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SCC to Consider Conflict of Interest Rule

Posted in Case Previews, Professions
Malcolm MercerBrendan Owen Brammall

Introduction

The Supreme Court of Canada has granted leave to appeal in Canadian National Railway v. McKercher LLP et al., which raises significant issues relating to conflicts of interest, legal ethics, and the appropriate balance to be struck between the courts and the law societies in regulating the legal profession.

Perhaps most importantly, the case will require the Court to consider the “bright-line rule” and the related “professional litigant exception.” This rule was first articulated in R. v. Neil, and was subsequently re-affirmed in Strother v. 3464920 Canada Inc.. It provides:

… a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client — even if the two mandates are unrelated — unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other. (Neil, para. 29; emphasis in original);

 

The professional litigant exception to this rule, as expressed in Neil, allows consent to be inferred with respect to professional litigants, such as governments and chartered banks, where the matters are sufficiently unrelated and there is no danger of confidential information being abused.

Background

Gordon Wallace (“Wallace”) is the plaintiff in a proposed class action against the Canadian National Railway (“CN”) and other defendants with respect to alleged overcharging of farmers for grain transportation. $1.75 billion in damages are sought. McKercher LLP (“McKercher”) represents Wallace.

At the time that McKercher accepted the retainer from Wallace, it was acting for CN on a few unrelated matters. CN was thus a “current client” of McKercher. Shortly before the Statement of Claim was issued, McKercher advised CN that it was withdrawing as CN’s counsel in a personal injury action. Shortly after the Statement of Claim was served, McKercher advised CN that it would cease acting as CN’s attorney for service in Saskatchewan. A few weeks later, McKercher sought CN’s consent to continue acting for CN in a real estate transaction. CN declined to provide this consent and terminated its solicitor-client relationship with CN.

CN then moved for an order disqualifying McKercher from representing Wallace in the proposed class action.

Decisions Below

Saskatchewan Court of Queen’s Bench

Justice Popescul (now Chief Justice of the Saskatchewan Court of Queen’s Bench) granted CN’s motion and disqualified McKercher on two bases.

The first basis was the bright-line rule. Justice Popescul acknowledged that a superficial reading of the rule may suggest that there is almost an absolute prohibition (absent consent) against acting for two clients adverse in interest even in unrelated matters. Justice Popescul, however, indicated that a more balanced interpretation of the rule is required, and he expressly adopted the interpretation as set out by the Canadian Bar Association’s Task Force on Conflicts of Interest:

…absent proper consent, a lawyer may not act directly adverse to the immediate interests of a current client unless the lawyer is able to demonstrate that there is no substantial risk that the lawyer’s representation of the current client would be materially and adversely affected by the new unrelated matter. (para. 43; emphasis added)

Applying this interpretation of the rule, Justice Popescul held that there was a substantial risk that McKercher’s representation of CN was materially and adversely affected by its representation of Wallace. Justice Popescul noted, among other things, the magnitude of the claim in the class action, and the fact that McKercher had represented CN for more than a decade and was considered by CN to be its “go to” (though non-exclusive) counsel in Saskatchewan. Justice Popescul further determined that, though CN is a professional litigant, its consent could not properly be inferred in light of its express objection to McKercher’s representation of Wallace. Justice Popescul considered CN’s objection to be principled, not tactical. Accordingly, he held that it would be appropriate to disqualify McKercher because of this conflict of interest.

Justice Popescul’s second basis for disqualifying McKercher was its possession of confidential information regarding CN’s “litigation practices, policies, risk tolerances and attitudes toward litigation.” (para. 85) Although the Wallace retainer and the CN retainers were unrelated, Justice Popescul stated that a factual connection between the retainers is not necessarily required to trigger a disqualification. He held that McKercher had received general confidential information about CN’s litigation strategy, and that McKercher would therefore have an unfair advantage over CN if McKercher were permitted to represent Wallace against CN in the proposed class action.

