Assume that the following clause was included in the retainer agreement between SK Firm LLP and the Corporation (the Relieving Clause ):

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1 ETHICAL SCENARIO #3 I. FACT PATTERN A Saskatchewan law firm ( SK Firm LLP ) acts on behalf of an out of province (e.g. national) corporation (the Corporation ). SK Firm LLP s role has been solely to file extra-provincial corporate filings and act as power of attorney for corporate law purposes on behalf of the Corporation in Saskatchewan. The law firm is approached by a third party who wishes to sue the Corporation. Assume that the following clause was included in the retainer agreement between SK Firm LLP and the Corporation (the Relieving Clause ): The Corporation hereby acknowledges and agrees that SK Firm LLP s engagement as Attorney for Service will not affect SK Firm LLP s right to act in relation to other matters that may directly or indirectly involve the Corporation, even where its involvement in another matter is adverse to the Corporation s immediate interests. Furthermore, the Corporation hereby acknowledges and agrees that SK Firm LLP will be free to act on behalf of existing or new clients in relation to any matters, whether or not those clients are engaged in business endeavours competing with the Corporation or have interests directly or indirectly adverse to the Corporation. SK Firm LLP s representation of such other clients may require it to give advice directly or indirectly adverse to the Corporation, become involved in negotiations with or, directly or indirectly, affecting the Corporation, and/or commence or otherwise prosecute an action or other proceeding against the Corporation. The Corporation hereby acknowledges that it has been advised to seek independent legal advice in relation to this waiver of any and all conflicts of interest, and that absent independent legal advice, the Corporation will be deemed to have understood and agreed to SK Firm LLP s representation of clients adverse in interest. Nothing herein shall be interpreted to infer that SK Firm LLP will represent the Corporation in matters other than the filing of extra-provincial corporate filings in Saskatchewan. II. ISSUES 1. In the absence of the Relieving Clause, may SK Firm LLP terminate its relationship with the Corporation and proceed to act on behalf of the third party in the lawsuit against the Corporation? 1

2 2. Alternatively, may SK Firm LLP pursue the third party claim against the Corporation if the retainer agreement with the Corporation expressly states that the law firm would be entitled to represent clients directly adverse to the Corporation s interests? In particular: a. Would the general future waiver of a conflict of interest in the Relieving Clause be effective as against the Corporation thereby allowing SK Firm LLP to act for the third party? or b. Would SK Firm LLP be prohibited from representing the third party because the firm acted as corporate agent and power of attorney on behalf of the Corporation in Saskatchewan? III. ANALYSIS The analysis of these issues requires a consideration, inter alia, of case law, the Canadian Bar Association Code of Professional Conduct, the Law Society of Saskatchewan Code of Professional Conduct, and the final report Conflicts of Interests: Final Report, Recommendations & Toolkit (August 2008, Canadian Bar Association) (the Task Force Final Report ) prepared by the CBA Task Force on Conflicts of Interest (the Task Force ). A. Termination of the Lawyer-Client Relationship in Favour of another Client Courts have commented that a lawyer may not terminate the lawyer-client relationship simply to avoid the bright line rule. The bright line rule was set out in R v. Neil, [2002] 3 S.C.R. 631 [ Neil ]. Where there is a substantial risk that a current client would be materially and adversely affected by the lawyer s representation of a new client in an unrelated matter, absent informed consent, a lawyer may not act for both. As noted in Wallace v. Canadian Pacific Railway 2009 SKQB 369 [Wallace] (discussed below), there is an exception to the bright line rule. Citing Neil, consent may be inferred where the client is a professional litigant, for example, a government or chartered bank, which may generally accept that private practitioners will act against them in unrelated matters. Disqualification of a lawyer in such a case may be tactical rather than principled and will not be allowed. In Wallace, the question was whether a Saskatchewan law firm could represent western farmers in a lawsuit against their client, Canadian National Railway ( CN ), for whom the law firm had been acting since At the time the claim arose, the firm represented CN on three matters: a personal injury claim, power of attorney in Saskatchewan, and a real estate transaction. The firm withdrew from service on the personal injury matter prior to issuing the statement of claim on behalf of the farmers and then proceeded to withdraw or seek consent to continue representation on the other matters after issuance of the statement of claim. CN opposed the firm s 2

