"Crossing the Line: Courts apply Neil while The Law Society of B.C. considers an exception", Harper Grey LLP Law Bulletin

2004

By Kimberly J. Jakeman, Bryan G. Baynham, Q.C., and Praveen K. Sandhu (formerly of our firm). 

Introduction
In an article published last spring titled “The Bright Line,” we discussed the decision of R. v. Neil and its impact on the business of law across the country.1

In R. v. Neil Mr. Justice Binnie for the Supreme Court of Canada articulated a three dimensional duty of loyalty owed by lawyers and law firms to clients: the duty to avoid conflicting interests, a duty of commitment to the clients cause, and a duty of being candid with respect to matters relevant to the retainer. In addition, Justice Binnie states that the firm, not just the individual lawyer owed a fiduciary duty to clients and that a bright line was required. Specifically:

The bright line is provided by the general rule 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.2

With the introduction of the bright line analysis we expected, as did the Supreme Court of Canada, corresponding changes to the way law firms, particularly national firms, handle conflicts and conduct business.3

There were others in the legal community with similar expectations. In his recent article, Julius Melnitzer concluded the effect of Neil is that, absent informed consent, lawyers cannot accept retainers that adversely affect their client's business interests. In his view, the core of the Neil decision is that lawyers owe a duty of loyalty which includes a duty with respect to the clients strategic business interests. This prohibits representation of one client that harms the economic or social interests of another client, even where the matters are unrelated4. Melnitzer refers in his article to a statement from a senior litigator at Fasken Martineau DuMoulin (Toronto) that national litigation departments will start concentrating on servicing corporate clients and, as a result, we may see a repeat of the trend seen in the 1990's when litigators from large firms broke away to litigation boutiques5. As we discuss below, to some extent these expectations and predictions have became a reality.

Ironically, one of the firms to recently see the departure of three litigators is Fasken Martineau DuMoulin. Two of them are now with Elliot Kym, a Toronto class-action boutique. At least one of them, it seems, was responding to the fact he was being conflicted out of potentially lucrative files6.

Recent Decisions
Another example of how conflict rules are affecting the business of law comes from a recent CSFB panel decision that disqualified Stikeman Elliott (Toronto) from acting for a new client because doing so violated a duty owed to its former client. The law firm in this case was taking a position directly adverse to the interest of the former client by challenging the former client's jurisdiction and independence. Essentially the law firm was arguing against the advice it had provided to the former client7.

We also see the courts applying the law as articulated in Neil. In First Property Holdings Inc. v. Beatty8 Fasken Martineau DuMoulin (“Faskens”) acted as the filing agent for First Property. Faskens then sought to represent the Plaintiffs in an action against First Property. The court held that there is a bright line regarding conflict rules related to current clients. Absent informed consent, Faskens could not cross this bright line; Faskens could not act for the Plaintiffs in an action against First Property.

In Schober v. Walker9, the Defendant client retained one of the two lawyers at Maxwell, Schuman & Company in 2000. The Maxwell, Schuman partnership subsequently dissolved but the two lawyers continued working in the same premises and continued to appear to be a partnership. The client reasonably thought that Maxwell, Schuman continued to be a partnership. The second lawyer from this “partnership” was now acting as an expert witness against the same client in a matter related to the 2000 matter.

The court found that the second lawyer was not acting as counsel and the presumption that information would pass between the two lawyers had been rebutted. However, the court then referred to the Neil decision stating that there is a fiduciary relationship which includes a duty that goes beyond not disclosing confidences. It includes loyalty, good faith and not acting against a client's interests. The court held that the second lawyer was violating the duty of loyalty owed to the client by providing an expert report for the opposing party.

In Chiefs of Ontario v. Ontario10, Blake, Cassels and Graydon (“Blakes”) acted for the Mnjikaning First Nation (“MFN”) and the Chiefs of Ontario (“CO”) after it had obtained consent from MFN to act for CO whose interests were potentially adverse to MFN. MFN had independent legal advice before signing the consent. However, the consent did not contemplate or include the right to make direct and serious claims against MFN such as breach of fiduciary duty, bribe-taking and deception which Blakes was making against MFN as part of CO's claim.