Saskatchewan Court of Appeal

Although the Saskatchewan Court of Appeal agreed with Justice Popescul’s interpretation of the bright-line rule (in line with the CBA’s Task Force on Conflicts of Interest), it overturned his disqualification order. There are, in essence, four aspects to the Court of Appeal’s decision.

Firstly, the Court of Appeal held that CN had not adduced cogent evidence that general confidential information about CN’s litigation strategy had been imparted to McKercher or that there was a real risk of prejudice that such information would be used to CN’s prejudice in the proposed class action. The Court of Appeal found the evidence of CN’s primary witness to be “no more than a non-specific, bald assertion of transfer of confidential information devoid of any greater detail,” and that “the relationship of CN and McKercher, although long-term, was anemic in the litigation area.” (paras. 76-77) The Court of Appeal further held that, even if some strategic confidential information had been imparted to McKercher, the risk of prejudice to CN was small because the Wallace retainer and the CN retainers “are not related factually or by subject matter.” (para. 79)

Secondly, the Court of Appeal held that the CN was properly viewed as a professional litigant, that its consent could properly be inferred, and—contrary to Justice Popescul’s holding—that CN’s subsequent, express objection did not vitiate this consent. The Court of Appeal stated that the professional litigation exception would be “meaningless” if a subsequent, express objection could vitiate the consent and added that:

If a professional litigant takes the view that any counsel acting for it must receive express consent before acting adverse in interest, it should be dealt with by contract or at least made known to the lawyer. (para 100; emphasis in original)

 

Thirdly, the Court of Appeal held that McKercher had breached its duty of loyalty to CN, by attempting to “dump” CN as a client and by not being candid in disclosing to CN in a timely manner that it intended to take on the Wallace retainer.

Fourthly, though, the Court of Appeal held that disqualification was not the appropriate remedy for this breach of the duty of loyalty. The Court of Appeal noted that disqualification is a prospective remedy, and that in this case there is no continuing relationship between McKercher and CN to protect. Disqualification would also be costly for Wallace, forcing him to look for new counsel, possibly outside of Saskatchewan. The Court of Appeal stated that, in the circumstances, CN’s remedial options would be suing for damages for the added cost of having the CN files transferred to other solicitors, or making a complaint to the Law Society of Saskatchewan.

Potential Significance

The case will be of great significance to the legal profession across Canada. It is the Court’s first opportunity since Strother to address squarely the bright-line rule and, in particular, what it means for one client’s interests to be “directly adverse to the immediate interests” of another current client. The rule has given rise to conflicting interpretations. As Justice Popescul observed, the rule could be interpreted, on a plain reading, to create an almost absolute prohibition against representing two clients adverse in interest, even in unrelated matters. When read in light of the other principles expounded in Neil, however, the rule could be interpreted quite differently to mean that the potential risk to the representation is determinative of whether there is a true conflict.

Beyond the bright-line rule itself, the case also calls on the Court to consider when it is appropriate to disqualify a law firm for a breach of the duty of loyalty. As the Court stated in Neil, “[i]t is one thing to demonstrate a breach of loyalty. It is quite another to arrive at an appropriate remedy.” (para. 36) The Saskatchewan Court of Appeal described disqualification as a “blunt instrument” (para. 112), and the case will provide guidance in determining when less aggressive remedies are appropriate.

With respect to the other main issue—the duty of confidentiality—the case raises the question of when information about a client’s litigation strategy can constitute confidential information sufficient to trigger a disqualification. This type of information is sometimes called “playbook information,” by analogy to a sports team’s “playbook” containing strategies that would be valuable to the opposing team. Whether the possession of this type of information should disqualify a law firm from acting has not been clearly established in the Canadian case law to date.

Case Information

Canadian National Railway v. McKercher LLP, et al.

Leave Granted: May 24, 2012

SCC Docket: 34545