S I M O N C H E S T E R H E E N A N B L A I K I E L L P

THE CONFLICTS REVOLUTION

MARTIN V. GRAY AND FIFTEEN YEARS OF CHANGE

L E A D I N G T H E C A N A D I A N L A W F I R M I N T H E 2 1 S T C E N T U R Y : M A N A G I N G T H E F U T U R E

The State of Play in Canada in 2006................................................................................. 1

Law Moves From Profession to Business ......................................................................... 8

The Traditional Approach to Conflicts .......................................................... 10

Commonwealth Evolution of the Law of Conflicts ....................................... 11

The Rakusen Decision....................................................................................... 11 Canada breaks from Rakusen............................................................................................................... 14

Martin v. Gray – The Case of the Migrating Junior ...................................................... 14

The Strict Canadian Test ................................................................................. 16

Australia follows suit ........................................................................................ 20 Mallesons Stephen Jaques v. KPMG Peat Marwick: Acting Against Former Clients .................... 21 Grounds for Injunctive Relief.......................................................................................................... 21 Privileged Information and Potential Prejudice............................................................................... 22 Imputing Knowledge to Partners – Can Chinese Walls Stop the Flow? ......................................... 23 Carindale Country Club: The New Law Solidifies.......................................................................... 24 Privileged Information: The Controlling Tests................................................................................ 24

New Zealand opts for pragmatism.................................................................. 25 Conflicts in a Tighter Market for Legal Services ............................................................................ 27 The Court of Appeal’s Pragmatic Approach to Conflicts................................................................ 28 The Commonwealth Consensus Asserts Itself in the Dissenting Judgment .................................... 30 Russell McVeagh in Context........................................................................................................... 31

The Saga of Prince Jefri Bolkiah v. KPMG ................................................................... 31

The Courts Learn from the Commonwealth ................................................. 34 The Principled High Court................................................................................................................... 34 The Pragmatic Court of Appeal ........................................................................................................... 35 The House of Lords: Tougher Standards ............................................................................................. 35

The Solicitor’s Duty to Former Clients Under English Law ........................................................... 37 The Degree of Permissible Risk: The Solicitor’s Duty Defined...................................................... 38 Prince Jefri, KPMG, and the New Test in Action ........................................................................... 38 A Bright Line Test?......................................................................................................................... 43

The Dangers of Entrepreneurial Models of Lawyering ................................................. 47 “Directly adverse interests” and “immediate interests”: Strother’s predicament ............................ 48 The bright line test: candour, commitment, and the avoidance of conflicts .................................... 48 Duty of loyalty and duty to disclose material information beyond the retainer agreement ............. 50 Time and effort dedicated to a mandate: how much should a lawyer disclose? .............................. 50 Remedies and Personal Liability ..................................................................................................... 51 The Firm’s Liability for Strother’s Improper Conduct.................................................................... 53 Liability for legal fees earned as a result of the breach of duty of loyalty....................................... 53

Where Will Strother Take the Canadian Law on Conflicts of Interests?............................................. 55 What is Consent? ............................................................................................................. 58

Solicitor-client relationships and the duty of loyalty: from current to former clients.......................... 59 The Meaning of Informed Consent Requirements............................................................................... 60 Public information and legal advice: how relevant to confidential information? ................................ 61

Duty Of Loyalty And Confidential Information ............................................................. 62

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The nexus of relevance: the “sufficient relationship” revised.............................................................. 62 Imparting confidential information: the lawyer’s heavy burden.......................................................... 63 Towards a doctrine of imputed knowledge in Canadian courts? ......................................................... 64

Loyalty to Former Clients................................................................................ 64 The enduring obligation to protect confidential information ............................................................... 65 Proximity of relationship: duty of loyalty owed to third parties .......................................................... 65 Doctrine of imputed knowledge and timing in implementing screening measures ............................. 67

Duties to a Non-Client ...................................................................................... 68 “Immediate interest” and the pursuit of similar objectives.................................................................. 69 Imputed Knowledge............................................................................................................................. 70 Duties Owed To Non-Clients – Canadian Law Evolves...................................................................... 71

The Court tackles “what is an immediate interest? ......................................................................... 72 The “limited loyalty” owed to parties “involved in or associated with” the firm’s client ............... 73 The converging interests of client and third party ........................................................................... 73 Termination of the retainer and subsequent motion to disqualify ................................................... 74

Chinese Walls or Potemkin Villages? ............................................................................. 75

Walls in the United States ................................................................................ 79

The Consenting Client...................................................................................... 82

Towards an Empirical Look at Conflicts Management in Canadian Law Firms......... 83

A Practical Guide to Wall Construction.......................................................................... 85

Conclusions ...................................................................................................................... 91

Schedule A - Conflicts Survey Results ............................................................................ 97 Standard Procedures and Protocols for Conflicts ............................................................................ 97 Elements of Information Barriers .................................................................................................... 97 Improving Screens........................................................................................................................... 98 Walls Constructed and Dismantled in 2005 .................................................................................... 99 Conflicts Decision-Making ........................................................................................................... 101 Attitudinal Responses.................................................................................................................... 102 Impact of Conflicts Rules on the Firm .......................................................................................... 104 Conflicts – Coming Priorities........................................................................................................ 104

Schedule B : Conflict Of Interest Checklist.................................................................. 106 New Business .................................................................................................................................... 106 Ongoing Matters ................................................................................................................................ 107 Staff ................................................................................................................................................... 107 Hiring................................................................................................................................................. 108 Lawyers’ Outside Interests ................................................................................................................ 109 Prophylactic Measures....................................................................................................................... 109

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T H E C O N F L I C T S R E VO LU T I O N

THE STATE OF PLAY IN CANADA IN 2006

For the past fifteen years, the common law of conflicts of interest in Canada and elsewhere has undergone remarkable, even revolutionary, changes. As this paper1 is being written, we anticipate within a few months2 the next chapter in the Supreme Court of Canada’s trilogy of conflicts cases3, expecting that it, like its two predecessors, will strike off in novel directions, challenging the Canadian legal profession to adapt. It is, accordingly, timely to take stock of where we have come from, what the current state of play is, and what is likely to come in the future.

This paper, despite its length, is no more that an aerial sketch of a broad landscape. Its structure is as follows. It starts by situating conflicts within the remarkable evolution that has taken place in the market for professional legal services in Canada and elsewhere4. A broad overview of the caselaw follows, highlighting the significant cases from Canada and England. We then move on to the topic of Chinese walls – or cones of silence, ethical screens, or information barriers5 – which are sanctioned devices for managing certain types

1 This paper builds on earlier writings for the International Bar Association, The Independent (London) and Lexis-Nexis Butterworths Canada’s publication, Barristers and Solicitors in Practice. My colleagues J. William F. Rowley, QC, and Brett Harrison at McMillan Binch Mendelsohn and Christian Paquette at Heenan Blaikie LLP have helped with their research and critical commentary. Everyone who writes in this area owes a profound debt of gratitude to Bill Freivogel, whose blog on conflicts of interest is continuously useful. I have also learned much through discussing these issues in the context of specific conflicts problems with Daniel V. MacDonald of McMillan Binch Mendelsohn, and with my partners Norman Bacal, Benoît G. Bourgon, Chris Diamond, David Edinger, Gavin MacKenzie, Angus McKinnon, Jon Stainsby, David Stratas, Guy Tremblay and Jean Trudel. This paper represents neither their views, nor the views of either Heenan Blaikie LLP or McMillan Binch Mendelsohn. The grosser errors I acknowledge mine. 2 The case, 3464920 Canada Ltd. v. Strother was argued in the second week of October 2006. 3 Martin v. Gray [1991] 1 W.W.R. 705, 121 N.R. 1, 77 D.L.R. (4th) 249, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113, [1990] 3 S.C.R. 1235, reversing [1989] 3 W.W.R. 653, 58 D.L.R. (4th) 67, 57 Man. R. (2d) 161 (C.A.)[also referred to as MacDonald Estate v. Martin]; R. v. Neil, [2002] 3 S.C.R. 631, 218 D.L.R. (4th) 671, [2003] 2 W.W.R. 591, 168 C.C.C. (3d) 321, 6 C.R. (6th) 1, 6 Alta. L.R. (4th) 1 4 I will argue that market conditions shape conflicts rules in jurisdictions in ways that we seldom recognize in Canada. 5 For reasons that I explain at page 77, I prefer the term information barriers, which is the preferred Australian term, not because of the objections sometimes made to the term Chinese Walls, but because, uniquely, it describes the purpose – and limits - of such devices.

of conflicts of interest. There is a lack of empirical data6 on how conflicts are managed within Canadian law firms7, so we have collected some very tentative information on the conflict of interest management techniques of a selection of larger Canadian law firms – the evidence, such as it is, suggests that firms have constructed very many information barriers, with hundreds of hours of professional time being devoted each year to the analysis of conflicts issues8. The paper provides some practical advice on how to build a barrier, drawn from the caselaw across the Commonwealth and various professional regulatory statements. Finally, I end with some speculation about our current situation, and the challenges that lie ahead. I will suggest that, in contrast to some regulatory and professional bodies elsewhere in the world, Canadian law societies and bar associations have been more passive and reactive, leaving it to the courts to articulate how the profession should cope with conflicts issues, through the fragmentary evolution of the common law. Their relative – even spasmodic – inaction has contributed to significant uncertainty about key issues of principle within Canadian law, which has resulted in a large amount of professional time being devoted to teasing out answers to novel conflicts questions from broad and abstract statements within the key cases. Canadian lawyers still spend too much time worrying about uncertainties in the law of conflicts, dwelling on things that really should not be that speculative.

A conflict is a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s own interests or by the lawyer’s duties to another current client, a former client, or a third person.

American Law Institute, Restatement Third, The Law Governing Lawyers, accepted by Supreme Court of Canada in R. v. Neil9

Part of the difficulty of the Canadian law in this area derives from the extent to which Canadian law has embraced and extended the concept of fiduciary obligations. From an English or Australian perspective, the extensive use of fiduciary language by 6 The empirical research is scarcely any greater in the United States and England although useful work has been done by Janine Griffiths-Baker, Susan P. Shapiro, Paul R. Tremblay, and Lee A. Pizzimenti. See Janine Griffiths-Baker, Serving Two Masters: Conflicts of Interest in the Modern Law Firm, Oxford: Hart Publishing, 2002, Susan P. Shapiro, Tangled Loyalties - Conflict of Interest in Legal Practice (University of Michigan Press, 2002), Paul R. Tremblay, "Migrating Lawyers and the Ethics of Conflict Checking" Spring 2006, Georgetown Journal of Legal Ethics, Lee A. Pizzimenti, Screen Verite: Do Rules About Ethical Screens Reflect the Truth About Real-Life Law Firm Practice?, U. Miami L. Rev. (November 1997). 7 When the Canadian Bar Association embarked on developing a response to Martin v. Gray in 1991, it sought comment from a sampling of law firms, but the only empirical question asked was whether firms had encountered Martin v. Gray like problems. 8 More such research would be necessary to verify the extent to which this phenomenon is restricted to larger metropolitan firms. 9 R. v. Neil, [2002] 3 S.C.R. 631, 218 D.L.R. (4th) 671, [2003] 2 W.W.R. 591, 168 C.C.C. (3d) 321, 6 C.R. (6th) 1, 6 Alta. L.R. (4th) 1

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Canadian judges can be seen as extreme or even problematic, since it appears to import the strictest level of obligation known to our law to all aspects of a lawyer’s relationship with a client, sometimes in situations where to import such obligation produces anomalous results.10

When Sir Anthony Mason, the former Chief Justice of Australia described the fiduciary relationship as a “concept in search of a principle”, he was commenting on the difficulty of deriving coherence from a multiplicity of examples. Lord Millett11, writing just before his classic judgment in Prince Jefri Bolkiah v. KPMG12 distinguished between:

(a) a relationship of trust and confidence; (b) a relationship of influence, whose defining characteristic is vulnerability; (c) the relationship of confidentiality.

Lord Millett, while on the Court of Appeal, had articulated the core meaning of

fiduciary obligations in Bristol & West Building Society v. Mothew13:

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work14 he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”

The three underlying duties encompassed by the duty of loyalty are rooted in the equity concept of fiduciary duty. The general duty of loyalty has frequently been stated. In Ramrakha v. Zinner15, Harrandence J.A., concurring, observed:

A solicitor is in a fiduciary relationship to his client and must avoid situations where he has, or potentially may, develop a conflict of interests. ... The logic behind this is cogent in that a solicitor must be able to provide his client with

10 In the area of conflicts of interest, like much in the law of equity generally, Australian courts outshine Canadian courts in the nuance of their analysis. 11 Millett, Equity’s Place in the Law of Commerce (1998), 114 LQR 214. 12 Prince Jefri Bolkiah v. KPMG [1999] 2 A.C. 222, [1999] 1 All E.R. 517 (H.L.) 13 [1998] Ch 1 at 8 14 Fiduciary Obligations (1977) p. 2, 15 (1994), 157 A.R. 279 at para. 73 (C.A.)

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complete and undivided loyalty, dedication, full disclosure, and good faith, all of which may be jeopardized if more than one interest is represented.

As professionals, lawyers owe fiduciary duties to their clients16. “Even among fiduciaries, solicitors stand in a special position17.” The most important of these fiduciary duties is to avoid any conflict between personal interest and duty to clients. A conflict of interest has been defined as:

a compromising influence that is likely to negatively affect the advice that a lawyer would otherwise give to a particular client because it affects adversely the “lawyer’s judgment concerning a client or prospective client, ... the lawyer’s loyalty and respect of a client or prospective client, or the lawyer’s safeguarding of interests of a client or prospective client18.

The foundation of the rules is this feature nature of the lawyer-client relationship. As Storey J. put it in the early 19th Century:

When a client employs an attorney, he has a right to presume, if the latter be silent on the point, that he has no engagements, which interfere, in any degree, with his exclusive devotion to the cause confided to him; that he has no interest, which may betray his judgement, or endanger his fidelity19.

The principle is of course also a manifestation of the lawyer’s role as an agent, which requires loyalty. If an agent represents multiple principals, only scrupulously following principles of disclosure and consent will protect the agent from attack. The general principle was stated by Scrutton L.J. in Fullwood v. Hurley20:

No agent who has accepted an employment from one principle can in law accept an engagement inconsistent with his duty to the first principal from a second principal, unless he makes the fullest disclosure to each principal of his interest, and obtains the consent of each principal to the double employment.

The sources of conflict rules are found in both case law21 and the rules of professional conduct. The courts have made it clear that the rules of professional conduct are not necessarily congruent with the rules that the court will apply22:

(footnote continued)

16 The Supreme Court of Canada first enunciated the fiduciary nature of a lawyer’s duty in Read v. Cole, [1915] S.C.R. 176. 17 National Mutual Holdings Pty. v. Sentry Corp. (1989), 87 A.L.R. 539 at p559, per Gummow J. 18 See K. Bell, Managing Conflict of Interest Situations (Toronto: Lawyers’ Professional Indemnity Co., 1998) at p4. 19 Williams v. Reed, 3 Mason 405 at p418 (Fed. Case No. 17, 733, C.C. Maine 1824); reaffirmed in IBM v. Levin, 579 F2d. 271 (3d. Circ. 1978) and U.S. v. Harris, 846 F. Supp. 12 (DDC, 1984). 20 [1928] 1 K.B. 498. 21 The commentary below focuses largely on common law Canada, since that is where the bulk of the recent Canadian jurisprudence has developed. At one time, Quebec was largely influenced by French doctrine. On the subject: see J.L. Baudouin, Secret Professionnel et

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The codes of professional conduct governing lawyers do not govern the court, which must follow the law governing fiduciaries and confidences, not rules of professional ethics. But that theoretical distinction weakens in practice, for the law and the ethics are similar, as are the problems. So professional ethics codes are suggestive, even persuasive in court23.

Since a conflict of interest is a breach of the lawyer’s fiduciary duty to the client, the rules are thus strictly construed and applied in such a way that any doubt will be construed in favour of the client. The special public element of a lawyer’s role as an officer of the court was singled out as a critical factor by the Australian courts in Carindale Country Club Estate Pty v. Astill24.

In Ontario, a recent case25 confirmed that the Rules of Professional Conduct and the Commentaries are not an all-inclusive Code governing lawyers’ conduct in every aspect of professional life. In particular, they do not state definitively the fiduciary duties owed by lawyers to clients. This is also the pattern followed in civil law

Droit au Secret Dans le Droit de la Preuve, Étude de Droit Québecois comparé au Droit Français et à Common-Law (Paris: Pichon, 1965). More recently the Canadian Bar Association’s work and decisions such as MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235, [1991] 1 W.W.R. 705, 121 N.R. 1, 77 D.L.R. (4th) 249, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113; revg. [1989] 3 W.W.R. 653, 58 D.L.R. (4th) 67, 57 Man. R. (2d) 161 (C.A.) (sub nom. Martin v. Gray) have led to Quebec courts moving to tests that much more closely resemble those of common law Canada: see Service de recherche et de législation du Barreau du Québec, Guide sur les conflits d’intérêts (Montréal, Québec, 1996); Fonds d’assurance responsabilité professionnelle du Barreau du Québec, Guide de Prévention en Responsabilité Professionnelle (Montréal, Barreau du Québec, 1996). Nicole Laduceur. Le contrôle des conflits d’intérêts: mesures législatives et murailles de Chine (Cowansville, Éditions Y. Blais, 1993). For other recent discussion, see D. Collier and C. Roy, Habile ou inhabile? Jurisprudence récents sur les conflits d’intérêts, in Développements récents en preuve et procédure civile (Cowansville: Les Éditions Yvon Blais, 1996) at pp47-63; L. Belleau, Développements récents en matière de conflits d’intérêts, in Développements récents en droit criminel (Cowansville: Les Éditions Yvon Blais, 1994) at pp47-82. 22 Some courts have stated (albeit in (what used to be known as) obiter) that the courts should defer to the ethical rules and precautions mandated by law societies and take only a supervisory role: Ford Motor Co. of Canada v. Osler, Hoskin & Harcourt (1996), 131 D.L.R. (4th) 419, 43 C.P.C. (3d) 156, 24 B.L.R. (2d) 217, 27 O.R. (3d) 181 (Gen. Div.). 23 Gainers Inc. v. Pocklington (1995), 29 Alta. L.R. (3d) 323, 165 A.R. 274, 89 W.A.C. 274, [1995] 7 W.W.R. 413, 125 D.L.R. (4th) 50 at 53, 20 B.L.R. (2d) 289 (C.A.); affg. (1994), 21 Alta. L.R. (3d) 363, [1994] 10 W.W.R. 36, 156 A.R. 281 (Q.B.); leave to appeal to S.C.C. refused (1996), 23 B.L.R. (2d) 285n, [1996] 2 W.W.R. lxxxn, 35 Alta. L.R. (3d) xlvn, 130 D.L.R. (4th) viin, 199 N.R. 160n (S.C.C.). 24 (1993) 115 A.L.R. 112, 42 F.C.R. 307 (Fed. Ct.) 25 See Stewart v. Canadian Broadcasting Corp. (1997), 150 D.L.R. (4th) 24; additional reasons 152 D.L.R. (4th) 102.

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jurisdictions such as, Belgium and France, where the court’s role is restricted to judicial review of the decisions of internal professional tribunals26.

In comparison with the more relaxed rules, that historically applied elsewhere in the Commonwealth, Canadian courts have, over the last ten years, been applying an increasingly rigorous standard. In part, this has been the application in this area of the law of the developing Canadian law of fiduciary duties27, together with a heightened public sensitivity to conflicts of interest in public arenas. As a result, there has been significantly more conflicts jurisprudence in Canada over the last decade than in England28, New Zealand29, Australia30, or even proportionately, the United States31.

(footnote continued)

26 See Chester et al., Conflicts of Interest, Chinese Walls and the Changing Business of the Law (2000) 2 B.L.I. 35 27 See Hodgkinson v. Simms, [1994] 3 S.C.R. 377, [1994] 9 W.W.R. 609, 97 B.C.L.R. (2d) 1, 22 C.C.L.T. (2d) 1, 117 D.L.R. (4th) 161; revg. (1992), 6 C.P.C. (3d) 141, 65 B.C.L.R. (2d) 264, [1992] 4 W.W.R. 330, 45 E.T.R. 270, 5 B.L.R. (2d) 236; revg. (1989), 43 B.L.R. 122 (B.C.S.C.); and International Corona Resources Ltd. v. LAC Minerals Ltd. (1986), 53 O.R. (2d) 737, 32 B.L.R. 15, 39 R.P.R. 113, 25 D.L.R. (4th) 504, 9 C.P.R. (3d) 7 (H.C.J.); affd. (1987), 62 O.R. (2d) 1, 46 R.P.R. 109, 23 O.A.C. 263, 18 C.P.R. (3d) 263, 44 D.L.R. (4th) 592, 28 E.T.R. 245; affd. [1989] 2 S.C.R. 574, 26 C.P.R. (3d) 97, 69 O.R. (2d) 287, 61 D.L.R. (4th) 14, 6 R.P.R. (2d) 1, 44 B.L.R. 1, 35 E.T.R. 1, 101 N.R. 239, 36 O.A.C. 57 (sub nom. LAC Minerals Ltd. v. International Corona Resources Ltd.). A number of commentators have noted that Canada has been alone among common-law countries in its use of fiduciary concepts to police commercial relationships. See T.G. Youdan, Equity, Fiduciaries and Trusts (Toronto: Carswell 1989). 28 The English writing was for a long time relatively underdeveloped largely due to the fact that until 1998 the courts required proof that there was a reasonable probability of real mischief. Compare the development from Little v. Kingswood Collieries Co. (1882), 20 Ch. D. 733 (C.A.), Rakusen v. Ellis, Munday & Clarke, [1912] 1 Ch. 831 (C.A.), to contemporary cases such as, Re a Firm of Solicitors, [1992] Q.B. 959, [1992] 1 All E.R. 353 (C.A.), Re a Firm of Solicitors, [1997] Ch. 1, [1995] 3 A11 E.R. 482, Prince Jefri Bolkiah v. KPMG, [1999] 2 A.C. 222 (H.L.). 29 See Equiticorp Holdings Ltd. v. Hawkins, [1993] 2 NZLR 737; Black v. Taylor, [1993] 3 NZLR 403; Merck Sharpe and Dohme (NZ) v. Pharmaceutical Management Agency Ltd. (June 7, 1996, High Court, CP 23/96). M.R. Dean and C.F. Finlayson, “Conflicts of Interest: When May a Lawyer Act Against a Former Client” [1990] N.Z.L.J. 43; P. Finn, “Conflicts of Interest and Professionals”, in New Zealand Legal Research Foundation Professional Responsibility (Auckland: The Foundation, 1987). For more recent discussion, see “An Editorial, Conflict of Interest, Discussing Kooky Garments Ltd. v. Charlton, [1994] 1 N.Z.L.R. 587 (C.A.) and Russell McVeagh v. Tower Corp. No. 86/98 (N.Z.C.A. Aug. 25, 1998)” in N.Z.L.J., Sept. 1998 at 305(1). David Coull, Typhoid Marys: the Ethical Dilemma of Lawyers Who Switch Firms (1998) 28 VUWLR 41. David Coull, “Conflicts of Interest and Chinese Walls.” N.Z.L.J. Oct 1998 at 347-351; Conflict of interest. (Editorial) N.Z.L.J. Sept 1998 at 305(1). 30 For further discussion of the Australian tests, see C. Edmonds, “Trusting Lawyers with Confidences — Conflicting Realities (a review of the test and principles applying to lawyers’

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Indeed there is some evidence that in particular provinces, motions to disqualify on the basis of conflict of interest have become a routine weapon in the litigator’s arsenal. Whether this is true, the stakes are clearly high. LPIC the Ontario professional malpractice insurer for the Ontario legal profession notes that conflicts which arise from acting for more than one party in a matter represent the third most frequent cause of claims for professional liability against Ontario lawyers, and give rise to the second highest category of claims in terms of financial exposure.

conflicts of interests)” (1998) 16 Australian Bar Rev. 222. See also Carindale Country Club Estate Pty. Ltd. v. Astill (1993), 115 A.L.R. 112, (1993) 42 F.C.R. 307 (Federal Court of Australia), where the court reviewed, but declined to follow, the Supreme Court of Canada’s approach in MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235, [1991] 1 W.W.R. 705, 121 N.R. 1, 77 D.L.R. (4th) 249, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113; revg. [1989] 3 W.W.R. 653, 58 D.L.R. (4th) 67, 57 Man. R. (2d) 161 (C.A.) (sub nom. Martin v. Gray). The Australian courts have consciously rejected the sort of American models which were so attractive to the Supreme Court of Canada in Martin v. Gray. See R. Teele, “The Necessary Reformulation of the Classic Fiduciary Duty to Avoid a Conflict of Interest or Duties” (1994) 22 Australian Bus. Law Rev. 99, noting that Australian conflicts rules are moving from strict prohibition to an analysis of actual breach of confidentiality or prejudice to another client. The Supreme Court of Canada gets a more sympathetic hearing in Wan v. McDonald (1992), 105 A.L.R. 473, (1992) 33 F.C.R. 491. Even in those cases Australian law in recent times has developed and applied a more stringent test than that laid down in Rakusen v. Ellis, Munday and Clarke, [1912] 1 Ch. 831. (See: National Mutual Holdings Pty. Ltd. v. Sentry Corporation (1989), 19 F.C.R. 155; Mallesons Stephen Jaques v. K.P.M.G. Peat Marwick, [1990] 4 W.A.R. 357; Equiticorp Holdings Ltd. v. Hawkins, [1993] 2 N.Z.L.R. 737; L. Aitken, “‘Chinese Walls’ and Conflicts of Interest” (1992) 18 Monash University Law Rev. 91; P. Finn, “Conflicts of Interest and Professionals”, Seminar on Professional Responsibility, University of Auckland, 28-29 May 1987 at p9; Reynolds, F.M.B. “Solicitors and Conflict of Duties” (1991) 107 L.Q.R. 536.). For further Australian discussion, see M. Gronow, “Chinese Walls and Conflicts of Interest” (1993) 67 Law Institute Journal 502-505; R. Nicholson, M. Darling, “Hitting the Chinese Wall (Avoiding Conflict of Interest)” (1986) 60 Law Institute Journal 1338(4). 31 For general U.S. discussion, see J.J. Wang, “Conflicts of Interest in Successive Representations: Protecting the Rights of Former Clients” (1998) 11:2 Georgetown J. of Legal Ethics 275; R. D. Donoghue, “Conflicts of Interest: Concurrent Representation” (1998) 11:2 Georgetown J. of Legal Ethics 319; Conflicts of Interest in Legal Representation (New York: Practising Law Institute, 1988); R. Alexander-Smith, Conflicts of Interest: Multiple Representations (Chicago: American Bar Association, c. 1983). See also 7 Am. Jur. 2d Attorneys At Law, § 198 “Where conflict of interest arises from former employment of attorney in firm”; and Annotation: “Sufficiency of screening measures (Chinese Wall) designed to prevent disqualification of law firm, member of which is disqualified for conflict of interest” 68 A.L.R. Fed. 687. The increasing rigour of the American tests is described in K.L. Penegar, “The Loss of Innocence: a Brief History of Law Firm Disqualification in the Courts” (1995) 8 Georgetown J. of Legal Ethics 831.

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LAW MOVES FROM PROFESSION TO BUSINESS

As the waves of consolidation and globalization wash upon the legal system, old traditions fade. In the last forty years, the business structure of law firms has undergone major changes. Law firms have grown in size and complexity. They span the globe through alliances and mergers. What started in the United States, has since spread to many other countries. Even in Canada, the growth in the market for legal services, and the nature and size of large national firms has been remarkable.

While law firms with even a hundred lawyers would have been considered large in the 1960’s, some of today’s British and American firms exceed 1000 lawyers. In Canada a handful of firms have over six hundred lawyers. In firms like these, growth changes not only the entity’s economic presence, but also its professional structure. Realizing that effective leadership needs sharper focus, firms begin to specialize and form practice groups. The nature of partnership also changes. Firms that grew from strong professional relationships built on personal friendships, shared visions and common experiences have had to institutionalize management and adapt to changes in their clients’ business milieu.

Changes in the business law firm have spurred change in other, less obvious areas. The pressures lawyers face world-wide challenge old rules and long-standing behaviour patterns. In a world where law firms grow in size, power and revenue, and as other professions converge into areas previously reserved for lawyers, it is not surprising that ethical rules face reassessment. Law has become a business, as well as a profession

This paper provides an overview of how economic and professional change has affected one of the fundamental ethical rules on which the legal profession is based: avoiding conflicts of interest. It is axiomatic that lawyers must not allow their professional responsibilities to be compromised by competing loyalties, whether between client and personal interests or between the interests of two clients. A complex body of ethical and legal rules has developed to define and channel acceptable behaviour when conflicts arise.

Since the 1980s, conflicts rules have been transformed with the rise of complex business law firms and other changes in the market for legal services. A Supreme Court of Canada that had not considered conflicts of interest to be one of its routine topics now finds itself dealing with the subject three times in two decades. Old rules were premised on the notion that lawyers would likely practice either alone, or in small firms where all members were intimately involved in the practice, collaborating closely and sharing common knowledge and experience. While that model still dominates the profession in pure numbers, with the majority of lawyers working in firms of fewer than ten lawyers, the market for legal services has generated economically powerful, professionally sophisticated and highly specialized large firms. Ethical rules that presented few problems for solo practitioners and small firms no longer fit into the modern legal landscape. Part of the difficulty also results from

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courts’ willingness to apply deeming rules, which are either demonstrably false, or not verifiably true. When deeming becomes compounded, an analysis may loose touch with reality. If a court analyzes the deemed knowledge of a deemed fiduciary to a deemed client, the result may be surprising to both the lawyer and notional client involved.32 All this has contributed to the tactical use of conflicts as mechanisms to jostle for temporary advantage in litigation.

This article focuses primarily on how ethical rules have been modified to address broader changes in the business and professional operations of large law firms. The approach is broadly comparative, canvassing the fascinating ways different jurisdictions have fashioned new and more intricate rules responding to market developments that challenge old learning. From these parallel developments, the paper explores how the profession is developing new understandings of the meaning of conflicts, and what the future holds. As old issues of conflict of interest and duty assert themselves into the debate, a global law of conflicts of interest appears to be taking shape.33

All these developments came into sharp focus in the last decade of the last century, when the Supreme Court of Canada and England’s highest court, the House of Lords, decided their most important conflicts cases. Canada’s case dealt with the issue of migrating lawyers, and set standards which have profoundly affected the way in which lawyers move between firms. Although it focussed on forensic accountants, the English case posed the most significant implications for the legal profession. In its decision, the court transformed English law, set higher standards of conduct, and challenged both law firms and professional regulators to adapt. Explicitly comparative in its analysis, their Lordships’ decision was also sensitive to the professional context of sophisticated markets for legal services.

This paper contains a critical examination of the opportunities to effectively use screening devices or ethical walls to neutralize conflicts. I conclude that such screening devices, while plausible and attractive – and encouraged by the Rules of Professional Conduct within Canada - are only intermittently effective. In numerous jurisdictions around the world, such devices have fallen under forensic challenge and court scrutiny.

32 See generally Lon L, Fuller, Legal Fictions (Stanford: Stanford University Press, 1967). See also Pierre J.J. Olivier, Legal Fictions in Practice and Legal Science, Rotterdam University Press, 1975, L. Mitchell, 'The Fictions of the Law: Have They Proved Useful or Detrimental to its Growth' (1893) 7 Harvard Law Review 249, Hans Vaihinger, Die Philosophie des Als Ob (1911), translated as “The philosophy of ’as if", by C. K. Ogden. (New York, Harcourt, Brace; 1925) Bentham’s Theory of fictions by C. K. Ogden, London: Kegan Paul, Trench, Trubner & Co., 1932. 33 In Chester et al, Conflicts of Interest, Chinese Walls and the Changing Business of the Law, (2000), 2 Business Law International 36.88, I explored how both common law and civil law jurisdictions were converging in their identification of the key issues of principle.

