to each client that he is being remunerated by the other. Secondly, much more importantly, until each client agrees to the contrary, or unless there is a legally acknowledged custom to the contrary, each client is entitled to, and is entitled to assume that he has, the undivided loyalty of the fiduciary he has engaged.”[15]


 


This means that any individual who is confined to this duty of undivided loyalty should not make a structure for the interest of the other individual acting as the client and eventually acquire the commission of another person to assault the said structure. This is apparent in the Prince Jefri case as seen in the actions of KPMG. The creation of Project Lucy and Project Gemma essentially constitute of elements that could inevitably be used to one another. The risk of leaking information given by Prince Jefri in confidence fundamentally represents this assault.


4.    No Profit Rule

The “no profit rule” mentioned by the Law Commission pointed out that


“A fiduciary must not profit from his position at the expense of his customer, the beneficiary.“[16]


 


This indicates the legal duty of the parties to a fiduciary relationship to gain advantage in the expense of the other party. This is also discussed in the Boardman v Phipps case.[17] Based on the decisions made by the court, the regard towards the interpretation of the law is rather stern. Seen also in the case, a person with access to “inside information” bestows fiduciary duty to another individual.   


C.           Chinese Walls

Basically, this concept is the process pointing to the initiatives taken by a particular firm with regards to information. Specifically, Chinese walls points to the barriers installed by the company to limit the flow of sensitive information.[18] This initiative is normally taken when there are specific people in the firm who are privy to information which held in confidence within the organisation. The use of this course of action is considerably becoming frequent as companies have been engaging with multiple clients with the implication of globalisation.


Before the Prince Jefri case has been established, the area surrounding the use of this concept has been under immense scepticism. Based on the existing case laws in the English and the Australian context, the concept of Chinese walls was not discussed in cases of dispute between clients and accounting firms. This implies that the judgment in Jefris has been among the first to use this as a means of legal defence.    


IV.          Case Analysis

As seen above, the Prince Jefri case has indeed provided the impetus for the legal consideration of fiduciary relationship and conflict of interest and duty. The following part will be providing an examination of the case particularly with the verdict provided by the House of Lords.


A.           Rightly Decided?

Basically the decision in the case notes that the KPMG should have refused to take the commission on the new instructions given by the Brunei government to investigate Prince Jefri’s concerns. In order to analyse as to whether it was appropriately judged, this paper will be focusing on UK Law commission’s definition of fiduciary duties.   


For instance, based on the “no conflict” rule, the case shows that the firm was indeed in breach of the fiduciary duties it has with Prince Jefri, regardless of the fact that he considered was a past client. The problem on the part of KPMG was that they did not realise that fiduciary duties are bestowed to them as a company, thus the duty is given to the company as a whole and not merely to the individual who holds the confidential information they have regarding the affairs of the Prince. Thus, accepting the order from the government of Brunei is rather a lapse on judgement on their part as it was foreseeable that the possibility of conflict was apparent. This paper will have to agree on the judgement that the imposition of the Chinese walls is not enough to mitigate this conflict. Though it is understandable on the part of KPMG that they are susceptible to such a condition given that they were a multi-function company, the firm should have realised that installing barriers will not stop any information in leaking, especially in the conditions they are in where Projects Lucy and Gemma are held within the same department.


 The case also mentioned the speech of Lord Millet indicating that KPMG, given that it was still acting as a fiduciary, is not at liberty to take the commission from the Brunei government. He noted that a fiduciary is not allowed to work against and in favour of a particular client all at once.[19] This highlights the reference to the no profit rule. In the same regard, one must also take note on the fact that the report of the Law Commission of UK regarding the duty of undivided loyalty bestows the duty to the fiduciary to give a client all the information that he/she requires to protect and develop his/her interests. In the case of KPMG, being both an accounting and legal firm, tends to complicates things as they have entitled the Brunei Government to all the information that it needed for the investigation of the Prince in his affairs with the BIA. These should have been well and straightforward if the company did not serve as a fiduciary of the Prince. This thus still protects the Prince as the firm still owes him the duty of confidentiality. To answer the question: was the case rightly decided? It is the contention of this paper that the House of Lords was right in affirming the decision of the High Courts and the Courts of Appeal. The firm was in blatant breach of it fiduciary duties and should have avoided it at the very start.    


