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The Supreme Court of Canada today clarified the rules under which lawyers may act against existing clients.
“The result is a great one for advocates of choice, because the court ruled that clients were free to choose their lawyers and lawyers were free to act for them unless there was a real risk of mischief,” says Malcolm Mercer of McCarthy Tétrault LLP, who represented the Canadian Bar Association.
The decision, Canadian National Railway v. McKercher LLP, affects a wide range of clients — from large companies who must rely on the limited number of major firms in Canada’s legal market for representation in significant transactions and litigation, to consumers from rural and remote areas that are served by only a few lawyers. It is also a blow to those who advocated a bright line rule forbidding lawyers from acting against current clients or former clients without first obtaining their consent. Indeed, the court ruled that even lawyers who breach conflicts of interest rules by acting against existing clients without obtaining consent to do so may still avoid disqualification from continuing as counsel in the proceedings.
According to Scott Joliffe, the Toronto-based chair and chief executive of Gowling Lafleur Henderson LLP, the issue in the case boiled down to whether there was a categorical prohibition preventing lawyers from acting against clients in unrelated matters even where there was no risk of prejudice to the current or former clients, or whether the prohibition was merely a presumption that required the lawyers to establish that no substantial risk of prejudice exists. The issue is of such importance that the Canadian Bar Association intervened, advancing a presumptive approach that included a proposed model rule.
The case originated in 2008, when McKercher LLP, one of Saskatchewan’s top law firms, took on a proposed class action brought on behalf of a group of Prairie farmers. The claim alleged that CN and others overcharged the class for grain transportation for over 25 years. At the time, McKercher was acting for the railway in other matters, but subsequently withdrew from these cases. CN sought to disqualify McKercher from acting on the class action lawsuit.
The motions judge characterized the behaviour of McKercher as “dumping” CN Rail. The Saskatchewan Court of Appeal found that McKercher had breached its duty of loyalty to the railway by handling the matter without candour and by improperly withdrawing from the cases on which the firm had been counsel. Still, the court refused to disqualify McKercher from continuing against CNR on the class action. The court stated: “Disqualification is a prospective remedy. There is in this case now no existing relationship between CN and McKercher to protect. The point is, that once the withdrawal has taken place, whether by the client or improperly by the law firm, where there is no risk that confidential information will be used to the prejudice of the client, the potential for actual future disloyalty on its previous retainers no longer exists.”
The Supreme Court, however, ruled that disqualification was an option, and sent the case back to the motions court to determine the appropriate remedy.
As the SCC saw it, a lawyer’s duty of loyalty comprised three elements: a duty to avoid conflicting interests; a duty of commitment to the client’s cause; and a duty of candour. The general rule was a bright line rule: lawyers and their law firms could not represent clients adverse in interest without first obtaining their consent. This rule applied where a situation engendered an inescapable conflict of interest, applied to concurrent representation in both related and unrelated matters, and could not be rebutted.
But the bright line rule was limited in scope: it applied only where the immediate interests of clients were directly adverse in the matters on which the lawyer was acting. It also applied only to legal interests, not to commercial or strategic interests. It could not be raised tactically and did not apply where it was unreasonable for a client to expect that a law firm would refrain from acting against it in unrelated matters. Where the bright line rule was inapplicable, the issue became whether the concurrent representation created a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s own interests or by the lawyer’s duties to another current client, a former client, or a third person.
McKercher’s conduct, however, fell squarely within the bright line rule: CN and the class suing the railway were adverse in legal interest; CN’s resistance to McKercher’s representation of the class was not tactically abusive; and the expectation that McKercher would not act against CN was reasonable in a lawsuit where the amount claimed was $1.75-billion. By failing to obtain CN’s consent, terminating its retainers with CN, and failing to advise CN of its intention to represent the class, McKercher breached the bright line rule. Still, McKercher’s had no confidential information that was prejudicial to CN.
Normally, a breach of the bright line rule attracted disqualification as a remedy that could avoid the improper use of confidential information, avoid the risk of impaired representation, and maintain faith in the administration of justice. Here, however, only the need to maintain faith in the administration of justice came into play and factors that might militate against disqualification had to be considered. These factors, to be considered by the motions judge in determining whether disqualification was warranted, included delay in seeking disqualification; prejudice to the new client’s right to retain counsel of choice; and the law firm’s good faith in accepting the new retainer.
Gavin Mackenzie, now of Davis LLP, represented McKercher; Douglas Hodson of MacPherson Leslie & Tyerman LLP acted for CN, and John Hunter appeared for the Federation of Law Societies of Canada.
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