Freehills dispute exposes confusion over who lawyers work for - The Financial Review

Corporate lawyers routinely face the problem of getting conflicting instructions from board directors and owners because their client is a company, lawyers say.

The inherent difficulty of taking instructions from a company – a non-speaking, artificial legal entity – was exposed this week after The Australian Financial Review detailed the multi-million dollar fallout between top tier law firm Herbert Smith Freehills and its former client United Petroleum.

United claims Freehills partner Michael Ziegelaar breached duties by writing a draft script for only two of its five board members and stopping its legal work on the IPO when there was a division within the board over whether the float should go ahead in December 2016.

At the heart of the dispute between Freehills and United Petroleum is a huge amount of confusion about whom lawyers work for.

United says Freehills owed duty of care not only to United Petroleum Holdings, the company the subject of the float, but also to its subsidiaries and co-founders Avi Silver and Eddie Hirsch.

Even though there were five directors at the holding company, Mr Silver said Mr Ziegelaar should have taken instructions from him because he was the one picking up the bill.

“Michael [Ziegelaar] would still come to me for instructions basically on everything material. When I had to call him up and say, ‘Michael, remember who is paying your bills and who is instructing you’, Michael apologised on two different occasions and say, “Look, it ran away from me,” and he done it in front of a bunch of people and he said it won’t happen again,” Mr Silver said during cross-examination last week.

Blow the whistle

Freehills disagrees, and says the law firm didn’t have a responsibility to act just for the co-founders of the company and the retainer makes it clear Freehills was engaged by the company and not any of the individual co-founders.

“One can readily see why that is absurd, really, because their interest […] is getting the price up as high as possible and getting as much as they can from the IPO, which is a very different interest to the other non-directors of the company,” Philip Crutchfield, QC, barrister for Freehills, said last week.

A managing partner, who declined to be named, said while the founders have no special status above any other shareholders, as soon as Freehills became aware of the developing dispute between the directors, the lawyers should have called it out and asked for clear instructions.

“You’d be blowing the whistle and avoid being forced to pick a side,” he said.

Constant problem

The kind of problem faced by Freehills arises constantly for corporate lawyers acting for a company, Marque Lawyers managing partner Michael Bradley said.

“The problem is, the company can’t talk. It’s the board which has the power to speak for the company. But who speaks for the board? That’s often unclear, especially when divisions exist within the board,” he said.

He said in reality it could be difficult to manage these situations.

“It’s not practicable or appropriate to insist on unanimous agreement by the whole board, because often there will be a disgruntled minority who don’t agree with what’s being done,” he said.

Difficult exercise

Alan McDonald, managing director of employment law firm McDonald Murholme, said the primary duty is owed to the person legitimately giving instructions – in this case, a director of the company.

“It is the duty of the lawyer to ensure that the director complies with their duties. A director complying with all of his duties will act in the best interests of the shareholders. In that way conflict will be avoided,” he said.

Law Society of NSW president Doug Humphreys declined to comment on the case, but said in general, lawyers should ensure there is no conflict of interest between the client and the person giving instructions on behalf of the company, even though it could be a difficult exercise in practice.

 “You can imagine the difficulty of telling somebody, ‘I require a written resolution of the company’. At the end of the day, you need to be properly satisfied the instructions that are given to you come from the client,” he said.