3 representation of a third party adverse to its interests on the grounds that the firm was familiar with CN s position on litigation and had insight into the company s strategies and defences. In Wallace, Justice Popescul cites other Canadian jurisprudence for support in the conclusion that dumping an existing client in favour of another is not permissible. In particular, at paragraph 66, he cites Master Sandler in Toddglen Construction Ltd. v. Concord Adex Developments Corp., [2004] O.J. No (QL) [Toddglen] for the proposition that a lawyer in a civil case cannot terminate a litigation retainer of a client other than for good cause. Master Sandler stated: 85 In my view, the "duty of loyalty" described in Neil does not permit a law firm to terminate the relationship of an existing client solely in order to take on the work of a more financially desirable client, where the two clients' interests are adverse, although the mandates are unrelated, so as to avoid the Neil "bright line" rule. In my view, if terminating one client's retainer in order to take on a financially more attractive prospective client's retainer were allowed many clients would be put in jeopardy and suffer much inconvenience by having their retainers terminated and by having to go out and retain and brief and pay extra for new lawyers just because of the financial interests of their former lawyer or law firm. Justice Popescul relies on De Beers Canada Inc. v. Shore Gold Inc., 2006 SKQB 101 [De Beers] for further support that a law firm may not terminate its relationship with one client to take on another where the clients are adverse in interest, as to avoid the bright line rule in Neil. The focus in Toddglen and DeBeers is on the duty of loyalty owed to the client, a duty that exists whether retained for litigation or other matters. Wallace, Toddglen and DeBeers may be distinguishable from the present scenario. In those cases, the lawyers had represented the existing client in a litigation matter, while in the present scenario, SK Firm LLP has not represented the Corporation in any litigation matter but rather has merely acted as Attorney for Service and filed extra-provincial corporate filings in Saskatchewan. However, Justice Popescul in Wallace elaborates that "dumping" an existing client in order to sue that client is an ethical breach. He relies on the withdrawal chapters of the Canadian Bar Association Code of Professional Conduct (Ottawa: Canadian Bar Association, 2006), and The Law Society of Saskatchewan Code of Professional Conduct (Regina: Law Society of Saskatchewan, 1991). The rule provides that a lawyer owes a duty to the client not to withdraw services except for good cause and upon notice appropriate in the circumstances. Justice Popescul is of the view that terminating the existing solicitor-client relationship for the sole purpose of accepting a retainer to sue that client offends the Code of Conduct. 3

4 Based on Wallace, there is an argument that SK Firm LLP will not be able to terminate its relationship with the Corporation, absent justifiable cause, in order to act on behalf of the third party in the lawsuit against the Corporation, even if the firm does not represent the Corporation in a litigation matter. However, the Task Force clearly states that the primary purpose of the duty of loyalty is to protect the duty of performance. In the situation where the relationship between SK Firm LLP and the Corporation strictly involves filing extra-provincial filings, it is unlikely that the representation of the client with respect to those filings would be affected and thus the duty of performance could remain in tact. Further, typically the concern over withdrawal of services is that there will be prejudice to the client from whom the solicitor is withdrawing services, or an unfair advantage conferred on the new client. Thus, it is debatable whether Justice Popescul s view in Wallace extends so far as to cover the present situation. B. Representation of Clients Adverse in Interest On the disqualification of counsel in relation to conflicts of interest, Justice Popescul commented in Wallace: 24 Courts have disqualified lawyers from further acting on a matter primarily for one of two reasons -- to protect the confidential information of clients or because of a conflict of interest The confidential information of clients must be preserved regardless of whether there is a conflicting interest or duty and whether or not the lawyer's representation of the client is complete. On the other hand, disqualifications due to a conflict of interest are rooted in the duty of loyalty, which is intertwined with the fiduciary nature of the solicitor-client relationship, and do not necessarily involve aspects pertaining to the confidential information of clients. The general rule in the Saskatchewan Professional Code of Conduct is that a lawyer shall not advise or represent both sides of a dispute and only after adequate disclosure and with the consent of the parties concerned may the lawyer act or continue to act in a matter when there is or is likely to be a conflicting interest. Although not yet incorporated into the Saskatchewan Professional Code of Conduct, the Task Force recommended that conflicting interest be defined to mean an interest that gives rise to a substantial risk of material and adverse effect on representation. Justice Popescul adopted the interpretation of the bright line rule in Neil as set out in the Task Force Final Report. He said that the appropriate interpretation is that absent proper consent, a lawyer may not act directly adverse to the immediate interest of a current client unless the lawyer 4

