Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39 was released this morning. It is an extremely important decision dealing with when a law firm is unable to act, or will be removed, because of conflict.
R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631, held that the general bright line rule is that a lawyer, and by extension a law firm, may not concurrently represent clients adverse in interest without first obtaining their consent. When the bright line rule is inapplicable, the question becomes whether the concurrent representation of clients creates 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. The bright line rule is based on the inescapable conflict of interest inherent in some situations of concurrent representation and it reflects the essence of a fiduciary's duty of loyalty. The rule cannot be rebutted or otherwise attenuated and it applies to concurrent representation in both related and unrelated matters. However, the rule is limited in scope. It applies only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting and it applies only to legal interests, as opposed to commercial or strategic interests. It cannot be raised tactically. It does not apply in circumstances where it is unreasonable for a client to expect that a law firm will not act against it in unrelated matters.
The Court holds:
[1] Can a law firm accept a retainer to act against a current client on a matter unrelated to the client's existing files? More specifically, can a firm bring a lawsuit against a current client on behalf of another client? If not, what remedies are available to the client whose lawyer has brought suit against it? These are the questions raised by this appeal.
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[8] The case at hand requires this Court to examine the lawyer's duty of loyalty to his client, and in particular the requirement that a lawyer avoid conflicts of interest. As we held in R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631, the general "bright line" rule is that a lawyer, and by extension a law firm, may not concurrently represent clients adverse in interest without obtaining their consent — regardless of whether the client matters are related or unrelated: para. 29. However, when the bright line rule is inapplicable, the question becomes whether the concurrent representation of clients creates 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": Neil, at para. 31. This appeal turns on the scope of the bright line rule: Did it apply to McKercher's concurrent representation of CN and Wallace? Or is the applicable test instead whether the concurrent representation of CN and Wallace created a substantial risk of impaired representation?
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[10] In addition to its duty to avoid conflicts of interest, a law firm is under a duty of commitment to the client's cause which prevents it from summarily and unexpectedly dropping a client in order to circumvent conflict of interest rules, and a duty of candour which requires the law firm to advise its existing client of all matters relevant to the retainer. I conclude that McKercher's termination of its existing retainers with CN breached its duty of commitment to its client's cause, and its failure to advise CN of its intention to accept the Wallace retainer breached its duty of candour to its client. However, McKercher possessed no relevant confidential information that could be used to prejudice CN.
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A. The Role of the Courts in Resolving Conflicts Issues
[13] Courts of inherent jurisdiction have supervisory power over litigation brought before them. Lawyers are officers of the court and are bound to conduct their business as the court directs. When issues arise as to whether a lawyer may act for a particular client in litigation, it falls to the court to resolve those issues. The courts' purpose in exercising their supervisory powers over lawyers has traditionally been to protect clients from prejudice and to preserve the repute of the administration of justice, not to discipline or punish lawyers.
[14] In addition to their supervisory role over court proceedings, courts develop the fiduciary principles that govern lawyers in their duties to clients. Solicitor-client privilege has been a frequent subject of court consideration, for example.
[15] The inherent power of courts to resolve issues of conflicts in cases that may come before them is not to be confused with the powers that the legislatures confer on law societies to establish regulations for their members, who form a self-governing profession: MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235, at p. 1244. The purpose of law society regulation is to establish general rules applicable to all members to ensure ethical conduct, protect the public and discipline lawyers who breach the rules — in short, the good governance of the profession.
[16] Both the courts and law societies are involved in resolving issues relating to conflicts of interest — the courts from the perspective of the proper administration of justice, the law societies from the perspective of good governance of the profession: see R. v. Cunningham, 2010 SCC 10, [2010] 1 S.C.R. 331. In exercising their respective powers, each may properly have regard for the other's views. Yet each must discharge its unique role. Law societies are not prevented from adopting stricter rules than those applied by the courts in their supervisory role. Nor are courts in their supervisory role bound by the letter of law society rules, although "an expression of a professional standard in a code of ethics . . . should be considered an important statement of public policy": Martin, at p. 1246.
[17] In recent years the Canadian Bar Association and the Federation of Law Societies of Canada have worked toward common conflict rules applicable across Canada. However, they have been unable to agree on their precise form: see, for example, A. Dodek, "Conflicted Identities: The Battle over the Duty of Loyalty in Canada" (2011), 14 Legal Ethics 193. That debate was transported into the proceedings before us, each of these interveners asking this Court to endorse their approach. While the court is properly informed by views put forward, the role of this Court is not to mediate the debate. Ours is the more modest task of determining which principles should apply in a case such as this, from the perspective of what is required for the proper administration of justice.
