Canada: The Bright Line Rule: The SCC Reconsiders Its Approach To Conflicts Of Interest

In a recent decision, Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39, the Supreme Court of Canada revisited the "bright line" rule that applies to conflicts of interest among current clients. This rule, which was first articulated in R. v. Neil, [2002] 3 S.C.R. 631, provides 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." (Neil, para. 29; emphasis in original)

The Supreme Court's decision in McKercher will be important for the legal profession across Canada. Perhaps most significantly, the Court clarified the scope of the bright line rule. In particular, the Court held that the rule is engaged only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting, and that the rule does not apply in unrelated matters where it is unreasonable for a client to expect that its law firm will not act against it. Additionally, the Court held that, even when the rule is engaged, disqualification is not automatic and should only be ordered when necessary (1) to avoid the risk of improper use of confidential information, (2) to avoid the risk of impaired representation, and/or (3) to maintain the repute of the administration of justice.

Background and Decisions Below

As discussed in two earlier posts (here and here), Gordon 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. The McKercher firm represents Wallace.

At the time that McKercher accepted the retainer from Wallace, it was acting for CN on a few unrelated matters. Accordingly, CN—a "current client" of McKercher—moved for an order disqualifying McKercher from representing Wallace in the proposed class action.

The motion judge, Justice Popescul (now Chief Justice of the Saskatchewan Court of Queen's Bench), granted CN's motion and disqualified McKercher on two bases. Firstly, 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 Pospecul noted, among other things, the magnitude of the claim in the proposed 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. Secondly, Justice Popescul held that McKercher was in possession of information regarding CN's "litigation practices, policies, risk tolerances and attitudes toward litigation" (para. 85), and that this constituted relevant confidential information that would give McKercher an unfair advantage over CN if McKercher were permitted to represent Wallace against CN in the proposed class action.

The Saskatchewan Court of Appeal overturned Justice Popescul's disqualification order. There were, 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 that such information would be used to CN's prejudice in the proposed class action. Secondly, the Court of Appeal held that CN was properly viewed as a "professional litigant" whose consent to the Wallace retainer could be inferred despite CN's later protestations. Thus, McKercher was not prevented from taking on the Wallace retainer because of the bright line rule. Thirdly, the Court of Appeal held that McKercher had nonetheless 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. In this regard, the Court of Appeal noted that the relationship between CN and McKercher had already been terminated, and also that disqualification would be costly for Wallace, who would then have to retain new counsel.

The Decision of the Supreme Court of Canada

In unanimous reasons written by Chief Justice McLachlin, the Supreme Court allowed CN's appeal and remitted the matter to the Saskatchewan Court of Queen's Bench for redetermination of the appropriate remedy.

Although the Supreme Court reaffirmed the language of the bright line rule, the Supreme Court noted that it is "not a rule of unlimited application" (para. 30), and that the "main area of application of the bright line rule is in civil and criminal proceedings." (para. 35) The Supreme Court provided four important pieces of guidance about the rule's scope. Firstly, the rule applies "only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting." (para. 33) Secondly, the relevant interests must be legal (not merely strategic or commercial). Thirdly, the rule cannot be invoked by a party for purely tactical purposes. In this regard, the Supreme Court cautioned that "institutional clients should not spread their retainers among scores of leading law firms in a purposeful attempt to create potential conflicts." (para. 36) Fourthly, the rule does not apply to unrelated matters where it is unreasonable for a client to expect that its law firm will not act against it.

In discussing the fourth point, the Supreme Court cited the example given in Neil of the "professional litigant" (such as a chartered bank) whose consent to concurrent representation of adverse legal interests can be inferred. But the Supreme Court in McKercher indicated that the reasonable client expectation is not tied to the notion of implied consent and instead requires a broader contextual analysis:

"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." (para. 37)

In addition, the Supreme Court held that, if the bright line rule does not apply, it is still necessary to consider whether accepting the new retainer would create a "substantial risk of impaired representation." (para. 40) If no such risk is created, the new retainer may be accepted.

On the facts of this case, the Supreme Court held that the bright line rule was breached, because the "immediate interests of CN and Wallace were directly adverse, and those interests were legal in nature." (para 51) Further, there was no evidence on the record that CN's motion was made for purely tactical purposes, and it was "reasonable for CN to be surprised and dismayed when its primary legal counsel in the province of Saskatchewan sued it for $1.75 billion." (para. 52) The Supreme Court, however, agreed with the Court of Appeal that the Wallace retainer did not create a risk of misuse of confidential information, because CN had failed to show that McKercher had gained any relevant confidential information about CN in the unrelated matters.

Having concluded that McKercher breached its duty to avoid conflicting interests (as well as its related duties of commitment and candour to CN), the Supreme Court then turned to the issue of remedy. As mentioned above, the Supreme Court held that disqualification requires sufficient reason and does not follow automatically upon a breach of these duties. Instead, disqualification may be ordered, on a case-by-case basis, when necessary (1) to avoid the risk of improper use of confidential information, (2) to avoid the risk of impaired representation, and/or (3) to maintain the repute of the administration of justice.

The Supreme Court indicated that, in this case, the first and second of these factors are not relevant, because CN did not establish that McKercher is in possession of any relevant confidential information about CN, and because the relationship between CN and McKercher has already been terminated such that there is no risk of impaired representation. Accordingly, the Supreme Court held that only the third factor is relevant and remitted the matter to the Court of Queen's Bench to reconsider whether disqualification is required to maintain public confidence in the justice system.

Potential Significance

McKercher was a highly anticipated decision, especially given that it was the Supreme Court's first opportunity in several years (since Strother v. 3464920 Canada Inc., 2007 SCC 24) to address squarely the bright line rule. McKercher may prove to be most significant because of the limitations that it puts on the rule's application. In particular, for unrelated matters, the Supreme Court has replaced the previous "implied consent" exception to the rule with a potentially much broader "reasonable expectation" exception. Whereas the implied consent exception (as outlined in Neil) applied to chartered banks and other sophisticated, "professional litigants" and could in principle be overridden by a client's express objection, the reasonable expectation exception (as outlined in McKercher) is not limited to a particular type of client and is likely not subject to being overridden by a client's express objection. Instead, as set out above, a series of factors (including 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) must be considered when determining whether a client could reasonably expect the rule to apply to unrelated matters.

Additionally, the Supreme Court has reaffirmed the remedial principle stated in Neil: "It is one thing to demonstrate a breach of loyalty. It is quite another to arrive at an appropriate remedy." (Neil, para. 36) McKercher strongly indicates that disqualification is not an automatic remedy and provides guidance as to when disqualification should be ordered. The general message is that disqualification should not be ordered without good reason. Indeed, in remitting the matter to the Court of Queen's Bench, the Supreme Court cautioned against jumping too quickly to the conclusion that disqualification is appropriate in this case:

"As discussed, a violation of the bright line rule on its face supports disqualification, even where the lawyer-client relationship has been terminated as a result of the breach. However, it is also necessary to weigh the factors identified above, which may suggest that disqualification is inappropriate in the circumstances." (para. 67; emphasis added)

It will be interesting to watch how McKercher is applied by courts across the country.

Case Information

Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39

SCC Docket: 34545

Date of Decision: July 5, 2013

To view original article, please click here.

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