5 is able to demonstrate that there is no substantial risk that the lawyer s representation of the current client would be materially and adversely affected by the new unrelated matter. Further, at paragraph 46, Justice Popescul states: 46 It is the representation of the client that must be examined to determine the materiality of the adverse effect. The question involves weighing the significance of the adverse effect, rather than its likelihood. An extreme likelihood of an insignificant effect may not offend the rule, whereas a reasonable likelihood of a substantial effect would. This is because it is problematic if the duty of loyalty conflicts with a fundamental aspect of the retainer, as opposed to an aspect that is completely unimportant. As long as SK Firm LLP represents the Corporation solely in relation to filing extra-provincial returns, the representation of the Corporation would not materially affect or be affected by the firm s representation of the third party. In any case, SK Firm LLP should obtain informed consent as to avoid the bright line rule. Provided there are no other ethical issues at play, SK Firm LLP should be able to represent the third party. C. Waiver of a Conflict of Interest The question in part is whether a properly worded Relieving Clause in a retainer or engagement letter can provide future consent for a lawyer to act against a client where there is a conflict of interest. The Task Force Final Report stated that if a retainer is in writing and signed by the client, it is less likely that the client will be able to successfully assert unawareness or disapproval of the conflict. Waivers of conflict of interest have been addressed in case law. In Chiefs of Ontario v. Ontario, (2003), 63 O.R. (3d) 335 (S.C.J.), the Court held that a vaguely worded retainer did not provide consent for the law firm to act in a conflict situation. Although the consent to act for the third party was valid, it was so ambiguous that neither the law firm nor the client contemplated the nature of the future conflicting interest. The law firm had acted for its client for a number of years and with respect to a matter closely related to the allegations by the third party against that client. As such, the law firm was not entitled to rely on the waiver. Generally, the enforceability of the waiver will depend on three factors: 1. informed consent; 2. the sophistication of the client; and 3, the availability of independent legal advice. 5

6 The Task Force states that a retainer agreement which modifies the scope of a lawyer s duty to avoid conflicts of interest will not be upheld unless there is full disclosure by the lawyer of both the relevant facts and the implications of the clients consent. Consent that is general and openended is not likely to be effective because it is not reasonable that the client will have understood the material risks involved. The Task Force notes that in California, prospective waivers that purport to waive all future conflicts between the parties may be valid where the client was a knowledgeable and sophisticated user of legal services. The sophistication of the client is also an important consideration and is dependant on the facts of each case. Sophistication refers to the client s ability to comprehend the implications of waiving the conflict, not sophistication relative to their business. In Strother v Canada Inc SCC 24, Justice Binnie stated that sophistication of the client may lead to an inference of implied consent; however, a client cannot consent to conflicts that it does not know exist. In Strother, a lawyer represented a corporation, Monarch, with respect to some tax issues. The initial retainer agreement was expressed in writing, and a subsequent retainer was made orally. The written agreement terminated, but the oral retainer remained for general corporate and tax planning services. Notwithstanding, the lawyer advised another corporation, a competitor of Monarch with whom he engaged in business, on similar tax issues. In doing so, the lawyer failed to inform Monarch of advantageous tax rulings obtained in the course of acting for the other client. Therefore, notwithstanding that a client is sophisticated, consent will not always be implied. Clients may provide informed consent in the absence of independent legal advice; however, independent legal advice is preferable where a lawyer seeks the consent of a current client to act directly against the client s immediate interests. Lawyers who have ensured their clients sought independent legal advice before signing the future waiver will be more likely to be successful in upholding that waiver. A future waiver will only be effective where there is informed consent and the client understands the risk involved. A waiver may not be effective where it is lacking specificity. However, where SK Firm LLP acts only with respect to filing extra-provincial returns and as Attorney for Service, it could be argued that so long as SK Firm LLP is clear that they intend for the Corporation to waive a conflict of interest in any matter, the Corporation understands the nature of conflicts of interest, and has the opportunity to obtain independent legal advice, the waiver will be effective. In this circumstance, SK Firm LLP does not have the possession of any confidential information of the Corporation, so it would not be possible to specify in what matters the firm may wish to act against the Corporation. 6

7 D. Fiduciary Duties It is well-established that lawyers are in fiduciary relationships with their clients. This relationship involves a duty of loyalty to the client, the duty to avoid conflicting interests and a duty to protect confidential information. Thus, even where there is a valid waiver of a conflict and the duty of loyalty is not offended, lawyers must remain cognizant of protecting confidential information. In Wallace, Justice Popescul discussed the importance of protecting client confidentiality as a separate duty from avoiding a conflict of interest. He cited the test adopted by the Supreme Court of Canada in MacDonald Estate v. Martin, [1990] 3 S.C.R that a lawyer should not act for a client who is adverse in interest to a former client unless "the public represented by the reasonably informed person would be satisfied that no use of confidential information would occur. A factual connection between the previous retainer and the new matter is not necessarily required. For example, the Task Force cites Ramsbottom v. Morning (1991), 48 C.P.C. (2d) 177 (Ont. C.J. (Gen. Div.)), where the Court disqualified a law firm after it found that during the five-year solicitor-client relationship, the law firm acquired knowledge of practices, procedures and defence strategies in the litigation process as to give the firm an unfair advantage. Therefore, even if SK Firm LLP is able to successfully uphold a future waiver in a retainer agreement, the duties of loyalty and confidentiality still apply and the firm would have to take measures to ensure no confidential information was transmitted. However, where SK Firm LLP does not possess confidential information with respect to the Corporation, such measures are not necessary. IV. SUMMARY 1. In the absence of the Relieving Clause, may SK Firm LLP terminate its relationship with the Corporation and proceed to act on behalf of the third party in the lawsuit against the Corporation? The courts in Saskatchewan do not favourably view the dumping of one client for another. The Saskatchewan Court of Queen s Bench in Wallace v. Canadian Pacific Railway was of the opinion that terminating a relationship with a client in order to take on another client where the clients are adverse in interest offends the duty of loyalty as described in R. v. Neil and cannot be done to avoid engaging the bright line rule. This view is supported in other Canadian cases, for example Toddglen Construction Ltd. v. Concord Adex Developments Corp and De Beers Canada Inc. v. Shore Gold Inc. However, in these cases, the client being dumped had either a long-standing relationship with the law firm or the firm had knowledge of their litigation strategies and defences, or both. 7