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THE TRADITIONAL APPROACH TO CONFLICTS

In examining conflicts, a number of professional interests and values are at stake. Protecting clients and ensuring their legal advisors’ undivided loyalty are of primary importance. Even after the lawyer-client relationship ends, lawyers must scrupulously respect the confidentiality of any information they possess. The integrity of the justice system depends on the legal profession’s high standards. The next priority is to foster consumer choice; litigants should not be deprived of their counsel of choice without good reason. A third interest concerns respect for market forces within the market for legal services. As will be observed, conflicts jurisprudence feels the resistance to inter-jurisdictional and interdisciplinary consolidation within the market for legal services. These market forces manifest themselves both at the firm and individual level. Law firms began to merge in the 1980s within national markets. In the 1990s, firms in different countries and continents began to merge, and true global law firms emerged, although the bulk of legal work remains concentrated at the local or national market level. As these firms began to develop highly specialized expertise, they were sought out in specific transactional retainers, as opposed to longer term comprehensive relationships.

Failure to deal with a conflict of interest situation can be not merely costly, but have serious professional consequences including: civil liability for professional malpractice; disciplinary action by the law society; disqualification from representation of one or more clients; forfeiture of fees charged, together with unrecoverable fees for work in progress or other time invested; embarrassment, inconvenience and aggravation of defending a malpractice claim or investigation; and lost time spent on defending a malpractice claim or investigation34. Migrating lawyers may also be subject to a suit35, if their former firm believes that its clients have been lured to the new firm. One of the major consequences of finding that a lawyer has been in breach of conflict rules, may be denial of reduction of fees. Generally, such sanctions are reserved for breaches of fiduciary duty rather than technical violations of disciplinary rules36.

The stakes are high, not merely in terms of embarrassment and damage to client relations, but also in monetary terms.37 In the United States, the consequences of 34 The court in one case even imposed a fine for contempt of court upon counsel for actions that consitituted a conflict: Weglarz v. Bruck, 470 NE 2d 21, 128 111. App. 3d. 1 (1984). 35 A million dollar example surfaced in Coudert Brothers v. Stevens, discussed in Wall Street Journal, June 11, 1997 at pB-7. 36 See Kidney Association of Oregon v. Ferguson (1992), 315 OR 135 at pp142-144, 843 P.2d 442 (S.C.); as discussed in Portland General Electric Co. v. Duncan, Weinberg, Miller & Pembroke (1999), (Oregon C.A.), as reported in http://www.publications.ojd.state.or.us/A100072.htm . 37 In Canada, press reports speak of a substantial payment by Torys LLP in connection with the Hollinger affair, but how much of that relates to allegations of conflict of interest has not been made public.

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botched conflicts issues has resulted in litigation and awards of damages. 38 One Oklahoma firm was reportedly hit with a $120 million claim for attempting to switch sides in an oil industry dispute, and in 1996, Louisiana’s appellate court upheld a $5.5 million judgement against a lawyer who had tried to act for both sides in a corporate merger. Winston & Strawn found itself the subject of an Energy Department Inspector General Report39. Firms have also had to forfeit fees; Milbank Tweed reportedly lost a $1.9 million fee award in 199740, Willkie Farr41 lost almost $3 million in fees the following year, 42 and Washington-based Gilbert Heintz & Randolph forfeited $13 million in asbestos-related insolvency fees for not disclosing a conflict.43

COMMONWEALTH EVOLUTION OF THE LAW OF CONFLICTS

THE RAKUSEN DECISION

For nearly eighty years, the common law approach to conflicts remained essentially static. Few conflicts issues were raised, and fewer litigated, largely due to the liberal approach taken in the leading Commonwealth case on conflict of interest, Rakusen v. Ellis, Munday & Clarke44. English conflicts law developed mainly to regulate solicitors, since barristers (advocates) practised as sole practitioners, rather than in firms where the possibility of conflicting interests and shared knowledge is always present. 45 In the Rakusen case, lawyers Munday and Clarke were the only partners in a firm of 38 Michael Chambers, Matthew Jones and Patrick Wilkins, Conflicts of Interest – The Growing Climate of Distrust, (April 1999) 33 Commercial Lawyer at p.27. 39 Review of Alleged Conflicts of Interest Involving a Legal Services Contract for the Yucca Mountain Project at http://fl1.findlaw.com/news.findlaw.com/hdocs/docs/doe/doews1101rpt.pdf 40 Matthew Goldstein. Grand jury subpoenas issued in inquiry on Milbank conflict. New York Law Journal, June 11, 1997 v217 n111 p1 col 1. Paul M. Barrett Legacy of conflict case haunts Milbank Tweed. The Los Angeles Daily Journal, Jan 26, 1998 v111 n16 p8 col 1. 41 Wendy R. Leibowitz. Client conflict software: no panacea; complexity of client relationships at firms like Wilkie Farr presents ethical traps. The National Law Journal, July 21, 1997 v19 n47 pA1 col 2 . 42 Michael Chambers, Matthew Jones and Patrick Wilkins, Conflicts of Interest – The Growing Climate of Distrust, (April 1999) 33 Commercial Lawyer at p.27. 43 Henry Gottlieb, Conflicts Cost Firm in Congoleum Case $13 Million in Fees, February 13, 2006, New Jersey Law Journal. 44 [1912] 1 Ch. 831 (C.A.); English cases following Rakusen include In re a solicitor (1987) 131 S.J. 1063. 45 Note however that the assumption that a barrister is a sole practitioner may be unduly formulaic in settings of chambers, where different barristers may share clerks, secretarial help, facsimile machines and common technology. Santow J. notes that the same obligation of confidence will arise in Watson v. Watson (Supreme Court of NSW, Unreported May 25, 1998, quoted in Lee Aitken. A breach in the great walls of China: the "heavy burden" of confidentiality. Law Society Journal May 1999 v37 i4 p. 40(4). See also Laker Airways v. FLS, The Times, May 21, 1999, and Sent and Primelife Corporation v. John Fairfax Publication Pty [2002] VSC 429 (Sup.Ct.)

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solicitors. The two conducted business separately, with no knowledge of each other’s clients. The plaintiff Rakusen consulted Munday about a wrongful dismissal action that he planned to bring against a corporation. Rakusen later changed solicitors and sued the corporation. The case was referred to arbitration, and Clarke was appointed to act for the corporation.

Clarke knew nothing of Rakusen’s consultations with Munday, and both lawyers were prepared to undertake that they neither had nor would discuss the case. The court held that Clarke could continue to act for the corporation, as no absolute impediment bars one partner in a two-man firm from taking instructions against a client who had previously consulted the other partner regarding the same litigation. In refusing the injunction, the court abandoned stricter Nineteenth Century law. The Court of Appeal observed that each case must be judged on its own circumstances to determine whether it presents a probability of mischief and prejudice. 46 Cozens-Hardy M.R. states: 47

I do not doubt for a moment that the circumstances may be such that a solicitor ought not to be allowed to put himself in such a position that, human nature being what it is, he cannot clear his mind from the information which he has confidentially obtained from his former client; but in my view we must treat each of these cases, not as a matter of form, not as a matter to be decided on the mere proof of a former [solicitor] acting for a client, but as a matter of substance, before we allow the special jurisdiction over solicitors to be invoked, we must be satisfied that real mischief and real prejudice will in all human probability result if the solicitor is allowed to act.

The Rakusen approach became known as the “probability of real mischief” test. Later cases48 read Rakusen as resting on the need to preserve confidentiality, as noted in the following:

46 In his concurring reasons, Fletcher Moulton L.J. stated [at p. 841]: "As a general rule the Court will not interfere unless there be a case where mischief is rightly anticipated." Cozens-Hardy M.R. affirmed the authority of a court to invoke its special jurisdiction over an officer of the court to prevent him or her from acting where the court is satisfied that "... real mischief and real prejudice will in all human probability result if the solicitor is allowed to act" [at p. 835]. 47 At p. 835; Buckley L.J. [at p. 842], said: “There is no general rule that a solicitor who has acted in a particular matter for one party shall not under any circumstances subsequently act in that matter for his opponent. Whether he will be restrained from so acting or not depends on the particular circumstances.” See further, Farmers Mutual Petroleums Ltd. v. United States Smelting, Refining & Mining Co. (1961), 28 D.L.R. (2d) 618 at p. 626, 34 W.W.R. 646 at p. 655 (Sask. C.A.) ; Rather than applying some absolute principle, Fletcher Moulton L.J. stated [at p. 840]: "The Court must act in each case according to the circumstances of the case." 48 See for example Aldrich v. Struk (1986), 1 B.C.L.R. (2d) 71, [1986] 3 W.W.R. 341, 26 D.L.R. (4th) 352, 12 C.P.C. (2d) 6, 12 C.P.R. (3d) 118 (S.C.)

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... the principle upon which it [the court] restrains a solicitor from acting against a former client is the prevention of abuse of the confidence reposed in the solicitor by his former client; accordingly, before an injunction can be obtained, the Court must be convinced of the existence of such confidence and of the probability of its being abused.49

Until Martin v. Gray, 50 Canadian courts followed the Rakusen test. 51 The same approach persisted in Australia.52 Dissatisfaction with Rakusen began in the 1970’s, 53

and culminated with the decision in Martin v. Gray. Although it was regularly distinguished, Rakusen was not expressly disavowed until Prince Jefri Bolkiah v. KPMG.

49 For a learned analysis suggesting that both Rakusen v. Ellis, Munday and Clarke [1912] 1 Ch 831 and Prince Jefri Bolkiah v. KPMG [1999] 2 A.C. 222 were mistaken in their analysis of this jurisdiction, see the judgment of Brooking J.A. in Spincode Pty. Ltd. v. Look Software Pty. Ltd. [2001] VSCA 248 (C.A.) 50 [1991] 1 W.W.R. 705, 121 N.R. 1, 77 D.L.R. (4th) 249, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113, [1990] 3 S.C.R. 1235, reversing [1989] 3 W.W.R. 653, 58 D.L.R. (4th) 67, 57 Man. R. (2d) 161 (C.A.)[also referred to as MacDonald Estate v. Martin] 51 Sinclair v. Ridout, [1955] O.R. 167, [1955] 4 D.L.R. 468 at 483 (Ont. H.C.); Farmers Mutual Petroleums Ltd. v. U.S. Smelting, Refining & Mining Co. (1961), 34 W.W.R. 646, 28 D.L.R. (2d) 618 (Sask. C.A.), affirming (1960), 32 W.W.R. 556 (Sask. Q.B.); Re Law Society of Manitoba and Giesbrecht (1983), 2 D.L.R. (4th) 354, [1984] 1 W.W.R. 430, 24 Man. R. (2d) 228, R. v. Burkinshaw (1967), 60 D.L.R. (2d) 748 (Alta. S.C., T.D.); Devco Properties Ltd. v. Sunderland (1977), C.P.C. 158, 2 Alta. L.R. (2d) 37, [1977] 2 W.W.R. 664 (Alta. S.C., T.D.); Mercator Enterprises Ltd. v. Mainland Investments Ltd. (1978), 6 C.P.C. 297, 29 N.S.R. (2d) 703 (S.C.T.D.); Christo v. Bevan (1982), 36 O.R. (2d) 797, 28 R.F.L. (2d) 197, 27 C.P.C. 209 (H.C.); Schmeichel v. Saskatchewan Mining Development Corp., [1983] 3 W.W.R. 30, 22 Sask. R. 170 (Q.B.), affirmed [1983] 5 W.W.R. 151 (Sask. C.A.); and International Electronics Corp. v. Woodside Developments Ltd., unreported, British Columbia Supreme Court, June 26, 1985. 52 Contrast D & J Constructions Pty. Ltd. v. Head (1987), 9 N.S.W.L.R. 118 (S.C.) with Mills v. Day Dawn Block Gold Mining Co Ltd (1882) 1 QLJ 62. 53 Szebelledy v. Constitution Ins. Co. of Canada (1985), 11 C.C.L.I. 140, 3 C.P.C. (2d) 170; Falls v. Falls (1979), 12 C.P.C. 270 (Ont. Co. Ct.); Christo v. Bevan (1982), 36 O.R. (2d) 797, 28 R.F.L. (2d) 197, 27 C.P.C. 209 (H.C.); J. (A.M.) v. J. (N.M.S.) (1986), 49 R.F.L. (2d) 367 (Ont. H.C.); Schmeichel v. Saskatchewan Mining Development Corp., [1983] 3 W.W.R. 30 (Sask. Q.B.), affirmed [1983] 5 W.W.R. 151 (C.A.); Fahr v. Fahr, [1985] 3 W.W.R. 261, 37 Sask. R. 56 (Q.B.); Steed & Evans Ltd. v. MacTavish (1976), 12 O.R. (2d) 236, 68 D.L.R. (3d) 420 (H.C.); Can. Southern Railway Co. v. Kingsmill, Jennings (1978), 8 C.P.C. 117 (1978), 4 B.L.R. 257, 8 C.P.C. 117 (Ont. H.C.) Sniderman v. Sniderman, Ont. H.C., May 29, 1981; Kruse v. Wiesco Can. Ltd. (1987), 58 O.R. (2d) 729 (H.C.); MTS International Services Inc. v. Warnat Corp. (1980), 31 O.R. (2d) 221 (H.C.); Lukic v. Urquhart (1985), 50 O.R. (2d) 47, 15 D.L.R. (4th) 639 (C.A.), reversing in part (1984), 47 O.R. (2d) 462, 45 C.P.C. 19, 11 D.L.R. (4th) 638 (H.C.) Flynn Development Co. v. Central Trust Co. (1985), 51 O.R. (2d) 57 (H.C.) and Diamond v. Kaufman (1984), 45 C.P.C. 23 (Ont. H.C.).

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Indeed, Rakusen departed significantly from the tougher Nineteenth Century view, exemplified by the following observation from Little v. Kingswood Colliers Co54.:

Where the second transaction flows after the first and from the nature of the dispute, is so connected with it..., the new client ought not to employ that particular solicitor in the transaction, and the solicitor ought not to accept the employment, and the case is then one in which at the instance of the former client, the solicitor ought upon general principles of equity be restrained from so acting.

In Rakusen, Cozens-Hardy M.R. criticized the breadth of the Little principle. In turn, in Bolkiah, Otton L.J. described the Rakusen facts as “peculiar.”

CANADA BREAKS FROM RAKUSEN

Compared with Rakusen, Canadian courts in the past fifteen years have been applying an increasingly rigorous standard. Partly due to the application of the burgeoning Canadian law of fiduciary duties to this area55 and heightened public sensitivity to conflicts of interest in public arenas, Canada has seen significantly more conflicts jurisprudence in the last decade than have England, New Zealand, Australia, and even the United States proportionately. Because of its proximity to the United States, Canada drew much from the American experience in fashioning an approach to conflicts56. Indeed, evidence indicates that motions to disqualify on the basis of conflict of interest have become a routine weapon in the litigator’s arsenal in some provinces.

MARTIN V. GRAY – THE CASE OF THE MIGRATING JUNIOR

Martin v. Gray ignited the conflicts revolution in Canada57. In Martin, the respondent, administrator of the estate of John MacDonald, commenced an action for an accounting against the appellant. The appellant retained A. Kerr Twaddle, 54 (1882), 20 Ch. D. 733 55 Frame v. Smith 1987] 2 S.C.R. 99; (1987), 42 D.L.R. (4th) 81; (1987), 9 R.F.L. (3d) 225; (1987), 23 O.A.C. 84; International Corona v. Lac Minerals [1989] 2 S.C.R. 574; (1989), 69 O.R. (2d) 287; (1989), 61 D.L.R. (4th) 14; (1989), [1990] 44 B.L.R. 1; (1989), 26 C.P.R. (3d) 97; (1989), 36 O.A.C. 57; Hodgkinson v. Simms [1994] 3 S.C.R. 377, 117 D.L.R. (4th) 161; [1994] 9 W.W.R. 609; (1994), 16 B.L.R. (2d) 1; (1994), 49 D.T.C. 5135; (1994), 57 C.P.R. (3d) 1; (1994), 97 B.C.L.R. (2d) 1 56 Compare the willingness of the Ontario Court of Appeal in Re Regina and Speid (1983), 43 O.R. (2d) 596, 37 C.R. (3d) 220, 3 D.L.R. (4th) 246, 8 C.C.C. (3d) 18 (C.A.) to consider cases such as U.S.A. v. Dolan 570 F.2d. 1177 (1978), with the reluctance of Browne-Wilkinson V.C. in David Lee v. Coward Chance [1991] Ch. 259 to consider non-English caselaw. 57 [1991] 1 W.W.R. 705, 121 N.R. 1, 77 D.L.R. (4th) 249, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113, [1990] 3 S.C.R. 1235, reversing [1989] 3 W.W.R. 653, 58 D.L.R. (4th) 67, 57 Man. R. (2d) 161 (C.A.)[also referred to as MacDonald Estate v. Martin]

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Q.C. Kristin Dangerfield, a junior lawyer employed by Twaddle, became actively involved with the file. Dangerfield assisted in several tasks, including preparing documents, conducting examinations for discovery, and negotiating settlement with the respondent’s solicitors, Thompson, Dorfman, Sweatman. When Dangerfield’s principal was appointed to the bench as Twaddle J., she left the firm and joined another. Two years later, she and other members of her firm joined the firm representing the respondent. However, Dangerfield had no further involvement with the respondent’s case, which had been in litigation for some nine years and was nearing conclusion. One discovery remained before the case could be set down for trial.

The appellant brought a motion for a declaration that the respondent’s firm could not continue to act for the respondent because of Dangerfield’s conflict of interest. At the time, Dangerfield was on maternity leave and the firm undertook to have her either work from home until the case closed, or stop working for the firm during that time, if necessary. Both Dangerfield and the other lawyers filed affidavits indicating that no breach of confidence had occurred. The issue in the respondent’s motion concerned the appropriate standard to apply to a law firm when addressing a possible conflict of interest.

At the Court of Queen’s Bench, Hanssen J. initially granted the respondent’s motion, applying the principles set out in Morton v. Asper58. In Morton, Jewers J. stated that solicitors should be restrained from continuing to act where an appearance of impropriety is reasonably seen to exist. The Morton court had removed the solicitors because, even if the party’s former solicitors undertook to refrain from divulging confidential information, the solicitors might appear to be tempted to do so, and the former client would believe he was being treated unfairly.

In dismissing the Martin appeal, the Manitoba Court of Appeal divided, with the majority considering a number of factors thought to either negate any imputation of knowledge from Dangerfield to the firm59, or outweigh any conflict of interest arising from the imputation60. By negating the possibility of mischief, the Manitoba Court of Appeal chose a middle road between the English “probability of mischief” test and the American “possibility of mischief” test.

58 (1987), 21 C.P.C. (2d) 95, 49 Man.R. (2d) 167, [1988] 1 W.W.R. 47 (Q.B.), affd 45 D.L.R. (4th) 374, 51 Man.R. (2d) 207, [1988] 2 W.W.R. 317 (C.A.). Interestingly, Morton and Martin arose independently from the same merger of Winnipeg firms. 59 The factors considered were: their oaths that they would not discuss the case, her relatively junior status, her lack of involvement with the file for the preceding three years and her current absence from the firm on maternity leave. 60 In this category was the fact that the litigation was at an advanced stage. If Thompson, Dorgman, Sweatman were removed as solicitors of record, Gray would be put to considerable expense and delay in retaining new counsel.

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Martin was appealed to the Supreme Court of Canada, which divided on the issues. A minority, led by Cory J., argued for tougher standards than the majority. Sopinka J., writing for the majority, noted two separate issues. The first issue asks whether the lawyer actually received confidential information relevant to the matter at hand within the solicitor-client relationship. The second considers the possible risk (measured against an objective “reasonable person” standard) that information will be used to prejudice the client.

THE STRICT CANADIAN TEST

Today, potential confidentiality-based conflicts in Canada are assessed in accordance with the Supreme Court of Canada’s Martin v. Gray tests as articulated in Sopinka J.’s majority judgment. To resolve conflicts, Sopinka J.’s analysis directs them to three competing values: maintaining the legal profession’s high standards and the justice system’s integrity, not depriving litigants of their choice of counsel without good cause, and permitting reasonable mobility in the legal profession.61

To decide whether a given conflict of interest should disqualify counsel, courts must determine whether the challenged lawyer’s having entered into a solicitor-client relationship raises the possibility of real mischief. The mischief contemplated concerns the lawyer’s misuse of confidential information against a former client. The degree of likelihood issue stems from the precept that justice must not only be done, but also be seen as manifestly done. So, if it reasonably appears that confidential information might be disclosed, the lawyer will be disqualified on grounds of conflict of interest62.

In assessing the possibility of real mischief, one must ask whether a reasonably informed person, objectively considering the situation, would be satisfied that no confidential information would be used63. Once the client establishes that a previous relationship existed64, which was sufficiently related to the retainer from which the lawyer’s removal is sought, courts should assume that confidential information was imparted, unless the lawyer establishes that no such information was in fact revealed. The lawyer’s burden is difficult to discharge65, as a simple affidavit contesting the client’s assertions generally does not suffice66. Unlike in the Rakusen days, courts are

61 Compare Carindale Country Club Party v. Astill (1993) 115 A.L.R. 112, Black v. Taylor [1993] 3 N.Z.L.R. 403, Roberts & Schaefer Co. v. San-Con Inc. 898 First Supplement 356, 363 (U.S.D.C. WV 1995) 62 (1990), 77 D.L.R. (4th) 249 at 257 (S.C.C.). 63 Martin v. Gray (1990), 77 D.L.R. (4th) 249 at 267 (S.C.C.). 64 This is generally done through affidavit evidence. The rule of disqualification is not mechanically applied. Only when the moving party specifies the subject matters, issues and causes of action presented in a former representation can the court determine if a substantial relationship test has been met. 65 Martin v. Gray (1990), 77 D.L.R. (4th) 249 at 268 (S.C.C.). 66 For an example of this being done, see Schiessle v. Stephens 717 F. 2d 417 (C.A. 7, 1983).

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unwilling to accept a simple statement “Trust Me”, even if made under oath. Moreover, lawyers who have received relevant confidential information from a client cannot act against their clients or former clients. Disqualification is automatic in such cases67.

The more difficult question arises when partners or associates in a lawyer’s firm have relevant information, but the challenged lawyer has had no direct contact with those colleagues concerning the matters in question. In this grey area, some courts employ the imputed knowledge concept, premised on the idea that each partner is the agent of every other partner and that a partnership is an entity in which the common enterprise belies any notion of secrecy between partners. The doctrine of imputed knowledge assumes that one firm member’s knowledge constitutes the knowledge of all members. Although in practice the assumption may be somewhat unrealistic in the era of multi-jurisdictional mega-firms, a strong inference that lawyers who work together share confidences persists68. Reasonable members of the public could well conclude that confidences will likely be disclosed in every case, unless there are robust institutional efforts to prevent disclosure. Accordingly, courts should draw this inference, unless satisfied by clear and convincing evidence that all reasonable measures have been taken to ensure no disclosure from the “tainted lawyer to the member or members of the firm who are engaged against the former client.” Reasonable measures would include institutional mechanisms like Chinese walls and cones of silence. 69

In Martin, Sopinka J. challenged the Canadian legal profession to develop standards to clearly test the adequacy of these mechanisms. He suggested that courts will not likely accept institutional mechanisms as sufficient evidence of effective screening until the profession’s governing bodies have studied the matter and determined whether institutional guarantees satisfy the need to maintain confidence in the profession’s integrity70. This was an innovative (and unconventional) move by Sopinka J. to ensure that whatever standards or models were developed to prevent information flow would represent a more considered consensus than is possible in a fact-constrained bi-polar dispute resolution mechanism like litigation. The Bar Association Working Group under the leadership of John Jennings set out to draft guidelines through a consultative process. As is disappointingly usual in such consultations, little useful comment materialized and the final recommendations closely followed the tentative recommendations circulated in a draft report. The Group had a blank slate to work on. The durability of their work testifies to its

67 Martin v. Gray (1990), 77 D.L.R. (4th) 249 at 268 (S.C.C.). 68 Martin v. Gray (1990), 77 D.L.R. (4th) 249 at 268 (S.C.C.). 69 Martin v. Gray (1990), 77 D.L.R. (4th) 249 at 269 (S.C.C.). The term Chinese Wall was used without any apparent reservation by Sopinka J. 70 Martin v. Gray (1990), 77 D.L.R. (4th) 249 at 269 (S.C.C.).

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merit71. The Canadian legal profession has since largely adopted such institutional guidelines, following the Canadian Bar Association Task Force study. 72

The tests recognize that relationships do end, and it would be unreasonable to prevent a lawyer from ever acting against a former client73. Instead, lawyers may act against former clients74 in circumstances where a reasonable member of the public, in possession of the facts, would conclude that no confidential information had been or would be disclosed and the matter is not related to the former retainer. In one American case, the court examined the lawyer’s degree of knowledge and involvement with the file to determine whether a conflict existed. 75

As the Manitoba Court of Appeal observed in Mitchell v. Institute of Chartered Accountants (Manitoba), 76 the Martin v. Gray judgments “encourage a recognition of the importance of the appearance of things when legal conduct is measured.”77 Courts hold law firms to stringent standards to ensure that no conflicts of interest arise. A client’s right to counsel of choice is not absolute. Rather, that right is tempered by the

71 The Canadian work clearly influenced Australian developments, although it seems to have gone largely unnoticed in England. 72 The Federation of Law Societies of Canada Rule with Respect to Conflicts of Interest Arising as a Result of Transfers between Law Firms, which in turn largely derives from the Canadian Bar Association Task Force Report, Conflict of Interest Disqualification: Martin v. Gray and Screening Methods (Ottawa: Canadian Bar Association, 1993). 73 Since Martin v. Gray, Canadian courts have started to explore the extent to which fiduciary relations of loyalty, beyond protecting client confidences, may endure following the termination of a retainer. See more generally Brooking J.A. in Spincode Pty. Ltd. v. Look Software Pty. Ltd. [2001] VSCA 248 (C.A.) 74 Compare Law Society of England and Wales’ Guide to the Professional Conduct of Solicitors (7th edition, 1996) c. 15 with Solicitors’ Practice (Conflict) Amendment Rule 2004, adding new Rules 16D and 16E to the Solicitors’ Practice Rules 1990 governing members of the Law Society of England and Wales. 75 Interestingly, the facts of the case resembled Martin v. Gray: A firm was not disqualified from representing a plaintiff when an associate of the firm had previously worked for the firm representing the defendant, even though the associate had worked on the case for both parties, where the associate never acquired any confidential information and handled only routine and perfunctory assignments as a junior associate in the defendant’s firm: see Nissan Motor Corp. v. Orozco, 595 So. (2d) 240, 17 F.L.W.D. 638; review denied (Fla. Ca., 4th Dist., 1992) 605 So. (2d) 1265. 76 [1994] 3 W.W.R. 704, 91 Man. R. (2d) 138 at 144, 22 Admin. L.R. (2d) 182 (Q.B.); affd. [1994] 10 W.W.R. 768, 97 Man. R. (2d) 66, 79 W.A.C. 66 (C.A.). 77 See, similarly, Grimwade v. Meagher [1995] 1 VR 446, Black v. Taylor [1993] 3 NZLR 403, Kooky Garments Ltd. v. Charlton [1994] 1 NSLR 587, Caruso v. Tartaglia (2002) VSC 91, Grey v. Alexander (2000) ANZCR 386, Sent and Primelife Corporation Ltd. v. John Fairfax Publication Pty. [2002] VSC 429 at para 111.

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public interest in maintaining confidence in the administration of justice. 78 To justify their strict application79 of conflict standards, courts frequently cite the need to preserve the integrity of the administration of justice by maintaining the highest standards in the legal profession. 80

At this stage in the evolution of Canadian law, courts continue to develop a coherent set of norms to govern conflicts of interests81, necessitated by the Martin v. Gray and Neil82 decisions’ marked break with past jurisprudence. Indeed, the Supreme Court’s decision itself recognized the need for detailed development of the law, beyond what might be accomplished in individual cases. 83 The Court’s deliberations led to the rules currently regulating transferring lawyers, 84 and invigorated consideration of traditional conflicts. 85

78 Otherwise preference should be given to the party’s choice of counsel: see Planned Insurance Portfolios Co. v. Crown Life Insurance Co. (1989), 58 D.L.R. (4th) 106, 68 O.R. (2d) 271, 36 C.P.C. (2d) 218 (H.C.J.). 79 It is refreshing to come across more realistic decisions such as the Ontario case where the court held that “[i]n matters related to conflicts of interest, as in matters of professional competence, what is required of solicitors is not omniscience or perfection, but knowledge and performance which are reasonable in the circumstances.” Canadian Newspapers Co. v. Kansa General Insurance Co. (1991), 5 C.C.L.I. (2d) 66 at 104, [1991] I.L.R. 1-2751 (Ont. Gen. Div.); revd. on other grounds (1996), 30 O.R. (3d) 257, 93 O.A.C. 26 (C.A.). 80 Peel Condominium Corporation No. 395 v. Mahoney (1996), 6 O.T.C. 315 (Gen. Div.). 81 The best discussion of the traditional rules, together with a useful taxonomy of conflict situations is found in P.M. Perell, Conflicts of Interest in the Legal Profession (Toronto: Butterworths, 1995). 82 R. v. Neil, [2002] 3 S.C.R. 631, 218 D.L.R. (4th) 671, [2003] 2 W.W.R. 591, 168 C.C.C. (3d) 321, 6 C.R. (6th) 1, 6 Alta. L.R. (4th) 1 83 Sopinka J. in Martin v. Gray noted that whatever institutional resolution might result from the various law society responses to that decision, it should not impair lawyer mobility. See [1990] 3 S.C.R. 1235 at 1243, 77 D.L.R. (4th) 249 at 254. While at one time, a lawyer might reasonably expect to spend his or her professional career within the same partnership or institution, this pattern does not prevail today. The rules should respect the changing realities of professional practice. 84 Most provinces adopted Rules based upon The Federation of Law Societies of Canada’s Rule With Respect to Conflicts of Interest Arising As a Result of Transfers Between Law Firms, which in turn was largely derived from the Canadian Bar Association Task Force Report, Conflict of Interest Disqualification: Martin v. Gray and Screening Methods (Ottawa: Canadian Bar Association, 1993). Even provinces, such as Newfoundland which had adopted the old Canadian Bar Association Code looked to the Federation Rule on lateral migration and screening devices. 85 For more detail on how Canadian courts have applied the law following Martin v. Gray, see Simon Chester, Conflicts of Interest, in Lundy et al. Barristers and Solicitors in Practice (Toronto: Butterworths, 1999)

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If time permitted, it is useful to compare Martin v. Gray with parallel developments in the caselaw in Australia and New Zealand.86

AUSTRALIA FOLLOWS SUIT

In the 1990’s, Australia also broke from the traditional English mould. In a series of recent decisions, Australian Courts have embraced a parallel approach to assessing potential conflicts of interest strictly adopted by Canadian courts.87 In Mallesons Stephen Jaques v. KPMG Peat Marwick88 and later in Carindale Country Club Estate Pty. Ltd. v. Astill and others, 89 the Supreme Court of Western Australia and the Federal Court of Australia forged a mode of analysis closely resembling the prevailing Canadian view.

