Canada: Scotia Mortgage Corporation v Furlong: The Supreme Court Of Newfoundland And Labrador Weighs In On The Former Client Rule In Commercial Transactions

In the recent decision of Scotia Mortgage Corporation v Furlong1 the Supreme Court of Newfoundland and Labrador confirmed that where a law firm acts jointly for the borrower and lender in the placement of security, that law firm cannot subsequently act adversely to the borrower in realization proceedings.

Background

In 2011, the mortgagee, Furlong, and the mortgagor, SMC, were represented by the same law firm in respect of a residential property transaction. That law firm subsequently merged with another law firm (the "merged firm"). In 2016, Furlong allegedly defaulted under the mortgage and SMC retained the merged firm to initiate power of sale proceedings against him pursuant to the Conveyancing Act.2 Furlong filed an Interlocutory Application seeking a declaration that the merged firm was in a conflict of interest in representing SMC in the power of sale proceedings against him.

The primary question presented before the Court in these proceedings was whether the merged firm was in a conflict of interest in representing SMC in the power of sale proceedings against its former client, Furlong.

The Decision

The heart of Burrage J's decision was that a conflict exists if the law firm acts against a former client in a matter which is central to the prior retainer. This is the fundamental tenet of the former client rule as stated in the Code of Professional Conduct governing the legal profession which provides that a lawyer must not act against a former client in the same or related matter unless the former client consents.3

Burrage J went on to consider Brookville Carriers Flatbed GP Inc v Blackjack Transport Ltd, 2008 NSCA 22, the leading case from the Nova Scotia Court of Appeal which articulates the duties lawyers owe to former clients. According to that case, a lawyer may be disqualified in acting against a former client on the same or related matter, even though confidential information was not in issue. Burrage J quoted the Court in Brookville: "of concern is ... a lawyer effectively changing sides by taking an adversarial position against a former client with respect to a matter that was central to the previous retainer."4

In this case, it was agreed that the two retainers were not the same, so the question turned to whether the retainers were related. In respect of the former client rule, Burrage J made the following key findings:

[42] At the time of his purchase in 2011, Mr. Furlong was provided with legal advice on his rights and obligations under the mortgage with SMC. This advice would have been central to the firm's retainer at the time. In the second retainer, the firm is called upon to enforce those very same obligations against Mr. Furlong in pursuit of SMC's rights under the mortgage. Simply put, the firm is now suing Mr. Furlong on the very document for which it advised him in 2011.

[43] Mr. Furlong's rights and obligations under the mortgage are now the core of McInnes Cooper's representation of SMC, in a manner that is adverse to Mr. Furlong. The fact that the enforcement proceedings are conducted within the legislative framework of the Conveyancing Act, R.S.N.L. 1990, c. C-34 does not change the fact that it is the mortgage that is at the heart of the power of sale proceedings. Mr. Furlong was entitled to assume in 2011 that the law firm then advising him would not in a few years be suing him on the very document for which their advice was given.

[44] In conclusion, I am satisfied that the mortgage in question is central to both retainers. The two retainers are thus related. As a result, McInnes Cooper is in conflict in acting on behalf of SMC in the power of sale proceedings against its former client.5

In reaching this conclusion, Burrage J also highlighted the fiduciary duty and duty of loyalty which lawyers owe to former clients. Even after the lawyer-client relationship has ended, former clients still have a legitimate expectation that their lawyer's loyalty will persist with respect to the subject matter of the retainer.

Commentary

This decision stands as the first articulation from the Newfoundland and Labrador Supreme Court of the duty of loyalty owed to former clients by law firms who place security and subsequently act on realization. In light of the lawyer's fiduciary duty to former clients and the professional ethical rules governing the legal profession, there is little room, if any, for a lawyer or law firm to act adverse to a former client in a matter which involves the subject of the prior retainer.

Lenders often want their lawyer who placed security to be available for subsequent realization proceedings. In such cases, lenders should be aware that if they consent to the same firm acting for the borrower for convenience or to expedite the matters, the law firm involved will not be able to act adversely to the borrower in the future. Advance waivers can be used to manage the risk of conflicts of interest in such joint retainers, but depending on such factors as the sophistication of the clients and disclosure of the risks involved, such waivers may not be held to be effective in some circumstances.

Footnotes

1. 2017 NLTD(G) 21.

2. RSNL 1990 c C-34

3. Rule 3.4-10 of the Code of Professional Conduct, cited at para. 19 of the decision

4. Supra note 1 at para 41

5. Ibid, paras 42-44.

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.

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Justin Hewitt
 
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