Canadian National Railway Co. v. McKercher LLP

The Supreme Court of Canada has finally spoken in the matter of Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39. Legal practitioners have been waiting for light to be shed on the issue of the potential for a conflict of interest in a situation where a lawyer sues a current client in an unrelated matter. The Court’s reasoning will allow lawyers to better identify the components of the duty of loyalty, but stops short of providing them with the precise answer they may be seeking.

The facts underpinning the decision

Law firm McKercher LLP had for ten years been one of the principal outside legal counsel to CN, a transportation company with a vast rail network throughout North America.  One of the biggest companies in Canada, CN distributes an average of 600 legal matters a year to some 50 law firms across the country.

In January 2009, McKercher began a legal battle against CN concerning the alleged overcharging of grain transportation costs to Western farmers over a 25-year period. The firm instituted a $1.75 billion class action against CN, without informing the company beforehand.

When CN was served with the class action, McKercher was acting for it in four pending matters, three of which were unilaterally terminated by McKercher, and the fourth by CN. It is interesting to note that both parties admitted there was no legal or factual connection between any of the four matters and the class action.

McKercher no longer being the solicitor of record in those four matters, CN claimed it felt betrayed by its former legal counsel’s suddenly deciding to switch allegiances. CN also maintained that confidential information regarding its business approach, its risk tolerance and its litigation strategies had been disclosed to McKercher over the years and that the latter could use that information against it in representing Wallace.

Thus was born the dispute with which the Supreme Court was seized. CN claimed that McKercher should be disqualified from representing Wallace, as the firm had breached the duty of loyalty it owed CN and placed itself in a conflict of interest by agreeing to represent Wallace.

The decision of the Saskatchewan Court of Appeal

The Court of Appeal overturned the motion judge’s decision and declared that McKercher was qualified to represent Wallace. The principal grounds of the Court’s decision were threefold.

The Court first found that the evidence led did not allow of the conclusion that confidential information had been disclosed to McKercher. In any event, the Court considered that the risk of harm from any such disclosure was non-existent, given that the matters it was handling for CN were unrelated to
the class action. None of the matters entrusted to McKercher by CN bore any similarity to the Wallace claim.

The Court went on to dismiss CN’s argument that McKercher’s acceptance of a mandate against it constituted a breach of McKercher’s duty of loyalty. In the Court’s view, in light of the Neil decision, courts must inquire into the vulnerability of the complainant before deciding that there was a breach. The Court of Appeal considered that it would be erroneous to maintain that CN was a vulnerable client as, inter alia, it had its own legal department and regularly retained various law firms to represent it, leading the Court to characterize it as a “professional litigant”. In light of those factors, the Court held that CN had impliedly consented to McKercher’s acting against it in matters unrelated to those for which McKercher had been retained.

Finally, while the Court criticized McKercher for not having immediately notified CN of its representation of Wallace, and for breaching its duty of loyalty by terminating the mandates that CN had given it, the Court did not consider that disqualification was the appropriate remedy, as CN could obtain other redress, such as restitution of the costs of transferring the files for which McKercher was responsible.

The decision of the Supreme Court

As mentioned above, the Supreme Court did not specifically decide the question submitted to it, i.e. whether a law firm can sue a current client on behalf of another client. It did however establish guidelines for determining whether a lawyer’s duty of loyalty had been breached.

According to the Supreme Court, the duty of loyalty has three components.

1^st component

A lawyer must avoid placing himself or herself in a conflict of interest. This concept was explained in the Neil decision, which holds that the “bright line rule” prevents law firms from acting against current clients without their free and informed consent, regardless of whether the matters involved are related. The Court readily concluded that the precedents establishing that rule should not be departed from.

However, the Court qualified the rule by stating that it “applies where the immediate legal interests of clients are directly adverse”¹. It then specified four types of exceptions to the application of the “bright line rule”.

First of all, the rule does not apply where the respective clients are not directly adverse in interest.

Second, nor does it apply unless the clients are adverse in legal interest. For example, a lawyer may represent A in a litigation context and also issue to B a legal opinion on a commercial matter that is adverse to the interests of A. However, that lawyer may not subsequently sue A on behalf of B on the basis that the latter was originally a commercial client rather than a litigation client. Otherwise, the lawyer would be representing two clients who are adverse in legal interest, despite the fact that the original situation posed no problem.

Third, the bright line rule cannot be successfully raised by a party who seeks to rely on it in a manner that is “tactical rather than principled”². The Court pointed out that institutional clients are especially prone to do this and should preferably avoid distributing their files among several large law firms. For example, a client operating in a specific technological area would be using the rule tactically by giving mandates to the five lawyers in the jurisdiction specializing in that area, thereby avoiding the possibility of being sued by an adversary represented by a specialist in that area of the law. The client’s lawyer would then be assured of having as an adversary a lawyer unfamiliar with the legal concepts inherent in that specialized area. Thus, following the Court’s logic, a client employing such a tactic should not be able to benefit from the protection afforded by the rule.

Finally, the rule does not apply where the client can be characterized as a “professional litigant”³ who should reasonably expect that its law firm may act against it in unrelated matters. The Court considered governments and chartered banks as coming within that category. However, any contractual agreement between the parties prohibiting the law firm from acting against the client would render the exception inapplicable. An example of the “professional litigant” exception would be where a lawyer representing ABC bank in litigation matters involving the bank’s commercial leases sues the bank on behalf of one of its executives for unjust dismissal. It is clear that the Court intentionally forbore from identifying all of the potential parties that could be characterized as “professional litigants”, thereby leaving some doubt as to exactly which entities fall into that category.

With respect to this first component, the Court held that McKercher’s conduct infringed the “bright line rule”, as CN and Wallace had adverse legal interests, and it was reasonable for CN to expect that McKercher would not agree to represent a party suing it for $1.75 billion.

2^nd component

The Court pointed out that a law firm must abide by its duty of commitment to the cause of its client, which means that it must never abruptly drop a client simply in order to avoid conflicts of interest with existing or future clients. The Court concluded that McKercher breached this duty by unilaterally ceasing to represent CN in matters in which it had been acting, in order to file a lawsuit against it.

3^rd component

The Court also referred to a lawyer’s duty of candour towards the client, which entails keeping the client informed about any matter the lawyer knows to be relevant to the latter’s retainer. The Court concluded that McKercher failed to fulfill this duty by not informing CN of its intention to represent Wallace, which would have allowed CN to make an informed decision as to whether or not to consent to that representation.

The Supreme Court ultimately decided that McKercher had placed itself in a conflict of interest and that a disqualification order was probably the appropriate remedy, unless it could be shown that CN’s conduct rendered the issuance of the order inappropriate, that Wallace’s interest in retaining the counsel of its choice was being seriously prejudiced, or that McKercher believed in good faith that it was not in breach of the bright line rule.

Conclusion

As the reasons canvassed above recast the legal framework for analyzing a lawyer’s duty of loyalty, the Court decided to remit the matter to the Court of Queen’s Bench to be decided in accordance with those reasons and for determination of the appropriate remedy, if warranted.

In closing, Chief Justice McLauchlin stated the following in obiter:

“[I]t is also necessary to weigh the factors identified above, which may suggest that disqualification is inappropriate in the circumstances.”⁴

As the McKercher case is still pending, it remains to be seen whether the Court of Queen’s Bench will take the course alluded to by the Chief Justice, or once again order McKercher disqualified to represent Wallace.