Canada: The Cost Of An Ineffective Conflict Check System: $45 million!

On July 8, 2015, the Ontario Superior Court of Justice released its decision in the Trillium Motor World Ltd. v. General Motors of Canada Limited class action trial,1 granting the plaintiffs damages in the amount of $45 million.

The liable party was not General Motors of Canada Limited (GMCL), but rather the law firm Cassels Brock & Blackwell, which the court held had been in conflict of interest following retainers with multiple parties involved in the 2009 post-economic downturn restructuring of GMCL's dealership network in Canada.

The damages were awarded in consideration of dealers' lost opportunity to obtain greater compensation from GMCL in connection with the restructuring and the winding down of a large number of GMCL dealerships.

Background

The class action arose as a result of GMCL's execution of a plan to reduce its large GM vehicle dealership network in Canada following the calamitous economic downturn commencing in the fall of 2008. Prior to that time, GMCL knew that it had too many dealers in a single market. The immediate effect of this over-dealering was a reduction in dealer profitability which in turn caused reluctance for investments in facilities and equipment. Combined with GM's general declining market share of the automobile market and multibillion losses in 2007 and 2008, and GM rapidly running out of cash, over-dealering had to be rectified in the context of any restructuring.

Once the likely depth of the economic downturn became apparent, GMCL engaged in restructuring planning, considered a CCAA proceeding and engaged with the Canadian and US governments for assistance. One of its restructuring plans was to rationalize its dealer network and terminate a large number of its dealership agreements with individual dealers across Canada. In May 2009, GMCL delivered Notices of Non-Renewal and Wind-Down Agreements to 240 GM dealers. If accepted, those Wind-Down Agreements – which carried with them compensation payable to the dealer – would terminate the dealer-GMCL relationships over a period of time. The dealers were given six (6) days to accept or decline the offers. Two-hundred-and-two of the 240 dealers accepted the Wind-Down Agreements. Saturn dealers were particularly affected by the restructuring plan in that all Saturn dealers received Wind-Down Agreements following the discontinuance of the Saturn brand.

In March 2009, the Saturn dealers retained the Cassels law firm through the Canadian Automobile Dealers Association ["CADA"] to provide advice as to their rights and options with respect to the discontinuance of the Saturn brand. Later in the same month, Industry Canada retained the Cassels firm to advise it on a potential commercial financing transaction to support GMCL and Chrysler. In April 2009, the Cassels firm opened a new file matter in its long-standing retainer with CADA to provide CADA with legal assistance concerning the problems GMCL and Chrysler were facing. In May 2009 the Cassels firm entered into a retainer with GMCL dealers in relation to potential CCAA proceedings even though the specific GMCL dealers had yet to be identified. This last retainer was also facilitated by CADA.

The result

The court found that the Cassels firm did not have an effective conflicts checking system in place – that is, a system which actually leads to lawyers discussing and resolving potential conflicts. Moreover, the firm did not heed the alarm bells going off in all quarters despite the deficiencies in its conflicts checking system, and did not respond appropriately to readily apparent conflicts amongst the dealers it was representing. 

Considering that one of the main issues in the matter was whether the Cassels firm had been retained by the GMCL dealers in relation to CCAA proceedings, the court reviewed the hallmarks and indicia of the formation of a solicitor-client relationship and reiterated that such a relationship is a question of fact considered in the circumstances of the case. No formal retainer letter or other document is necessary for a solicitor-client relationship to arise. No invoice need be sent to the client. No bill need be paid by the client. The underlying question to be answered to determine whether a solicitor-client relationship has been formed is whether a reasonable person in the position of a party with knowledge of all of the facts would reasonably form the belief that the lawyer was acting for a particular party. In this case, the court held that a retainer had been entered into and that the Cassels firm had mischaracterized the facilitation role played by CADA in the formation of that retainer: CADA was not the client, but the conduit through which the client, in this case a large group of GMCL dealers, dealt with its legal counsel.

Although the Cassels firm argued that its retainer, if there was one, was a limited retainer restricted to acting for the GMCL dealers in the event of a CCAA proceeding, the totality of the evidence considered led the court to conclude that the retainer was not limited to representation in a possible CCAA proceeding. We note that there was no written retainer agreement in connection with the GMCL dealer retainer. The retainer included pre-filing advice on issues relating to the restructuring of the dealer network. The Cassels firm had not understood that its retainer was as wide as found by the court and, consequently, did not provide pre-filing advice to the GMCL dealers.

The court also found the Cassels firm in conflict of interest in its acceptance of the GMCL dealers retainer and the Industry Canada retainer. The main issue was whether a conflict of interest analysis was carried out by the Cassels firm and, if so, whether the conflict of interest between the retainers was only hypothetical or real. The court found that Industry Canada's interests were adverse to the interests of the GMCL dealers. Industry Canada's interests were to have a restructuring plan in place which cut costs to its and GMCL's satisfaction while the interests of the GMCL dealers, and indeed that of the Saturn dealers, was to take a hard line on the negotiation of the Wind-Down Agreements in order to obtain maximum compensation from GMCL. Had the GMCL dealers retainer been limited to representation in CCAA proceedings, the conflict would not have arisen. The same cannot be said, however, of the Saturn dealers retainer. 

Although in some cases it is possible to "try to manage around" unexpected conflicts which arise in class action or CCAA litigation, the court held that this was not one of those cases. The conflicts of interest were apparent from the outset in a very significant potential CCAA filing wherein many of the dealers, GMCL and Saturn alike, stood to lose their livelihoods precisely because the Canadian Governments were demanding massive restructuring before they would offer financial support to GMCL.

The conflicts of interest and their effects were exacerbated when the Cassels firm failed to advise its dealer clients of its conflict of interest with respect to the Wind-Down Agreement and failed to get involved in the negotiation of the Wind-Down Agreements. The affected dealers were not advised to negotiate or prepare for the consequences of the Wind-Down Agreement and indeed were not prepared for the Wind-Down Agreements or their terms. The loss of chance the dealers suffered was the loss of the opportunity to negotiate the Wind-Down Agreement terms with GMCL as a group rather than individually. The court quantified the dealers' loss attributable to the firm's conflict of interest and inaction at $45 million.

The court's reasons highlight the difficulties inherent in avoiding conflicts of interest in class action and CCAA proceedings and the good sense of written retainer agreements which clearly define the representation which will be provided. 

The take away point from the decision for lawyers is that there is no substitute for serious conflict searches and conflict resolution discussions within law firms and between law firms and their clients without the minimization of potential conflicts through "business conflict" rationalizations and the use of conflict walls within firms. The take away for clients is quite simply this: get your retainer in writing to ensure your lawyers are representing you fully.

Failure to do so can and and likely will, be costly to all involved.

Footnote

1. 2015 ONSC 3824

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions