Understanding Conflicts of Interest: Tips from the Tax Court

Canadian National Railway Company v McKercher LLP and Gordon Wallace, 2013 SCC 39

Conflict of interest rules are becoming increasingly important in a number of professions including the investment services industry under the new Client Relationship Model introduced by IIROC on March 26, 2012. New Rule 42, requires that all material conflict situations between the Approved Person and the client and between the Dealer Member and the client be addressed by either: avoiding the conflict, disclosing the conflict, or otherwise controlling the conflict of interest situation.

As a point of interest on the matter, the Supreme Court of Canada (“SCC”) recently considered when a law firm can act for clients that are adverse in interest in unrelated matters. On July 5th, the SCC released its decision in Canadian National Railway Company v McKercher LLP and Gordon Wallace. McKercher clearly delineates when a law firm will be in a conflict of interest; the immediate issue before the court was whether a law firm could sue a current client on behalf of another client. In deciding this question, the court provided a clear explanation of the application of the so-called “bright line” rule.

Background.  The firm of McKercher LLP was representing the Canadian National Railway Company (“CN”) on a few relatively small matters when it accepted a retainer to bring a $1.75 billion class action lawsuit against CN. The first time CN received notice of this potential conflict was when it was served with the Notice of Civil Claim in the massive class action proceeding, that alleged CN was overcharging western farmers for grain transport.

Upon receipt of the lucrative retainer from Gordon Wallace, McKercher LLP terminated all of its representation agreements with CN, except for one, which CN quickly withdrew.

The Court of Queen’s Bench of Saskatchewan initially disqualified McKercher from acting in the class action, but the Court of Appeal overturned that decision.

The Supreme Court of Canada. In allowing CN’s appeal, the SCC stated that a lawyer’s duty of loyalty consists of three salient dimensions: a duty to avoid conflicts of interest; a duty of commitment to the client’s cause, and a duty of candour.

Avoiding conflicts is generally concerned with protecting confidential information and ensuring effective representation of the client. It is more than the effect of protecting these interests though; a large aspect of conflicts is just avoiding the perception of a conflict. Lawyers will fall short of their duty of commitment if they drop a client to avoid a conflict in favour of another contract. The duty of candour requires the lawyer to inform the client of anything relevant to the ability to provide effective representation, including of course, potential conflicts.

The Court upheld a strict interpretation of the so called “bright line” rule, which stipulates that a law firm cannot concurrently represent clients whose interests are adverse without first obtaining their consent, even if the matters are unrelated.

The application of the rule in this manner is interesting because McKercher did not possess any relevant confidential information that could have prejudiced CN in the class action. It is common for a law firm to be disqualified from acting for one party in order to avoid the risk of confidential information being used improperly and thus impairing effective representation of the other client. But in this instance, the court felt that it was not the risk so much as the perception of conflict that justified overturning the Court of Appeal’s decision; the matter was referred back to the Court of Queen’s Bench to determine the remedy. “A breach of the bright line rule”, the SCC said at paragraph 11, “usually attracts the remedy of disqualification”.    

The SCC clarified that the bright line rule:

• applies only where the clients’ immediate interests are directly adverse in the legal matters the firm is representing them on;
• applies only to legal interests, not to commercial or strategic interests; 
• cannot be used tactically; and
• does not apply where it would be unreasonable for a client to expect that the firm would not act against it in an unrelated matter (for example, with professional litigants, whose consent can be inferred when the conflicting matters are unrelated and there is no risk of improper use of confidential information).

Conflicts of interest are becoming increasingly important as law firms continue to grow and expand their offices nationally. The clarification of the bright line rule by the SCC in McKercher is therefore welcomed.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.