B.           Implications on Future Cases

The case has become one of the most cited case laws with reference to the conflicts of interest and fiduciary duties. The following are recent cases that used the judgment and principles in the Prince Jefri case in determining its verdict. Essentially, these cases were also influential in their respective rights as they have similarly established innovative legal principles since the Prince Jefri case.  


 


ASIC v Citigroup Global Markets Australia Pty Ltd[20]


This recent Australian case represents a new addition to the innumerable cases involving financial institutions. In this case, the Australian Securities and Investments Commission (ASIC) alleged that the Citigroup was engaging in insider trading between Patrick Corporation Ltd and Toll Holdings Ltd. Another allegation was that the financial institution failed to comply with the Corporations Act 2001 of the country pertaining to the adequate arrangement required of companies to manage conflict of interest in case these arise.[21]


These allegations were decided with reference to the federal court’s interpretation of the Prince Jefri case. Particular focus was given to the use of Chinese walls to protect the information privy of other units in the company. The federal court intimated that Citigroup did install a sufficient amount of arrangements that could manage the conflict if it did take place. In the same regard, the federal court took the principles given in the Prince Jefri case regarding the use of Chinese walls. They pointed out that “a raft of written policies and procedures” are not enough to contain the possibility of information leaking. Thus, this case law similar took the stand of the Prince Jefri case relating to the lacking nature of Chinese walls in instituting protections from conflict of interest. In this case, it established that regardless of the presence of proper monitoring and strict disciplinary actions, confidential information will never be safe as daily contact among the staff is incontrovertible.    


 


Marks & Spencer Plc v Freshfields Bruckhaus Deringer[22]


This English case is slightly similar to the Prince Jefri case but the setting is seen between solicitor and client. In this case, Freshfields initially represented Marks and Spencer. Given that this relationship, there was a period where Freshfields was commissioned by Philip Green to manage the bid to acquire Marks and Spencer. A challenge was thus raised regarding the conflict of interest present on the part of Freshfields. Specifically, Marks and Spencer claimed that Freshfield acted without consulting them on representing Philip Green. The Prince Jefri case was thus consulted.


The high court deemed that there is an existing fiduciary duty between Marks and Spencer and Freshfields. This therefore prohibits Freshfields from acquiring any commission on the part of any entity seeking to go against the interests of Marks and Spencer. The courts also highlighted the principle indicated in the Prince Jefri case regarding a fiduciary working for and against a party in the same time.


Seeing the cases above, the Prince Jefri case has thus established a new precedent involving the confidential information principle as well as the recognition of fiduciary duty. Specifically, the case has provided that companies should be cognisant of the possibility of any conflict of duty even before a relationship is established, and that mere protection like physical separation or a set of policies will suffice in protecting confidential information. On the other hand, the Marks and Spencer case maintained that fiduciary duty still exist even for part clients.    


V.           Conclusion

The discussions above have presented the description of the Prince Jefri Case and its implication in the estimation of the legal framework with the rest of the globe, specifically in countries like Australia and UK who have accepted the principles of the law. This paper maintains that the findings of the Prince Jefri case were made in an opportune time when the configuration of the modern organisation as it is slowly acquiring multifarious functions. As seen in the case of KPMG, functions for investigation and accounting purposes were held in conjunction with other capabilities. Along with the reputation of the firm, the apparent capabilities allow them to be appealing in the eye of potential clients. As intimated in this paper, it is inevitable for a company like KPMG to acquire clients with interest distinctly separate with one another. There is always a possibility that they could encounter conflict of duty and conflict of interest along the way. It is the contention of the Prince Jefri case that, once conflict or any glimpse of breach in fiduciary duty is at bay, proper management is taken. To boot, the context of proper management does not constitute the imposition of Chinese walls or any policy that restricts the flow of confidential information in the organisation. In any case, the findings of the case imply the responsibility of a company in determining early on whether they will be encountering conflict of interest or conflict of duty on both existing and past clients.    


 



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