On July 5, 2013 the Supreme Court of Canada clarified the scope of a lawyer’s duty to avoid conflicts of interest when it decided a law firm breached its duty of loyalty to its client:

• Bright Line Dimmed. The SCC confirmed the “bright line rule” for avoiding conflicts of interest – but dimmed it by recognizing several limitations and exceptions to the rule.
• No Automatic Disqualification.  The SCC held that counsel’s breach of the “bright line rule” does not automatically warrant disqualification of counsel.

BACKGROUND

Law firm McKercher LLP represented CN in three matters.  It agreed to represent a class suing CN for $1.75 billion.  The class action was unrelated to the other three matters; McKercher did not get CN’s consent to its representation of the class. McKercher quickly terminated two of its CN retainers, and CN terminated the third.  CN immediately asked the Court to disqualify McKercher from acting in the class action on the basis McKercher had breached its duties to CN.

BRIGHT LINE “DIMMED”

The SCC confirmed the “bright line rule” that a law firm cannot act against a current client – but “dimmed” the brightness of the line by recognizing several limitations and exceptions to the rule:

The Bright Line Rule.  If the “bright line rule” applies, a lawyer may not concurrently represent clients adverse in interest without first obtaining the consent of each client.

 

Related and Unrelated Matters. The rule applies to concurrent representation in both related and unrelated matters.

Limitations and Exceptions. The rule does not apply where it is unreasonable for a client to expect a lawyer not to act against it in unrelated matters, and only applies where:

• the clients’ immediate interests are directly adverse in the matters on which the lawyer is acting;
• legal (not commercial or strategic) interests are involved; and
• the party is not raising the rule tactically.

The SCC agreed McKercher’s concurrent representation of the class against CN breached all three aspects of its duty of loyalty to CN:

• The bright line rule applied.  McKercher’s failure to get CN’s consent before acting for the class breached its duty to avoid conflicting interests;
• McKercher’s termination of its CN files breached its duty of commitment; and
• McKercher’s failure to tell CN that it intended to represent the class breached its duty of candour.

NO AUTOMATIC DISQUALIFICATION 

The SCC held, however, that a breach of the bright line rule does not automatically warrant disqualification of counsel: courts must also consider protection of the administration of justice. The SCC sent the case back to the original motions judge to determine the appropriate remedy in accordance with the SCC’s reasons.

Click here to read the SCC’s decision in Canadian National Railway Co. v. McKercher LLP.

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Please contact your McInnes Cooper lawyer or McInnes Cooper Partner Harvey Morrison to discuss this topic or any other legal issue.

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