Blakes did obtain a consent which was held to be valid and binding but it was not broad and clear enough in scope to cover this type of direct and extreme adversity. The court held that any ambiguity in the consent is to be resolved against Blakes.

In de Guzman v. de la Cruz11 the Petitioners brought an action against the Philippines Community Centre Society (the “Society”) and Mr. de la Cruz. The Petitioners were members of the Society and they wanted to have Mr. de la Cruz removed as its President. In the particular motion, they sought an Order that it is a conflict of interest for the same lawyer to be acting for both the Society and Mr. de la Cruz. There was no conflict. The court said that a lawyer is not always in conflict when acting for an officer of a society and the society itself, it depends on the circumstances. The positions of the Society and Mr. de la Cruz were not adverse. Furthermore, the Petitioners brought the application late in the proceedings and failed to demonstrate any prejudice to themselves.

Although the court found that there was no conflict of interest in this particular case, it went on to clarify the scope of the inquiry in cases concerning potential conflicts. The court reiterated the duty of loyalty articulated in Neil. It involves more than just concerns about uses and abuses of confidential information. It includes a duty to avoid conflicts of interest and a duty to commit to the client's cause by ensuring loyalties are not divided between clients.

Since Neil, courts have applied both the bright line analysis and the expanded duty of loyalty owed by lawyers and law firms. They have upheld the requirement to obtain informed consent from a client before acting against that client. In conjunction, they have said that the lawyer or law firm's ability to act against the client only exists within the parameters of the actual consent obtained. The duty of loyalty owed by a lawyer is owed not only by all lawyers within a firm but also any other lawyer that the client reasonably assumes is part of that law firm. A lawyer in such circumstances could not, for example, provide an expert opinion to a party who is adverse in interest the firm's client. Finally, courts repeatedly emphasise that the duty of loyalty means undivided loyalty.

Law Society Rules
In addition the duty of loyalty articulated in the case law, lawyers in British Columbia are also governed by the conflict of interest rules in the Professional Conduct Handbook (the “Handbook”)12. The rule in question is found in Chapter 6:

Acting against a current client

6.3 A lawyer must not represent a client for the purpose of acting against the interests of another client of the lawyer unless:

(a) both clients are informed that the lawyer proposes to act for both clients and both consent, and

(b) the matters are substantially unrelated and the lawyer does not possess confidential information arising from the representation of one client that might reasonably affect the other representation.

6.4 For the purposes of Rule 6.3, the consent of a client to the lawyer acting for another client adverse in interest may be inferred in the absence of contrary instructions if, in the reasonable belief of the lawyer, the client would consent in the matter in question because the client has

(a) previously consented to the lawyer, or another lawyer, acting for another client adverse in interest,

(b) commonly permitted a lawyer to act against the client while retaining the same lawyer in other matter to act on the client's behalf, or

(c) consented, generally, to the lawyer acting for another client adverse in interest.

As it stands currently, this rule does not permit a lawyer in this province to cross the “bright line” articulated in Neil. However, The Law Society is currently considering a proposal to change this rule. The change purports to carve out an exception to the need for informed consent. This exception would be created by adding the following subparagraph to Section 6:

6.31 As an exception to rule 6.3(a), a lawyer may represent a client against the interests of another client who does not consent if:

(a) the client, to the knowledge of the lawyer, regularly engages another lawyer,

(b) the lawyer has notified the client in writing at the time the lawyer was engaged that the lawyer may act against the interests of the client in circumstances permitted by this rule, and

(c) any client involved that does not regularly engage another lawyer consents.13

Footnotes:

3.1 In the case of an engagement existing when this Rule comes into effect, the lawyer may notify the client in writing on or before (three months after rule comes into effect).

Essentially this would nullify the need for a lawyer to obtain informed or any consent before acting against a client as long as the lawyer includes some reference to potential future conflicts in the original retainer and the client ‘regularly engages' another lawyer.

Not surprisingly, the proposed amendment has met with opposition from corporate counsel and other members of The Law Society of BC. In our view, there are several good reasons to resist pressure to relax the rules concerning conflicts of interest.

First, the proposed change purports to allow a lawyer or law firm to act in the face of a conflict which crosses the bright line outlined by Mr. Justice Binnie in the Neil decision14. The bright line analysis would continue to apply even in situations where a lawyer obtains a general consent with the original retainer. This is because the only exception to the bright line that the Supreme Court of Canada has provided for is where the current client consents.

“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.”15

It is our view that the exception articulated in the proposed Rule 6.31 is broader than the exception provided for in Neil. Specifically, it falls short of ensuring that the current client receives “full disclosure.” Furthermore, even if a lawyer does provide full disclosure to a current client, any general consent obtained by a lawyer with the original retainer is unlikely to be sufficiently broad and clear to be effective in all situations. This was precisely why Blakes was disqualified from acting in Chiefs of Ontario.

Second, lawyers should not repeat the mistake made by the accounting profession. For accountants, accepting contracts despite conflicts increased business in the short term. An accounting firm could generate large fees for management services while other accountants from the same firm conducted the annual audits. Those providing management services benefited from favourable audits. Arthur Anderson's relationship with Enron is the most egregious example of this conflict. As we are all aware, the conflict in conjunction with inadequate audits ultimately lead to the firm's disappearance. Further, public trust and confidence in the accounting profession suffered a corresponding decline.

The Canadian Institute of Chartered Accountants recently enacted new “Independence Rules” for accountants16. This is part of the effort to restore public confidence in the accounting profession and ensure that future accounting firms do not suffer the fate of Arthur Anderson.

By making our professional rules less restrictive, we may be heading down the same road taken by the accounting profession.

Third, preserving the independence of the profession and the administration of justice requires that lawyers collectively, and law societies in particular, put the interest of clients ahead of their own self interest. The administration of justice depends on the public's ability to rely on those that represent them and their causes in an increasingly complex legal regime. If clients can not be assured that their counsel will maintain their confidences and represent their position zealously, their confidence and trust in the system will deteriorate as will the foundations of our legal system which is built on this trust and confidence.

Looking at it another way, there is nothing to be gained by the profession through the proposed amendment. In fact, there is a significant risk to the profession in that the perception will be that lawyers are putting their own self-interest ahead of that of the clients. This perception can only erode the trust clients normally place in their lawyers. Being a professional in any field includes having the trust and respect of others. Earning trust and respect requires, among other things, a dedication to the interest of the client which must always come first.

This dedication manifests itself through actions such as refusing retainers that conflict with the interests of a current client. This may mean a short-term loss for the purposes of investing in the long-term goals of preserving the independence of the profession and maintaining public confidence in the administration of justice. We are far beyond the age when trust was placed in professionals without hesitation and without questions. Clients today are asking more questions about the services law firms provide, the costs of those services and, the self-interest of the firm providing those services. Our clients need to know and trust that we are dedicated to putting their interests first17.

One final point is important to bear in mind. The proposed rule would not bind the courts. The case of Ribeiro v. Vancouver (City)18 illustrates this point. In that case a law firm was acting both for and against the city in unrelated matters. The lower court disqualified the law firm as its representation violated Rule 6.3 of the Handbook. The British Columbia Court of Appeal, however, reversed this judgement stating that the judge erred in concluding that he was obliged to apply Rule 6.3.19 In reaching this conclusion, the court quoted the following passages from MacDonald Estate v. Martin (Martin)20:

The legal profession is self-governing. In each province there is a governing body usually elected by the lawyers practising in the province. The governing body enacts rule of professional conduct on behalf of those it represents. These rules must be taken as expressing the collective views of the profession as to the appropriate standards to which the profession should adhere.

