Canada: The "Bright Line" Rule Is Dimmed By The Alberta Court Of Appeal In Statesman

Last Updated: May 27 2015
Article by Ryan MacIsaac

Most Read Contributor in Canada, September 2018

Joint retainers are common in modern legal practice. But what happens when a dispute is brewing between two parties represented by the same law firm? How is a lawyer to know when the "bright line" of conflict of interest has been crossed? And when the duty of loyalty to a client is breached, when is disqualification of the law firm an appropriate remedy? The Alberta Court of Appeal addressed these issues in Statesman Master Builders Inc v Bennett Jones LLP, 2015 ABCA 142 ("Statesman").

I. Background

Matco Investments Ltd. ("Matco") had used the same law firm (the "Law Firm") for over 25 years. Matco entered a partnership (the "Partnership") in 2006 to build condominiums in Calgary with the Statesman Group of Companies ("Statesman").

In 2008, a third party contractor filed builders' liens against the condominium project. Matco and Statesman asked the Law Firm to represent the General Partner in the builders' lien dispute. The Law Firm agreed, but first emailed to Statesman's general counsel the following:

As discussed, Matco is an important client of our firm, and I want to be careful that by this retainer we do not disqualify ourselves from assisting Matco in what I trust is the unlikely event of disagreement between it and the Statesman group in future. I confirm our agreement that this retainer is sufficiently limited in scope that you will take no objection to our continued freedom to act for Matco in such event.

The Law Firm confirmed the limited scope of retainer with Statesman two more times in the subsequent two years. In late spring 2010, Statesman asked the General Partner to terminate the retainer with the Law Firm. The applications judge found that the Law Firm acted for the General Partner and Statesman until June 24, 2010.

Around the same time, a dispute arose between Statesman and Matco. On June 21, 2010, Matco served a notice attempting to terminate the General Partner. On July 8, 2010, Matco commenced an oppression action against Statesman. The Law Firm represented Matco throughout. Statesman objected to the Law Firm representing Matco in the oppression action.

II. Decision at First Instance

At first instance, the case management judge held that the Law Firm had breached its duty of loyalty to Statesman and should be disqualified from representing Matco in the oppression action. The judge held that the Law Firm ought to have told Statesman prior to June 21, 2010 that it was representing Matco in a dispute involving the potential elimination of Statesman from the Partnership. The judge held that Statesman had consistently maintained its opposition to the Law Firm's representation of Matco, that Statesman had never waived any claim it may have, and that, in any event, no prejudice would result from disqualification since Matco had already retained different legal counsel.

III. Decision on Appeal

The Court of Appeal reversed the trial judge's decision and held that (a) the Law Firm had not breached its duty of loyalty, and (b) even if the Law Firm had breached its duty, disqualification would not be an appropriate remedy.

The Court of Appeal addressed the three components of the duty of loyalty: (a) duty to avoid conflicting interests, (b) duty of commitment to the client's cause, and (c) duty of candour. The Court of Appeal then addressed the appropriate remedy.

a. Duty to Avoid Conflicts and the Bright Line Rule

The Court of Appeal discussed the duty to avoid conflicts of interest in the context of the "bright line" rule set out by the Supreme Court of Canada in R v Neil, 2002 SCC 70 ("Neil"). The bright line rule prohibits a law firm from representing 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.

The Court of Appeal said that the bright line rule appeared "at first glance" to apply because Statesman was still a client of the Law Firm when Matco commenced planning its legal strategy in the oppression action. The Court of Appeal, however, emphasized the limitations of the bright line rule at paragraph 22 of its reasons:

[The bright line rule] applies only where the immediate interests of clients are directly adverse in the matters on which the client is acting. It applies only when clients are adverse in legal interest. It cannot be successfully raised by a party who seeks to abuse it by relying on it in a manner that is tactical rather than principled. And, most importantly for the purposes of this appeal, the bright line rule only applies in circumstances where it is reasonable for a client to expect that its law firm will not act against it in unrelated matters. (emphasis in original)

The Court of Appeal considered the following factors identified by the Supreme Court of Canada in Canadian National Railway Co v McKercher LLP, 2013 SCC 39 ("McKercher") in analysing whether a client could reasonably expect the law firm's exclusive loyalty:

  • Nature of the relationship between law firm and client – Matco had been a client of the Law Firm for over 25 years, whereas the Law Firm had only represented Statesman (through the Partnership) for the builders' lien dispute.
  • Terms of the retainer – The retainer with the General Partner was for the limited purpose of the builders' lien dispute, and was accepted by the Law Firm only on the express condition that it could act for Matco in any future dispute between the parties. By the time Matco launched the oppression action (July 8, 2014), Statesman had already terminated the limited retainer (Statesman's request for termination in spring 2014, and the representation by the Law Firm actually ending on June 24, 2014).
  • Types of matters involved – The "true substance" of the builders' lien dispute was unrelated to the oppression action.

The Court of Appeal held that the oppression action was "exactly the kind [of dispute] that could have been anticipated as this joint venture was [Matco's and Statesman's] only involvement". Through the waiver in the limited retainer, Statesman had "expressly consented in advance" to the Law Firm acting for Matco in any action arising from the joint venture. The Court of Appeal held that Statesman could not have reasonably expected the Law Firm to owe it an exclusive duty of loyalty in respect of the oppression action. The bright line rule did not apply.

In the absence of the bright line rule, there was no evidence that the Law Firm's representation of Statesman on the builders' lien matter was materially and adversely affected during the "short overlap" between Matco first discussing the oppression action with the Law Firm, and the termination of Statesman's limited retainer.

b. Duty of Commitment to Client's Cause

The Court of Appeal held that the Law Firm did not breach its duty of commitment to Statesman's cause because it was Statesman who had terminated the retainer.

c. Duty of Candour

The Court of Appeal held that it "cannot be viewed as a surprise" that the Law Firm would act for Matco in the oppression action. Statesman knew or ought to have known that there was a dispute with Matco, and it had provided its consent to the Law Firm acting for Matco in the future. The Law Firm did not breach its duty to be candid to Statesman.

d. Appropriate Remedy if Duty of Loyalty Breached

The Court of Appeal stated, in obiter, that even if the Law Firm had breached its duty of loyalty, disqualification of the Law Firm would not have been the appropriate remedy. There were no concerns about a risk of improper use of confidential information, and the Law Firm had not represented Statesman at the time that the oppression action was actually launched.

The Court of Appeal reversed the case management judge's apparent conclusion that disqualification was necessary to maintain the repute of the administration of justice, stating at paragraph 34 of its reasons:

Considering that [Statesman] delayed over a year in bringing the application to disqualify [the Law Firm] as counsel, the fact that Matco would be deprived of its counsel of choice with whom it had a longstanding relationship of over 25 years, and the fact that [the Law Firm] believed in good faith that its continued representation of Matco did not contravene any duty of loyalty it may have owed to [Statesman], the only reasonable conclusion is that disqualification was not necessary in this case to protect the integrity and repute of the administration of justice.

IV. Discussion

The Court of Appeal reinforced that the bright line rule is not a hard-and-fast rule to be applied in all circumstances, even when a law firm is representing two parties whose legal interests are directly adverse. Where a client cannot reasonably expect the law firm not to act against it in unrelated matters, the bright line rule does not apply. Although the Supreme Court of Canada in Neil and McKercher held that such cases were the exception, not the rule, the Court of Appeal in Statesman identifies such an exception.

The Court of Appeal's decision tacitly recognizes the realities of modern legal practice where large law firms have a broad roster of clients, and in which lawyers often move from firm to firm. The decision avoids a chilling effect that might have resulted if the Law Firm was forced to abandon its long-term client as the ultimate result of taking a joint retainer that, at the time, had been to both clients' benefit.

At the same time, the Court of Appeal's decision serves as a cautionary tale: It is crucial that a law firm make it clear to joint clients which client will stay with the law firm in the event of a conflict, and which one will need to find new counsel. It is also crucial that law firms communicate to their clients the possibility of a conflict of interest at the earliest opportunity. Joint retainers can promote efficiency and access to justice, but must be continually monitored to ensure that the law firm can give both parties its untainted loyalty.

Case Information

Statesman Master Builders Inc v Bennett Jones LLP, 2015 ABCA 142

Docket: 1401-0054-AC

Date of Decision: April 21, 2015

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