86 For such a comparative analysis, see Chester et al, Conflicts of Interest, Chinese Walls and The Changing Business of the Law, (2000) 2 Business Law International 36-88. 87 For further discussion of the Australian tests, see C. Edmonds, “Trusting Lawyers with Confidences — Conflicting Realities (a review of the test and principles applying to lawyers’ conflicts of interests)” (1998) 16 Australian Bar Rev. 222. See also Carindale Country Club Estate Pty. Ltd. v. Astill (1993), 115 A.L.R. 112, (1993) 42 F.C.R. 307 (Federal Court of Australia), where the court reviewed, but declined to follow, the Supreme Court of Canada’s approach in Martin v. Gray, [1990] 3 S.C.R. 1235, [1991] 1 W.W.R. 705, 121 N.R. 1, 77 D.L.R. (4th) 249, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113; revg. [1989] 3 W.W.R. 653, 58 D.L.R. (4th) 67, 57 Man. R. (2d) 161 (C.A.) (sub nom. Martin v. Gray). The Australian courts have consciously rejected the sort of American models which were so attractive to the Supreme Court of Canada in Martin v. Gray. See R. Teele, “The Necessary Reformulation of the Classic Fiduciary Duty to Avoid a Conflict of Interest or Duties” (1994) 22 Australian Bus. Law Rev. 99, noting that Australian Conflicts Rules are moving from strict prohibition to an analysis of actual breach of confidentiality or prejudice to another client. The Supreme Court of Canada gets a more sympathetic hearing in Wan v. McDonald (1992), 105 A.L.R. 473, (1992) 33 F.C.R. 491. Even in those cases Australian law in recent times has developed and applied a more stringent test than that laid down in Rakusen v. Ellis, Munday and Clarke, [1912] 1 Ch. 831. (See: National Mutual Holdings Pty. Ltd. v. Sentry Corporation (1989), 19 F.C.R. 155; Mallesons Stephen Jaques v. K.P.M.G. Peat Marwick, [1990] 4 W.A.R. 357; Equiticorp Holdings Ltd. v. Hawkins, [1993] 2 N.Z.L.R. 737; Re a firm of solicitors, [1992] 1 Q.B. 959; L. Aitken, “‘Chinese Walls’ and Conflicts of Interest” (1992) 18 Monash University Law Rev. 91; P. Finn, “Conflicts of Interest and Professionals”, Seminar on Professional Responsibility, University of Auckland, 28-29 May 1987 at 9; Reynolds, F.M.B. “Solicitors and Conflict of Duties” (1991) 107 L.Q.R. 536.). For further Australian discussion, see M. Gronow, “Chinese Walls and Conflicts of Interest” (1993) 67 Law Institute Journal 502-505; R. Nicholson, M. Darling, “Hitting the Chinese Wall (Avoiding Conflict of Interest)” (1986) 60 Law Institute Journal 1338(4); and Ipp. J. “Lawyers’ Duties to the Court”, (1998) 114 LQR 63 at 93. 88 [1990] 4 WAR 357 89 (1993) 115 ALR 112, 42 F.C.R. 307 (Fed. Ct.).

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Mallesons Stephen Jaques v. KPMG Peat Marwick: Acting Against Former Clients

For many years, the Australian accounting firm KMG Hungerfords annually audited Rothwells Ltd.’s financial accounts. However, when Rothwells’ financial statements were released, concerns were expressed that the accounts failed to accurately disclose the company’s financial position. When Hungerfords became concerned that their involvement in the Rothwells audits might ultimately lead to criminal charges, the accounting firm sought legal advice from Mallesons Stephen Jaques. Over the course of the Hungerfords’ retainer, Hungerfords provided Mallesons with confidential information about their past audit of Rothwells’ accounts. Although Mallesons concluded that no evidence suggested that Hungerfords had acted recklessly or was party to the production of misleading accounts, Mallesons advised Hungerfords to notify their insurers that claims might be made, given Rothwells’ precarious financial state.

Whatever Mallesons thought of the potential for prosecution, criminal charges were officially laid against the individual accountants involved in the Rothwells audits shortly after Hungerfords’ retainer with Mallesons ended. Soon after, the Commissioner of Corporate Affairs asked Mallesons to assist in prosecuting the criminal charges against the Hungerfords accountants. In response, Hungerfords petitioned for an interlocutory injunction to restrain Mallesons from representing the Commissioner, arguing that Mallesons’ involvement would raise an impermissible conflict of interest.

Grounds for Injunctive Relief

Hungerfords raised two grounds in support of its request for equitable relief. First, Hungerfords argued that the information it provided to Mallesons was protected by legal privilege and if Mallesons’ were to represent the Commissioner, a serious risk existed that such information would be disclosed to the former client’s prejudice. Second, Hungerfords contended that the duty Mallesons owed to their former client and the Commissioner’s interest in obtaining the accountants’ criminal conviction raised an insurmountable conflict.

The Supreme Court of Western Australia consulted the relevant foreign jurisprudence in attempting to discern the applicable law governing conflicts of interest. That survey included Rakusen, 90 where the English Court of Appeal held that a solicitor’s prior representation of a client in a specific matter, standing alone, does not bar the solicitor from acting against the client in the same matter in the future. However, the Supreme Court was quick to observe that a host of limitations restrain a solicitor’s freedom to act against former clients. For instance, solicitors may not represent clients where privileged information gathered during a former

90 [1912] 1 Ch 831

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retainer might be disclosed. Similarly, lawyers may not represent clients in specific matters where a current and former client’s interests diverge on the very same issue.

Not surprisingly, the Court acknowledged that the two bases for equitable intervention are closely intertwined. The Court also found prior jurisprudence on how to assess whether a lawyer may act against a former client to be largely inconsistent. Some cases framed the applicable test rigidly, suggesting that any circumstances that might lead to disclosure of privileged information would be unacceptable. At the other extreme, many early cases analysed the issue more loosely, prohibiting lawyers from acting only in instances that raised a probability that privileged information would be released.

To reconcile the two competing schools of thought, the Court considered general conflict of interest principles applicable to fiduciaries. In Re Van Laun; Ex parte Chatterton91, the court held that the lawyer-client relationship as one of the most important fiduciary relationships known to law. In Aberdeen Railway Co. v. Blaikie Bros,92, Lord Cranworth LC set forth the rule in forthright terms:

It is a rule of universal application, that no-one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.

The rationale for such stringent requirements rests upon the public interest in maintaining professional, workable relationships between lawyers and clients, which in turn enhances the administration of justice by encouraging clients to make full and frank disclosure. The Supreme Court concluded that respect for the public interest requires solicitors to be prohibited from acting against former clients:

If, by a solicitor acting for a new client, there is a real and sensible possibility that his interest in advancing the case of the new client might conflict with his duty to keep information given to him by the former client confidential, or to refrain from using that information to the detriment of the former client. 93

Privileged Information and Potential Prejudice

On the specific facts before it, the Court concluded that the information disclosed to Mallesons during the course of Hungerfords’ retainer clearly was relevant to the prosecution of the accountants charged criminally in the Rothwells audits. In fact, the Court found that the value of the information gathered during the initial retainer extended far beyond its mere content. The Court observed that adversarial proceedings are highly charged, dynamic events where appearances often are as

91 [1907] 2 KB 23 92 (1854) 1 Macq 461 93 Mallesons Stephen Jaques v. KPMG Peat Marwick (1990) 4 WAR 357, at pp. 362-3.

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important as hard fact. Hungerfords’ knowledge that the solicitors representing their opponent were privy to confidential information, directly related to the case at hand, afforded the Commissioner a formidable psychological advantage. Specifically, the Court observed:

In a trial involving serious charges, lasting many months, covering many complex issues, there could be an incalculable and prejudicial effect upon the state of mind, and therefore the demeanour, of a defendant who knows that prosecuting counsel has been briefed by the very firm of solicitors whom he previously consulted to advise him on several of the very issues which form the subject matter of the prosecution. Such prejudice would be intangible, but, nevertheless, very real. 94

That the Commissioner might have been able to collect the information gathered during the Hungerfords retainer from outside sources in no way diminishes those intangible benefits. Accordingly, Mallesons’ representation of the Commissioner clearly conflicted with a former client’s interests, and could not be permitted by law.

Imputing Knowledge to Partners – Can Chinese Walls Stop the Flow?

The Supreme Court was extremely sceptical of the potential effectiveness of Chinese walls. The Court characterized such devices as “relatively novel and potentially porous,” and discounted the ability of any such barrier to offset the risk that privileged information would be disclosed. More particularly, the Court held that “the way the law treats fiduciaries has the effect that undertakings of the kind offered…do not avoid the consequences that ordinarily flow from a conflict of interest situation.” Consequently, the Court ruled that Chinese walls do not effectively cure possible conflicts of interest.

On the question of imputed knowledge, the Court expressly supported the view that, under normal circumstances, the knowledge of one partner is imputed to other members of a partnership. The seemingly contrary Rakusen holding was distinguished on the basis of that particular partnership’s unique and segmented character.95

The Mallesons ruling sent a strong signal to the Australian bar that any substantive conflict between a former and potential client’s interests might disqualify lawyers from acting on the latter’s retainer. Following the decision, some speculated that the criminal nature of the impending proceedings heightened the Court’s scrutiny of the conflicts of interest issue. However, the Federal Court of Australia laid all such speculation to rest with its decision in Carindale Country Club Pty. Ltd. v. Astill and others.

94 Mallesons Stephen Jaques v. KPMG Peat Marwick (1990) 4 WAR 357, at pp. 368. 95 Six years later, Otton L.J. described the Ellis, Munday and Clarke partnership as peculiar, in Prince Jefri Bolkiah v. KPMG.

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Carindale Country Club: The New Law Solidifies

In the late 1980’s, the Carindale Country Club Pty. Ltd. began to build and market upscale and exclusive residential properties. Carindale allegedly pledged that no properties in the development would be sold below a minimum price and no lots would fall below a minimum size of three hundred square meters. Relying on Carindale’s promises, the plaintiffs purchased a residential unit. According to the plaintiffs, they later sustained losses due to Carindale’s misrepresentations.

From the date Carindale was first established through January 1992, a lawyer named Mr. Astill represented the corporation. Astill provided a variety of services, including drafting the standard contract Carindale used to sell lots in the development. Astill’s association with Carindale extended beyond the bounds of the traditional solicitor-client relationship, since Astill served as a director and company secretary of Carindale for a while, and maintained a financial interest in the corporation. Over the course of the relationship, Astill was privy to both general information regarding the developer’s pricing strategies and specific information regarding the substandard size of selected units within the development.

In 1992, the plaintiffs launched a claim for damages resulting from the purchases made on the basis of the developer’s alleged misrepresentations. The plaintiffs retained one of Astill’s partners to represent them in the action. Carindale sought to disqualify the plaintiffs’ counsel on the grounds that he might possess confidential information gathered by Astill during Astill’s legal relationship with Carindale.

Privileged Information: The Controlling Tests

The Federal Court recognized Rakusen’s “real mischief and prejudice” test as the starting point for analyzing conflicts issues. Rakusen held that a new retainer must be relinquished if allowing the lawyer to act while in possession of confidential information would cause real mischief and prejudice to the former client. However, given the complexities of modern legal practice, the Federal Court reasoned that “modern developments in the law of confidentiality make the principles set out in Rakusen too narrow.”

After surveying much of the relevant international jurisprudence, the Federal Court ultimately embraced the conservative approach enunciated by Ipp J. in Mallesons. 96 In articulating a test based on the Mallesons ratio, the Carindale court specifically held that:

A solicitor is liable to be restrained from acting for a new client against a former client if a reasonable observer, aware of the relevant facts, would think that there is a real, as opposed to a theoretical possibility that confidential information given

96 [1990] 4 WAR 357.

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to the solicitor by the former client might be used by the solicitor to advance the interests of a new client to the detriment of the old client.

The Federal Court tightened the Rakusen test on two grounds. First, Drummond J. stressed the importance of the public character of the work solicitors perform as officers of the court.97 Unlike private fiduciaries, lawyers play an integral role in the administration of justice. A solicitor’s duty of loyalty is always present, and is not extinguished by the termination of a client’s retainer. Second, legal professional privilege directly conflicts with any rule that readily allows solicitors who have obtained confidential information from one client to later act for another with adverse interests. Permitting lawyers to accept such new retainers would undermine the essence of legal professional privilege.

The Federal Court further concluded that once a solicitor possesses confidential information, the solicitor cannot simply pledge that the information will not be used to advance the new client’s cause. Drummond J. cited favourably the following principle articulated by Megarry, Ch. in Spector v. Ageda: 98

A solicitor must put at his client’s disposal not only his skill but also his knowledge…and if he is unwilling to reveal his knowledge to his client, he should not act for him. What he cannot do is to act for the client and at the same time withhold from him any relevant knowledge that he has.

Drummond J. also observed that even a solicitor with the best intentions, determined not to use information from another client, may subconsciously draw upon the information to the former client’s detriment.

Upon developing the tests to detect an impermissible conflict of interest, the Federal Court concluded that the information that Astill possessed regarding the substandard lot sizes in the case at hand raised the spectre of a serious conflict of interest. Astill’s possession of such information would give the “knowledgeable observer” the impression that the confidential information could “consciously or unconsciously” be used to Carindale’s detriment. Consequently, the court prohibited Astill and his partners from acting against Carindale in the litigation.

NEW ZEALAND OPTS FOR PRAGMATISM

Across the Tasman Sea, the New Zealand profession’s conflict rules closely resemble those of the other common law jurisdictions. 99 However, the New Zealand courts have not applied their rules as rigorously, reasoning that to do so 97 See Mills v. Day Dawn Bloch Gold Mining Co. Ltd. (1882), 1 QLJ 62 at 63 98 [1973] Ch 30 99 See M.R. Dean and C.F. Finlayson, “Conflicts of Interest: When May a Lawyer Act Against a Former Client” [1990] N.Z.L.J. 43. For more recent discussion, see “An Editorial, Conflict of Interest, Discussing Kooky Garments Ltd. v. Charlton, [1994] 1 N.Z.L.R. 587 (C.A.) and Russell McVeagh v. Tower Corp. - No. 86/98 (N.Z.C.A. Aug. 25, 1998)” in N.Z.L.J., Sept. 1998 at 305(1).

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would have harsh consequences for litigants. 100 New Zealand’s approach to conflicts has attracted smaller markets for legal services, like South Africa.

The New Zealand judiciary is far less rigid in its approach to assessing the breadth and permissibility of potential conflicts of interest. Buoyed by a strong desire to incorporate practical considerations into any conflict of interest test, the New Zealand Courts have fashioned a flexible qualitative standard that permits legal retainers that may be subject to only minor benign conflicts. In Russell McVeagh Bartleet and Co. v. Tower Corporation, 101 the Court of Appeal of New Zealand resisted the temptation to disqualify legal counsel whose representation of a new client could possibly conflict with a former client’s interests.

The Russell McVeagh case concerned a complicated tax dispute between the Tower Corporation and the Inland Revenue Department over an alleged liability of over $30 million. Needing specialized legal counsel, Tower approached a partner with the national firm of Russell McVeagh Bartleet and Company. One of the largest firms in New Zealand, Russell McVeagh has offices throughout the country and principal establishments in both Auckland and Wellington.102 Working from the firm’s Wellington office, a partner named Heenan managed the Tower file, and represented Tower in the tax dispute until the matter resolved in April 1997.

Despite Russell McVeagh’s continued representation of Tower, the firm considered additional retainers from individuals whose interests potentially conflicted with Tower Corporation In May 1996, SBC Warburg Dillon Read asked a partner in the Auckland office to give advice on a strategy to acquire and demutualize Tower. Aware of Heenan’s involvement with Tower, the partner discussed with Heenan whether the firm should represent both clients, with different staff assigned to each file. Heenan saw no reason why the firm should not represent both parties, as he had provided Tower with only very specialized tax advice. Heenan felt that he possessed no information likely to be of any value to SBC in its effort to seize control of Tower. Accordingly, Russell McVeagh accepted the SBC retainer and decided not to inform Tower of SBC’s goal.

Sixteen months after Russell McVeagh accepted the SBC retainer, SBC presented Tower with a take-over proposal. Tower rejected the proposal and hostilities erupted between the parties. Dismayed by Russell McVeagh’s simultaneous involvement with both parties, Tower immediately sought an injunction to prevent it from representing SBC. In Tower’s view, Russell McVeagh had obtained both general information about how Tower conducted business and specific information about its financial performance, over the course of the past two years. Tower perceived this information as highly relevant to anyone wishing to acquire control. 100 See David Coull, Typhoid Mary’s: the Ethical Dilemma of Lawyers Who Switch Firms (Victoria University Law Review) 101 [1998] 3 NZLR 641 (C.A.) 102 At the time, the firm had 64 partners and 190 fee-earning personnel.

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Conflicts in a Tighter Market for Legal Services

In considering Tower’s application, the High Court applied the following restrictive test for disqualification:

In the case of a direct conflict the Courts will disqualify persons involved in that conflict from participation. In all other cases the Courts will accept that it is inappropriate for a legal practitioner to have an involvement in proceedings where there is a reasonable perception that a reasonable person apprised of the relevant facts, would perceive a risk that the participation of the person concerned might result in a conflict of interests. If the disclosure advertently or inadvertently of confidential information of sufficient relevance to and significance for the matters in issue make it undesirable in the interests of justice that the person concerned should continue to participate, the Courts will also intervene. 103

While the court did not find that the general information Russell McVeagh obtained while representing Tower warranted injunctive relief, the court did find the financial information collected while preparing for the taxation dispute sufficiently and potentially valuable to SBC to disqualify Russell McVeagh.

The High Court ruled that one firm member’s knowledge should not automatically be imputed to another member. However, on the facts before it, the court held that a reasonable member of the public, apprised of all facts in the case, would perceive a risk that members of the firm representing the SBC-led initiative could acquire sensitive information provided by Tower. Sceptical of the protection afforded by Chinese walls, the court held that such arrangements would be acceptable only under exceptional circumstances “where there is ample evidence to indicate not only that no possibility of leakage has already occurred, but that it could not occur in the future”. 104

The court dismissed the contention that the injunction should be denied for practical considerations. Despite the fact that New Zealand has relatively few large law firms, ample evidence indicated that SBC could have obtained other competent legal counsel. Consequently, the court found the information barriers erected insufficient to dispel potential public perception of a conflict of interest.

103 Unreported judgment of Gallen J. (CP 347/97) at p.23 as quoted by Henry J. in Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 645 [CA]. 104 Unreported judgment of Gallen J. (CP 347/97) at p.28 as quoted by Henry J. in Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 646 [CA].

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The Court of Appeal’s Pragmatic Approach to Conflicts

The New Zealand Court of Appeal adopted a far more liberal and pragmatic view of the potential legal problems conflicts of interest pose than the High Court’s strict approach. In constructing an appropriate test, the Court of Appeal reasoned that the rationale for intervention must not be predicated upon the desire to prevent disloyalty or impropriety. Rather, injunctive relief must be justified on principle, most notably, the desire to protect the confidential information provided during the lawyer-client relationship. The court took notice of the many foreign authorities, citing Rakusen105 as the logical starting point for conflict of interest analysis. The court observed that Rakusen clearly established a need to search for a real risk to a client’s interests before imposing equitable remedies. Speaking for a majority of the New Zealand Court of Appeal, Henry J.A. further noted that, in the years following Rakusen, courts of other Commonwealth jurisdictions applied far more stringent tests when confronted with possible conflicts of interest. For example, both Australian and Canadian courts established a series of presumptions that effectively prevent lawyers from accepting new retainers when there is any risk that confidential information secured under privilege from a former client might be used to the client’s prejudice.

However, in contrast to the “bright-line” tests many other Commonwealth courts advocated, Henry J.A. developed an approach more sensitive to each case’s unique characteristics. The court explicitly rejected the use of rebuttable or irrebuttable presumptions to ascertain the presence of a conflict of interest, and instead suggested that any conflict analysis must include two independent steps. First, the duties the solicitor owes to each client must be defined. Next, one must determine whether the independent duties will likely conflict. According to Henry J.A., answers to the following three questions will determine whether the confidential information the solicitor possesses may raise a conflict of interest: 106

Is the confidential information held likely to affect the former client’s interests adversely, if disclosed?

Do the particular facts, viewed objectively, raise a real or appreciable risk that the confidential information will be disclosed?

If the first two questions are answered in the affirmative, should the Court exercise its discretionary powers to disqualify a particular lawyer from continuing to represent a particular client, considering the significance and importance of the special fiduciary relationship raising the duty to protect?

The court recognized that consideration under each branch of the test would frequently overlap. The court held that proper conflict of interest analysis entails 105 [1912] 1 Ch 831 106 Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 651 [CA].

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balancing that is “mindful of the interests of all directly concerned, but does not undermine the integrity of the fiduciary relationship”. 107 Factors ranging from the nature and sensitivity of the information to the adverse effect associated with possible disclosure could decide the outcome of any dispute.

The court decisively applied its newly minted conflict of interest test to the case at hand. Henry J.A. stressed that there must be a conflict created by some link between the nature of the past retainer and the actions the new client plans to take. Equitable intervention would not be warranted where a client with potentially adverse interests was represented in the past, but disclosed no pertinent confidential information during the retainer. The court found nothing incompatible between Tower’s interests, concerned solely with the tax dispute, and SBC’s interests, focused only on the take-over initiative.

Regarding information gathered during the Tower retainer, the court again held that no real risk that confidential information relating to Tower could be disclosed to a client with adverse interests existed. After analyzing the information provided to Russell McVeagh, Henry J.A. rejected Tower’s assertion that any of the information was confidential or raised a risk of disclosure to parties with contrary interests. The court viewed the insights regarding Tower’s managerial operations as so general as to be of “little real significance” to the SBC-led action. Similarly, the Court noted that all documentation containing specific financial data, collected during the Tower tax dispute, had been delivered to the High Court and was subject to a suppression order. Since staff attorneys in the tax dispute would not likely recall the data, the risk that any specific information would be disclosed was extremely remote. Thus, the court easily concluded that the case presented no real risk that material, confidential information could be disclosed to the parties associated with SBC.

The majority also gave a qualified endorsement to Chinese walls as a potential method for effectively preventing information flows that might raise a conflict of interest. Henry J.A. noted:

Although the concepts of Chinese walls and cones of silence leave much to be desired, and cannot be allowed to obscure the realities of life and the ordinary behaviour and incidents of relationships where individuals practice together in a firm, internal control measures may nevertheless in some circumstances be both appropriate and sufficient to ensure protection. 108

Finally, the court considered the New Zealand legal profession’s unique characteristics, observing that the availability of legal counsel “should not be unduly

107 Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 651 [CA]. 108 Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 654-655 [CA].

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restricted by Court imposed control or sanctions which are not required in the overall interests of justice to protect individual rights”. 109

In a separate minority opinion, Blanchard J.A. elaborated on the majority’s judgement, highlighting two additional points he considered crucial to disposition. First, and arguably foremost, Blanchard J.A. questioned Tower’s motives for seeking injunctive relief. In Blanchard J.A.’s view, courts must remain acutely aware of tactical objections made to pursue ulterior objectives. Blanchard also reformulated the majority’s conflict of interest test slightly, incorporating the civil “balance of probabilities” standard. Specifically, Blanchard J.A. characterized the appropriate test as follows:

If the Court finds that the law firm is by reason of its retainer for the first client privy to confidential information the disclosure of which to the second client has the potential to be detrimental, it will infer that disclosure has actually occurred or is likely to occur unless on a balance of probabilities the law firm negatives that concern. 110

The Commonwealth Consensus Asserts Itself in the Dissenting Judgment

In his dissent, Thomas J.A. departed dramatically from the majority’s flexible approach, arguing for a conflicts test closer to that used by the other common law jurisdictions. The dissent criticized both how the majority articulated the controlling test and the degree to which they integrated supplementary considerations into their analysis. Thomas J.A. dismissed the arguments that the SBC group could not obtain alternative competent legal counsel, citing the presence of several other large firms throughout New Zealand, and that the narrow character of the advice Tower received could not be classified as relevant to the SBC take-over initiative. The dissent further condemned the majority’s permissive approach to examining potential conflicts of interest, contending instead that identifying any risk alone warrants judicial intervention. Qualifying the test with adjectives such as real or appreciable exposes former clients to possible harm. Thomas J.A. went on to suggest that the information a client provides need not even be confidential to merit protection. In the dissent’s view, the duty of loyalty lawyers owe their clients bars them from creating any risk that information, which may be material to a new client, might be disclosed in a new retainer.

Thomas J.A. reiterated concern over the effectiveness of Chinese walls and endorsed the cautious approach adopted by other jurisdictions, observing that Chinese walls are “inherently insecure and prone to leak.” According to the dissent,

109 Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 655 [CA]. 110 Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 678 [CA].

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such mechanisms should be used only in “exceptional circumstances where there is an overriding and compelling need.” 111

Russell McVeagh in Context

The Court of Appeal’s Russell McVeagh judgement contrasts starkly with the rigid and absolute decrees enunciated by most other Western courts. The flexible three-prong test, with its willingness to consider mitigating external factors, runs counter to the principled formulae developed in Canada, England, Australia, and the United States. While many commentators have suggested that New Zealand’s shallow pool of large legal firms compelled the Court of Appeal to adopt a permissive standard, it remains to be seen whether this loose test will ultimately fall to pressure to conform with the emerging international consensus.112

THE SAGA OF PRINCE JEFRI BOLKIAH V. KPMG

When we look at England and Wales, the Canadian position seems comparatively calm and uni-dimensional, with two Supreme Court cases staking out the new principles. England has, by contrast, experienced significant jurisprudential evolution, sustained academic commentary, and heated and public debate within the legal profession. I suspect that the issues have been so controversial is due to the heightened economic stakes in the last twenty years. When the Big Bang threw open London’s financial services market to competitive forces, it prompted the rapid growth of highly specialized ancillary services. The largest law firms responded with deep specialization, transnational capabilities and aggressive and sustained growth.113 Clients in the financial services sector sought out that expertise on a transaction by transaction basis. Relationships were team-to-team, deal-by-deal. This resulted in different customs114 for conflicts, shared assumptions about the acceptable retainer arrangements and the scope of informed consent.115

111 By Thomas J.A. in Russell McVeagh McKenzie Bartleet & Co v. Tower Corporation [1998] 3 NZLR 641at 670 [CA]. 112 See Glazebrook J. Conflicts of Interest: the New Zealand Perspective, at pp. 13-14 where Justice Glazebrook of the New Zealand Court of Appeal states that in the vast majority of cases, applying Russell McVeagh would lead to the same results as the Bolkiah tests discussed below. 113 Twenty years ago, the largest law firms in the world were all American-based. Today only half of the top ten are. 114 These customs crystallized into the Report of the City of London Law Society on Conflicts of Interest. 115 The gaps between practices governed by this custom, and the ‘official’ rules of the Law Society is explored in Griffith-Baker’s Serving Two Masters.

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Accountants once joked that lawyers have conflicts of interest, while accountants have industry experience. Knowledge that might disqualify lawyers simply made Chartered Accountants more expert in their work. In a case that has thrown the European accounting profession into a tizzy, the House of Lords extended conflicts of interest rules to accountants and toughened the rules for lawyers. Prince Jefri Bolkiah v. KPMG116 contained all the elements of high-stakes drama, combining crime, intrigue, wealth and deception into a single case that has changed how large professional service firms conduct business internationally.

The story begins in Brunei, an oil-rich sultanate on the island of Borneo. 117 The world’s richest ruler,118 the Sultan, runs the country with his three brothers, each of whom has built staggering fortunes. Brother Jefri acted as Brunei’s finance minister and ran the country’s financial crown jewel, the Brunei Investment Agency (the BIA). Prince Jefri’s high-rolling lifestyle included conspicuous consumption (he owned 600 cars), sexual excess (a former Miss America sued him for $90 million) and controversial business deals (he recently settled the largest personal action in British legal history).

KPMG, a large, multi-national partnership, provides a range of financial services to a broad array of large and small clients. The firm employs almost 5,000 personnel in its London office alone, and maintains a significant commercial global presence. In 1983, the government of Brunei asked KPMG to audit the core funds of the newly

116 [1999] 1 All E.R. 517, [1999] 2 WLR 215 (H.L.); for the rich commentary on Bolkiah see Michael Chambers, Matthew Jones and Patrick Wilkins, Conflicts of Interest – The Growing Climate of Distrust, (April 1999) 33 Commercial Lawyer at p.27. Andrew D. Mitchell. Chinese walls in Brunei: Prince Jefri Bolkiah v. KPMG. University of New South Wales Law Journal Winter 1999 v22 i1 p. 243-255; Tony Levitt, Philip Hartley. Chinese whispers? Solicitors Journal Jan 29, 1999 v143 i4 p. 80(2); Barry A.K. Rider. Chinese walls and pragmatism. The Company Lawyer Feb 1999 v20 i2 p. 61-62;) Janine Griffiths-Baker Further cracks in Chinese walls. New Law Journal Feb 5, 1999 v149 i6874 p. 162(3); Price Jefri’s privilege. New Law Journal April 30, 1999 v149 i6886 p. 651(3); Rakesh Kapila, The truth about Chinese walls, November 1998, International Commercial Litigation 25 (note that this case comment concerns the High Court decision); John Kleefeld, Prince Jefri Bolkiah v. KPMG: House of Lords holds accountants to solicitors' duty of confidentiality in "Chinese walls" case. The Advocate March 1999 v57 i2 p. 223(12); Lee Aitken. A breach in the great walls of China: the "heavy burden" of confidentiality. Law Society Journal May 1999 v37 i4 p. 40(4). Jim Kelly, Opinion: A conflict within these walls? Accounting & Business, October 1998, p. 12; Tony Bingham. Chinese whispers, at http://www.tonybingham.co.uk/column/1999/19990122.htm . Allen & Overy, Bulletin, Chinese Walls, February 1999. Confidentiality and Chinese Walls: have they sprung a leak?, http://www.phillipsfox.com.au/publications/puf99005.htm . Breon Gravatt and Clive Elliot, Chinese walls – where to now? http://www.nz-lawsoc.org.nz/lawtalk/gavett.htm . 117 For the first extensive discussion of the business affairs of Prince Jefri Bolkiah, see Richard Behar, The Fairy Tale’s Over for the Kingdom of Brunei, in Fortune, February 1, 1999. 118 Bill Gates’ domain is note quite a sultanate.

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formed BIA, the financial organization managing the government’s General Reserve Fund.

While chairman of the BIA from 1983 through March 1998, Prince Jefri maintained a close relationship with his brother, the Sultan. In mid-1996, Prince Jefri retained KPMG to conduct an investigation on his own behalf related to a large law suit in which he was directly involved. Prince Jefri’s personal investigation was cloaked by KPMG in a dark veil of confidentiality, identified by the code name Project Lucy. Project Lucy required KPMG’s forensic accounting department in London to provide the Prince with a wide-range of litigation support services, including fact investigation, witness interviews (both with and without lawyers), document searches, conference participation, subpoena drafting and cross-examination preparation. While discharging the Project Lucy duties, the KPMG team was privy to significant confidential information concerning the identity and location of the Prince’s assets, and the legal structure of vehicles used to maintain his holdings. By March 1998, KPMG’s involvement in Project Lucy was reduced, and by 14 May 1998, the project ended entirely.

In the years following the BIA’s formation, large transfers of capital were frequently diverted from the core funds of the General Reserve Fund. KPMG had to rely on the BIA Board of Directors’ annual representation that the transfers were legitimate, bona fide executions of the Agency’s mandate. Consequently, the destination and use of these special transfers were excluded from the scope of KPMG’s audits.

In June 1998, the brothers became less amicable and Government of Brunei began to question the legitimacy of the BIA’s investment activities; it appointed a finance task force to fully investigate. Soon after, the government asked KPMG to assist the task force in determining the position of the Agency’s core funds and in summarizing the funds’ movement since the BIA’s inception. Although all information required to complete the initial investigation could be extracted from both audited accounts prepared by KPMG and the auditor’s working papers, on 2 July 1998, the government again asked KPMG to assist in further investigations to determine the destination and location of special transfers.

Although KPMG’s initial investigation could reasonably be seen as simply an extension of its existing auditing responsibilities, the later broadened mandate raised the real possibility of a conflict with the firm’s past representation of Prince Jefri. KPMG conceded that the interests of the expanded investigation might conflict with Prince Jefri’s interests, and that certain confidential information obtained during Project Lucy might be relevant to the expanded initiative. Even so, KPMG decided that the expanded initiative raised no substantive conflict of interest because the firm had stopped acting for Prince Jefri more than two months earlier and maintained no continued client relationship with him. KPMG accepted the new retainer, implementing special mechanisms to guard against the use or disclosure of confidential information Prince Jefri had provided about his holdings. KPMG did

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not advise Prince Jefri of the new assignment, or attempt to obtain his consent. At this point, Project Gemma was born.

Project Gemma began in earnest on 8 July 1998. An extremely high information barrier119 was immediately constructed to prevent confidential information KPMG held concerning Prince Jefri from reaching Project Gemma’s members. The Chinese wall contained two primary blocks. First, no one possessing information regarding Project Lucy was permitted to work with the new investigative group. Second, staff were selected in a way that prevented those privy to confidential information from infiltrating the team. All members of the new project team were required to swear affidavits attesting that they had no knowledge of Prince Jefri’s past dealings with KPMG. All documents and material relating to Project Gemma were physically and electronically segregated from the firm’s general population. The team worked in a different building from the rest of KPMG’s personnel.

When Prince Jefri discovered KPMG’s involvement with the finance task force, he immediately contested the legality of the new retainer, in light of KPMG’s past representation of his interests and the significant amount of confidential information revealed through Project Lucy. Although not discussed in the House of Lords’ judgement, the Court of Appeal’s judgement suggests that KPMG initially “stonewalled” 120 in responding to the accusations. Prince Jefri sought an injunction restraining KPMG from participating in Project Gemma. On 15 September 1998, Pumfrey J. issued an injunction.

THE COURTS LEARN FROM THE COMMONWEALTH

One of the most interesting features of the major conflicts cases is the extent to which appellate courts move in different directions from trial courts. In turn, final courts of appeal often move into unexpected expositions of novel doctrine. This pattern, clearly seen in the conflicts cases that reach the Supreme Court of Canada, is exemplified by the English courts’ consideration of Prince Jefri’s motion.

THE PRINCIPLED HIGH COURT

Before the High Court hearing, KPMG volunteered to pledge that it would neither use nor disclose any information about Prince Jefri’s affairs acquired during Project Lucy’s life. The BIA acknowledged that it could not expect KPMG to use confidential sources, and recognized that KPMG could not be replaced quickly and inexpensively. Although he found that KPMG had taken all steps to minimize or

119 I am not aware of law firm information barriers (outside of tobacco industry defence work) relying on different buildings and different computer networks to split a firm. 120 Otton, L.J. in Bolkiah in the Court of Appeal described KPMG’s behaviour as having “obfuscated” when accused. As the Court of Appeal noted, there was a period of over two weeks when no attempt had been made to erect a Chinese Wall. As in the Canadian decision of Ford Motor Company v. Osler Hoskin & Harcourt, the delay proved fatal.

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avoid the disclosure of confidential information, Pumfrey J. ruled that he must assess protective measures with a “very critical eye.” He noted that “the intrinsic difficulty with Chinese walls was that, while they were well adapted to deal with foreseeable or deliberate disclosure of information, they were not well adapted to deal with disclosure which was accidental, inadvertent or negligent”. In the final analysis, Pumfrey J. concluded that former clients should never be exposed to the risk of disadvantageous disclosure of confidential information, absent compelling countervailing factors. Given the potential difficulties arising from KPMG’s prior association with Prince Jefri, the court granted the injunction restraining KPMG from acting on Brunei’s behalf.

THE PRAGMATIC COURT OF APPEAL

In a marked contrast to Pumfrey J.’s strict ruling, the Court of Appeal rejected the notion that information barriers cannot remove the real risk of disclosure. Speaking for the majority, Lord Woolf M.R. adopted the New Zealand Court of Appeal’s analytical approach from Russell McVeagh121. Lord Woolf M.R. suggested that the following three questions determine whether professional service providers may represent clients whose interests conflict with former clients’ interests:

(1) Does the professional possess confidential information likely to adversely affect a former clients’ interests if disclosed?

(2) Do the facts suggest a real or appreciable risk that confidential information will be disclosed?

(3) Do the nature and importance of the former fiduciary relationship require the court to exercise its discretion and intervene to protect confidential information?

The court concluded that KPMG’s steps would ensure the integrity and confidentiality of the information gathered during Project Lucy. Specifically, Lord Woolf M.R. found that KPMG’s duty required it to take only “reasonable efforts to protect Prince Jefri’s confidential information and that it was not reasonable for Prince Jefri to require KPMG to be dismissed unless he ‘really would suffer serious damage’.”

THE HOUSE OF LORDS: TOUGHER STANDARDS

Before Bolkiah, as we have noted, Rakusen122 had been the controlling English authority on conflicts of interest. In Rakusen, the Court of Appeal held that solicitors who were nominally partners, but never collaborated on client files, were not

121 [1998] 3 NZLR 641 (C.A.) 122 [1912] 1 Ch. 831

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precluded from representing clients whose interests conflict with former clients’ interests. Rakusen is widely cited as authority for two propositions:

(1) no absolute rule of law bars solicitors from acting against former clients in litigation, and

(2) solicitors may be restrained from acting in disputes against former clients when necessary to avoid a significant risk that confidential information belonging to the former client will be disclosed or misused.

While Rakusen specifically concerned the regulation of solicitor-client relationships, in Bolkiah123, KPMG readily conceded that accountants performing litigation services, as in Project Lucy, must be treated the same as solicitors. In Bolkiah, the House of Lords moved away from the Rakusen test’s looser presumptions. As Otton L.J. observed,124 the Rakusen125 facts were somewhat unusual, 126 in that the partnership operated more as two sole practitioners sharing some common facilities.127 Even so, Rakusen remained the starting point for conflicts analysis for eighty years.

Bolkiah is in its own way an unusual case, mainly because of KPMG’s provocative behaviour in acting against its former client so aggressively. The contrast between the language Lord Millett and Lord Woolf M.R. (in the Court of Appeal) used in assessing KPMG’s behaviour in their respective opinions is quite remarkable. A distinct tone of censure resonates through Lord Millett’s summary of the underlying facts. Lord Millett’s judgement states that the test places an unjust burden on former clients and renders them vulnerable to possible and avoidable risks to which they did not consent; former clients do not receive sufficient reassurance that their confidences will be protected.

According to the House of Lords, the court’s intervention in cases that may present a conflict of interest is not based on the need to eliminate the perception of impropriety, but rather on the requirement that information provided in confidence 123 Prince Jefri Bolkiah v. KPMG [1999] 2 A.C. 222, [1999] 1 All E.R. 517 (H.L.) 124 Prince Jefri Bolkiah v. KPMG [1999] 2 A.C. 222, Royal Courts of Justice (Civil) Court of Appeal, London, Oct-19-98, Case No. RC2 98/7087/3 CHANI 98/1196/3, reversed on appeal [1999] 1 All E.R. 517, [1999] 2 A.C. 222 (H.L.) 125 Prince Jefri Bolkiah v. KPMG, Royal Courts of Justice (Civil) Court of Appeal, London, Oct-19-98, Case No. RC2 98/7087/3 CHANI 98/1196/3, reversed on appeal [1999] 1 All E.R. 517, [1999] 2 A.C. 222 (H.L.) 126 Otton L.J.’s epithet is “peculiar”. 127 This would have been irrelevant under contemporary Canadian conflicts rules: see Baumgartner v. Baumgartner (1995), 2 B.C.L.R. (3d) 126; [1995] 5 W.W.R. 289, 122 D.L.R. (4th) 542, 55 B.C.A.C. 277, 90 W.A.C. 277 (C.A.); revg. in part (1994), 92 B.C.L.R. (2d) 141, 113 D.L.R. (4th) 579 (S.C.) and R. v. Neil [2002] 3 S.C.R. 631, 218 D.L.R. (4th) 671; [2003] 2 W.W.R. 591; (2002), 168 C.C.C. (3d) 321; (2002), 6 C.R. (6th) 1; (2002), 6 Alta. L.R. (4th) 1.

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may not be disclosed, especially to that client’s detriment. Upon terminating retainers, according to Lord Millett the only duty lawyers still owe former clients is to preserve confidential information provided during representation.128

Thus, to establish that an injunction restraining a former solicitor from acting for another client should issue, applicants must prove that:

(1) the solicitor possesses confidential information whose disclosure the client has not authorized, and

(2) the information is or may be relevant to the client whose interests conflict with the former client’s.

Although not particularly onerous, the burden of proof rests with the applicant. Moreover, the House of Lords reasoned that, given the underlying basis on which courts exercise their equitable jurisdiction, the knowledge of one partner should not automatically be attributed to other partners. Instead, the other partners’ knowledge is a question of fact, extracted from the surrounding circumstances.129

The Solicitor’s Duty to Former Clients Under English Law

The House of Lords ruled that the duty to preserve client confidentiality is both unqualified and absolute. Solicitors, and other professionals providing litigation support services, must keep all personal information confidential, regardless of the cost or sacrifice involved in maintaining such confidences. In fact, the duty of confidentiality extends far beyond the obligation not to refrain from disclosing information to third parties. Speaking for the majority, Lord Millett reasoned:

It is a duty not to misuse [confidential information], that is to say, without the consent of the former client to make any use of it or to cause any use to be made of it by others otherwise than for his benefit. The former client...is entitled to prevent his former solicitor from exposing him to any avoidable risk; and this includes the increased risk of the use of the information to his prejudice arising from the acceptance of instructions to act for another client with an adverse interest in a matter to which the information is or may be relevant.

Accordingly, the duty to a former client to preserve confidential information endures far beyond the termination of a particular retainer, and may properly restrict a lawyer’s ability to represent other clients in the future.

128 While this statement appears to be unimpeachable, Canadian courts continue to explore post-termination residual duties of loyalty. For an extensive critique, see Brooking J.A. in Spincode Pty. Ltd. v. Look Software Pty. Ltd. [2001] VSCA 248 at paras 26 to 60. 129 Note that this too departs from a deemed knowledge presumption in Canada that appears artificial in transnational megafirms.

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The Degree of Permissible Risk: The Solicitor’s Duty Defined

In Rakusen, the Court of Appeal reasoned that injunctive relief may be granted only to cure a “reasonable probability of real mischief.” However, Rakusen has since attracted significant judicial criticism abroad. For instance, the Supreme Court of Canada has replaced the Rakusen standard with a stricter set of rebuttable presumptions.130 Acknowledging the reforms embraced by other Commonwealth courts, the House of Lords redefined English law, adopting a far more stringent test that promises to both clarify the circumstances in which conflicts are present and heighten the probability that a terminal conflict will be found in any case. Lord Millett articulated the following test for discovering impermissible conflicts of interest:

[T]he court should intervene unless it is satisfied that there is no risk of disclosure. It goes without saying that the risk must be a real one, and not merely fanciful or theoretical. But it need not be substantial. ...

In my view no solicitor should, without the consent of his former client, accept instructions unless, viewed objectively, his doing so will not increase the risk that information which is confidential to the former client may come into the possession of a party with an adverse interest. 131

In formulating the new English standard, Lord Millett explicitly rejected the balancing approach found in the New Zealand Court of Appeal’s Russell McVeagh132 decision. In Lord Millett’s eyes, the New Zealand Court’s analysis focuses on whether a former client consented to the solicitor’s acceptance of a new retainer, rather than on the particular set of circumstances that actually raised a conflict of interest.

Prince Jefri, KPMG, and the New Test in Action

Armed with a new test, the House of Lords examined the relationship between KPMG and Prince Jefri, and the actual possibility that confidential information could leak to KPMG staff working on Project Gemma. The House proclaimed that, given the confidential information obtained during Project Lucy, and the potentially damning nature of such knowledge in the new investigation, unless KPMG could establish that there was no risk of disclosure to the Project Gemma team, KPMG had to withdraw. Although KPMG insisted that its Chinese wall adequately preserved the

130 See Martin v. Gray [1991] 1 W.W.R. 705, 121 N.R. 1, 77 D.L.R. (4th) 249, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113, [1990] 3 S.C.R. 1235, reversing [1989] 3 W.W.R. 653, 58 D.L.R. (4th) 67, 57 Man. R. (2d) 161 (C.A.). 131 [1999] 1 All E.R. 517 at 528f and 529a, [1999] 2 A.C. 222 (H.L.). 132 Russell McVeagh v. Tower Corporation [1998] 3 NZLR 641

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confidentiality of any information from Project Lucy, the House of Lords had doubts, both because of the timing of its construction and the sheer scale of the prior retainer.

While conceding that no rule of law proclaims that information barriers cannot sufficiently eliminate the risks associated with a conflict of interest, Lord Millett suggests that injunctive relief should be granted unless the court is satisfied, on clear and convincing evidence, that effective measures have been taken to ensure that no disclosure will occur. In the specific case under review, the Chinese wall constructed on Project Gemma’s commencement was ad hoc and limited to a single department. According to Lord Millett, to be effective, a Chinese wall must constitute an established part of the organization’s internal structure. Sworn affidavits of those engaged in the relevant work will not suffice. The number of individuals who worked on Project Lucy, along with the fact that they rotated between various positions during the project, raised the real danger of unwitting disclosure to others in the firm.133

Given the special character of KPMG’s services and its standing practice of consulting peers for professional guidance when working on a project, the probability of information leaking among members was high. Evidence also suggested that physical segregation alone would not adequately prevent information leaks, and KPMG lacked the ability to prevent previously gathered confidential information from circulating. The House of Lords ruled that the High Court appropriately exercised its equitable jurisdiction to restrain KPMG from acting on Brunei’s behalf in the BIA and Prince Jefri investigations.

The House of Lords’ Bolkiah ruling has had far-reaching ramifications not merely for lawyers, but for professionals practising in a variety of businesses and disciplines. Although the court limited much of its analysis to individuals providing litigation support services, that the House of Lords was willing to extend conflicts of interest law beyond the traditional realm of the solicitor-client relationship suggests a line of jurisprudence for all professionals entrusted with confidential information yet to emerge. Indeed, one commentator134 suggested that the House of Lords’ decision may require barristers’ chambers to consider erecting walls. Although barristers are self-employed, their shared use of clerks and fax machines may suggest the possibility of information flowing within chambers. The court clearly will not view structures formalistically. Instead, courts will look closely at what professionals do, rather than at the labels they wear.

The Bolkiah court’s sceptical view towards the impenetrability of Chinese walls should warn lawyers intending to represent clients with adverse interests in the future: conflicts procedures must be established and observed to be in force well in advance 133 The timing may also have weighed in the balance; the former retainer was very recent, and the information barrier was not in place when it should have been. 134 Simmons & Simmons, Professional Liability Review, 1998

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of their intended application and likely challenge. Long-standing procedures are virtually prerequisite to establishing that an information barrier is sufficiently secure to rebut the presumption that information travels freely throughout firms. Moreover, not only law firm retainers, but also the termination of retainers must be formally documented. Note that the Bolkiah court emphasized the fact that KPMG had not formally notified Prince Bolkiah that their relationship had been terminated.135

In Bolkiah, the degree of risk of disclosure or misuse of confidential information is also central to the court’s examination of a Chinese wall’s effectiveness. According to the House of Lords, former clients should not, without consent, be exposed to even minimal risk that confidential information from a former client may come into a third party’s possession and be used to the former client’s disadvantage. If the information is not only confidential, but also privileged, even stricter controls apply: clients should have complete confidence that what they tell their lawyers will remain secret. Faced with any risk of disclosure, courts will intervene. Although the risk should be real (not fanciful or theoretical), it need not be substantial. Accordingly, prudent solicitors should not accept instructions unless (viewed objectively) doing so will not increase the risk that confidential information from the former client may come into an adverse third party’s possession.

The effect of Bolkiah was to shift English law closer to Commonwealth models136, and to have English firms scrambling to master the fundamentals of barrier construction.137 For Canadian lawyers the most interesting and important elements of Lord Millett’s judgment come from the care with which he analyzed the fiduciary elements of a lawyer’s responsibilities, and the distinctions drawn between duties of confidentiality and duties of loyalty. THE SUPREME COURT’S SECOND ACT IN THE TRILOGY: CONFRONTING THE DUTY OF LOYALTY

The Supreme Court of Canada has spoken so seldom in its 130 years of existence about conflicts of interest, that anything it says repays careful attention. The case of R. v. Neil138 is its second important case in twelve years, as significant in probing professional obligations of loyalty, as McDonald Estate v. Martin139 was in elucidating

135 This point is especially important for law firms which will typically maintain a list of ostensibly current clients and matters which is three or four times larger than the actual files currently being worked on. 136 Indeed, the House of Lords specifically quotes from Sopinka J. in Martin v. Gray 137 Within three years two separate books were published, each bearing the title Conflicts of Interest and Chinese Walls. See Chizu Nakajima and Elizabeth Sheffield, Conflicts of Interest and Chinese Walls, Butterworths 2002, and Charles Hollander and Simon Salzedo, Conflicts of Interest and Chinese Walls, (2nd Edition, 2004) supplemented by the empirical study by Janine Griffiths-Baker, Serving Two Masters: Conflicts of Interest in the Modern Law Firm. 138 2002 SCC 70 139 McDonald Estate v. Martin, [1990] 3 S.C.R. 1235

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continuing obligations of confidentiality. Neil is an odd and somewhat inscrutable case. It is on one level a swift disposition of a criminal appeal upon a very complex and unusual set of facts. At another level, however, it is a careful restatement of the obligation of loyalty which is a direct challenge to the conventional behaviour of much of the corporate bar. The Supreme Court’s Neil decision was unanimous, but turnover in the Court made that no-one on the panel of five judges had participated in the Martin decision. Neil was a seminal judgment from the practioners’ point of view because of its renewed focus on the duty of loyalty above and beyond the confidentiality issues to which they were accustomed.

The facts are complex. Neil worked as a paralegal in Alberta, assisted by Ms. Lambert. For matters beyond his skill and experience, he had an arrangement to refer the matters to a solicitor, Mr. Venkatraman. The Venkatraman firm had excess space so they rented the space out to a solicitor called Lazin. In 1995 Lazin joined the firm as an employee. Based upon the Law Society of Alberta's definition of firm in its Code of Professional Conduct, he was deemed to be a member of the Venkatraman firm at all relevant times. The police had investigated complaints about Neil's paralegal services. One of the indictments involved an alleged scheme to defraud Canada Trust. It was alleged that Neil, with the help of Lambert, fraudulently obtained mortgages from Canada Trust for people who had bad credit ratings. It was asserted that Neil would obtain the mortgage supposedly for Lambert and would then allow the client with bad credit to assume that mortgage. Another indictment alleged that Neil had fabricated court documents in a divorce action. Specifically, he had allegedly prepared a false affidavit of service and forged the signature of the opposing party on a Certificate of No Appeal.

The Venkatraman firm was in a conflict of interest in two different ways. In regard to the Canada Trust charges, the Venkatraman firm was acting for Neil on his criminal charges at the same time as they were acting for Lambert on an unrelated matter, known as the Doblanko matter. The firm knew or ought to have known that Lambert would likely be charged in connection with the Canada Trust proceedings. Lazin, who was representing Lambert, at one point attended an interview with Neil. The trial judge found that the sole purpose for his attendance at this interview was to gather information that he could use to defend Lambert in the anticipated criminal proceedings. The trial judge further found that Lazin intended to pursue a "cut throat defence" for Lambert whereby Neil would be portrayed as the manipulative leader of the criminal activity while Lambert would be portrayed as an innocent dupe. Neil was not advised until later that the firm would no longer be able to represent him as a result of their involvement with Lambert. The other conflict surrounded the divorce proceeding involving the documents which Neil had fabricated. The wife had hired Neil to help her obtain a divorce and had relied upon the fabricated documents. The husband met with Lazin for assistance concerning his divorce. Lazin, whose firm was still representing Neil at this time, encouraged the husband to report the forgery to the police. Lazin steered the husband to speak to the same police officer dealing with the charges against Neil in the Canada Trust indictment. It

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was alleged that Lazin had done this in order to help bolster his anticipated defence of Lambert. As a result, Neil was charged with the forgery.

When the conflict of interest came to light, Neil applied to stay proceedings on all of the charges. As for the conflict of interest in the Canada Trust matter, the Supreme Court denied the stay sought by Neil on the grounds that Venkatraman’s conduct could not affect the outcome of the new trial. The Court considered that the new counsel selected to represent Neil had not been privy to confidential information in Venkatraman’s possession.

While the Court is most often preoccupied with uses and abuses of confidential information in cases where it is sought to disqualify a lawyer from further acting in a matter, as in MacDonald Estate140, the duty of loyalty to current clients includes a much broader principle of avoidance of conflicts of interest, in which confidential information may or may not play a role141. Considering the conflicts of interests solely from the duty of loyalty point of view, the Court has articulated a clear conception of the incumbent responsibilities lawyers face in fulfilling their duty to clients. Moreover, although the aspects of the duty of loyalty relevant to this appeal did include issues of confidentiality in the Canada Trust matters, the decision’s importance stems from the particular attention paid to three other dimensions of the duty of loyalty:

(i) the duty to avoid conflicting interests142.

(ii) a duty of commitment to the client's cause (sometimes referred to as "zealous representation") from the time counsel is retained, not just at trial, i.e. ensuring that a divided loyalty does not cause the lawyer to "soft peddle" his or her defence of a client out of concern for another client143; and,

140 McDonald Estate v. Martin, [1990] 3 S.C.R. 1235 141 Montreal Trust Co. of Canada v. Basinview Village Ltd. (1995), 142 N.S.R. (2d) 337 (C.A.); Enerchem Ship Management Inc. v. Coastal Canada (The), [1988] 3 F.C. 421 (C.A.); Jans v. Coulter (G. H.) Co. (1992), 105 Sask. R. 7 (C.A.); Stewart v. Canadian Broadcasting Corp. (1997), 150 D.L.R. (4th) 24 (Ont. Ct. (Gen. Div.)); Gaylor v. Galiano Trading Co. (1996), 29 B.L.R. (2d) 162 (B.C.S.C.). 142 Davey v. Woolley, Hames, Dale & Dingwall (1982), 35 O.R. (2d) 599 (C.A.), and Services environnementaux Laidlaw (Mercier) Ltée v. Québec (Procureur général), [1995] R.J.Q. 2393 (C.A.), including the lawyer's personal interest: Szarfer v. Chodos (1986), 54 O.R. (2d) 663 (H.C.), aff'd (1988), 66 O.R. (2d) 350 (C.A.); Moffat v. Wetstein (1996), 29 O.R. (3d) 371 (Gen. Div.); Stewart v. Canadian Broadcasting Corp., supra. 143 R. v. Silvini (1991), 5 O.R. (3d) 545 (C.A.); R. v. Widdifield (1995), 25 O.R. (3d) 161 (C.A.); R. v. Graham, [1994] O.J. No. 145 (QL) (Prov. Div.)

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(iii) a duty of candour with the client on matters relevant to the retainer144.

All three duties are intimately related and require a high level of alert on the lawyer’s part to allow a proper and timely disclosure of foreseeable issues. “If a conflict emerges, the client should be the first to know”, writes the Court.145 The question of timing is central since it affects both the firm’s implementation of countervailing measures, including ethical screens to rebut information flow, as in MacDonald, as well as its disclosure strategy to obtain the client’s informed consent in order to pursue its mandate. As will be shown however, these three components of the duty of loyalty remain nebulous and courts have yet to define their precise scope and meaning for modern firms. Indeed, the duty of loyalty has spilled much ink since Neil as lower courts have attempted to shed light on the matter over the past few years.

A Bright Line Test?

The key statement of the Supreme Court on the duty of loyalty came as an attempt to reconcile the realities of contemporary practice with the unflinching duty of lawyers to maintain public confidence in the justice system. The statement is now commonly referred to as the bright line test and is widely cited in conflicts of interest matters:

The general prohibition is undoubtedly a major inconvenience to large law partnerships and especially to national firms with their proliferating offices in major centres across Canada. Conflict searches in the firm's records may belatedly turn up files in another office a lawyer may not have been aware of. Indeed, he or she may not even be acquainted with the partner on the other side of the country who is in charge of the file. Conflict search procedures are often inefficient. Nevertheless it is the firm not just the individual lawyer, that owes a fiduciary duty to its clients, and a bright line is required. The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client – even if the two mandates are unrelated – unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.

This explains why the Venkatraman law firm was found to have breached its duty of loyalty when it lent its services to Neil and to his co-accused in the Canada Trust charges. Clearly, the cut-throat arrangement with Lambert would adversely affect the

144 R. v. Henry (1990), 61 C.C.C. (3d) 455 (Que. C.A.) per Gendreau J.A., at p. 465; Spector v. Ageda, [1971] 3 All E.R. 417 (Ch. D.), at p. 430; the Canadian Bar Association, Code of Professional Conduct (1988), c. 5, Commentary 4 - 6 145 [2002] 3 S.C.R. 631, par.19

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outcome of Neil’s proceeding. Lazin sought out confidential information that he intended to use for the benefit of his defence of Lambert by negotiating a deal with the Crown. Binnie J.’s bright line test also obviates the conflict of interest on the Doblanko charges since the firm’s actions would likely lead to the downfall of Neil before the divorce court. Such representations are not compatible with the duty of commitment to the client’s cause. Again, it is interesting to note the Court’s restatement of the distinct tests for the duty of loyalty versus confidential information: “it was contended that the Doblanko and Canada Trust cases were wholly unrelated in the sense that Lazin could not have obtained in the Doblanko mandate confidential information that would be relevant in the Canada Trust mandate. This, as stated, is not the test of loyalty to an existing client, and it is not entirely true either.”146 Essentially, the firm could not act in these two matters, absent the question of relevant confidential information, because these new parties had adverse interests to those of their existing client.

Such a formulation of the bright line test obviously requires a preliminary inquiry as to whether there exists a real solicitor-client relationship to protect. Most professional codes of conduct include a definition of this relationship and the Court could not interfere with the undisputable conclusion of the trial judge in summarizing the nature of the relationship between Venkatraman and Neil: “This relationship, which seems to have been in the nature of a general retainer, predated the events in question, and continued through the events in questions.”147 However, when analyzing recent trends in Canadian case law, note that the scope of the solicitor-client relationship appears to be expanding to include third parties while the Neil decision only refers to such close and obvious relationships involving an “existing client”.148 In a sense, the duty of loyalty has moved from the notion of “relevant matters” to “adverse interests”, thus shifting the focus on a broader concept of “client base”.

Nevertheless, courts have remained sensitive to practical issues arising from the application of the test and have strived to create a balance between the legitimate business interests of firms and their clients and the broader public policy concerns relating to the integrity of the justice system. Binnie J. was well aware of these competing interests when stating his reasons as is clearly demonstrated by his opening remarks. Indeed, the rules governing conflicts of interest have posed a dilemma for many large firms due to ever expanding client bases, precarious alliances, firm mergers and the greater mobility of lawyers in the industry. The question was appropriately phrased by Binnie J. in the following terms:

146 [2002] 3 S.C.R. 631, par. 33. 147 [2002] 3 S.C.R. 631, par.23 148 See GMP Securities Ltd. V. Stikeman Elliot LLP, 04-CL-5449 and Hoy J.’s discussion of “limited duty of loyalty” at par. 56.

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What are the proper limits of a lawyer’s “duty of loyalty” to a current client in a case where the lawyer did not receive any confidential information that was (or is) relevant to the matter in which he proposes to act against the current client’s interests?

The Court made two important points to preclude conflicts of interests from being used as mere strategic weapons for litigators and to introduce a greater flexibility in client management. Firstly it recognized that not all parties require the same level of protection from potential abuses by lawyers. Some sophisticated parties are well equipped to deal with and prevent conflicts of interests. Similarly, the court acknowledged that parties must remain free to choose their court representatives provided they are well informed on potential or rising conflicts of interests and can make an informed choice. On the first point, Binnie J. wrote:

In exceptional cases, consent of the client may be inferred. For example, governments generally accept that private practitioners who do their civil or criminal work will act against them in unrelated matters, and a contrary position in a particular case may, depending on the circumstances, be seen as tactical rather than principled. Chartered banks and entities that could be described as professional litigants may have a similarly broad-minded attitude where the matters are sufficiently unrelated that there is no danger of confidential information being abused. These exceptional cases are explained by the notion of informed consent, express or implied.

Although the courts have not explored the limits of this first exception, it remains an interesting avenue for firms representing or acting against banks, government entities and similarly sophisticated parties. Of course it also seems clear that this exception will be negated by any express denial of consent, either generally (XYZ Bank expects total loyalty from its counsel) or specific (XYZ Bank refuses its consent to ABC Law firm acting in this matter).

On the second point, Binnie J. accepted that law firms may continue to pursue their business endeavours by representing clients with “adverse interests” when they can demonstrate that they have fully disclosed the conflict in a timely and honest manner.

However, the proper interpretation of the concepts of “directly adverse interests” and “immediate interests”, two key components of the bright line test, still remains

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nebulous.149 Indeed, both concepts have bearing on the actual scope of the duty of loyalty. Specifically, these components of the bright line test beg the question as to how long the firm must consider itself bound by its duty of loyalty and whether the duty can be extended outside the lien of conventional retainers to protect third parties. As the business of law and the clients of firms become increasingly complex and as a number of parties now share common interests in large transactions, the bright line of conflicts steadily dims.

The Court has also accepted the definition of conflict proposed in §121 of the Restatement Third, The Law Governing Lawyers (2000), vol. 2, at pp.244-45 which reads a “substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s own interests or by the lawyer’s duties to another current client, a former client, or a third person”.150 It appears that the Court’s newly adopted definition of conflict is meant to assist the Court in determining if there was in fact a breach of duty once a solicitor-client relationship has been established and the bright line test examined.

As allegations of conflicts of interests continue to multiply in Canada, lower courts will continue to venture into various interpretations of this definition in an attempt to reach the proper balance between public interest and client needs. Two cases have had a profound impact on the interpretation of the duty of loyalty since Neil and have offered a meaningful attempt at fleshing out the full meaning of Binnie’s comments. The Next Act in Canada’s Conflict Revolution

The Court of Appeal for British Columbia delivered a significant judgment in 2005 in the matter of 3464920 Canada Inc. v. Strother.151 Writing for a unanimous court, Mary Newbury J.A. reversed the trial judge’s decision and significantly broadened the scope of the duty of loyalty which recently affirmed in Neil and Ramrakha v. Zinner152. Moreover, the case confirmed that a lawyer’s commitment to his client and the duty of candour which flows from this relationship of trust is applicable to solicitors as much as barristers.153 The case has also provoked significant comment on the remedy awarded to the plaintiff and the findings against the defendant’s former firm.

149 See my colleague Gavin MacKenzie’s paper for the Canadian Bar Association “How Murky Can a Bright Line Be; “How Murky can a Bright Line be: Coping with Conflicts of Interest in the Wake of R. v. Neil. 150 [2002] 3 S.C.R. 631, par. 31 151 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.) 152 (1994), 157 A.R. 279 (C.A.) 153 Interestingly English law does draw sharp distinctions between solicitors and barristers, but classically English barristers are sole practitioners. Although many chambers are becoming more business-like in their operations, they fall far short of the indicia of partnership that grounds the Canadian law loyalty.

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The case addressed two duties, namely the duty of loyalty and the duty not to disclose vital confidential information. Indeed, the fiduciary duty of loyalty entails a duty to disclose material information susceptible of affecting a client’s judgment. The paradox is that this same duty of loyalty may require a lawyer to protect confidential information for the benefit of another client. In the present case, the duty of loyalty owed to two clients with conflicting interests placed the lawyer between Scylla and Charybdis: he could not divulge confidential information held for a client nor could he omit the disclosure without harming either party’s interest. Specifically, the lawyer found himself in a conflict of interest on two fronts: he owed a duty of loyalty to two clients with opposing interests but also had a personal interest in the matter on which he was advising.

The confidentiality issue was side-stepped however as Newbury J.A. plainly stated that the lawyer, and his firm, were in breach of their duty of loyalty the moment they decided to accept a retainer with a competitor of their existing client. The controversial case has attracted much attention because of the onerous remedy which was sought in connection with the reproachable behaviour and the liability of the law firm for its lawyer’s deceptive conduct.

THE DANGERS OF ENTREPRENEURIAL MODELS OF LAWYERING

The case involved a prominent tax lawyer then practising in the Vancouver offices of Davis & Company (“Davis”), Robert Strother, who offered tax-assisted production services (“TAPSF”) financing advice to investors in the entertainment business. One such investor Harry Knutson and his film financing company Monarch Entertainment Corporation, (“Monarch”), had been one of Davis’ biggest clients. Monarch profited from Mr. Strother’s TAPSF advice for a number of years to market investments in syndicated tax shelters. In an effort to tighten up tax shelter schemes in Canada, the Minister of Finance introduced new rules under the Income Tax Act in late 1996. The announcement marked a turning point in the industry and foreshadowed the premature termination of the long standing relationship between Monarch and Davis. Their last formal retainer was to remain in effect from October 1996 until the end of 1997. When the rules came into full effect in November of 1997 however, Strother advised Monarch that there was no “fix” to the new rule and that the tax shelter business “was over”. The formal agreement between Davis and Monarch expired shortly thereafter.

Little did Monarch know, its knowledgeable former CFO, Mr. Darc, had met several times with Strother by the end of 1997 to secretly discuss alternative tax structures and a potential business plan. Strother had also talked to the CCRA about slightly different schemes. Although the new TAPSF idea elaborated by both men appeared a “long shot” at the outset, it became increasingly clear that the scheme would be workable. At no time did Strother disclose this possibility to Monarch, nor did he discuss his meetings and possible business venture with Mr. Darc. He was

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forced to divulge, albeit incompletely, the new TAPSF idea with his firm in late 1998 as the rumours of his projects became increasingly public.

Strother eventually obtained an advanced tax ruling which confirmed the viability of the new tax scheme and conferred a first-mover advantage in the market place. Strother and Darc, (no longer employed due to Monarch’s cessation of TAPSF activities) concluded an agreement in January of 1998 before incorporating a new company known as Sentinal Hill Entertainment Corporation (“Sentinel”) to market the scheme. With the help of other key players in the industry, Sentinel made a handsome profit during the following year.

Meanwhile, Monarch effectively withdrew from the tax shelter business but continued to consult Davis through Strother for various legal matters after the formal contract had expired. Monarch was, the Court of Appeal found, at all relevant times, a client of the firm and of Mr. Strother. Monarch reacted promptly when it learned of Strother’s activities in the advanced tax ruling and threatened legal action.

“Directly adverse interests” and “immediate interests”: Strother’s predicament

It seems clear that the solicitor-client relationship continued between Monarch and Davis, even if on an informal basis. It took the conventional form of a general retainer for which the client was billed on various matters at an hourly rate. It was also clear that Sentinel and Monarch were direct competitors in the entertainment tax shelter market and thus, had “directly adverse interests”. Strother himself had a personal “directly adverse interest” from Monarch’s own immediate interests because of his equity investment in Sentinel. Indeed, Strother was his own client’s competitor since his market share of the TAPSF business would be undermined if Monarch knew of the new tax “fix”. One memo suggested that Strother was clearly aware of his former client’s interest in the TAPSF developments yet he never hinted at this business opportunity despite working for Monarch on subsequent files.

The bright line test: candour, commitment, and the avoidance of conflicts

Newbury J.A. writing for a unanimous Court of Appeal disagreed with the trial judge on two points: Strother’s duty to disclose information material to the client’s interests and his capacity to act for Sentinel Hill while maintaining a solicitor-client relationship with Monarch.

For the first part, the Court held that Strother had breached his duty of candour to Monarch since his answer was neither honest nor complete and bordered on misleading the client.

Certainly when Monarch asked “what was to be done”, it was entitled to an honest and complete answer, whether or not Mr. Strother had a file open for continuing TAPSF work. The fact that the client did not ask about s.18.1 (15) (b) specifically, or seek repeated confirmations that Mr.

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Strother had not yet become aware of the possibility of a “technical fix”, is surely not conclusive of his duty to respond candidly. The very reason Monarch had abandoned its TAPSF business, ad discontinued the meetings of its “deal team”, and was looking around for other alternatives, was that Mr. Stother had told them there was “nothing to be done” (in the way of TAPSF syndications) under the new rules.154

What is more, the Court explained that it was unfair to foreclose any hopes of a revival in the TAPSF business and expect a client who was not legally knowledgeable to keep asking specifically whether his predicament had any solution. For the second part, the trial judge could not rightfully assume that Strother was in a position to act for one client if he was also advising another client in which he had a personal interest and who also manifested diverging interests. Strother breached his duty of loyalty obligations as soon as he entered into the agreement with Darc while he and his firm continued to act for Monarch. Strother’s personal interest under the agreement prevented him from fulfilling his duty of commitment to Monarch.

At the least, a lawyer appears to be under a continuous obligation to inform his client of the existence or potential manifestation of a conflict of interest. Practitioners should note the Court’s reminder that a lawyer’s fiduciary duty to disclose material information persists beyond a written agreement and remains so long as the lawyer maintains “ascendency” over his client.155 The absence of a written contract does not affect this overriding duty.156

Lastly, a conflicting duty of loyalty cannot excuse “soft peddling” a disclosure for the benefit of another client. Such a predicament can never be excused since the duty to avoid conflicts of interest should prevent a lawyer from finding himself in such a position in the first place. Thus, Strother could not hide behind the duty of confidentiality he owed Sentinel to excuse his silence or his advice that “nothing (could) be done”. The duty to disclose is a strict one and is grounded in the premise that the lawyer is always at fault for putting himself in such a position of conflict. Considering Neil, Newbury J.A. wrote that the bright line had obviously been crossed. Strother did not avoid putting himself in a position of conflict, could not

154 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.) 155 This is a variant on the formulation of Québec courts in Metro c. Regroupement des marchands actionnaires inc. [2004] RJQ 2265 as well as similar assertions in Dobbin v. Conway, (2005), 246 Nfld & PEI R 177, 2005 NLCA 22. The parallel can also be drawn from the articulation of most codes of professional conduct in Canadian jurisdictions. See for instance “persons involved in or associated with the client” as found in Rule 1.04 of the Rules of Professional Conduct in Ontario. 156 One wonders what would have happened had the entire Monarch retainer been terminated.

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diligently fulfill his commitment to the client’s cause and breached his duty of candour when he held back on his advice knowing that the tax shelter business was not necessarily “over”.

Duty of loyalty and duty to disclose material information beyond the retainer agreement

Davis and Strother argued that once the formal retainer had expired, Strother’s contractual duties did not warrant the disclosure of the “new idea” regarding the tax scheme. The Court rejected the argument and drew an analogy with Credit Lyonnais S.A. v. Russell Jones & Walker157: similarly to a lawyer’s duty to inform his client of a potential risk as he becomes aware of it, a lawyer must disclose material facts which would be likely to influence the client’s judgment. At the very least, Newbury J. suggested that a lawyer must advise his client when there is a risk that his previous advice was incorrect. Strother should have advised Monarch that his previous advice needed to be revisited.

Once he had accepted Mr. Darc’s retainer (and became entitled to a share of profits) he then was required in my view to cease acting for both clients and as I have already said, to alert Monarch to the possibility that his previous advice was incorrect.158

The fiduciary duty may therefore require a lawyer to provide advice or to disclose information beyond the scope of his formal retainer. Such a duty survives so long as the lawyer retains “ascendancy” over his client.

Time and effort dedicated to a mandate: how much should a lawyer disclose?

Strother attempted to convince the court that a lawyer is only required to dedicate the time and effort required by his retainer and that he should not raise a hopeless idea when providing advice. The trial judge had initially accepted this argument and stated that the duty of loyalty “did not serve to broaden his contractual duty in the sense of requiring him to give advice or provide information beyond what his firm’s retainer required”.159

This conclusion was overturned by the Court of Appeal as it distinguished the contractual duty of the lawyer from his fiduciary duty to his clients. The Court

157 [2003] Lloyd’s Rep. PN 7 (Ch.D.) 158 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 25 159 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 22

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suggested that the latter will not be overridden or restricted by the contract and that the fiduciary duty will indeed force the lawyer to disclose material facts relating to his position of conflict. In this case, “the fact that the ‘long shot’ became less of a long shot only gradually [did not] in my opinion provide a defence or diminish his duty”.160

The nature of the “idea” and the manner by which it was developed were irrelevant in this case. So was the question of “time and effort” in the eyes of the Court. Seen from the perspective of fiduciary duty, the problem was phrased in the following terms:

But having undertaken to work towards a tax ruling that would contradict the continuing advice he had given and was continuing to give Monarch – either by his silence or by telling its principals there was “noting to be done” – Mr. Strother had placed himself in a position of conflict of duty and of interest.161

In practice therefore, it appears that the duty to disclose material information requires the lawyer to go beyond any agreement in divulging information which may serve the client’s interest and which could operate on the client’s judgment. But how long should this obligation remain? How long will courts be prepared to find that there is still “ascendancy” over the client?

Remedies and Personal Liability

Having established that Strother had breached his duty of loyalty to Monarch by acting for its competitor, Sentinel Hill, and by maintaining an undisclosed personal interest in this company, the Court ordered Strother to account for all the profits and benefits he received. To this end, any corporate vehicle used to collect such benefits was also to be considered a constructive trustee.

Some key considerations were brought up in delivering this order. The Court of Appeal followed the liberal approach developed by the Supreme Court of Canada in Hodgkinson v. Simms162 in granting compensation. In so doing, it strayed from the more conservative approach typically associated with the equity doctrine of accounting.

160 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 26 161 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 25 162 [1994] 3 S.C.R. 377

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Furthermore, the Court specified that bad faith or underlying motives are not required to impose liability. Profits can be disgorged if unjust enrichment can be shown. Although disgorgement of profits cannot be claimed beyond those earned in consequence of the breach, “the necessity for a causal connection does not mean that before the beneficiary of a fiduciary duty may recover, he or she must prove that ‘but for’ the breach, he or she would have taken up the opportunity in question and would have made the profits in question – effectively to prove a lost”.163 Newbury J.A. felt justified in handing down such a harsh penalty because “In a very real sense, the profits that continued to accrue to him after these events are the fruit of the tree rooted in his double conflict of interest”.164

A second hearing allowed the Court to examine further Monarch’s claim against the law firm, Davis & Company. Specifically, three questions were put before the Court. Could Davis be considered to be directly liable, jointly or jointly and severally, with its deceiving partner for all the profits he received from the Sentinel Hill enterprise? If not, was the partnership vicariously liable for the wrongs perpetrated by its partner under the Partnership Act? In the alternative, is it vicariously liable for the profits it earned in the form of legal fees as a result of acting for Sentinel Hill?

Davis’ direct liability cannot be inferred according to an objective standard of conduct. “Instead, the focus is on the equitable principle that a fiduciary must not be permitted to profit from his position or from his own wrong, and on Davis’s state of knowledge”.165 Central to the state of knowledge is whether a party provided knowing assistance to the wrongdoer or was reckless or wilfully blind to the misconduct. Justice Newbury could not make any such finding given the deceitful conduct of Strother in discussing his affiliation with the Sentinel Hill enterprise with his firm’s management committee. The required proof of knowledge was not made and the firm had no reason to suspect dishonesty on Strother’s part. The law firm could not suspect it was assisting a lawyer in a breach of fiduciary duty and, in any event, did not receive any direct benefit from his scheme, save for the habitual legal fees.

163 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 47 164 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 60

165 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para.17

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The Firm’s Liability for Strother’s Improper Conduct

The Court of Appeal relied on the Supreme Court of Canada’s reasoning in Bazley v. Curry166 to determine if the law firm could be said to have “created” the “opportunity” for the wrongdoer to commit its tort: “one must ask whether the practice of law as carried out by Davis materially increased the risk of Mr. Strother’s taking of a personal interest, or whether there were only “incidental” connections such as time and place, with the law practice”.167 Such a determination is a question of fact and the Court found that the lawyer’s behaviour was outside the firm’s practice. Once more, the Court could not agree with Monarch that Davis was vicariously liable for Strother’s behaviour. Davis’ business did not include taking secret interests in its clients, the firm had expressly forbidden investments in Sentinel Hill, and such a secret “sideline” agreement was not necessary to the legal services the firm was providing for the enterprise. Essentially, the firm had done nothing to materially enhance the risk of wrongdoing. Furthermore, Strother’s secret agreement was not reached in the ordinary course of business of the firm nor was it concluded with the authority of his partners, within the meaning of the Partnership Act168 and the law of agency.169 The Court also stated: “However, the fact that an agent has contravened the principal’s instructions (and, by analogy, the fact a partner has contravened his firm’s partnership agreement or policies) does not necessarily mean that he or she was acting outside the ordinary course of business.”170

Liability for legal fees earned as a result of the breach of duty of loyalty

The considerations for imposing liability in the face of a breach of duty of loyalty were different however:

The law of agency imposes liability irrespective of the principal’s or partners’ personal knowledge or fault. The partnership (i.e., all the partners thereof at the relevant time) is liable “because the partner is guilty”. And as

166 [1999] 2 S.C.R. 534 167 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 37 168 R.S. B.C. c. 348 169 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 42 170 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 36

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should be clear from our previous Reasons, Mr. Strother’s wrong was in any event more that an error in judgment on an obscure point of law.

Davis was therefore held liable for its clear breach of duty: it acted for two parties with adverse interests. Although the full details of the legal advice were unknown, the firm was fully aware that it was providing tax advice to both parties. The underlying prophylactic purposes of fiduciary liability do not allow firms to benefit from such a breach, even if other partners are personally innocent.

Based on the remedial flexibility suggested in Hodgkinson v. Simms171, the Court imposed an order for accounting of profits derived from the firm’s retainer with Sentinel Hill along with an order for damages. The Court ordered that the firm return all the fees paid by its client from the point at which the breach of fiduciary duty occurred. Newbury J.A. reasoned that the client would have sought advice from another firm had it been properly informed. As such, the firm should not be allowed to retain any profits from its illegitimate business with Monarch.

In addition, although it may be that the phrase “loss or injury” in s.12 is broad enough to include the breach of Monarch’s right to expect that its lawyer would not place himself in a position of conflict, I am also of the view that Equity will not generally order an accounting or disgorgement by an innocent person who has not received any of the profits resulting from the wrong. (By “innocent” in this context, I mean a person who was not aware of, or was wilfully blind to, or was reckless regarding, the wrongdoer’s breach.)172

The firm was providing tax assistance to Monarch to “clean up” old files related to TAPSF. However, this work was not directly related to the new “fix” it had found for Sentinel Hill and it was believed that the Monarch retainer, and its TAPSF business, had been terminated. Vicarious liability seems quite onerous since a mental element is not required and there seems to be no way that the firm could have prevented the breach under these circumstances.

The basic equitable proposition is that firms are not allowed to profit from a breach of duty of loyalty. Davis argued that Monarch should not be allowed to receive the fees from another client (Sentinel Hill). The Court responded by stating that “Monarch is not seeking to enforce any rights of Sentinel Hill but rather to ensure that Davis does not profit from the position of conflict in which Mr. Strother

171 [1994] 3 S.C.R. 377 172 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 43

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was acting”.173 The disgorgement raises squarely the question: does the remedy constitute overcompensation given that the client obtained both his own legal fees and those of a third party? Similarly, is Monarch the rightful beneficiary of those third party fees? The firm challenged the Court’s reasoning when it raised the very pertinent hypothetical issue regarding the consequences of two clients seeking this remedy but the Court ducked this puzzling but unnecessary question.

Strother should have disclosed his interest to Monarch, warned them of the potential inaccuracy of his initial advice, and referred them to another law firm. Ultimately, Strother should have left his firm to avoid acting for two clients with adverse interests. He should also have disclosed his personal interest in the matter to all parties had he wanted to work for Sentinel Hill in the first place. By avoiding these steps, Strother placed himself and his firm in a conflict of interest. Of course, the conflict could have been avoided all together if Strother had simply told Mr. Darc that he could not accept his business in the Sentinel Hill venture while carrying on his loose retainer with Monarch. On this point, the Court commented:

His failure to do so meant that he could not be candid with his existing client, Monarch, regarding a subject on which he had given clear and unequivocal advice. He would have to “hold back” on what he would normally advise Monarch, in order to protect the confidentiality of his other client, Mr. Darc (and the Sentinel Hill companies). Once he had accepted Mr. Darc’s retainer (and become entitled to a share of profits) he then was required in my view to cease acting for both clients and as I have already said, to alert Monarch to the possibility that his previous advice was incorrect.174

WHERE WILL STROTHER TAKE THE CANADIAN LAW ON CONFLICTS OF INTERESTS?

Although there is no doubt that the fiduciary duty of loyalty now covers any solicitor-client like relationship, the case has introduced some doubt concerning the length of time such a bond will preclude a lawyer from acting against a current client on a different matter. It is also unclear when and what type of material information must be disclosed without the client expressly asking.

The Court of Appeal decision has been criticized because it suggests that the lawyer is obligated to disclose material information even when the matters for which the lawyer provides advice are no longer related and the formal retainer is terminated. 173 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 49 174 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 25

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One is left wondering how much information must be disclosed in the case where no mandate is clearly stated in a retainer agreement or when such an agreement is particularly broad. Such an obligation could possibly turn out to be quite onerous. After all, it was clearly Strother’s incomplete advice that turned the client away from the TAPSF business and ended the relevant retainer. Would the results have been the same had the client terminated the retainer for any other reason?

Lastly, the Strother case has raised the lawyer’s duty to his client by stating that the practitioner’s loyalty survives the termination of a formal retainer arrangement and will remain so long as the lawyer maintains “ascendancy” over a client. This is a novel concept introduced by the Court of Appeal and its dimensions are unknown. The concept of “ascendancy” seems to extend to any client not legally knowledgeable and relying on a lawyer’s advice, but could it prolong the duty of loyalty after a matter is closed? Could the firm and Strother have pursued the retainer with Sentinel Hill without breaching their “ascendant” duty of loyalty? What if the client seeks alternative legal advice? Or the client himself is so sophisticated to be equally involved in the planning of tax efficient film financing. Could the client then be considered not knowledgeable enough to warrant this extended duty of loyalty? Not all clients are manifestly vulnerable – indeed some corporate clients have law departments that are the equal in size and sophistication of major law firms.

The case also raises obvious concerns regarding the liability of the partnership for a firm member’s outrageous but unknown conduct. On the facts of this case, the conflict of interest was a rather difficult problem for the firm to manage given Strother’s misleading information. Such a matter goes way beyond the modalities of ethical screens and conflict searches since the lawyer’s activities were largely unknown to the firm’s management the partnership: Strother eluded questions, omitted information, including his financial arrangements with Mr. Darc, and generally took pains to ensure that his personal scheme would pull through. Of course, the Partnership Act is clear that the firm’s liability will not be limited by its lack of knowledge.

On another note, while the Court expressly recognized that modern firms must be free to act for competitors and that their efforts should not exceed their contractual obligations it is unclear what type of opportunities can properly be pursued by individual lawyers and what type of obligations this entails for the firm in terms of client and “advice” management. How much scrutiny will they be required to display regarding their own trusted partners? What type of monitoring will they have to put in place to revise past advice provided to current clients in order to disclose material information? What disclosure is too Little? On the other hand, how much information is too much information? Firms would be well advised to develop policies or at least raise consciousness about the risks associated with these issues.

However, the controversy surrounding the judgment regards the Court of Appeal’s discussion of the timing of the breach of duty of loyalty and the consequences of the lawyer’s conduct for both his firm and himself. Newbury J.A. returns repeatedly to

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Strother’s personal involvement in the Sentinel business.175 The court seemed particularly irritated by the personal conflict of interest which corrupted the relationship - it is by no means clear what the outcome of the trial could have been if this crucial element had not been present. There were obvious manipulations on Strother’s part to ensure he would retain the first mover advantage in the TAPSF market and this appears to have weighed heavily in the Court’s decision.

For the individual lawyer seeking other business opportunities, the duty of loyalty offers scant choice when the matter is related to his expertise: refuse and advise the client to seek other legal advice, seek informed consent which may well threaten the actual opportunity, or simply let the opportunity go. Newbury J.A.’s remarks, in obiter, are revealing “… I would also suggest that he was precluded from going into business with Mr. Darc, even if he had first left his law practice”.176

Within the next few months these issues and others will be the subject of the Supreme Court of Canada’s third journey to the conflicts well. It is too soon to predict precisely how the court will approach these issues. However I hope that the Supreme Court:

• Returns to Binnie J.’s bright line test from Neil and clarifies its meaning and scope.

• Articulates what it means to be a client and a current client. I find Newbury J.A.’s concept of ‘ascendancy’ to be ingenious but vague in its scope. We should be able to know who is a client, to whom the full range of fiduciary duties are owed – and who is not a client.

• Listens carefully to the Canadian Bar Association177 which is arguing that the application of the rule in Neil must take into account the circumstances of each individual case, to avoid the risk of “an unnecessary expansion of the duty [which] may be as inimical to the proper functioning of the legal system as its attenuation”. The following circumstances, among others, are relevant to determine the scope of a duty of loyalty:

175 See for instance [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), paragraphs 17, 23, 25, 27, and 29 176 [2005] 5 W.W.R. 108, 2005 D.T.C. 5059, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, [2005] 3 C.T.C. 168 (C.A.) reversing in part (2002), 26 B.L.R. (3d) 235, 2002 D.T.C. 7327, [2003] 1 C.T.C. 87 (B.C. S.C.), para. 25 177 One of the major problems with R. v. Neil was that none of the parties before the Court (the Alberta Crown and a criminal accused) had any real interest in exploring the larger issues of loyalty that pre-occupied the Supreme Court.

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o the nature and duration of the retainer giving rise to the duty of loyalty;

o the nature of the client’s interest said to be at stake; o the nature of the adversity of interest alleged between the two clients

(including whether the adversity relates to legal rights or commercial interests); and

o whether the adversity of interest between the two clients arises from the matters in respect of which they have sought legal services.

WHAT IS CONSENT?

The Ontario Securities Commission also contributed a very significant analysis on the duty of loyalty owed to former clients, in a case involving Credit Suisse First Boston (“CSFB”) and an attack by its lawyers on a regulatory scheme that they had advised the regulators on when it was being developed.178 The OSC’s Hearing Panel proceeded to a detailed analysis of the duty of loyalty even though it had initially found a disqualifying conflict of interest. The case also offers insight into the type of confidential information which can amount to the disqualification of a firm in a MacDonald Estate conflict of interest case, and clarified the notion of “informed consent” which allows a firm to represented a client if confronted with a conflict of interest, with the willing concurrence of the affected clients.

In Credit Suisse, the OSC disapproved of Stikeman Elliot’s retainer with CSFB regarding alleged contraventions of “Universal Market Integrity Rules”. Essentially, the Regulatory Services Inc. (“RS”) had commenced an investigation in respect of CSFB’s behaviour and the bank chose Stikeman to defend its interests. The firm’s innovative argument on this matter was to challenge RS’s jurisdiction to lead the investigation. RS responded with a motion to disqualify Stikeman from acting for CSFB because the firm had been retained by the Toronto Stock Exchange (“TSE”) in 2001 to advise it in transferring regulatory authority from the TSE to the Regulatory Services Inc. (“RS”). To this end, the firm had played a major role in creating and empowering the new regulator. Specifically, RS claimed that Stikeman was in breach of its duty of loyalty because it was attacking the very advice it had provided the TSE in its previous mandate. The matter was brought before the hearing panel of the Market Regulation Services Inc. and was appealed to the OSC’s own hearing panel.

A key issue was the alleged informed consent of the TSE regulatory authority. Indeed, well aware of the potential for conflicts of interest in the corporate domain, Stikeman had initially obtained the oral consent of the Chief Executive Officer of the TSE for the firm to continue acting in matters which would be adversarial to the

178 Re Universal Market Integrity Rules, Re Credit Suisse First Boston Canada Inc., [2004] 27 OSCB 6127.

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TSE’s interests. Ironically, this consent would be challenged just two years after the mandate was fulfilled, at the same time when the firm’s lawyers were busy arguing the GMP conflicts of interest case.

SOLICITOR-CLIENT RELATIONSHIPS AND THE DUTY OF LOYALTY: FROM CURRENT TO FORMER CLIENTS

Before concluding that a duty of loyalty is owed, courts must first determine whether a solicitor-client relationship exists. The peculiar nature of Stikeman’s former retainer with the TSE and its close relationship to the new RS entity allowed the OSC to conclude that RS was a beneficiary of Stikeman’s initial legal advice and of the solicitor-client duty of loyalty. The OSC’s flexible interpretation of the solicitor-client relationship giving rise to the duty of loyalty is guided by the Rules of Professional Conduct.179 In this case, the transfer of knowledge and resources from the TSE to the RS had the practical effect of transferring the duty of loyalty to RS, despite the fact that it was technically not a client of the firm. RS could therefore be considered a former client of the firm.

Having established the solicitor-client relationship necessary to impose a duty of loyalty, the OSC then turned to the lawyer’s ongoing fiduciary duties to a former client. An extensive analysis of cases on fiduciary duties revealed that lawyers owe a separate duty of loyalty to former clients. Greatly assisted by the unusual Stewart v. Canadian Broadcasting Corp case.,180 the OSC made two key findings:

The underlying premise is that there is a duty of loyalty owed by a lawyer to a former client and this duty is separate from public interest concerns.181

And it later declared: It is also worth noting that the court in Stewart, at paragraph 318, recognized that all of the broadcast content was public knowledge but held that this did not detract from a fiduciary duty of loyalty or prevent it from binding the lawyer in that case.182

The OSC conceded that recent Canadian case law focused on the duty of loyalty owed to former clients in matters involving confidential information. Nevertheless,

179 This reflects a tendency towards a loose interpretation of “solicitor-client relationship” and “retainer” as seen in other recent case law. See for instance GMP Securities Ltd. v. Stikeman Elliot LLP, (2004), 71 O.R. (3d) 476 and Dobbin v. Conway, (2005), 246 Nfld & PEI R 177, 2005 NLCA 22. See also the Quebec acknowledgment of a flexible definition of the relationship giving rise to a duty of loyalty in Metro c. Regroupement des marchands actionnaires Inc., [2004] R.J.Q. 2665. 180 (1997), 150 D.L.R. (4th) 24 (Ont. Gen. Div.). 181 [2004] 27 OSCB 6127, par. 130 182 [2004] 27 OSCB 6127, par. 131

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the Hearing Panel affirmed that there exists an ongoing duty of loyalty to former clients, albeit less onerous, even when there are no confidentiality issues involved:

There is no doubt that a lawyer’s duty of loyalty to a former client is less onerous than its duty to a current client. However, based on our review of the relevant authorities, we have concluded that Speid, Stewart and Chiefs all provide support for the view that the law in Canada provides for a subsisting duty of loyalty to a former client.183

The duty of loyalty to a former client will not preclude a lawyer or firm from acting against the interest of such client. Rather, it prohibits the firm from attacking its own specific advice as it relates to the given matter. When a firm attacks the very advice it provided to a former client and such advice forms the basis of the original retainer, the public interest will justify the disqualification of the firm regardless of any confidential information issues.

THE MEANING OF INFORMED CONSENT REQUIREMENTS

The Credit Suisse matter is one of the few cases in which a law firm attempted to convince the tribunal that it had obtained the informed consent of its client to continue acting in a matter where it had a conflict of interests. In this case, the client had orally consented that the firm should be able to take on other mandates which could be adversarial to its interest.

The OSC established a test to confirm the validity of a client’s consent comprised of 4 criteria. The consent must be:

• granted by a proper agent of the client;

• binding on the client;

• informed;

• of an adequate scope to cover the alleged conflict. While the two first criteria are self-explanatory, the notions of informed consent

and of adequate scope were subject to the panel’s scrutiny in this matter. “Informed” consent must be assessed in light of what is objectively known to the parties at the time it is given. It must be construed according to the reasonable contemplation of the parties at that point in time. On the other hand, the scope of the consent must have been intended to be broad enough to cover the alleged conflict of interest. The law firm claiming the beneficial consent must satisfy the burden of proof on all criteria and the Courts hold them at a high standard: any ambiguity or absence of clarity will be interpreted against the firm.

183 [2004] 27 OSCB 6127, par. 135

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We find the nature and scope of the consent rendered by Ms. Stymiest to be imprecise and ambiguous. As a result, we are unable to conclude that it was informed or that the scope of the consent was broad enough to extend to the present fact situation.184

Specifically, the OSC was reticent to allow a firm to repudiate the very advice it had provided based on a loose oral consent. To produce such a result, a firm must seek a clear and unambiguous consent from its client. As this was not the case, Stikeman was not shielded from any breach of its duty of loyalty.

PUBLIC INFORMATION AND LEGAL ADVICE: HOW RELEVANT TO CONFIDENTIAL INFORMATION?

Stikeman argued that the relevant information it possessed in connection with the alleged conflict of interests was in the public domain and could no longer be considered disqualifying confidential information. Although this was true for the most part, the OSC found that Stikeman possessed confidential information in the form of letters and discussions with another law firm which had collaborated on the previous retainer.

The OSC in fact concluded that this information was sufficient to establish the required nexus to disqualify the firm from acting against its former client. Like the Chapters matter185, the OSC took the view that at least some confidential information would likely be imparted and, in such a case, the disqualification is automatic if the relevance of the matters is established:

During the three years that formed the basis of the original retainer, there were confidential factual exchanges and documents that have not become public to date. The reality of the solicitor-client relationship made this inevitable.186

This means to say that in cases involving confidential information, there is no need to scrutinize the relevance of the actual information. The issue is simply whether the confidential information acquired through the previous retainer can be connected to the matter at hand. Such is the link between the relevance of the information and the risk of misuse addressed in McDonald Estate:

The issue is not whether CSFB’s alleged off-market trade was related to the Retainer. The relevant question is whether the issues raised by Stikeman Elliott on behalf of CSFB in the RS Proceeding – namely certain of the Part V allegations – are so related. It is clear from the evidence, according to the Hearing Panel’s decision, that certain of the allegations in Part V of the Reply relating to lack of jurisdiction to impose penalties and RS’s alleged institutional bias in favour of the TSE resulting from its structure and governance are matters that must have been the subject of 184 [2004] 27 OSCB 6127, par. 111 185 Chapters Inc. v. Davies, Ward & Beck LLP, (2001) 52 O.R. (3d) 566. 186 [2004] 27 OSCB 6127, par. 123

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advice from Stikeman Elliott. For these reasons, we find the required nexus has been established.187

DUTY OF LOYALTY AND CONFIDENTIAL INFORMATION

The Court of Appeal for Ontario heightened the bar for the use of preventive measures and redefined the relevance of confidential information.188 It set a low threshold for plaintiffs to assert the sufficiency of the relationship between past and present retainers. In doing so, it also placed a heavy burden on law firms to rebut the relevance of the imparted information. The court has also set the stage for the wider use of the doctrine of imputed knowledge in Canada. Firms have since adapted their efforts to prevent conflicts of interests but it remains to be seen how accurately they will be able to forecast the relevance of imparted confidential information in order to set up effective ethical screens.

The case involved Davies, Ward & Beck LLP (“Davies”) law firm relationship with Chapters Inc. (“Chapters”), one of Canada’s largest retail booksellers at the time. Davies had previously acted for FICG Inc., Chapter’s predecessor which operated Smith Books, during its acquisition of Coles Book Stores Ltd. (“Coles”) in 1994. Shortly after, its expertise was sought by Coles in connection with antitrust aspects of the amalgamation destined to create Chapters. The retainer was finally completed in the spring of 1995. This was the last transaction that Davies would undertake before meeting the issue once again, in front of the court five and a half years later.

At that time, Chapters was the target of an aggressive takeover bid from Trilogy Enterprises Ltd. (“Trilogy”) aimed at amalgamating Chapters and Indigo. Davies was retained to act for Trilogy in this matter. Well aware of the potential conflict of interest due to its previous work for Chapters, Davies put in place a firewall to separate those lawyers which had been privy to confidential information during the 1994 amalgamation. After a careful assessment of its retainer with Trilogy and the nature of the confidential information disclosed by Chapters, Davies eventually decided to remove the ethical screen and allow senior lawyers to join the team leading this transaction.

THE NEXUS OF RELEVANCE: THE “SUFFICIENT RELATIONSHIP” REVISED

Davies relied heavily on the long time span which separated both client matters along with the changing nature of the Canadian retail industry to challenge the relevance of the confidential information. It argued that the market had undergone too many important changes since its past retainer and that the information which could still be considered confidential was no longer relevant. Surprisingly however, the judges disagreed with the firm’s assessment. 187 [2004] 27 OSCB 6127, par. 118. 188 Chapters Inc. v. Davies, Ward & Beck LLP (2001), 52 O.R. (3d) 566

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The Court of Appeal rejected all of Davies’ arguments and concluded that there was a sufficient relationship between the new retainer and the firm’s past mandate. It considered the 10 year forecasts as well as the long term agreements and forward-looking strategies to which Davies was made privy during its previous retainer as having “at least” some relevance to the takeover bid.

Given the nature and detail of the confidential information received, the limited time that has passed and the breadth of the current retainer, it is likely that at least some of that information could be relevant to the current matter.189

In suggesting that a party need only demonstrate the reasonable possibility of some confidential information being relevant, the Court clearly set a very low threshold for triggering the conflict of interest rules. It also found that Davies had access to “at least some” relevant information disclosed by Chapters.

The case revisited the MacDonald Estate test for disqualifying conflicts of interests: In the end, the client must demonstrate that the possibility of relevant confidential information having been acquired is realistic, not just theoretical. For the court to find that the retainers are sufficiently related, it must conclude that in all the circumstances it is reasonably possible that the lawyer acquired confidential information pursuant to the first retainer that could be relevant to the current matter.190

The Court also accepted that retainers which do not concern the same piece of litigation can still be considered sufficiently related to trigger the conflict of interest rule.

IMPARTING CONFIDENTIAL INFORMATION: THE LAWYER’S HEAVY BURDEN

The onus of establishing the “sufficient relationship” is therefore much easier to discharge for the party alleging the disqualifying conflict than it is for the law firm to demonstrate that no confidential information was actually imparted in the course of the litigious retainer.

The Court reiterated Sopinka J.’s declaration that the onus of demonstrating that no confidential information was disseminated is a difficult burden to discharge. On that point, the Court was not convinced by Davies’ submission that the information had become irrelevant with the passing of time:

For the same reasons that yield the conclusion that it is reasonably possible that Davies received confidential information that could be relevant to the Trilogy matter, Davies cannot discharge the onus upon

189 (2001), 52 O.R. (3d) 566, par. 36 190 (2001), 52 O.R. (3d) 566, par. 30.

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it (…) Davies simply cannot show that none of that information could be relevant to the Trilogy file.191

TOWARDS A DOCTRINE OF IMPUTED KNOWLEDGE IN CANADIAN COURTS?

The Court plainly stated that “a lawyer who has relevant confidential information cannot quarterback a hostile takeover of a former client. Given that Davies has removed the protection surrounding that information (…), the entire firm falls subject to this prohibition”.192

Oddly, Goudge J.A. asserts that for the plaintiff to discharge its onus of demonstrating the two retainers to be sufficiently related there “must be clear and cogent evidence from which the court can reach that conclusion”.193 This was precisely what Davies set out to do at trial and the firm argued to justify its decision of lowering its ethical screen and pursuing the retainer. In preferring a minimalist standard, the Court took a stricter approach. The business case for this decision is hard to make out: the current validity, business relevance and general value of such dated confidential information are doubtful. This shows how uncertain and subjective the rule of avoidance of even an “appearance of impropriety” can be.

LOYALTY TO FORMER CLIENTS

Delivered by Quebec’s Court of Appeal, the Metro decision194 explores the “proximity of the relationship” which triggers the actual duty of loyalty to clients. Unlike the GMP Securities Inc. case in which the duty of loyalty was at issue, the Metro case focused on the more typical situations where confidential information is imparted by clients. Both cases involved securities matters in which lawyers were involved with underwriters and both cases have extended the duty of loyalty to third parties by reference to a broad notion of “solicitor-client” relationship.

The case also falls in line with previous matters such as Chapters Inc. and Credit Suisse First Boston where former clients were owed a duty of loyalty. At a glance, one might think that the long decade dating the confidential information at issue in Metro is a far stretch from the 5 ½ years in Chapters and the 2 years in Credit Suisse, the facts of this case can be readily distinguished since the litigation itself dated back 10 years and was directly connected to the rather old confidential information.

The Metro Case involved confidential information acquired by Fasken Martineau DuMoulin LLP while acting for Metro. Prior to the series of mergers that created a new Fasken partnership, the firm had represented Metro on various labour matters from 1984 to 1994. It had also advised Metro on various other matters, from real 191 (2001), 52 O.R. (3d) 566, p ar.40 192 (2001), 52 O.R. (3d) 566, par 42. See also discussion on presumption on shared information in the Dobbin v. Conway 2005 NLCA 22 case below. 193 (2001), 52 O.R. (3d) 566, par. 29 194 Metro Inc. c. Regroupement des marchands actionnaires Inc., [2004] RJQ 2265

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estate transactions to securities deals, during subsequent mandates which it continued to fulfill until 2002. Fasken also gained access to confidential information on Metro’s business while working on three of the corporation’s public offerings: first in 1986, and later while acting for Metro’s underwriters in 1991 and 1992. The latter work raised concerns for Metro in the matter at bar, despite the rather long period of time separating the retainer from the conflict which brought them to court. More specifically, a lawyer of an allied firm had represented a faction of Metro’s discontent shareholders, the Regroupement, starting in 1999. This posed no problem until 2002 when the merger between Fasken and the allied firm placed a significant amount of confidential information at Fasken’s disposal. Naturally, Fasken continued to represent the Regroupement following the merger.

Meanwhile, tensions escalated between the Regroupement shareholders and the Metro management and eventually amounted to a full fledged litigation in 2003. The litigation opposed Metro to the Regroupement in a divide over management issues and the corporation’s business orientation. Represented by Fasken Martineau DuMoulin LLP, the Regroupement alleged oppressive behaviour from Metro’s management in connection with a series of resolutions adopted during the previous decade. Metro immediately reacted and moved to obtain the removal of Fasken as council for the plaintiffs.

THE ENDURING OBLIGATION TO PROTECT CONFIDENTIAL INFORMATION

The trial judge initially held that Fasken could not owe a duty of loyalty to Metro since no direct retainer existed between them. The firm had established a relationship solely with Metro’s brokers and underwriters. The Court of Appeal rejected the trial judge’s decision and granted Metro’s motion to disqualify Fasken from acting for the Regroupement.

In the end, the Court concluded that the duty of loyalty which guards confidential information between a client and his solicitor protects both former and current clients from any improper behaviour on the lawyer’s part. Pushing the McDonald ruling even further and confirming the duty’s expansion since Neil, the Court acknowledged that the duty of loyalty may protect any party, regardless of the existence of a direct retainer, provided there exist a de facto solicitor-client relationship. The Court meant to say that such a relationship can be found to exist whenever a person confides information to a lawyer or his firm “by reason of his profession”.195

PROXIMITY OF RELATIONSHIP: DUTY OF LOYALTY OWED TO THIRD PARTIES

The decision of the Court of Appeal suggests that a disqualifying conflict of interest may arise out of a relationship analogous to one between a solicitor and his client. Any confidential information relevant to the litigious matter obtained during

195 No: 500-09-014105-043, par. 55.

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the course of a lawyer’s professional relationship, whether directly or indirectly, may therefore constitute sufficient grounds to remove the solicitor. 196 The encumbering duty of loyalty will protect a third party who may be affiliated to the firm’s active client base. In this case, a third party, Metro, was owed a duty of loyalty by virtue of its association with the firm’s former client, the underwriters. Metro could therefore be considered a former client by association with the firm’s work for the underwriters.

A lawyer owing a duty of loyalty must preserve all confidential information imparted under a solicitor-client relationship “unless released from this obligation by his client”.197 In the case at bar, the nature of the motions confronting the court made it impossible to dissociate the information obtained during Fasken’s previous contacts with Metro and its underwriters from the matter put before the court by the Regroupement. Indeed, the judge found that the information obtained in 1986, 1991 and 1992, mainly through the due diligence process conducted during the public offerings, was sufficiently related to the litigious matter. Rochette J. took the view that“…the events which took place farther in the past have not been rendered irrelevant by the passage of time”.

It should be noted that the labour and “transport” information from Fasken’s previous direct retainers with Metro were considered irrelevant on the facts of this litigation. Hence, although there was a previous relationship between the firm and Metro, the relationship waS not arguably sufficient to trigger the conflict rule and warrant the disqualification of the firm as council to the opposing party. Therefore, such information could not be considered adverse to Metro’s interests in the litigation piece put before the court.

It is important to note that the judge did not find the previous work for Metro to be sufficiently related to warrant the firm’s disqualification. The breach of the duty of loyalty was deducted on the basis of Fasken’s previous work for the underwriters and its indirect association to Metro. The duty of loyalty stemming from the knowledge of confidential information was therefore owed by “association”. 196 The Court specified that the confidential information must be of such nature as to affect the outcome of the case. Surprisingly, this is also one of the few cases which made use of Justice Binnie’s adoption of a notion conflict to include third parties and former clients in the duty of loyalty. Paragraph 56 of the judgment legitimizes the analogy between solicitor and client in the following terms: “On the other hand, by requiring proof of a previous relationship (lien antérieur), Justice Sopinka did not exclude relationships other than that between a lawyer and his or her client”. Justice Binnie also spoke directly of the issue by stating that the notion of conflict applied to a current client, a former client, or a third person. 197 No: 500-09-014105-043, par 44, based on the Professional Code, R.S.Q., c. C-26, s.60.4. See also a similar provision in the Act respecting the Barreau du Québec, R.S.Q. c. B-1, s.131. The Court also acknowledged the extensive list of provisions regarding conflicts of interests in the Code of ethics of advocates, R.Q., 1981, c.B-1, r.1.

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On the facts of this litigation, the allegations of the Regroupement concerned a specific change of policy from Metro dating back to 1992. In the eyes of the Court, this constituted a sufficient link between the confidential information imparted to Fasken and the matter at hand to justify their disqualification.

DOCTRINE OF IMPUTED KNOWLEDGE AND TIMING IN IMPLEMENTING SCREENING MEASURES

In acting for Metro’s underwriters in past public offerings, Fasken gained information related to the claims put forth by the Regroupement. The latter organization had been advised by M. Morissette since it was created in 1999 and this retainer was renewed under the banner of Fasken when he joined the firm after the 2002 merger. Upon determining that a previous relationship between Metro and Fasken was sufficiently related to the matter opposing the two parties, the Court inferred a pooling of information between Fasken’s lawyers, despite M. Morissette having sworn an affidavit of confidentiality (as Martin v. Gray).

The disqualifying conflict of interest could not be rebutted since Fasken did not meet its burden of proving that all reasonable measures had been taken to ensure that no compromising disclosure would be made between M. Morissette and those lawyers which held confidential information regarding Metro’s business. “Certain measures were finally put in place, but only after the Regroupement had launched its action. By then, it was too late”.198

The Court of Appeal stated in obiter that: “In addition, the professional secrecy existing between the client and his or her lawyer, which is the rule in litigious matters, is even broader in scope in the case of disclosure of information made in the public interest by an issuing company”.199 There seems to be a general consensus in Canadian jurisprudence that firms acting in securities matters, containing issues important to the public interests, are measured against a high standard of ethics. The courts have no qualms about recognizing the duty of solicitors to third parties in such cases and the rationale behind this stringent standard is plainly stated by Rochette J.:

To not recognize a relationship in this case comparable to the one between a solicitor and client would, in my view, run the risk of affecting the openness and generosity of these crucial exchanges between issuer and underwriter. It would encourage the issuer to be reserved and prudent and to refrain from disclosing anything unless it appears absolutely indispensable to do so. Ultimately, this would be to the detriment of the public purchasers of securities.200

198 No: 500-09-014105-043, par.100 199 No: 500-09-014105-043, par.76 200 No: 500-09-014105-043, par. 69

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This is also echoed by the Chapters,201 GMP Securities Inc.,202 and Credit Suisse First Boston203 cases. This line of cases suggests that firms must be particularly wary of conflicts of interests in the securities practice. The duty of loyalty and the duty to protect confidential information will easily disqualify law firms from accepting lucrative contracts if proper measures are not efficiently put in place early in the transaction.

As opposed to the Chapters case decided three years earlier, the relevance of “old” business information, although much outdated from a business perspective, was quite relevant for legal purposes in the Metro case.204 Chapters focused on a hostile takeover bid while Metro concerned a piece of litigation on facts dating back 15 years. The case suggests that for litigation matters, there is no actual question of business relevance to the matter at hand. Rather, the confidential information can date back quite far and as long as it can be directly connected to the matter before the courts, law firms face the risk of being disqualified from representing parties with adverse interests to those of their former clients or any third parties which could be considered to be bound by a “solicitor-client” relationship. Once again, Metro Inc. c. Regroupement des marchands actionnaires Inc. demonstrates that affidavits are clearly not sufficient to countermeasure the risk of improper disclosure.205

DUTIES TO A NON-CLIENT

The conflict of interest in Dobbin v. Conway206 centered on Mr. Harrington, a solicitor for Stewart, McKelvey, Stirling, Scales LLP (“Stewart McKelvey”). Harrington’s services were retained by three employees of a corporation (“Vector”) concerned with their potentially wrongful dismissal. The alleged conflict arose when Stewart McKelvey was retained by a bank to renew Vector’s credit facility. There was no doubt that the firm had access to important confidential information regarding Vector’s strategy to deal with the former employees. In the interim, Vector had ceased its payment of Harrington’s legal fees, ending the retainer, and effectively terminated the employment of the three plaintiffs shortly thereafter.

However, Harrington was asked to continue to work on the file as solicitor for the three aggrieved employees. The file was handled by Mr. Harrington at the St-John’s office while the bulk of the work relating to the credit facility was performed at the Halifax office of Stewart McKelvey. Some of the credit work was relegated to the St-

201 (2001), 10 B.L.R. (3d) 104, 52 O.R. (3d) 566, 141 O.A.C. 380 (C.A.) 202 (2004), 71 O.R. (3d) 461, 6 B.L.R. (4th) 59, 37 C.L.R. (3d) 113 (Ont. Sup.Ct.J.) supplementary reasons at (2004), 6 B.L.R. (4th) 72 (Ont.Sup.Ct.J.) 203 (2004) 2 B.L.R. (4th) 109, 28 O.S.C.B. 1571 204 By contrast, see the disqualification of a barrister on the basis of a one or two hour meeting, fourteen years earlier in Sent and Primelife Corporation v. John Fairfax Publication Pty. [2002] VSC 429 205 No: 500-09-014105-043, par. 98 206 (2005), 246 Nfld and PEI 177, 2005 NLCA 22

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John office however and this work required access to information regarding the employees’ termination. Such information is typically required by banks when devising credit facilities. Mr. Harrington faced allegations of conflict of interest as he was alleged to be exposed to confidential information disclosed by Vector while the firm was representing the bank in Halifax.

The firm argued that Vector had waived these concerns. The court disagreed. A party should not be allowed to go back on a choice when it would be unfair to the other party to do so. A waiver requires a finding that the party had full knowledge of his or her rights and that an unequivocal and conscious intention to abandon those rights was evidenced. On the contrary, the correspondence between Vector’s solicitor and Harrington unequivocally demonstrated the company’s concern over the material conflict of interest. The correspondence explicitly mentioned that Vector would set aside these concerns rather than abandoning them in order to pursue the negotiations on the settlement issues with the employees.

“IMMEDIATE INTEREST” AND THE PURSUIT OF SIMILAR OBJECTIVES

The Court of Appeal of Newfoundland and Labrador delivered a short and swift judgment upholding the conclusions of the trial judge. The Court followed the leading Canadian case law to the letter, restating the framework described in Neil207 and Drabinsky208. At the heart of the issue lied the determination of the existence of a “client or near client relationship between the law firm and the person alleging a conflict of interest”.

The court clarified the broad notion of conflict adopted by Justice Binnie in Neil and held that such a relationship did not necessarily require that a near client have a consistent goal with a direct client to trigger concerns over conflicts of interest.

With respect, such an analytical approach is not helpful. The essence of the conflict of interest analysis does not depend on a near client having a common or consistent goal with the direct client, though typically this may be the case. Rather, the focus when assessing a particular situation must be the mischief which the conflict of interest rule is designed to address.209

The mischief referred to here is the appearance of improper use of confidential information. A situation of conflict requires a case by case analysis focusing on the nature of the relationship between the parties to the alleged “mischief”.

207 R. v. Neil, [2002] 3 S.C.R. 631, 218 D.L.R. (4th) 671, [2003] 2 W.W.R. 591, 168 C.C.C. (3d) 321, 6 C.R. (6th) 1, 6 Alta. L.R. (4th) 1 208 See Drabinsky v. KPMG (1999), 10 C.B.R. (4th) 130, 33 C.P.C. (4th) 318 (Ont.Div.Ct.) affirming (1998), 41 O.R. (3d) 565 (Gen.Div.) 209 2005 NLCA 22, par. 50

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In this case, the mischief about which Vector complains is that, in obtaining the credit facility, the Bank required, and was give, confidential information about Vector’s proposed strategy in dealing with the claim by the employees (…) [read in another matter there was] Mr. Harrington who had a duty to give his exclusive, undivided attention to the interests of the employees. The end to be achieved in the discharge of that duty could be furthered, to the detriment of Vector, by the information supplied by Vector which was within the knowledge of the law firm.210

This was the case since confidential information was imparted by Vector to Mr. Harrington’s firm, albeit indirectly, in order to obtain the credit facility. In turn, some of the confidential information was directly relevant to the employment matter on which he was advising.

IMPUTED KNOWLEDGE

More importantly, the Court maintained that, in the absence of proof to the contrary, there is a prima facie inference that lawyers within a firm share information, even under such remote relationships as this one. No such proof could rescue the firm in this case since there were no attempts whatsoever to shield Mr. Harrington from any communications with the Halifax office.

The Court of Appeal upheld the conclusions of the trial judge and found that Vector could indeed be associated to Stewart McKelvey’s client because of its disclosures pertaining to the credit facility, despite the fact that Vector was no longer a client of the firm. Furthermore, this association could be linked to the matter of the employees’ termination on which Mr. Harrington was advising.

Following the standard imposed in Martin v. Gray, the court ultimately concluded that, in the eyes of a reasonably informed member of the public, the duty of loyalty owed to Mr. Harrington’s current client, the aggrieved employees, could tempt the firm to use the confidential information to Vector’s detriment. Such a risk was believed to be apparent and constituted sufficient grounds to justify the removal of Stewart McKelvey as solicitor of record for the three employees.

The impact of such a decision remains unclear elsewhere in Canada.211 A critical consideration is the fact that Vector was a third party providing no direct confidential information to the law firm. What is more, the company had terminated the retainer with Stewart McKelvey and the information was made available through its work for

210 2005 NLCA 22, par. 51 211 Significantly, Dobbin v. Conway was not followed in Dreco Energy Services Ltd. v. Wenzel Downhole Tools Ltd. (2006), 56 Alta. L.R. (4th) 234; 148 A.C.W.S. (3d) 1007 and was merely mentioned in Travel Express Investments Inc. v. Paysystems Corporation [2005] J.E. 2005-1495 QCSC

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the bank on an unrelated matter. Thus the case does not offer the clear cut conclusions that were otherwise prominent in previous matters involving underwriters and investors in the securities market. Indeed, banks are quite knowledgeable and active in many spheres of activities and it cannot be said that their interests converge as closely with those of their numerous clients.212

Indeed, given the important quantity of information available to banks regarding the general affairs of corporations, the decision would make it increasingly hard for law firms acting for large institutional clients to prevent conflicts of interests in the future. The decision is particularly worrisome given the watered down link between Vector, the confidential information, and Mr. Harrington’s retainer with the employees. On one level, it could well spur time consuming searches to identify conflicts of interests when acting for large clients such as banks or on larger transaction including syndicated loans. Firms may well have to dig up the bank’s own involvement with its former clients or with third parties opposed to the firm in litigation concerning unrelated matters. On another level, it may well unduly prevent firms from seeking valid business opportunities.

In the end, this case delivers a challenging statement on conflicts of interests even when compared to similar third party contentions in the GMP Securities Inc. and Metro Inc. cases. Although the case can be made that underwriters and their clients have converging interests, so as to justify a duty of loyalty owed to third parties, the same does not necessarily hold true for banks and third parties. It appears that the necessity to avoid even the appearance of impropriety in the practice of law, as was clearly set out in the landmark decision of Martin v. Gray, was taken to a whole new level. Dobbin v. Conway is a troubling judgment because of the onerous burden it may well place on any firm acting for large clients such as banks and government entities who hold a wealth of knowledge on many different parties and to various degrees. Under such circumstances, it may well be next to impossible for law firms to properly assess the relevance of the information which may come into play in any given transaction and their own capacity to act for current clients without facing liability or disqualification. One suspects that, faced with uncertainty, firms may respond by proliferating the perpetual and burdensome erection of ethical screens.

DUTIES OWED TO NON-CLIENTS – CANADIAN LAW EVOLVES

In GMP Securities Ltd. v. Stikeman Eliot LLP213, Ontario’s Superior Court of Justice had to determine whether a law firm had breached its duty of loyalty to an underwriting firm it had previously represented by accepting a retainer to act for the bidder during a hostile take-over bid. The case explored the nature and scope of the 212 Binnie J. mentions their position as institutional litigants in R. v. Neil, [2002] 3 S.C.R. 631, 218 D.L.R. (4th) 671, [2003] 2 W.W.R. 591, 168 C.C.C. (3d) 321, 6 C.R. (6th) 1, 6 Alta. L.R. (4th) 1 213 (2004), 71 O.R. (3d) 461

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duty of loyalty owed by a law firm to its initial client when offering its services to new clients with adverse interests. It also elaborated on the degree to which a duty of loyalty may extend to a third party having no formal retainer with the solicitors. The main issue therefore consisted in determining whether or not a duty of loyalty was owed to both the formal client, GMP in this case, and to a third party, Wheaton River Minerals Ltd., which shared similar interests.

The conflict of interest emerged in the context of a bid from Coeur d’Arlene Mines Corporation to acquire Wheaton River Minerals Ltd. GMP’s expertise was solicited by Wheaton in connection with the bid, and the firm acted as lead agent for the transaction. In turn GMP chose Stikeman to provide legal advice on the matter. In any event, there was no formal retainer between Stikeman and Wheaton. The situation became problematic for Stikeman when it later accepted a retainer with Coeur, the bidder directly involved in the acquisition of GMP’s client. When it learned of Stikeman’s new relationship to the hostile bidder, GMP elected to terminate its retainer and seek alternative legal advice. Furthermore, despite electing to terminate the contract, GMP and Wheaton launched a motion seeking to disqualify Stikeman to act for Coeur on the bid.

Perhaps surprisingly, they raised no issue concerning confidential information exchanges from Stikeman to Coeur about GMP’s business. The plaintiffs’ arguments focused solely on the duty of loyalty Stikeman owed its client. The plaintiffs alleged that this duty prevented Stikeman from acting for Coeur who had immediate adverse interests to those of GMP and, by association, those of Wheaton.

Stikeman relied on two main arguments in its defence. The firm first argued that there was no breach of the bright line test established in Neil214 and codified in Rule 2.04 of the Rules of Professional Conduct since GMP and Coeur’s interests were not “immediately adverse”. The firm also took the position that GMP’s termination of the retainer prevented it from seeking any additional remedy, namely Stikeman’s disqualification from acting for Coeur.

The Court tackles “what is an immediate interest?

Stikeman firstly argued that Coeur’s interests were not directly adverse to those of

GMP because they were only indirectly involved in the bid as underwriters. The firm also stressed the fact that Wheaton was not a party to this retainer. It emphasized that, at the time it accepted the bidder’s retainer, the merger was not yet hostile but of a friendly nature. Stikeman speculated that GMP could still have earned its retainer from such a transaction and that, in any event, the transaction was stalled when the motion was brought so that there could not be any materially adverse “immediate interest”. As in other similar transactions however, underwriters earn significant fees

214

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and the Court found that the underwriters’ own financial interest would be materially affected should Coeur’s bid prove to be successful.

Building on the broad notion of loyalty articulated in Neil, the Court stated that Stikeman was acting for two opposing parties and could not be allowed to put itself in such a position without proper disclosure to its clients. Indeed, the Court considered that an investment banker’s interests are intimately linked to its own client’s interests, Wheaton’s in this case. Thus, Stikeman had never been in a position to accept any retainer with Coeur.

GMP was actively engaged with respect to the transaction at the time that the Firm accepted the Coeur retainer. The fact that the transaction was subject to market risks has no bearing on whether the transaction can be considered to be in the “immediate interest” of GMP.215

The “limited loyalty” owed to parties “involved in or associated with” the firm’s client

Secondly, Stikeman argued that the election to terminate the retainer prevented GMP from seeking additional remedies, including a disqualification from acting for Coeur. Again, the Court ruled against the law firm. The termination of the retainer did not have the effect of ending the firm’s duty of loyalty and consequently of legitimizing its retainer with Coeur. Instead, the Court introduced the concept of a “limited duty of loyalty” by imposing liability on Stikeman to Wheaton, even though a third party, despite the fact that no actual retainer existed between them.

Interestingly, the Court held without equivocation that Wheaton could be considered a party “involved in or associated with” the firm’s client, GMP, and that the duty of loyalty served to protect Wheaton’s interests. Based on the phrase “persons involved in or associated with the client” as found in Rule 2.04 of the Rules of Professional Conduct, the Court deducted that a duty of loyalty could be found to exist through such an association.

The converging interests of client and third party

The nature of the relationship between GMP and Wheaton, coupled with their converging financial interests in the bid, extended Stikeman’s duty of loyalty to Wheaton:

I think companies which retain investment banker’s counsel will not act against the interests of the company with respect to that transaction, to the extent such interests are consistent with those of the investment banker. Accordingly, the duty is limited (…) While GMP’s and Wheaton’s interests might have been different, they were not: Wheaton rejected Coeur’s “friendly proposal”. In this instance, I

215 (2004), 71 O.R. (3d) 461, par. 23

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treat Wheaton as essentially GMP’s client and conclude that the Firm owed Wheaton a limited duty of loyalty.216

Having found that a duty of loyalty was owed to both GMP and Wheaton, it

naturally followed that Stikeman had breached its duty to both parties the moment it accepted to act for the bidder whose interests were diametrically opposed.

Termination of the retainer and subsequent motion to disqualify

It further held that the disqualification was an appropriate remedy above and beyond the termination of the retainer:

The Firm also says that in terminating it, GMP elected its remedy and for that reason cannot now seek to disqualify it from continuing to act for Coeur. In essence, the Firm says that notwithstanding GMP’s justifiable outrage, it should have asked the Firm to continue acting for it and insisted that the Firm terminate its arrangement with Coeur.217

Although the duty of loyalty had long been extended to third parties when confidential information was involved, the concept of “limited duty of loyalty” owed to third parties in cases where there no confidential information issues are raised is a novel interpretation of Binnie J.’s bright line test set out in Neil.

Remember that such a “limited” duty of loyalty would appear to be circumscribed by two distinct elements: the timing and proximity of the relationship between the actual client, the third party, and the transaction.

Indeed, the duty of loyalty appears to remain an ephemeral “transaction-based” duty. This inference can easily be draw from Hoy J.’s careful formulation of the issue: “The second question is whether, because Wheaton was involved in or associated with GMP with respect to the Proposed Transaction, the Firm should be found to owe a duty of loyalty to it”.218 This remains in line with Binnie J.’s own choice of words in the Neil matter.219 Similarly, the “limited” duty of loyalty can only prevent a firm from acting against the interest of the third party “to the extent such interests are limited to those of the [firm’s client]”.220 This criterion appears to be a conscious 216 (2004), 71 O.R. (3d) 461, par. 56 217 (2004), 71 O.R. (3d) 461,, par. 30 218 (2004), 71 O.R. (3d) 461, par. 56 219 Binnie J.’s discussion of the duty of loyalty at paragraph 24 was preceded by the following title: “(2) The Duty of Loyalty to an Existing Client”. It also reiterated this point in concluding at paragraph 30 that: “The Venkatraman law firm was bound by this general prohibition to avoid acting contrary to the interest of the appellant, a current client, who was a highly vulnerable litigant in need of all the help and reassurance he could legitimately get”. 220 (2004), 71 O.R. (3d) 461, par.56

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attempt from the Ontario Superior Court of Justice to shield law firms from potential abuses by unexpected third parties seeking disqualifying motions. Hoy J. also felt the need to limit the duty to cases where law firms are aware of the identity of the investment banker’s client and are providing specific advice on the relevant transaction as opposed to “structuring advice on a hypothetical basis”.

Although the duty of loyalty had been extended to third parties when confidential information was involved, the concept of “limited duty of loyalty” owed to third parties in cases where there no confidential information issues are raised is a novel interpretation of Binnie J.’s bright line test from Neil. Remember that such a “limited” duty of loyalty is circumscribed by two distinct elements: timing and proximity of the relationship between the actual client, the third party, and the transaction.

Time will tell if the Court was successful in truly limiting the duty of loyalty owed to third parties.221 On the specific facts of this case, there is no doubt that Stikeman’s advice to Coeur would have prejudiced both GMP and Wheaton’s financial interests. However, financial interests can be far reaching and it remains to be seen how permissive Courts will be in their interpretation of the sufficiency of the relationship between these interests and the law firm’s work on a transaction necessary to justify their removal.

CHINESE WALLS OR POTEMKIN VILLAGES?