8 The bright line rule in Neil states that where there is a substantial risk that representation of the current client would be materially and adversely affected by the new unrelated matter, absent informed consent, a lawyer may not act for both clients. The exception to the bright line rule is the professional litigant, for example government or a chartered bank, where informed consent may be implied because the professional litigant expects that a private practitioner will act against it in unrelated matters. Relying on the Canadian and Saskatchewan Professional Codes of Conduct, Justice Popescul in Wallace states that dumping an existing client to allow the law firm to sue that client on behalf of a third party is an ethical breach. That being said, even in situations where SK Firm LLP does not represent the Corporation in litigation matters, there is a possibility of counsel disqualification where SK Firm LLP terminates its relationship with a Corporation so as to take on a more lucrative client. However, in this scenario because SK Firm LLP does not possess confidential information relating to the Corporation and withdrawing its services would not negatively impact the Corporation, it is debatable whether terminating the lawyer-client relationship would constitute an ethical breach by SK Firm LLP. From another perspective, SK Firm LLP s representation of the Corporation (i.e. extra-provincial filing) would not be materially affected by representation of the third party. 2. Alternatively, may SK Firm LLP pursue the third party claim against the Corporation if the retainer agreement with the Corporation expressly states that the firm would be entitled to represent clients directly adverse to their interests? Generally, the rule is that a lawyer shall not represent parties adverse in interest where the representation of one is likely to adversely and materially affect the representation of the other. In particular: a. Would the general future waiver of a conflict of interest be effective as against the Corporation thereby allowing SK Firm LLP to act for the third party? Retainer agreements or engagement letters may contain waivers to future conflicts of interest. However, three factors are assessed to determine whether the waiver will be enforceable. First, there must be informed consent. Broadly worded or general waivers will not likely be enforceable because the client must know what it is that they are consenting to waive. There must be full disclosure of the relevant facts and the implications of the client s consent. Second, the client must be sufficiently sophisticated with regards to conflicts of interest to be held to have understood the meaning of the future waiver. The suggestion is that the client must be one who is familiar with legal processes and is able to understand the material risks involved. 8

9 Third, independent legal advice is preferable in situations where the lawyer is seeking consent to act directly against the client s interests, even in an unrelated matter. In the present scenario, where SK Firm LLP does not possess confidential information and has been clear that it intends for the Corporation to waive all conflicts of interest, the waiver may be valid provided that the Corporation is sufficiently sophisticated. b. Would SK Firm LLP be prohibited from representing the third party because the law firm had acted as corporate agent and power of attorney on behalf of the Corporation in Saskatchewan? Even where a lawyer has obtained informed consent through a future waiver, protection of confidential information is an important consideration. The duty to protect confidentiality is separate from the duty of avoiding a conflict of interest. Not only must there not be any transfer of confidential information, but the public represented by the reasonably informed person must be satisfied that no transfer of confidential information between clients would occur. Where SK Firm LLP does not possess confidential information with respect to the Corporation, there is no issue of protecting such information. Conclusion SK Firm LLP may act for a third party adverse in interest to the Corporation provided that the following criteria are satisfied: 1. SK Firm LLP only acts for the Corporation for extra-provincial filing purposes and as Attorney for Service, and does not possess confidential information; 2. The Relieving Clause is clearly worded and the Corporation is aware that SK Firm LLP intends for the Corporation to waive any and all conflicts of interest; 3. The Corporation is aware of the potential consequences of waiving conflicts of interest and has either obtained or been advised to obtain independent legal advice; and 4. Representation of the Corporation and the third party would not be materially affected. SK Firm LLP should be aware that the Relieving Clause may not be effective should the relationship with the Corporation evolve such that SK Firm LLP provides other legal services and/or obtains confidential information respecting the Corporation. 9