The Supreme Court of Canada Clarifies the Duty of Loyalty Owed by Lawyers to Clients — By Timothy Morgan

On July 5, 2013 the Supreme Court of Canada released its decision in Canadian National Railway Co. v. McKercher LLP, clarifying the rules that operate where a law firm seeks to represent a party suing one of its current clients.  The case involved a law firm, McKercher LLP, that terminated its ongoing retainers with CN in order to act as counsel on a proposed class action lawsuit against the railway seeking $1.75 billion in damages.  McKercher had accepted this retainer before it terminated its ongoing retainers for CN and without informing CN.  Indeed, CN first learned of the retainer when it was served with the statement of claim in the proposed class action.  CN brought a motion to have McKercher removed as counsel.

At first instance the Saskatchewan Court of the Queen’s Bench found that McKercher had violated its duty of loyalty to CN and removed it as counsel.  The Court of Appeal overturned this decision.

CN appealed to the Supreme Court of Canada.  This decision marked the first time that the Supreme Court revisited its earlier decisions that had established the “bright-line rule”.   That rule prohibits law firms from acting for any client with an immediate legal interest in direct conflict with that of an existing client, unless both clients consent.  In a unanimous decision, Chief Justice McLaughlin confirmed that the bright-line rule remains the law in Canada and, once it applies, it admits of no exceptions.

However, the Supreme Court recognized that the bright-line rule will not apply in all situations.  The Court described the situations where the bright line rule does not apply:

  • Where the interests of the clients are not directly adverse;
  • Where the interests are not legal (i.e. commercial interests are not sufficient);
  • Where a client seeks to use the rule tactically.  For example, a client cannot retain several law firms in order to make it difficult for its adversaries to find counsel; and
  • In exceptional cases, where it would be ‘unreasonable’ for a client to believe that its lawyer will not act against it in unrelated matters.

Where the bright line rule does not apply, the Court stated that the test is whether there a substantial risk that a client’s representation would be materially and adversely affected by the law firm’s concurrent representation of both parties and the obligation is on the client to establish on a balance of probabilities the existence of a conflict.

On the facts of the CN case, the Court found that the bright-line rule applied and that McKercher had violated its duty of loyalty to CN by (i) accepting the retainer on the class action; (ii) terminating its other retainers with CN; and (iii) not informing CN of the fact that it had accepted a retainer on the class action.

Despite the Court’s conclusion that McKercher had crossed the bright line and breached its duty of loyalty to CN, it did not find that McKercher should be automatically removed as counsel in the class action.  The Court indicated that, unlike cases involving misuse of confidential information where disqualification is automatic, in some cases it would be appropriate to allow a law firm to continue its representation despite a breach of the bright line rule.   The Court stated that such a determination would be case specific, but highlighted the following factors that could be considered in determining the appropriate remedy for the breach:

  • behaviour disentitling the complaining party from seeking removal of counsel (such as delay in bringing the motion for disqualification);
  • significant prejudice to the new client’s interest in retaining its counsel of choice or in retaining new counsel; or
  • the fact that the law firm accepted the conflicting retainer in good faith reasonably believing that the concurrent representation fell beyond the scope of the bright line rule and applicable law society regulations.

The Supreme Court sent the case back to the Court of the Queen’s Bench to determine if disqualification was appropriate in light of the re-cast legal framework.

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