Accountants deal with conflicting interests in the same way as their clients in the capital markets, through institutional mechanisms which used to be called Chinese walls.222 As seen above, Commonwealth courts have greeted these mechanisms with

(footnote continued)

221 See also the Metro Inc. c. Regroupement des marchands actionnaires Inc., No: 500-09-014105-043where the Quebec civil law regime also suggested a duty of loyalty can stretch further than the traditional retainer. The duty of loyalty was owed to a former client in this case but the confidential information had been obtained indirectly through work for underwriters. The court found that a duty of loyalty can arise out of a situation “analogous” to that of solicitor-client relationship. 222 For contrasting approaches in the three leading capital markets, compare Abuse on Wall Street : conflicts of interest in the securities markets : Report to the Twentieth Century Fund Steering Committee on Conflicts of Interest in the Securities Markets (Westport, Conn. : Quorum Books, 1980); For London, see Wood, Philip R. Financial Conglomerates and Conflicts of Interest in Conflicts of interest in the changing financial world; edited by R.M. Goode London : Institute of Bankers, 1986. For comparisons in Tokyo, see Chizu Nakajima, The 'Chinese Wall' in Chizu Nakajima, Conflicts of interest and duty : a comparative analysis in Anglo-Japanese law London : Kluwer Law, 1998 at p. 285; Nakajima C. "Conflicts of Interest and Duty in Japanese Companies" in M.Andenas and D.Sugarman (eds.), 'Developments in Company Law: Conflicts of Interest and Duty (1999), Kluwer Law International, London and The Hague; Nakajima, C. (1995) "Conflicts of interest in Japan" in The Fiduciary, the insider and the conflict. Barry Rider and Michael Ashe (Ed.). Brehon Sweet and Maxwell.

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scepticism. An ethical screen, or Chinese wall, is simply a structural arrangement within a firm designed to prevent the passage of information. Chinese walls have little relevance to situations of conflicting loyalties, although they may be instituted, from time to time, to reassure a client, as part of the conditions of multiple representation, with informed client consent.

Courts have varied in the extent to which they require perfection in the construction and maintenance of screening devices. In the House of Lords decision in Prince Jeffri Bolkiah v. KPMG223, the House of Lords set an extremely high standard for screening devices, noting that most informal structures or arrangements established within law firms would not satisfy the test. Indeed, in the Bolkiah decision, KPMG went to extraordinary lengths in the construction of the screen, which would simply not be feasible in all but a handful of law firms. For example, all staff in the second matter were located in a different building, with different security, and different computer network arrangements, apart from the rest of the accounting firm concerned. In the circumstances of that case, KPMG had not constructed the wall in sufficient time to rely on its effectiveness. Slightly lower standards have been mandated in the Ontario courts224 and in England. In a post-Bolkiah decision, Laddie J. in Young v. Robson Rhodes225 was not prepared to rule against ad hoc arrangements in principle, stating that the crucial question in all cases would be “will the barriers work”.

Chinese walls are well-established in American jurisprudence, where the most sophisticated thinking on their construction has occurred. In the United States, the presumption that all members of a firm share one member’s knowledge may be rebutted. 226 An ABA Ethics Opinion227 suggests that the presumption that all members of a firm are disqualified by one member’s disqualification is overcome where the firm institutes adequate measures or Chinese walls to screen the disqualified lawyer.228 Note that a 1988 United States Federal Court decision suggests

(footnote continued)

See generally, R. Schotland, “Conflicts of Interest Within the Financial Firm: Regulatory Implications”, - in Edwards, F. (ed.), Issues In Financial Regulation, New York, McGraw-Hill. 223 [1999] 2 AC 222 224 See Ford Motor Co. of Canada v. Osler Hoskin & Harcourt (1996), 27 O.R. (3d) 181; (1996), 131 D.L.R. (4th) 419 225 [1999] 3 All ER 524 226 Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186, 201 U.S.P.Q. 642, 206 U.S.P.Q. 769 (en banc) (1979 U.S.C.A. 7th Circ.). 227 See American Bar Association, Commission on Ethics and Professional Responsibility, Formal Opinion 342 (1975) reprinted in (1976) 62 A.B.A.J. 517. 228 “The Chinese Wall Defense to Law Firm Disqualification” (1980), 128 U. Pa. L. Rev. 677 at 678. See also L.A. Hammermesh, “In Defence of a Double Standard in the Rules of Ethics: A Critical Re-evaluation of the Chinese Wall and the Vicarious Disqualification” (1986) 26 J. of Law Reform 245; M.P. Moser, “Chinese Walls: A Means of Avoiding Law-firm Disqualification When a Personally Disqualified Lawyer Joins the Firm” (1990) Georgetown J. Of Legal Ethics 399; M.C. Brodeur, “Building Chinese Walls: Current

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that the phrase Chinese Wall may be discriminatory.229 Accordingly, most American legal professionals currently use the phrase ethical wall instead. Chinese walls are also known as insulation walls, zones, cones of silence, confidentiality screens and fire walls. Sopinka J. challenged the Canadian legal profession in Martin v. Gray to develop an institutional response to conflicts of interest. He did so by referring to concepts such as “Chinese walls” and “cones of silence”. Since that decision, the terminology has shifted. Some commentators have expressed discomfort with the term “Chinese walls”, although Winkler J. used the term in Ford Motor Co. of Canada v. Osler Hoskin & Harcourt230. The Canadian Bar Association Task Force Report refers to screening methods, which has led to the term “ethical screen” becoming more prevalent in current use. For my own part – and not to muddy the waters – I prefer the term “information barriers” to “ethical screens” because the former term emphasizes the central role of these mechanisms which is to rebut the inference that information will flow within a partnership. It cannot be used as a substitute for informed client consent to deal with loyalty conflicts. While occasionally lawyers and clients will suggest the use of screening mechanisms to deal with loyalty conflicts, Binnie J. makes it clear in R. v. Neil, that only informed client consent can address or mitigate a conflict of loyalties.

The Chinese wall is an arrangement within a large firm or corporation designed to prevent information available to one group of partners and employees from Implementation and a Proposal for Reforming Law-firm Disqualification” (1988) 2 Rev. of Lit. 167, also reprinted in (1989), 38 Defence L.J. 259. J.M. McCauley, “Screening to Avoid Disqualification: Erecting ‘Chinese Walls’” http://members.aol.com/jmccauesq/ethics/chinwall.htm (from November 1997 issue of the Virginia Lawyer Register). R.B. Bateman, “Return to the Ethics Rules as a Standard for Attorney Disqualification: Attempting Consistency in Motions for Disqualification by the Use of Chinese Walls” (1995) 33 Duquesne Law Rev. 249; J. R. Parker, “Private Sector Chinese Walls: Their Efficacy as a Method of Avoiding Imputed Disqualification” (1994) 19 Journal of the Legal Profession 345; G. S. Kaplan, “Chinese Walls: a New Approach” (1990) 15 Journal of the Legal Profession 63; W. I. Weston, “Is the Chinese Wall Viable? (Management of Conflict of Interest Problems)” (1987) 4 Compleat Lawyer 26(3). 229 Peat, Marwick, Mitchell & Co. v. Superior Court, 245 Cal. Rptr. 873 (1988) (Low, J., concurring). The controversy over the name reflects Californian political correctness at its most fascinating. The decision of the Chinese authorities to rent the Great Wall to Ferrari SPA for its 2000 advertising campaign described in The Globe and Mail (Toronto), October 25, 1999, p. D-1, “The Emperor’s New Toys”, shows that Beijing is not unduly sensitive to the meaning of Chinese Walls. The seminal work on such meanings is Jorge Luis Borges,: "La muralla y los libros". La Nación. Buenos Aires, October 22, 1950, 2a secc. pág. 1., reprinted in Otras inquisiciones. (1952, Buenos Aires, Sur), translated as “The Wall and the Books” in Labyrinths. (Harmondsworth: Penguin,1970) at p.221. Homenaje a Borges. 230 Winkler J. described the Chinese wall in the Ford Motor Co. case as “a common colloquial term used to describe a screen established within a firm to segregate lawyers and staff working on one retainer, and the information associated with that retainer, from other personnel within the same law firm, for the purpose of protecting client confidences.”

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becoming available to others. 231 In the Bolkiah case, the Chancery Division cited with approval the following Australian analysis:

The derivation of the nomenclature is obscure. It appears to me to be an attempt to clad with respectable antiquity and impenetrability something that is relatively novel and potentially porous. It is a practice that apparently emanates from the United States of America, having been devised by large firms of lawyers in an attempt to justify representation of conflicting interests at the same time. It has been subject to considerable criticism and scrutiny there. 232

At least in Canada and the United States, any screening device must be instituted when the conflict first arises, before the possibility of improper disclosure surfaces.233 Thus, law firms must implement Chinese walls before accepting conflicting retainers.234 If the screen is not erected sufficiently early, courts will disqualify the firm, regardless of how effective the wall may be. Simply sharing an office may attract disqualification motions. Those sharing space should ensure that they have separate filing systems.235

Information barriers should extend beyond the lawyers. Articling students and law clerks are to be treated the same as practicing lawyers. Assistants or secretaries only 231 See Baden Barnes Groves and Co. v. Bristol West Building Society (unreported, November 22, 1996), as cited in Prince Bolkiah v. KPMG (unreported October 19, 1998, Court of Appeal, SC2 98/7079/3: SCW 98/7083/3 232 Mallesons Stephens Jaques v. KPMG Peat Marwick [1990] W.A.R.357 at 371-372. 233 For recent examples of successful walls, see Kala v. Aluminum Smelting & Refining Co. 688 NE 2d 258 at 266 (OH Sup. Ct. 1998), 234 See Ford Motor Co. of Canada v. Osler, Hoskin & Harcourt (1996), 131 D.L.R. (4th) 419 at 441, 43 C.P.C. (3d) 156, 24 B.L.R. (2d) 217, 27 O.R. (3d) 181 (Gen. Div.), where the screen was not put in place at the outset of the retainer and therefore Osler, Hoskin & Harcourt was removed as solicitor. See also A.K. Film Ltd. Partnership v. Gallery Pictures Inc. (1996), 50 C.P.C. (3d) 170 (Ont. Gen. Div.), involving an application to remove Miller Thomson as the plaintiff’s solicitor because of a conflict which arose when the defendant’s former lawyer became a member of the firm. Prior to the lawyer’s arrival at Miller Thomson, the firm put a proper Chinese wall in place and this timing was important to the court in dismissing the application. In contrast, in Chippewas of Kettle & Stony Point v. Canada (Attorney General), [1994] 2 C.N.L.R. 33 (Ont. Div. Ct.); affg. (1993), 17 C.P.C. (3d) 5 (Ont. Gen. Div.), a screen was implemented too late even though the wall was put in place a few days after the firm was retained. Where the lawyer who had worked extensively on the plaintiffs’ case became employed by the defendants’ firm during litigation, and the defendants’ firm had not erected a Chinese wall in a timely manner, the firm would be disqualified from representation of the defendants. Cobb Publishing v. Hearst Corp., 891 F. Supp. 388, 1995 U.S. Dist. LEXIS 9784 (1995, E.D. Mich.). 235 Baumgartner v. Baumgartner (1995), 2 B.C.L.R. (3d) 126; [1995] 5 W.W.R. 289, 122 D.L.R. (4th) 542, 55 B.C.A.C. 277, 90 W.A.C. 277 (C.A.); revg. in part (1994), 92 B.C.L.R. (2d) 141, 113 D.L.R. (4th) 579 (S.C.). For a similar Ontario case, see Prakash v. Jain (unreported Ont. Gen. Div. January 29, 1998, Doc. No. Ottawa 24218/98).

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have the actual knowledge of the files they work on and are not presumed to have imputed knowledge as lawyers do.236

While Canadian lawyers, likely following the blueprints prescribed by the Law Societies, continue to erect staggering numbers of information barriers, the trend in Europe, Australia, Sweden, and even the United States237 does not favour them. One may question whether too much trust has been placed in an inherently frail structure. Indeed, in the post-Martin v. Gray and Bolkiah environment, are these structures really walls, or instead Potemkin Villages? 238

WALLS IN THE UNITED STATES

In 1975, the ABA first addressed screening procedures for former government lawyers in the Model Code of Professional Responsibility’s Disciplinary Rule 9-10(B). In general, the ABA rule did not grant former government lawyers complete freedom to represent clients regardless of past actions involving one or more parties. However, it did permit firms to establish screening procedures. The ABA expanded the requirement to include notice and approval by the former government employee’s agency. 239

In 1983, the Model Rules of Professional Conduct codified the screening policy.240 In 1988, the ABA eliminated the distinction between former government attorneys and non-government attorneys, setting the stage for the private bar to also institute screening procedures to avoid conflicts of interest.241 In Formal Opinion 88-356, the ABA considered the scope of screening to cover attorneys who were not former government attorneys or temporary attorneys. 242 The ABA declined to endorse any broad-based screening policy, limiting screening to situations only where the information concerning previous clients is neither extensive nor sensitive.243 Only Model Rule 1.11 countenances timely screening and only for migrating government lawyers. The Restatement of the Law Governing Lawyers244 permits screening where 236 Gouveia v. Fejko (1992), 18 C.P.C. (3d) 12 at 14 (Ont. Master); affd. (1992), 18 C.P.C. (3d) 12 (Ont. Gen. Div.).; Ocelot Energy Inc. v. Jans [1998] S.J. No. 287 (Sask. Q.B.), 237 Are we a profession or merely a business? The erosion of the conflicts rules through the increased use of ethical walls. Neil W. Hamilton; Kevin R. Coan. Hofstra Law Review, Fall 1998 v27 i1 p57-108 238 Grigory Aleksandrovich Potemkin (1739-91), favourite of Empress Catherine II of Russia, was reputed to have built sham villages with cardboard houses and paste palaces, in order to create a false picture of progress and prosperity, for Catherine's tour of the Crimea in 1787. 239 ABA Comm. of Ethics and Professional Responsibility, Formal Op. 342, 5 (1975), reprinted in 62 A.B.A.J. 517 (1976). 240 Model Rules Rule 1.11 (1983). 241 ABA Comm. on Ethics and Professional Responsibility Formal Op. 88-356 (1988). 242 ABA Comm. on Ethics and Professional Responsibility Formal Op. 88-356 (1988). 243 ABA Comm. on Ethics and Professional Responsibility Formal Op. 90-358 (1991). 244 § 124

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risks are small or information relatively innocuous. A minority of states permit screening in private law firms245; without the client’s consent.

The Formal Opinion created a fundamental split between the ABA, whose opinions are advisory only, and many courts, as each state and circuit has its own specific policies. Currently, the Second,246 Third,247 Sixth,248 Seventh,249 and Eleventh250 Circuits allow some degree of private sector screening. Conversely, the First,251 Fourth,252 Fifth,253 Eighth,254 and Tenth255 Circuits do not sanction screens. The Ninth Circuit has embraced screening outright.256 The D.C. Circuit Court of Appeals has not yet dealt with the issue. It is difficult to generalize about American law. While generally conservative, some judges appear to be open to consider the realities of contemporary practice.

As noted by Coffee J., Circuit Judge in his Analytica, Inc. v. NPD Research, Inc. dissent: 257

245 Approximately ten states’ rules permit this and another four permit screening if the court so decides, according to one US expert. Check the scorecard at http://www.freivogelonconflicts.com “Changing Firms”. 246 Cheng v. GAF Corp., 631 F.2d 1052, 1057-58 (2d. Cir. 1980). 247 Nemours Found v. Gilbane, Aetna, Fed. Ins. Co., 632 F. Supp. 418, 428 (1986) (citing United States v. Miller, 624 F. 2d 1198 (3rd Cir. 1980)); Webb v. E.I. Du Pont de Nemours & Co. 811 F.Supp. 158, 163, (1992). 248 Manning v. Waring, Cox, James, Sklar & Allen, 849 F. 2d 222, 226 (6th Cir. 1988); Cobb Publishing v. Hearst Corp. 891 F.Supp 388, 390 (1995). But see a very recent case in which the Sixth Circuit held that it would be governed by the ABA Model Rules on lawyers changing firms, National Union Fire Ins. Co. v. Alticor, Inc., 2006 U.S. App. LEXIS 25752 (6th Cir. Oct. 18, 2006) 249 Cromley v. Board of Education, 17 F3d 1059 (7th Cir. 1994). 250 Cox v. American Cast Iron Pipe Co., 847 F.2d 725, 731 (11th Cir. 1988) (holding that screening measures combined with other mitigating factors to constitute a sufficient evasion of conflict of interest, however the court did not decide if screening devices alone are sufficient); Blitch Ford v. MIC Prop. & Cas. Ins. Corp. 980 F.Supp. 1261, 1262 (1997). 251 Kevlik v. Goldstein, 724 F.2d 844 (1st Cir. 1984) (declining to evaluate the legitimacy of screens and instead finding the case to be one of first impression); In re Ferrante, 126 B.R. 642 (1991); distinguished by Starlight Sugar v. Soto 903 F.Supp. 261 (1995). 252 The Fourth Circuit does not appear to have considered the issue of screening: though see Nes v. Anne Arundel County, 2004 U.S. App. LEXIS 7965 (4th Cir. April 22, 2004). 253 In re American Airlines, Inc., 972 F.2d 605 (5th Cir. 1992). 254 Because the Eighth Circuit holds the presumption of shared confidences is irrebuttable, it has logically precluded itself form use of screening to rebut the presumption. 255 Smith v. Whatcott, 757 F.2d 1098,1102 (10th Cir. 1985) (declining to judge the acceptability of screening procedures). However, the Tenth Circuit questioned this holding in SLC, Ltd. V. V. Bradford Group West, Inc. 999 F.2d 464 (1993). 256 In Re the County of Los Angeles 223 F 3d 990 (9th Circ. 2000) 257 708 F 2d 1263 (7th Circ. 1983).

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The irrebuttable presumption that all information is shared among every attorney in a firm ignores the practical realities of modern day legal practice. The practice of law has changed dramatically in recent years, with many lawyers working in firms consisting of 20, 30, 60, 100 or even 300 or more attorneys, and with some firms having offices located throughout the country or even throughout the world. Additionally, the trend within law firms has been toward greater specialization and departmentalization. Surely, it defies logical and common sense to establish a presumption, with no opportunity for rebuttal, that every individual lawyer in such a multi-member and multi-specialized firm has substantial knowledge of the confidences of each of the firm’s clients. Recognizing these realities of the modern practice of law, we must continue to take a more realistic view toward the law of attorney disqualification by allowing the presumption that confidences have been shared throughout a firm to be rebuttable.

For many years, American law was more fully developed than the law of other jurisdictions regarding conflict issues. American law has always held that independent professional judgement lies at the heart of the lawyer’s service. 258 If conflicting interests compromise this independence, the lawyer must decline engagement.

When lawyers transfer between firms, American courts apply a two-fold test. First, they consider whether the transferring lawyer can continue to act against the former client’s interests. If the individual lawyer cannot continue to act, courts next ask whether the lawyer’s new firm can act against the interests of the lawyer’s former client. The key factor in assessing the individual lawyer’s ability to act is whether the lawyer actually possesses (or is presumed to possess) confidential information relating to the client. United States law contains many examples of effective screening devices. Yet, the various jurisdictions have not adopted a uniform approach, and decisions often turn on the jurisdiction where the issue is raised. In general, United States only a small minority of jurisdictions recognize non-consenual screening procedures created to avoid conflicts of interest. Screening by informed agreement is, however, widely accepted in a variety of contexts.

American conflicts policy dissensus stood fully revealed in 2001 when the ABA – Ethics 2000 Commission proposed screening rules stating that it had heard no evidence to suggest a factual basis for objections to screening259. Those objecting did however continue their criticisms260 and the proposal for screens was defeated in the ABA House of Delegates in August 2001.

258 See Canon 5 and DR 5-105, ABA Code of Professional Responsibility. 259 87 A.B.A.J. 61 (May 2001) 260 See Andrew L. Kaufman, Ethics 2000 – Some Heretical Thoughts, The Professional Lawyer I, (Symposium Issue, 2001)

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THE CONSENTING CLIENT

The tension conflict rules create has led many lawyers to resort to client waivers and consents. 261 However, case law does not yet clearly reveal just how effective waivers are.262 Although client consents may not always be effective,263 they cannot hurt. If one views the lawyer’s responsibility as stemming from a fiduciary relationship with the client, one wonders whether a fiduciary can ask a beneficiary to excuse the fiduciary’s breach of duty. Of course, as sophisticated investor rules in securities regulation suggest, not all beneficiaries are helpless and in need of strict rules to protect them. Courts recognize that informed consent may neutralize potential conflicts,264 but set the more demanding requirements for informed consent. As the Privy Council stated in Clark Boyce v. Mouat: 265

261 Brief of Irwin L. Trieger and William J. Lipton (Co-Chairs, National Conference of Lawyers and Certified Public Accountants), March 11, 1999. ABA Commission on Multi-disciplinary Practice, http://www.abanet.org/cpr/multicom.html . 262 Paul Lush; Prashanth Satyadeva, Chinese walls and client consent. Solicitors Journal, June 25, 1999 v143 i25 p610(3); Diane L. Karpman. Written consents to prospective conflicts of interest. California Lawyer, Dec 1998 v18 i12 p29(1); Thomas E. Moore, Conflicts of interest: disclosure, consent and related issues, Georgetown Journal of Legal Ethics, Summer 1991 5 n1 p99-106; Julia Reynolds. Conflicts of interest: disclosure, consent, and related issues. (Current Developments: Annual Survey of Developments in Legal Ethics) Georgetown Journal of Legal Ethics, Summer 1988 2 n1 p143-153. PR Jarvis and BF Tellam, When Waiver Should Not Be Good Enough: An Analysis of Current Client Conflicts Law 33 Willamette LR 145 (1997) 263 There are circumstances under which full disclosure and consent of all clients will not necessarily stop disciplinary proceedings against a lawyer who attempts to represent competing interests. See In re A & B, 44 NJ 331, 209 A2d 101, 17 ALR3d 827 264 The requirement that informed consent is a precondition to the implementation of Chinese walls was recently endorsed by the New South Wales Court of Appeal in Citicorp Australia Ltd v. O’Brien (1996) 40 NSWLR 398. 265 [1994] 1 A.C. 428 at 435 per Lord Jauncey. See also Hawkins v. Clayton (1988) 164 CLR 539 (H.C.). For analysis of Clark Boyce v. Mouat - (1993) 4 All E.R. 268 (P.C.), see C.I.Howells. Mortgagees and purchasers: separate solicitors? New Law Journal, Feb 10, 1995 145 n6682 p193(2); H.W. Wilkinson. Acting for buyer and lender. New Law Journal, Sept 30, 1994 144 n6665 p1327(3); Rosemary Tobin, Intolerable burden or good conveyancing practice? Conveyancer and Property Lawyer, Sept-Oct 1994 p404-411; Alexander Bates. Law and professional ethics: solicitors: what constitutes a conflict of interest? Queensland Law Society Journal, April 1994 24 n2 p153-155; Richard C. Nolan. Conflicts of duty and the morals of the market place Cambridge Law Journal, March 1994 53 n1 p34-36; Jayne Francis. Privy Council decision. (fiduciary duties of solicitors in dealing with an elderly client) New Zealand Law Journal, March 1994 p83(2); Steven Fennell. Conflicts of interest: Clark Boyce v. Mouat Professional Negligence, March 1994 10 n1 p22(2) ; Richard C. Nolan.Conflicts of duty - helping hands from the Privy Council? The Company Lawyer, Feb 1994 15 n2 p58-60

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Informed consent means consent given in the knowledge that there is a conflict between the parties and that as a result the solicitor may be disabled from disclosing to each party the full knowledge which he possesses as to the transaction or may be disabled from giving advice to one party which conflicts with the interest of the other.

Consent always may be withdrawn or challenged, unless freely given following full disclosure and independent legal advice. Legal professional privilege or separate obligations of confidentiality may make it difficult for lawyers to fully inform potential clients of possible conflicting interests. In practice, the obligation to preserve privilege and protect confidential information renders disclosure immeasurably more problematic. It is always difficult for fiduciaries to protect themselves from beneficiaries through gratuitous waivers.

Consistent Australian concern over the effectiveness of Chinese walls culminated in a significant decision in September 1999, which is seen as threatening an end to Chinese walls in Australia. The Western Australia ruling may also constrain future mergers. In the case, Philips Fox was ordered to sever its ties with a long-standing client, Fletcher Construction, which was involved in a dispute with another contractor. Hely Edgar had represented the contractor for four years. When Hely Edgar dissolved, the senior partner and other staff joined Philips Fox.

At trial, the judge found a possible conflict of interest, rejecting arguments that the firm’s Chinese wall afforded adequate protection. The decision has prompted the Western Australia Law Society to condemn screening practices, and one Australian partner commented that it “ may well spell the end of Chinese walls. The problem in the [Australian] marketplace is that there are so few major players that these problems of conflict are bound to crop up”266.

TOWARDS AN EMPIRICAL LOOK AT CONFLICTS MANAGEMENT IN CANADIAN LAW FIRMS

High walls are nothing

Sophocles, Oedipus Rex

266 This theme is echoed in both the South African and New Zealand jurisprudence, reflecting the concentration of those markets, and in the Canadian reference to the availability of alternative qualified counsel in remoter communities

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“I doubt very much whether an impregnable wall can ever be created and I consider that it is only in very special circumstances that any attempt should be made to do so.”267

In preparation for the Canadian Bar Association’s Second Managing Partner Conference, Leading the Canadian Law Firm in the 21st Century: Managing the Future, which is dealing with conflict of interest issues, we conducted research to see whether any empirical or attitudinal research had been conducted concerning the practical application of conflict of interest rules in Canada. Discovering none268, I designed and distributed a brief web-based survey which was circulated to approximately a hundred managing partners and conflicts partners in firms across the country. Twenty-five responded269 – a number that is sufficiently large to be suggestive, but inadequate to draw reliable conclusions from. In an appendix at page 97, I have reproduced the results of the survey. The results suggest further areas for research and discussion:

• Fully one-third of those responding indicated that they had more than 100 information barriers currently active within their firm.

• Over the last year, most firms had erected more than 20 barriers, yet had dismantled less than 5.

• While all firms have standard procedures to put up information barriers, almost two-thirds have no such standard procedures to dismantle barriers.

• Firms are patchy in the extent to which they mandate comprehensive measures to screen off information. For the most part, they consist of protocols limiting access to files, which are physically segregated and acknowledgement of compliance by those affected, coupled with electronic security protocols limiting access.

• Some firms are spending a significant amount of lawyer time managing conflicts of interest. The average response is over 500 hours, with one firm reporting that it spent more than 3,000 hours.

• There is a hint of provincial variations between respondents in the extent to which they resort to information barriers, with Québec and Ontario-based firms tending to deploy them more frequently, while British Columbia and Alberta firms appear to use them seldom. More research would be revealing.

267 Parker LJ in Re a Firm of Solicitors [1992] QB 959, 971 268 An informal survey of 24 firms was contained in an appendix to the Canadian Bar Association, Draft Discussion Paper on Martin v. Gray Conflicts (Ottawa, 1991) 269 The results came from each part of the country, with the majority coming from firms based in Ontario and Québec.

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• Litigation and business law give rise to most conflicts, with mergers and acquisitions and corporate finance trailing behind. Other areas of law seem rarely to give rise to issues.

• Among the views which commanded most support were agreement that: o Our firm has lost business because of unmanageable conflicts; o I am confident that our ethical screens are effectively maintained; o Conflict of interest allegations are abused by litigants; o Canadian conflict rules pay insufficient attention to market conditions

prevailing in specialist practice areas; o Client consent does not cure all conflicts; o Firms worried that conflicts of interest will make it tougher for their

firm to enhance its client base. • Almost two-thirds of the firms responding had instituted a conflicts

committee or conflicts partner with the decision of that committee or partner being final. Only a small number of firms had any sort of appeal process.

• In terms of improving conflict management at firms, most firms gave as the highest priority improving client and matter intact information. Other priorities including dismantling screens, better conflicts training and ensuring that the clients clearly consented when requested.

• Finally, we asked what law societies and bar associations could usefully do to bring clarity to the area of conflicts. Clarifying the Neil duty of loyalty came highest on the list.

If one of Sopinka J.’s objectives in Martin v. Gray was to encourage Canadian law

firms to treat conflicts of interest more seriously than historically they had done, it seems that he has succeeded. But their frustration with what some saw as purely symbolic exercises was palpable.

A PRACTICAL GUIDE TO WALL CONSTRUCTION

Before I built a wall I’d ask to know

What I was walling in or walling out

Robert Frost, Mending Walls

The public would quite properly remain skeptical of the efficacy of the most sophisticated protective scheme.270

270 Cory J in Martin v. Gray at 730-731

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Canadian firms need to re-examine the adequacy of their conflict of interest policies and procedures.271

If you need to establish information barriers, how should you construct those walls? As the CBA Task Force Report noted, “a proper screen is not a rote set of procedures and affidavits, but rather a ‘specific set of institutional mechanisms’ designed to prevent inadvertent disclosure of client confidences”. The case law shows that in order to survive judicial scrutiny, a [screen] must be unimpeachable in two respects: “its components and its implementation”. Case law in Canada, England and elsewhere suggests many practical hints for sound construction,272 including the following.

1. Do not wait until conflicts arise. To be effective, the wall must be part of the firm’s institutional fabric. Management should circulate among all firm members (not just lawyers) a memorandum on walls, revised regularly.

2. When you face a potential conflict, start planning early. Do not wait until work has actually started on a retainer to construct the wall. More importantly, do not wait until confidential information has been exchanged. As soon as you have any indication that you might need a Chinese wall, examine the structural requirements.

3. Have an independent firm member assess the conflict, and design and construct the wall. The independent lawyer, outside the immediate client

271 A helpful checklist has been prepared by Susan Shapiro of the American Bar Foundation and is reproduced with permission at Appendix B on p. 106. 272 In the same way that the Canadian case of Ford Motor Co. of Canada v. Osler, Hoskin & Harcourt (1996), 131 D.L.R. (4th) 419, 43 C.P.C. (3d) 156, 24 B.L.R. (2d) 217, 27 O.R. (3d) 181 (Gen. Div.) provides a useful checklist to assess whether a particular set of institutional screening mechanisms will be considered to be effective, so Bolkiah sets out a road map for the construction of Chinese walls. The walls within KPMG were not satisfactory because of three structural flaws: Initially, they were established on an ad hoc basis, rather than being an established part of the organisational structure of the firm. They were erected within a single department. Secondly, KPMG’s working practices were to involve a large number of people in this type of retainer, and to rotate team members. The implication is that smaller tighter teams with stable membership are more likely to withstand scrutiny. Next, the separation of different departments is possible if there is little personnel movement between them and they are located in different buildings. Finally, firms should be careful about attempting to erect information barriers between members drawn from the same department who normally work together. Particularly in forensic accounting, the novel nature of problems encountered in the practice had led to close sharing of information and expertise between the professionals in the department.

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service team, must be available to monitor the wall’s effectiveness and address any difficulties273.

4. Identify the nature, sources and current location of confidential information. 5. Consider obtaining well-worded client consents. Although the law does not

clearly state whether such consents are always effective,274 they do not hurt. Any consent must be clear, freely given and confirmed by independent legal advice. Courts may well prefer the lawyer’s position where a sophisticated client grants consent and then seeks to remove counsel for tactical reasons.

6. Arrange for independent legal advice. 7. Ensure that the wall and other screening mechanisms are universal and

respected firm-wide. 8. Segregate all files whose access is limited to authorized team members.275

(footnote continued)

273 Interestingly, the 2006 New South Wales Law Society Report requires that the firm nominate a compliance officer to oversee each ethical screen. The Rules set out the qualifications for a compliance officer and his responsibilities and duties. The compliance officer should be an experienced practitioner with an appropriate knowledge of the Rules and law relating to confidentiality, conflict of interest and information barriers. The compliance officer will take appropriate steps to monitor compliance and deal with any breach or possible breach of an information barrier. The compliance officer will undertake not to disclose any information about the earlier matter to personnel involved in the current matter. The New South Wales Rules also provide:

“in the event of files and/or information relating to the earlier matter being required to enable the law practice to comply with an obligation at law to provide information, to answer a complaint, or defend a claim against the law practice, the screened person must not pass the files and/or information to anyone other than the compliance officer who may pass them on to a responsible officer of the legal practice who is not involved in the current matter, so that the legal obligation can be honoured. Nothing in these guidelines is intended to restrict a law practice’s rights to access and disclose any information relating to the earlier matter for the purposes of enabling the law practice to comply with any legal obligation.”

