Law Practice, Litigation

Supreme Court of Canada rules on conflict of interest issues for the first time since 2002 in the case of McKercher LLP

Jul 10th, 2013

By Barry Landy

The Supreme Court of Canada has recently issued reasons for judgment in the case of McKercher LLP. That law firm was  representing CN in a number of mandates, when, without CN’s consent or knowledge they agreed to act for plaintiffs in a $1.75 billion class action suit against CN.

McKercher then terminated all of its mandates for CN when it got the class action mandate.

The Motions judge declared McKercher could not act for the plaintiff;

The Court of Appeal of Saskatchewan reversed the Motions judge.

The Supreme Court of Canada reversed the Court of Appeal, in part, as explained below.

It is the first time the Supreme Court of Canada has ruled on conflict of interest issues since R. v. Neil, which was decided in 2002.

The question at issue was: Can a law firm accept a mandate against a current client on a matter unrelated to the client’s existing files?

McKercher did in fact represent CN in 3 different matters, but it was uncontested that the class action was totally distinct from these matters. McKercher served the class action lawsuit on Jan 15, 2009. Between Dec 15 2008 and Jan 15, 2009 it terminated the mandates where it was acting on behalf of CN.

Firstly, the Supreme Court of Canada stated the existing so-called “bright line” rule: A lawyer and by extension a law firm, may not concurrently represent clients adverse in interest without obtaining their consent, regardless of whether the matters are related or not. Where that 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”.

In the McKercher case, the issue was, did McKercher fall into the “bright line” rule or the “substantial risk” rule?

The Supreme Court of Canada held that the bright line rule clearly applied.

Here are some interesting observations made by the Court:

  1.  Issues of conflict are for courts to decide, but this power is not to be confused with the power that the profession has to govern the profession. Thus, law society rules can be different than court rules.
  2. Terminating existing retainers (i.e. summarily dropping a client in order to circumvent conflict rules) breached the law firm’s duty of commitment to the client’s cause and duty of candour to the client, so that the appropriate remedy was usually disqualification;
  3. Here is how the Supreme Court of Canada has now expressed the “conflict of interest” rule:a) 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 (not strategically adverse, for example). (ii) is the existing client seeking to exploit the bright line rule in a tactical manner, and (iii) can the existing client reasonable expect that the law firm will not act against it in unrelated matters. In most cases, simultaneously acting for and against a client breaches the bright line rule. This rule is absolute and cannot be rebutted;b) If the bright line rule is inapplicable, then the firm must ask itself whether accepting the new retainer will create a substantial risk of impaired representation. If the answer is no, the firm may accept the retainer. Where the existing client disagrees, it may bring a motion to disqualify.

    c) As a general rule, a law firm should not summarily and unexpectedly drop an existing client in order to avoid a conflict of interest (subject to law society rules)

    d) 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. To do this, the proposed new client has to give his consent.

    e) However, in terms of risk of misuse of confidential information, (for example, knowledge of a client’s “litigation philosophy”) this was not an applicable consideration in the case at Bar. There has to be an additional element, namely that the information must be “relevant”. That is, capable of being used against the client in a tangible way.

    f) Regarding the remedy of disqualification the Supreme Court of Canada said that this may be required for (3) reasons: (1) to avoid misuse of confidential information; (2) to avoid the risk of impaired representation and (3) to maintain the repute of the administration of justice.

    g) With regard to reasons 1 and 2, disqualification is generally the only appropriate remedy;

    h) Where only reason 3 is applicable, there may be factors militating against disqualification such as: (1) behaviour of the complaining party (for example, delay to bring the motion),; (2) significant prejudice to the new client’s interests in retaining counsel of its choice; and iii) the good faith of the law firm when it accepted the mandate in good faith, believing the bright line rule did not apply.

  4. In the event, the Supreme Court of Canada decided to refer the matter back to the motions judge for reconsideration, based on these principles.

Up to now, the conflict rules set forth by the Supreme Court of Canada in 2002 have led to many motions to disqualify attorneys, many of which are taken for purely tactical reasons. This case is welcome because it sets forth a set of conflict principles that has the merit of being complete and (relatively) easy to understand.

Barry Landy is a senior litigation lawyer at Spiegel Sohmer who focuses his practice on commercial litigation and is also experienced in the area of media law.