[18] Against this backdrop, I now turn to examine the principles that govern this appeal.
B. The Governing Principles
[19] A lawyer, and by extension a law firm, owes a duty of loyalty to clients. This duty has three salient dimensions: (1) a duty to avoid conflicting interests; (2) a duty of commitment to the client's cause; and (3) a duty of candour: Neil, at para. 19. I will consider each in turn.
1. Avoiding Conflicts of Interest
(a) English Origins
[20] Canada's law of conflicts as administered by the courts is based on precedents rooted in the English jurisprudence. Traditionally, the main concern was that clients not suffer prejudice from a lawyer's representation — at the same time or sequentially — of parties adverse in interest. Disqualification of a lawyer from a case was reserved for situations where there was a real risk of harm to the client, as opposed to a theoretical possibility of harm: see for example, Cholmondeley v. Clinton (1815), 19 Ves. Jun. 261, 34 E.R. 515; Bricheno v. Thorp (1821), Jacob 300, 37 E.R. 864; Taylor v. Blacklow (1836), 3 Bing. (N.C.) 235, 132 E.R. 401. The rule was not absolute or "bright line", but pragmatic. Courts looked to the circumstances of each case and sought to determine whether it was realistic to conclude that the client would suffer some form of harm. Fletcher Moulton L.J.'s statement in Rakusen v. Ellis [1912] 1 Ch. 831, catches the flavour of the English common law approach:
As a general rule the Court will not interfere unless there be a case where mischief is rightly anticipated. . . .[W]here there is such a probability of mischief that the Court feels that, in its duty as holding the balance between the high standard of behaviour which it requires of its officers and the practical necessities of life, it ought to interfere and say that a solicitor shall not act. Now in the present case there is an absolute absence of any reasonable probability of any mischief whatever. [p.841]
(b) The Martin Test: A Focus on Risk of Prejudice and Balancing of Values
[21] In the Martin case, this Court (per Sopinka J.) adopted the English common law's focus on protecting the client from real risks of harm, although it diverged from some of the English case law with respect to the exact level of risk that should attract the conflicts rule. The issue in Martin was whether a law firm should be disqualified from acting against a party because a lawyer in the firm had received relevant confidential information in the course of her prior work for that party. As will be discussed further below, the Court held that a firm cannot be disqualified unless there is a risk of prejudice to the client, although in some cases the client benefits from a presumption of risk of prejudice: pp. 1260-61.
[22] In addition to retaining an emphasis on risk of prejudice to the client, the Court concluded in Martin that an effective and fair conflicts rule must strike an appropriate balance between conflicting values. On the one hand stands the high repute of the legal profession and the administration of justice. On the other hand stand the values of allowing the client's choice of counsel and permitting reasonable mobility in the legal profession. The realities of large law firms and litigants who pick and choose between them must be factored into the balance. As was the case in the English common law, the Court declined to endorse broad rules that are not context-sensitive.
(c) Types of Prejudice Addressed by Conflict of Interest Rules
[23] The law of conflicts is mainly concerned with two types of prejudice: prejudice as a result of the lawyer's misuse of confidential information obtained from a client; and prejudice arising where the lawyer "soft peddles" his representation of a client in order to serve his own interests, those of another client, or those of a third person. As regards these concerns, the law distinguishes between former clients and current clients. The lawyer's main duty to a former client is to refrain from misusing confidential information. With respect to a current client, for whom representation is ongoing, the lawyer must neither misuse confidential information, nor place himself in a situation that jeopardizes effective representation. I will examine each of these aspects of the conflicts rule in turn.
(d) Confidential Information
[24] The first major concern addressed by the duty to avoid conflicting interests is the misuse of confidential information. The duty to avoid conflicts reinforces the lawyer's duty of confidentiality — which is a distinct duty — by preventing situations that carry a heightened risk of a breach of confidentiality. A lawyer cannot act in a matter where he may use confidential information obtained from a former or current client to the detriment of that client. A two-part test is applied to determine whether the new matter will place the lawyer in a conflict of interest: (1) Did the lawyer receive confidential information attributable to a solicitor and client relationship relevant to the matter at hand? (2) Is there a risk that it will be used to the prejudice of that client?: Martin, at p. 1260. If the lawyer's new retainer is "sufficiently related" to the matters on which he or she worked for the former client, a rebuttable presumption arises that the lawyer possesses confidential information that raises a risk of prejudice: p. 1260.
(e) Effective Representation
[25] The second main concern, which arises with respect to current clients, is that the lawyer be an effective representative — that he serve as a zealous advocate for the interests of his client. The lawyer must refrain "from being in a position where it will be systematically unclear whether he performed his fiduciary duty to act in what he perceived to be the best interests" of his client: D. W.M. Waters, M.R. Gillen and L.D. Smith, eds., Waters' Law of Trusts in Canada (4th ed. 2012), at p. 968. As the oft-cited Lord Brougham said, "an advocate, in the discharge of his duty, knows but one person in all the world, and that person is his client": Trial of Queen Caroline (1821), by J. Nightingale, vol. II, The Defence, Part I, at p. 8.
[26] Effective representation may be threatened in situations where the lawyer is tempted to prefer other interests over those of his client: the lawyer's own interests, those of a current client, of a former client, or of a third person: Neil, at para. 31. This appeal concerns the risk to effective representation that arises when a lawyer acts concurrently in different matters for clients whose immediate interests in those matters are directly adverse. This Court has held that concurrent representation of clients directly adverse in interest attracts a clear prohibition: the bright line rule.
(f) The Bright Line Rule
[27] In Neil, this Court (per Binnie J.) stated that a lawyer may not represent a client in one matter while representing that client's adversary in another matter, unless both clients provide their informed consent. Binnie J. articulated the rule thus:
The bright line is provided by the general rule that 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. [Emphasis in original.]
(Neil, at para. 29)
[28] The rule expressly applies to both related and unrelated matters. It is possible to argue that a blanket prohibition against concurrent representation is not warranted with respect to unrelated matters, where the concrete duties owed by the lawyer to each client may not actually enter into conflict. However, the rule provides a number of advantages. It is clear. It recognizes that it is difficult — often impossible — for a lawyer or law firm to neatly compartmentalize the interests of different clients when those interests are fundamentally adverse. Finally, it reflects the fact that the lawyer-client relationship is a relationship based on trust. The reality is that "the client's faith in the lawyer's loyalty to the client's interests will be severely tried whenever the lawyer must be loyal to another client whose interests are materially adverse": Restatement of the Law Third: The Law Governing Lawyers (2000), vol. 2, §. 128(2), at p. 339.
[29] The parties and interveners to this appeal disagreed over the substance of the bright line rule. It was variously suggested that the bright line rule is only a rebuttable presumption of conflict, that it does not apply to unrelated matters, and that it attracts a balancing of various circumstantial factors that may give rise to a conflict. These suggestions must be rejected. Where applicable, the bright line rule prohibits concurrent representation. It does not invite further considerations. As Binnie J. stated in Strother v. 3464920 Canada Inc., 2007 SCC 24, [2007] 2 S.C.R. 177, "[t]he 'bright line' rule is the product of the balancing of interests not the gateway to further internal balancing": para. 51. To turn the rule into a rebuttable presumption or a balancing exercise would be tantamount to overruling Neil and Strother. I am not persuaded that it would be appropriate here to depart from the rule of precedent.
[30] However, the bright line rule is not a rule of unlimited application. The real issue raised by this appeal is the scope of the rule. I now turn to this issue.
(g) The Scope of the Bright Line Rule
[31] The bright line rule holds that a law firm cannot act for a client whose interests are adverse to those of another existing client, unless both clients consent. It applies regardless of whether the client matters are related or unrelated. The rule is based on "the inescapable conflict of interest which is inherent" in some situations of concurrent representation: Bolkiah v. KPMG, [1999] 2 A.C. 222 (H.L.), at p. 235, cited in Neil, at para. 27. It reflects the essence of the fiduciary's duty of loyalty: ". . . a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position": Bolkiah, at p. 234.
[32] However, Neil and Strother make it clear that the scope of the rule is not unlimited. The rule applies where the immediate legal interests of clients are directly adverse. It does not apply to condone tactical abuses. And it does not apply in circumstances where it is unreasonable to expect that the lawyer will not concurrently represent adverse parties in unrelated legal matters. The limited scope of application of the rule is illustrated by Neil and Strother. This Court found the bright line rule to be inapplicable to the facts of both of those cases, and instead examined whether there was a substantial risk of impaired representation: Neil, at para. 31; Strother, at para. 54.
