Canadian National Railway Co v McKercher LLP

Background

The Supreme Court of Canada has recast Canadian jurisprudence in recent years concerning professional conflicts of interest in the legal profession. In its 1990 ruling in Macdonald Estate v. Martin, it first addressed the question of confidential information being handled by lawyers.

In 2002, the SCC dealt with the question of loyalty, ruling in R. v. Neil that the question of whether a conflict of interest may exist in how lawyers deal with clients was subject to a bright-line rule, where a lawyer, and by extension a law firm, may not concurrently represent clients adverse in interest without first obtaining their consent. While this was obiter to the case at hand, in 2007 it became the ratio for determining the later SCC case of Strother v. 3464920 Canada Inc.

The case at hand

In 2008, McKercher LLP (a large law firm in Saskatchewan) was representing Canadian National Railway with respect to various corporate matters within the province. In the same year, it also accepted a retainer from Gordon Wallace to act against CN in a $1.75 billion class action based on allegations that CN had illegally overcharged Western Canadian farmers for grain transportation. McKercher did not advise CN that it intended to accept the Wallace retainer, and CN only learned of it when it was served with the statement of claim in 2009. All of McKercher's dealings with CN were subsequently terminated that year, On McKercher's initiative in some matters, and on CN's initiative in another.

Following receipt of the statement of claim, CN applied for an order removing McKercher as solicitor of record for Wallace in the class action against it, on the grounds that McKercher:

The courts below

At the Court of Queen's Bench for Saskatchewan, Popescul J found that the firm had breached the duty of loyalty it owed CN, and the relationship was "materially and adversely affected" by its decision to accept the Wallace retainer, indicated by several relevant factors:

The Queen's Bench ruling was overturned by the Court of Appeal for Saskatchewan. In his ruling, Ottenbreit JA held that:

At the Supreme Court of Canada

The appeal was allowed by the SCC. In a unanimous ruling, McLachlin CJ identified several key issues.

The role of the Courts

The courts have inherent powers to resolve issues of conflicts in cases that may come before them. This is not to be confused with the statutory powers conferred on the legal profession by the various legislatures, as the courts are concerned with the administration of justice, and the various law societies are concerned with the good governance of the profession.

The governing principles

A lawyer owes his client a duty of loyalty, which has three dimensions:

1. a duty to avoid conflicting interests,
2. a duty of commitment to the client’s cause, and
3. a duty of candour.

With regard to the first dimension, the nature of the bright-line rule stated in Neil and Strother was clarified:

In that regard:

1. the bright line rule applies only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting,
2. it applies only when clients are adverse in legal interest,
3. it cannot be successfully raised by a party who seeks to abuse it, and
4. it does not apply in circumstances where it is unreasonable for a client to expect that its law firm will not act against it in unrelated matters.

Application of the principles

In the case at hand:

1. McKercher breached the bright-line rule stated in Neil, and by extension its duty to avoid conflicting interests, when it accepted to represent Wallace without first obtaining CN’s informed consent.
2. A law firm cannot terminate a client relationship purely in an attempt to circumvent its duty of loyalty to that client.
3. A lawyer must not "keep the client in the dark about matters he or she knows to be relevant to the retainer."

The appropriate remedy

Disqualification may be required:

1. to avoid the risk of improper use of confidential information (where it is generally the appropriate remedy),
2. to avoid the risk of impaired representation (normally required if the law firm continues to concurrently act for both clients), and/or
3. to maintain the repute of the administration of justice.

In the last case, the courts must consider several factors in arriving at the appropriate decision:

1. behaviour disentitling the complaining party from seeking the removal of counsel, such as delay in bringing the motion for disqualification,
2. significant prejudice to the new client’s interest in retaining its counsel of choice, and that party’s ability to retain new counsel, and
3. 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 restrictions.

In the current appeal, only the last case was relevant, and the matter was remanded back to the court of first instance to be decided in accordance with these reasons:

Impact

McKercher consolidated and clarified the case law in this field, and was seen as a statement that the bright-line rule in Neil was to be firmly applied, and not to be treated as a rebuttable presumption.