A code of professional conduct is designed to serve as a guide to lawyers and typically it is enforced in disciplinary proceedings. The courts, which have inherent jurisdiction to remove from the record solicitors who have a conflict of interest, are not bound to apply a code of ethics. Their jurisdiction stems from the fact that lawyers are officers of the court and their conduct in legal proceedings which may affect the administration of justice is subject to this supervisory jurisdiction.

Although the rules set professional standards for lawyers in a province, they can not bind a court. The court has a broader concern, that being how a lawyer's behaviour affects the administration of justice.

The current Law Society rule with respect to conflicts of interest is consistent with the Supreme Court of Canada's decision in R. v. Neil and the goal of maintaining public trust in the profession and the administration of justice generally. As is stands, if there is any suggestion that the self interest of the lawyer or law firm compromises the interests of a current client without informed consent, the lawyer or law firm has crossed the bright line and can no longer represent any party involved.

Amending Rule 6 will have the result that The Law Society rule with respect to conflicts of interest will no longer be consistent with the Supreme Court of Canada's decision in R. v. Neil. The Law Society rule will be less restrictive than that of the court. How can that be in the best interest of the public? Amending Rule 6 will not affect how B.C. judges apply R. v. Neil and, further, it may well undermine the credibility and independence of the profession.

Conclusion
We are beginning to see the ramifications of the R. v. Neil decision. Previous and existing clients are insisting that their interests come before those of the new clients or the law firm itself and the courts are imposing the bright line reasoning and forcing law firms to withdraw from cases where they have crossed the line.

The Law Society of BC is considering amending its conflict's rule in light of the R. v. Neil decision at the risk of undermining the independence of the bar and the public's respect for the legal profession.

How the “business of law” will ultimately change as a result of R. v. Neil remains to be seen, as both national and local law firms adjust their practices to bring them into line with R. v. Neil and ensure that they are not “crossing the line.”

ENDNOTES

1. Kim J. Jakeman and Shanti M. Davies, The Bright Line: The Decision of R. v. Neil and its Impact on the Business of Law in Canada, The Advocate (2003).
2. R. v. Neil [2002] S.C.J. No. 72 (SCC), at paragraph 29.
3. Jakeman and Davies, supra, at page 7, 8.
4. Julius Melnitzer, Neil Decision Sends Shockwave Through Canada's Legal Market: Canadian Court Rules Clients Deserve Law Firms' Loyalty, Cross Currents (April 2003), at page 38.
5. Melnitzer, at page 39.
6. Sandra Rubin, “Three Leaving Faskens”, The National Post, January 7, 2004, at page FP7
7. Shannon Kari “Law firm removed as CSFB counsel,” the National Post, February 17, 2004, FP ; The panel that made the decision in this case included a retired justice of the Ontario Court of Appeal
8. First Property Holdings Inc. v. Beatty [2003] O.J. No. 2943 (O.S.C.J.)
9. Schober v. Walker [2003] B.C.J. No. 1161 (B.C.S.C.)
10. Chiefs of Ontario v. Ontario [2003] O.J. 580 (S.C.J.)
11. de Guzman v. de la Cruz [2004] B.C.J. No. 72 (B.C.S.C.)
12. The Professional Conduct Handbook, http:www.lawsociety.bc.calibraryhandbook
13. Email received from The Law Society of British Columbia, March 4, 2004.
14. Leaving aside for the moment the fact that the proposed change does not address the expanded three-dimensional duty of loyalty articulated in R. v. Neil.
15. R. v. Neil [2002] S.C.J. No. 72 (SCC), at paragraph 29.
16. Canadian Institute of Chartered Accountants, “New Independence Standard” (October 2003).
17. David H. Maister, “True Professionalism,” Simon & Schuster (Toronto: 1997), at pages 16-17.
18. Ribeiro v. Vancouver (City) [2002] B.C.J. No. 2843 (BCCA).
19. There was a dissent on the issue of whether or not the trial judge felt bound by the rules.
20. MacDonald Estate v. Martin (Martin), [1990] 3 S.C.R. 1235 (SCC).