[33] First, the bright line rule applies only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting. In Neil, a law firm was concurrently representing Mr. Neil in criminal proceedings and Ms. Lambert in divorce proceedings, when it was foreseeable that Lambert would eventually become Neil's co-accused in the criminal proceedings. The lawyer representing Lambert in the divorce proceedings began to gather information that he could eventually use against Neil. The law firm also encouraged another one of its clients, Mr. Doblanko, to report criminal actions by Neil to the police. The goal was to mount a "cut-throat" defence for Lambert in the criminal case, painting her as an innocent dupe who had been manipulated by Neil.
[34] This Court did not apply the bright line rule to the facts in Neil, because of the nature of the conflict. Neither Neil and Lambert, nor Neil and Doblanko, were directly adverse to one another in the legal matters on which the law firm represented them. Neil was not a party to Lambert's divorce, nor to any action in which Doblanko was involved. The adversity of interests was indirect: it stemmed from the strategic linkage between the matters, rather than from Neil being directly pitted against Lambert or Doblanko in either of the matters.
[35] Second, the bright line rule applies only when clients are adverse in legal interest. The main area of application of the bright line rule is in civil and criminal proceedings. Neil and Strother illustrate this limitation. The interests in Neil were not legal, but rather strategic. In Strother, they were commercial:
. . . the conflict of interest principles do not generally preclude a law firm or lawyer from acting concurrently for different clients who are in the same line of business, or who compete with each other for business. . . .
The clients' respective "interests" that require the protection of the duty of loyalty have to do with the practice of law, not commercial prosperity. Here the alleged "adversity" between concurrent clients related to business matters. [paras. 54-55, per Binnie J.]
[36] Third, the bright line rule cannot be successfully raised by a party who seeks to abuse it. In some circumstances, a party may seek to rely on the bright line rule in a manner that is "tactical rather than principled": Neil, at para. 28. The possibility of tactical abuse is especially high in the case of institutional clients dealing with large national law firms. Indeed, institutional clients have the resources to retain a significant number of firms, and the retention of a single partner in any Canadian city can disqualify all other lawyers within the firm nation-wide from acting against that client. As Binnie J. remarked,
In an era of national firms and a rising turnover of lawyers, especially at the less senior levels, the imposition of exaggerated and unnecessary client loyalty demands, spread across many offices and lawyers who in fact have no knowledge whatsoever of the client or its particular affairs, may promote form at the expense of substance, and tactical advantage instead of legitimate protection. [Emphasis added]
(Neil, at para. 15)
Thus, clients who intentionally create situations that will engage the bright line rule, as a means of depriving adversaries of their choice of counsel, forfeit the benefit of the rule. Indeed, institutional clients should not spread their retainers among scores of leading law firms in a purposeful attempt to create potential conflicts.
[37] Finally, the bright line rule does not apply in circumstances where it is unreasonable for a client to expect that its law firm will not act against it in unrelated matters. In Neil, Binnie J. gave the example of "professional litigants" whose consent to concurrent representation of adverse legal interests can be inferred:
In exceptional cases, consent of the client may be inferred. For example, governments generally accept that private practitioners who do their civil or criminal work will act against them in unrelated matters, and a contrary position in a particular case may, depending on the circumstances, be seen as tactical rather than principled. Chartered banks and entities that could be described as professional litigants may have a similarly broad-minded attitude where the matters are sufficiently unrelated that there is no danger of confidential information being abused. These exceptional cases are explained by the notion of informed consent, express or implied. [para. 28]
In some cases, it is simply not reasonable for a client to claim that it expected a law firm to owe it exclusive loyalty and to refrain from acting against it in unrelated matters. As Binnie J. stated in Neil, these cases are the exception, rather than the norm. Factors such as the nature of the relationship between the law firm and the client, the terms of the retainer, as well as the types of matters involved, may be relevant to consider when determining whether there was a reasonable expectation that the law firm would not act against the client in unrelated matters. Ultimately, courts must conduct a case-by-case assessment, and set aside the bright line rule when it appears that a client could not reasonably expect its application.
(h) The Substantial Risk Principle
[38] When a situation falls outside the scope of the bright line rule for any of the reasons discussed above, the question becomes whether the concurrent representation of clients creates a substantial risk that the lawyer's representation of the client would be materially and adversely affected. The determination of whether there exists a conflict becomes more contextual, and looks to whether the situation is "liable to create conflicting pressures on judgment" as a result of "the presence of factors which may reasonably be perceived as affecting judgment": Waters, Gillen and Smith, at p. 968. In addition, the onus falls upon the client to establish, on a balance of probabilities, the existence of a conflict — there is only a deemed conflict of interest if the bright line rule applies.
(i) Practical Implications
[39] When a law firm is asked to act against an existing client on an unrelated matter, it must determine whether accepting the retainer will breach the bright line rule. It must ask itself whether (i) the immediate legal interests of the new client are directly adverse to those of the existing client, (ii) the existing client has sought to exploit the bright line rule in a tactical manner; and (iii) the existing client can reasonably expect that the law firm will not act against it in unrelated matters. In most cases, simultaneously acting for and against a client in legal matters will result in a breach of the bright line rule, with the result that the law firm cannot accept the new retainer unless the clients involved grant their informed consent.
[40] If the law firm concludes that the bright line rule is inapplicable, it must then ask itself whether accepting the new retainer will create a substantial risk of impaired representation. If the answer is no, then the law firm may accept the retainer. In the event that the existing client disagrees with the law firm's assessment, the client may bring a motion before the courts to prevent the firm from continuing to represent the adverse party. In this manner, the courts will be called upon to further develop the contours of the bright line rule, and to ensure that lawyers do not act in matters where they cannot exercise their professional judgment free of conflicting pressures.
(j) Summary
[41] The bright line rule is precisely what its name implies: a bright line rule. It cannot be rebutted or otherwise attenuated. It applies to concurrent representation in both related and unrelated matters. However, the rule is limited in scope. It applies only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting. It applies only to legal — as opposed to commercial or strategic — interests. It cannot be raised tactically. And it does not apply in circumstances where it is unreasonable for a client to expect that a law firm will not act against it in unrelated matters. If a situation falls outside the scope of the rule, the applicable test is whether there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected.
[42] I now turn to the other dimensions of the duty of loyalty which are relevant to the present appeal.
2. The Duty of Commitment to the Client's Cause
[43] The duty of commitment is closely related to the duty to avoid conflicting interests. In fact, the lawyer must avoid conflicting interests precisely so that he can remain committed to the client. Together, these duties ensure that "a divided loyalty does not cause the lawyer to "'soft peddle"' his or her representation "of a client out of concern for another client": Neil, at para. 19.
[44] The duty of commitment prevents the lawyer from undermining the lawyer-client relationship. As a general rule, a lawyer or law firm should not summarily and unexpectedly drop a client simply in order to avoid conflicts of interest with existing or future clients. This is subject to law society rules, which may, for example, allow law firms to end their involvement in a case under the terms of a limited scope retainer: see, for example, Law Society of Upper Canada, Rules of Professional Conduct (online), r. 2.02(6.1) and (6.2); Law Society of Alberta, Code of Conduct (online), Commentary to r. 2.01(2); Nova Scotia Barristers' Society, Code of Professional Conduct (online), rr. 3.2-1A and 7.2-6A.
3. The Duty of Candour
[45] A lawyer or law firm owes a duty of candour to the client. This requires the law firm to disclose any factors relevant to the lawyer's ability to provide effective representation. As Binnie J. stated in Strother, at para. 55: "The thing the lawyer must not do is keep the client in the dark about matters he or she knows to be relevant to the retainer (emphasis deleted)."
[46] It follows that as a general rule a lawyer should advise an existing client before accepting a retainer that will require him to act against the client, even if he considers the situation to fall outside the scope of the bright line rule. At the very least, the existing client may feel that the personal relationship with the lawyer has been damaged and may wish to take its business elsewhere.
[47] I add this. The lawyer's duty of candour towards the existing client must be reconciled with the lawyer's obligation of confidentiality towards his new client. In order to provide full disclosure to the existing client, the lawyer must first obtain the consent of the new client to disclose the existence, nature and scope of the new retainer. If the new client refuses to grant this consent, the lawyer will be unable to fulfill his duty of candour and, consequently, must decline to act for the new client.
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