274 There are circumstances under which full disclosure and consent of all clients will not necessarily stop disciplinary proceedings against a lawyer who attempts to represent competing interests. See In re A & B, 44 NJ 331, 209 A2d 101, 17 ALR3d 827 275 A salutary example happened at Sullivan & Cromwell, wehre a partner asked an associate for a court document, which the court had placed under seal. The associate duly provided the sealed complaint, without asking why. When the partner gave the document, with all its confidentiality restrictions, to a magazine reporter, the firm’s policies on confidentiality were

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9. Extend file precautions to computer systems. Precautions must cover word processing files, electronic mail files, spreadsheets, databases and transcript archives. Although a separate computer network offers the best protection, password protection and virtual drives to partition access also provide significant protection.

10. If files must be deleted from computer systems, ensure that back-up copies and archives are also deleted.

11. For fail-safe security, place one back-up on CD-ROM or floppy disk in escrow, to be released only with the opposing party’s authorization.

12. Select an independent systems auditor276 to ensure that all computer systems comply with the wall.

13. Consider whether the firm’s profit sharing and accounting systems should be structured to prevent screened lawyers from sharing in fees derived from the firm’s work behind the wall.

14. Ensure that authorized team members do not discuss the case with anyone outside the team.

15. Ensure that no disclosure of confidential client information or the team’s working documents is made to anyone outside the wall.

16. If the firm has different offices or multiple floors, consider locating the screened members of the firm physically apart from team members.277

17. Ensure that all members involved affirm the protective measures under oath by executing comprehensively drafted affidavits278.

18. Remind firm members that the firm will enforce compliance through disciplinary measures.279

shown to be more symbolic than effective. See John Morris, How Could Anyone Lose This Case, American Lawyer November 1995. 276 It might be prudent to ensure that the other party finds the auditor acceptable. 277 Physical separation was held to be critical in Young v. Robinson Rhodes [1999] 3 All ER 524. 278 Inglis v. Inglis (1993), 15 C.P.C. (3d) 129 (Man. Q.B.); Popowich v. Saskatchewan [1995] 6 W.W.R. 314 (Sask. Q.B.), reversed (1995), [1996] 1 W.W.R. 215 (Sask. C.A.) 279 In Canada, the Rule on Transferring Lawyers states explicitly that this should refer to sanctions up to and including termination of employment. All provinces have adopted Rules based upon The Federation of Law Societies of Canada Rule With Respect to Conflicts of Interest Arising As a Result of Transfers Between Law Firms, which in turn largely derive from the Canadian Bar Association Task Force Report, Conflict of Interest Disqualification: Martin v. Gray and Screening Methods (Ottawa: Canadian Bar Association, 1993).

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19. Develop procedures to deal with future changes of practice and protocol that may occur on consent or with court approval280.

20. File and retain any undertakings, waivers and affidavits. Fully document the wall.

21. Institute a regular mandatory review of existing walls and their effectiveness. 22. Institute a system for exposing conflicts. 281 Successful conflicts checking

systems282 depend on:

• • • •

•

integration with other office systems,

the existence of a conflicts avoidance policy,

zero tolerance for opting out of the conflicts checking system,

open communication within the firm concerning clients and potential clients,

client intake procedures to analyse new clients and matters283, and

(footnote continued)

280 For example, in Ontario, the success of Davies Ward Beck in defending their information barriers before the Ontario Court of Appeal in Davies, Ward & Beck v. Baker and McKenzie, (1998), 40 O.R. (3d) 257; (1998), 164 D.L.R. (4th) 423; (1998), 111 O.A.C. 352 led many Bay Street firms to construct barriers using their barriers as models or templates. 281 K. Bell, Managing Conflict of Interest Situations (Toronto: Lawyers’ Professional Indemnity Co., 1998). 282 Law offices of any size require accurate, comprehensive, and up-to-date client records which can be reviewed to assess whether a new retainer may trigger a conflict of interest. For the smallest offices these may still be retained in paper form, but the better solution is a comprehensive computerized system including fully searchable client and docket databases. See D. Novachick and M.A. Miller, “Conflict Avoidance Strategies: An Update” (1995) 21 Law Practice Management; and C.A. Canfield & R.D. Kraus, “Conflict-of-Interest Systems: Welcome to the New Generation” (1998) 220:58 N.Y. Law J. 5. David Z. Ribakoff. Conflicts checks must be thorough and accurate. The Los Angeles Daily Journal, August 9, 1999 v112 i152 p5 col 1; Pamela Person, Good fences make good partners. Legal Times, August 2, 1999 v22 i12 p30 col 1; David Beckman; David Hirsch. The human side of managing risk; software programs are fine but not a substitute for a lawyer's diligence. ABA Journal, Dec 1998 v84 p71(1) . 283 The bane of reliability for most conflict checking systems is the intake information. No matter what firms may attempt to require of lawyers at file-opening, the information collection process practically should not get in the way of effective client service. There is, thus, a temptation to provide all the information known at the point of file opening, but not to return later to supplement that information. Interestingly, in a very recent paper issued by the Law Society of New South Wales, it was suggested that the following information should be obtained:

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•

ongoing education and training about conflicts and conflict review processes284.

23. Be prepared for the worst – and the unexpected. As this paper has observed, walls will be challenged and may have to be dismantled.285

(footnote continued)

• Have all interested parties to the transaction been identified? • Have all clients who may have an interest in the transaction been identified? • If a new client is a corporate client, do you have details of all parent,

subsidiary, associated or affiliated companies, and details of all officers of such companies?

• Have all members of the firm registered their interests held outside the office (e.g. officers [presumably directorships and executive appointments], positions, financial interests)?

• Would any such positions held potentially give rise to a conflict? • Is a register maintained of all property owned by partners and would any such

interest give rise to a conflict? • Is the firm, by whatever means, in possession of confidential information

obtained from the client base that is relevant to the present matter? 284 New South Wales prescribes ongoing education:

“The law practice should have an ongoing education program in place, including:

(a) education for all personnel about the law practice’s protocol

for protecting confidential information and for setting up and maintaining information barriers, including:

1) employment terms for staff, 2) standard retainer terms with clients; 3) electronic and physical access to documents and files; 4) firm culture on such issues as discussion of client matters

only on a “need to know basis”; and 5) sanctions for non-compliance;

(b) additional education for individuals involved in matters affected by an information barrier including the arrangements in place for the particular case and sanctions for non-compliance.”

285 For unsuccessful walls see Prince Jefri Bolkiah v. KPMG, David Lee & Co. v. Coward Chance [1991] Ch 259, Re a Firm of Solicitors [1992] QB 959, Mallesons Stephen Jaques v. KPMG (1990) 4 WAR 357, Fund of Funds Ltd. v. Arthur Andersen 567 F. 2d 225, 229 n 10 (2d Circ. 1977); Some walls can be defended see Davies Ward Beck v. Baker McKenzie,

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TENTATIVE CONCLUSIONS

The legal profession faces unprecedented legal, business and ethical challenges in the new century. Conflicts of interest remain the single most common ethical problem for lawyers. As noted, the jurisprudence is complex. The fundamental principles underlying conflicts rules, however, are not.

No matter what setting lawyers practice in, care and attention to devising conflict management systems pay dividends. The key is to be sensitive to conflicts of interest, and be prepared to timely deal with them in accordance with applicable rules.

A veritable revolution in conflicts doctrine has erupted in recent years. The phenomenon has occurred in so many jurisdictions that it may represent the beginning of a sea-change for the legal profession. Clearly, the revolution is not over. Two main areas require further development.

First, the growth of national and inter-jurisdictional partnerships requires clear ethical rules, normative hierarchies to settle which of two competing principles might apply, and authorities to provide guidance and binding decisions. For example, in a global law firm, how do conflicts rules apply? Since ethics rules bind lawyers, not firms, lawyers must comply with their home jurisdiction’s ethical rules for professional conduct. Global firms will have to be aware that the rules in each relevant jurisdiction may differ. Indeed, firms may find tactical advantages arising from ethical differences when deciding how to staff multi-jurisdictional transactions. For example, the Netherlands frowns on Chinese walls, while England permits walls constructed according to Lord Millett’s specifications. A transaction might therefore be staffed from London rather than Rotterdam to avoid the problem. In the long run, harmonizing national ethical rules may solve this potential problem.286

Second, the rules must be more sensitive to the different circumstances within which lawyers practice. The profession must debate whether the rules governing small two- or three-person firms should apply equally to partners in large multi-

Fruehauf Finance Corp. Pty Ltd. v. Feez Ruthhling [1991] 1 Qd R 558, Dworkin v. General Motors Corp. 906 F. Supp. 273 (E.D. Pa 1995), McNaughten v. Tauranga City Council (No. 2) (1987) NZTPA 429, 431, Westinghouse Electric Corporation v. Kerr McGee Corporation 580 F 2d 1311, 1321 (7th Circ. 1978) 286 The Council of Bars of the Commission of Europe published a European Code available at http://www.ccbe.org/doc/En/code2002_en.pdf . For a more theoretical approach see, John Toulmin, Q.C., “A Worldwide Common Code of Professional Ethics?, in Rights, Liability, and Ethics in International Legal Practice ed. M. Daly and R. Goebel (Transnational Juris Publications, Inc.: New York, 1996).

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jurisdictional firms, who may never even meet partners whose detailed knowledge of a matter raises a conflict. 287

Under the leading Commonwealth cases, large professional service firms are much more likely to face conflict of interest issues than smaller “boutique” firms specializing in niche areas. Arguably, it no longer makes sense to presume that a Tokyo law firm’s representation of multi-national corporate client X conflicts with the firm’s representation of client Y through its Brussels office, merely because some unrelated business units of X and Y are adversaries in a lawsuit in Madrid.288

Clearly the context within which conflict issues are considered has changed, leading to a dramatic growth in incidents. The increase in conflicts claims may be due to a number of factors, including: 289

1. increased competition between lawyers and other professionals, 2. increased consumerism, 3. broadened definitions of legal duties, 4. the movement of lawyers from firm to firm, 5. the large size of some firms, and 6. the development of more intricate inter-relationships of corporate clients due

to mergers and globalization.

Conflicts rules date from times when law firms typically were so small that every firm member knew all files in the office. Lawyers ate together, discussing their day’s

287 As the American Bar Association Section of Business Law Task Force on Conflict of Interest put it (see (1995) 50 Bus. Lawyer 1381 at 1382-83):

1. Conflict Rules reflect an earlier time when individual practitioners and small law

firms dealt with long-time, loyal clients. The current reality includes large law firms with domestic and foreign branch offices, clients that spread their business among many firms, and lawyers who change firms with increasing frequency.

2. The divergent views and assumptions of law firms and clients often lead to misunderstandings. For example, lawyers see no conflict when the firm takes different positions on recurring legal issues, while clients may consider such an issue to be a conflict of interest or a breach of loyalty.

3. The disqualification of a law firm often becomes a litigation ploy and results in considerable expense to the client involved. Furthermore, conflicts of interest are often alleged to support malpractice allegations.

288 Brief of Irwin L. Trieger and William J. Lipton (Co-Chairs, National Conference of Lawyers and Certified Public Accountants), March 11, 1999. ABA Commission on Multi-disciplinary Practice, http://www.abanet.org/cpr/multicom.html. 289 See K. Bell, Managing Conflict of Interest Situations (Toronto: Lawyers’ Professional Indemnity Co., 1998) at 3.

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work, and consulted on difficult points of law. That paradigm still underlies the assumption that every partner possesses the knowledge of every other partner. Imputed knowledge, however, is a strained concept in firms with one hundred specialist lawyers, and is entirely artificial in firms of one thousand, where some partners are complete strangers to other partners and are located in offices on different continents.

The global movement towards consolidation of the market for professional services has inevitably tested, challenged and transformed old traditions, rules and practices. It is remarkable how fast this process of change has gathered speed. A domain of ethical practice that was once stable, unproblematic and uncomplicated is now changing country by country. Given that lawyers tend to focus on their own jurisdictions, the close attention courts have paid to developments in sister jurisdictions, adopting doctrinal innovation and practical solutions from abroad, is striking. In the new millennium, market developments should dictate continued and hastened evolution and innovation.

Where does Canada stand in relation to its trading partners, and the legal professions within those jurisdictions? In reviewing the conflicts around the world, certain features of the Canadian situation become readily apparent:

• Change in this area is being driven by the courts, and not by bar associations, law societies, academic scholarship, or the concerns of groups like the Canadian Corporate Counsel Association.

• Since Martin v. Gray, there has been an explosion in reported Canadian case

law on conflicts of interest, significantly more (adjusting for population) than in England, the United States, and comparable Commonwealth jurisdictions.

• Much in the Canadian jurisprudence has consisted of fairly mechanical

recitations of the key Supreme Court of Canada cases, teasing out the practical implications of very broad generalizations in the Supreme Court of Canada’s important cases.

• There is evidence of conflict issues being deployed as tactical mechanisms to

disqualify opponents’ counsel, sometimes on highly technical grounds.290

• The Supreme Court of Canada cases have tended to involve extreme and very unusual fact situations, from which broad norms, broad prescriptive norms have been derived. In some cases, unexpected remedies have been imposed.

290 See Manville Canada v. Ladner Downs (1992), Melamed v. ITT Continental Baking Co. 592 F 2d 290 (1979), Black v. Taylor [1993] 3 NZLR 403 at 420.

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• The centre of gravity for the evolution of Canadian law in this area has clearly

passed to the courts. While law societies and bar associations have made useful contributions, they tend to have been reacting to external stimuli. For example, it was Sopinka J.’s prompting in Martin v. Gray which led directly to the Canadian Bar Association and the Federation of Law Societies constructing rules and protocols for the construction of information barriers. The potential rise of multi-disciplinary partnerships, and competition from the accounting profession for some legal services prompted the law societies to examine how conflict rules might apply to multi-disciplinary partnerships.291

• When the Canadian Bar Association recently re-examined its code of

professional conduct from 2003 to 2005, the two conflict issues to generate discussion involved sexual relations with clients, and whether it would be beneficial to codify Binnie J.’s bright line test from R. v. Neil292, in professional conduct rules dealing with the duty of loyalty. While important, these matters were scarcely at the top of the agenda of the law firm leaders across Canada. Meanwhile Canadian law continued to lack clear rules on:

o the extent to which duties of loyalty were owed within corporate

conglomerates or to informal groupings like financing syndicates, o how far informed client consent can neutralize conflicts when two

different clients competing for the same goal, wish to retain different teams of lawyers, working behind information barriers,

o how conflicts affect proceedings in large scale insolvencies, like Air Canada where proceedings may involve more than one hundred parties with standing, and the same law firm representing multiple creditors,

o what exactly institutional litigants’ have impliedly consented to, when Binnie J. singled them out in Neil293 for special conflicts treatment.

Other countries’ law societies and bar associations have been more vigorously

engaged in developing their national law of conflicts. To give just three recent examples:

291 The regrouping of the accounting profession following the demise of Arthur Andersen, the collapse of Enron and similar conglomerates, and the strictures of the Sarbanes-Oxley Act led to this threat to not materializing globally as had been anticipated. See generally, B.V. Powell. The lesson of Enron for the future of MDPs, (2002) 80 Wash. V. L.Q. 1291-1306. 292 [2002] 3 S.C.R. 631; (2002), 218 D.L.R. (4th) 671; (2002), [2003] 2 W.W.R. 591; (2002), 168 C.C.C. (3d) 321; (2002), 6 C.R. (6th) 1; (2002), 6 Alta. L.R. (4th) 1 293 R. v. Neil, [2002] 3 S.C.R. 631, 218 D.L.R. (4th) 671, [2003] 2 W.W.R. 591, 168 C.C.C. (3d) 321, 6 C.R. (6th) 1, 6 Alta. L.R. (4th) 1

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• Largely in response to the Bolkiah decision, the City of London Law Society

embarked on a major study of Chinese Walls and Conflicts of Interest294, specifically focusing on the extent to which informed client consent from sophisticated business clientele could alleviate otherwise disqualifying conflicts. This has been followed by a detailed revision by the Law Society of England and Wales of conflicts rules, dividing the rules between confidentiality and loyalty, and permitting consensual representation of different clients competing for the same asset.295

• In a brief overview like this it is not possible to do justice to the work that has been done in the United States on Conflicts of Interest296. However two projects stand out. The American Bar Association, through its Center of Professional Responsibility undertook a multi-year review of legal ethics over the millennium, culminating in the Ethics 2000 Report297. The American Law Institute, working with an impressive group led by Professor Charles P. Wolfram, published the Restatement of the Law Third, on The Law Governing Lawyers, chapter 8 of which is devoted to a careful taxonomy of conflicts of interest.

• In 2006, the Law Society of New South Wales (working with the Law Institute of Victoria has released a series of documents298 to provide guidance to Australian lawyers practicing in that state on conflicts of interest, including practical guidance, together with background papers from staff solicitors299.

294 The City of London Law Society, Review of Conflict Rules, Report of Working Party, Draft for Consultation Purposes - July 2000. City firms have departed from what they regard as the unrealistic and unworkable rules of the Law Society, based upon informed client consent. Compare Janine Griffiths-Baker, Serving Two Masters: Conflicts of Interest in the Modern Law Firm, Oxford: Hart Publishing, 2002 with the Legal Week supplement at www.legalweek.com/documents/INSIGHT/Legal_Week_EY_Insight.pdf 295 See Solicitors’ Practice (Conflict) Amendment Rule 2004 296 The starting point for current developments is http://www.freivogelonconflicts.com. See for a historical overview Charles W. Wolfram, Toward a history of the legalization of American legal ethics--II the modern era, Georgetown Journal of Legal Ethics, Winter 2002 297 See generally http://www.abanet.org/cpr/e2k/home.html 298 A useful set of links can be found at http://www.lawsociety.com.au/%5Cpage.asp?partid=18097 299 One wonders whether the Canadian practice of having professional governing bodies issuing ethical guidance in the form of statute-like rules, with terse commentary beneath (all of which has to be formally approved by Benchers or their equivalent), leads governing bodies to avoid areas where the law, or the appropriate ethical standard, was unclear.

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One wonders how Canadian law might have developed had there been more of an institutional dialogue300 between the courts and the legal profession than occurs in the fact-bound confines of individual litigation. Canada may not have the resources to justify a Centre for Professional Responsibility, but the fact that we lack any resources other than ad hoc bar committees to address ethical issues including conflicts of interest is a significant weakness. The evidence shows that the results of the Supreme Court’s jurisprudence has admittedly been a heightened awareness of conflict issues, but at the cost of the erection of significant numbers of information barriers and the expenditure of significant quantities of professional time on their construction and maintenance. Whether that is simply a cost of doing business in today’s market is debatable – yet, as we wait for the next round in the Supreme Court’s remarkable reformulation of conflicts rules, one suspects that the conflicts revolution is far from its end.

300 The echo of Peter Hogg and Allison Bushell’s classic article, "The Charter Dialogue Between Courts and Legislatures" (1997), 35 Osgoode Hall L.J. 75, is deliberate.

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SCHEDULE A - Conf l ic ts Sur vey Resul ts

Standard Procedures and Protocols for Conflicts

0

50

100

Yes No

We have standard protocols for:

Wall construction Wall dismantling

Number of Active Screens

None Fewer than 5 5 to 20 21 to 50 51 to 100 More than 101

0%

10%

20%

30%

40%

50%

Number of Screens

NoneFewer than 55 to 2021 to 5051 to 100More than 101

Elements of Information Barriers

6. What measures make up your firm's screening mechanisms? Pick all that apply.

Electronic security protocols limiting access to confidential information 23 100%

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6. What measures make up your firm's screening mechanisms? Pick all that apply.

Protocols limiting access to confidential files, which are physically segregated from regular filing systems

22 96%

Requirement for those with access to confidential information to acknowledge compliance

17 74%

Objective oversight of effectiveness of screens 10 43% Formal training on rules and procedures governing ethical barriers 6 26%

Physical relocation of those with access to confidential information 5 22%

Audits of screens 4 17% Other, please specify 5 22%

• Publication to entire firm • Docketing, services, file names, communication • Lectures on screens and their utilization//website • Approval process for every screen and amendment. • Central administration of screens

Improving Screens

7. How could the efficacy of screens be improved?

• Clean desk policy

• Because they are based on human compliance there is always a concern with respect to unintended breaches.

• Audits of screens

• More locked cabinets and doors and more monitoring

• I feel that they are effective and do work

• Better audits

• More time to review and monitor continued need

• Consistency in rules / guidelines across jurisdictions. Better guidelines for requirements of physical and electronic segregation.

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Walls Constructed and Dismantled in 2005

8. Please estimate how many lawyer hours your firm spent on managing conflicts of interests in 2005 (excluding routine file opening procedures).

no idea but a lot

impossible to estimate and number is not known

20

20

25

Committee of 3 Snr Partners - 30 hours total

50

100

100

0%

10%

20%

30%

40%

50%

None Fewerthan 5

5 to 20 21 to 50 51 to 100 Morethan 101

Screens constructed Screens dismantled

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8. Please estimate how many lawyer hours your firm spent on managing conflicts of interests in 2005 (excluding routine file opening procedures).

100 hours

Probably 100 when we brought in 50 new lawyers

200

200

several hundred

300

500

1000

1000

1500

2,000

2500

over 3,000 hours

Which three practice areas are most likely to give rise to conflict issues?

Litigation Business law

Mergers & acquisitions

Corporate finance

Labour & employment

Securities Real estate

Family law

Tax Criminal law

Presents most conflicts

11 4 4 1 2 1 0 0 0 0

Presents second most conflicts

3 9 2 3 0 1 1 2 0 0

Presents third most conflicts

3 3 2 4 2 1 3 1 1 0

100

Do you have clients who require exclusivity (your firm cannot act in any way for any of their business competitors)? How many? None None Few or none Yes Only a few Maybe 1 or 2 A couple A few A few A few Very few Yes - 2 Yes - a few Yes A handful Yes. 3. Some but not many 3 5 Yes. About 10 10 Some. A dozen or so. Over 20

Conflicts Decision-Making

Who Adjudicates / Resolves Conflicts of Interest

13%

61%

26%A conflicts partner

A conflictscommitteeA managingpartner

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Does your firm have a formal mechanism for appealing conflicts decisions?

Attitudinal Responses

Do you agree or disagree with the following statements? Strongly agree

Agree Neither agree nor disagree

Disagree Strongly disagree

Our firm has lost business because of unmanageable conflicts

27% 59% 9% 5% 0%

I am confident that our ethical screens are effectively maintained

17% 61% 4% 17% 0%

Firms strive too hard to trivialize conflicts issues. Some conflicts can't be waived

17% 43% 9% 30% 0%

Conflict of interest allegations are abused by litigants

13% 65% 13% 9% 0%

Screening mechanisms are over-used within our firm

17% 4% 17% 61% 0%

Conflicts of interest can effectively be managed through the application

0% 78% 0% 22% 0%

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Do you agree or disagree with the following statements? Strongly agree

Agree Neither Disagree agree nor disagree

Strongly disagree

of strict internal rules

I am confident in our ability to identify disqualifying conflicts

9% 61% 13% 17% 0%

Acting for parties with adverse interests should be allowed if the client consents

17% 39% 22% 22% 0%

Our firm requires retainer letters, as a consequence of the tougher conflict rules

18% 50% 23% 9% 0%

Conflicts of interests rules limit litigants' right to retain their counsel of choice

9% 61% 17% 13% 0%

Canadian conflict rules pay insufficient attention to market conditions prevailing in specialist practice areas

14% 55% 23% 9% 0%

A significant number of our firm's ethical screens should be dismantled

9% 26% 22% 43% 0%

I am confident that our client databases contain most information needed to identify conflicts

4% 57% 17% 22% 0%

The conflicts of interest rules for migrating lawyers are reasonable and manageable

9% 57% 13% 17% 4%

Clients are entitled to expect undivided loyalty from their law firms

10% 52% 5% 29% 5%

Clients are irritated by requests to waive technical conflicts

4% 43% 22% 30% 0%

Courts have little idea about the practical consequences of transferring lawyer rules for large national firms

23% 41% 27% 5% 5%

The rules assume a mutual relationship of loyalty which is artificial when firms act for competitors and clients employ a roster of firms on a deal by deal basis

17% 43% 30% 4% 4%

Because of the vagueness of conflict rules, we are overly cautious in trying to ensure compliance

9% 35% 39% 17% 0%

Loyalty is a two way street. We should be able to expect greater loyalty from our clients

13% 35% 17% 26% 9%

Today's business pressures mean that firms cut corners on conflicts

0% 43% 30% 22% 4%

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Do you agree or disagree with the following statements? Strongly agree

Agree Neither Disagree agree nor disagree

Strongly disagree

Ethical screens get in the way of knowledge sharing

9% 22% 26% 35% 9%

We have lost a significant amount of work to boutiques because of conflicts

0% 9% 48% 39% 4%

Client consent cures all conflicts 9% 9% 17% 48% 17%

Impact of Conflicts Rules on the Firm

I worry that conflicts of interest will make it tougher for our firm to: Enhance our client base 82% Retain important clients 45% Grow strategically 45% Recruit talent through lateral hire 45% Increase profits per partner 23% Share knowledge within our firm 23% Retain talented lawyers (who may go to boutique firms to escape the conflicts burden) 23%

Conflicts – Coming Priorities

17. What is your most urgent conflicts priority in the coming year?

Improving client and matter intake information 12 55% Dismantling screens 5 23% Better conflicts training 4 18% Ensure clients clearly consent to conflicts 4 18% Ensuring that completed files are properly closed 3 14% Developing a conflicts policy 2 9% Tighter screen procedures 2 9% Lobby for changes to professional rules concerning conflicts 4 18%

Improving computer conflicts search results 1

Understanding major clients' conflicts concerns 1

If the Law Society / Barreau could bring clarity to one area of conflicts, what should it be? Modernize joint retainer rules

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The whole area of lawyers moving between firms. If they have not been directly involved in a file, it makes little sense for them to be the focus of the rules. Role of the courts I'm not sure that our Society believes that there is currently a lack of clarity and the subject is not currently on the agenda of the Ethics and Professional Responsibility Committee Business-loyalty conflicts Clarity on (increase the number of) clients to whom no duty of loyalty is owed because they are big / sophisticated enough to retain a variety of counsel. Acting for competing bidders with their consent as is done in Alberta and Quebec Acting "against" large clients where the conflict is really technical. Corporate litigants The scope of the words used in the Neil bright line test Acting against a current client on an unrelated matter with no relevant confidential information previously disclosed. Clarify duty of loyalty and its limits Given the small Canadian market, set up rules to prevent situations where there is no risk of prejudice to the client from becoming tactical tools in litigation

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SCHEDULE B : CONFLICT OF INTEREST CHECKLIST

This checklist was prepared by Susan Shapiro of the American Bar Foundation, and is reproduced with permission. It does not necessarily reflect the requirements of Canadian law.

NEW BUSINESS

The firm has procedures for managing or limiting information disclosed by prospective clients to lawyers, secretaries, or receptionists when they first contact the firm.

The firm has special procedures for participating in beauty contests.

New matter forms are completed for all potential cases.

New matter forms include information on:

a) principal business of the client;

b) the legal services currently or previously performed by the firm;

c) prior names used by the prospective client or commonly used abbreviations;

d) parents, subsidiaries, divisions, affiliates, and joint venturers;

e) principals, directors, officers, and principal shareholders; general or limited partners; members of an association client;

f) spouse and employer or business affiliation of an individual client;

g) related parties;

h) adverse parties;

i) other parties that might have an interest in the matter (e.g., officers, employees, major customers, suppliers, competitors);

j) relationship between proposed client and any existing client of the firm;

k) possible positional conflicts;

l) why the prospective client sought this law firm and who referred it;

m) whether a third party is paying for the representation;

n) whether lawyers have a relationship with the prospective client other than that of attorney/client;

o) whether a family member of a firm attorney has an ownership interest in or is an officer, director, or employee of the prospective client; etc.

All new matter forms (or summarized versions) are routinely circulated to all lawyers and paralegals in the firm, across all firm offices—either through e-mail, voice mail, memoranda, firm newsletters, or partnership meetings.

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All lawyers and paralegals must sign off or affirm that they have reviewed the prospective matter and see no potential for actual or future conflicts.

All new matter forms are entered into a computer conflicts database.

The conflicts database also includes information on:

a) corporate families and affiliates (e.g., a Standard & Poor’s database),

b) accounting and billing records,

c) nonmatters and nonparties that the firm declined or that the prospective client ultimately took to another firm;

d) former clients and adverse parties of lawyers hired laterally.

The conflicts database has been backdated, including matters opened long before conflicts screening was computerized.

All prospective new matters as well as pro bono cases are manually or electronically screened for conflicts of interest.

Conflicts screening and oversight is performed centrally in the headquarters of the firm for new matters opened in all branch offices.

Conflicts screening is also routinely undertaken before marketing the firm to a new client.

Conflicts screening is performed electronically by computer.

The firm has specialized computer software developed solely for conflicts checking (not simply part of billing or docketing programs). The software allows for aliases, acronyms, varied spellings or misspellings, abbreviations, similar roots of words, and complex searching algorithms.

A billing number is not assigned and no work can be performed on the new case until conflicts clearance and approval is complete.

ONGOING MATTERS

Lawyers are required to submit new forms and undertake new conflicts screening when changes develop in the course of an ongoing case (the client merges, new parties join the lawsuit or transaction, new codefendants are charged, new evidence is uncovered, parties file cross-claims, etc.).

STAFF

The firm employs full-time specialized nonlawyer staff to develop and update databases, input data, design and conduct searches, and administer the conflicts screening and analysis process.

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A conflicts-like committee has mandatory oversight of all new matters, determines whether they pose conflicts of interest, and exercises discretion about whether to accept or decline the new business or to seek waivers.

Associates or paralegals are assigned to the conflicts committee to help review new matters, analyze the output from conflicts searches, and perform legal research.

A new business committee, managing partner, or executive committee evaluates all prospective matters for business considerations.

A disinterested third party (e.g., the conflicts or new business committee, the managing partner, a member of the executive committee) signs off on all new matters.

One or more partners in the firm have special expertise in conflicts of interest or the firm uses outside ethics consultants for difficult conflict-of-interest questions.

HIRING

In the early stages of evaluating a lateral hire, the firm will generate and evaluate a list of all matters it has against the firm or entity currently employing the candidate.

In the early stages of evaluating a lateral hire, all lawyers in the firm will be consulted about any matters adverse to the candidate’s current employer.

Before making an offer of employment, candidates will be asked to supply a list of

a) clients, cases, or occasionally products that

b) they intend to bring with them;

c) they worked on in the prior firm and will be leaving behind;

d) adverse parties involved in any of these matters; and

e) substantial client contacts or clients that they know so much about that the clients might object to the new firm taking a position adverse to them.

These lists are checked against the firm’s conflicts database and circulated to all members of the firm for examination and approval.

Candidates are also asked to examine a list of our own clients for potential conflicts of interest.

The same procedures are undertaken for law clerks, entry-level associates, paralegals, and secretaries before hiring, as well as for potential merger or acquisition candidates.

Once hired, laterals complete new matter forms for all business they brought with them to the firm, which are subject to routine conflicts clearance and circulated for the approval of all members of the firm.

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Newly hired lawyers are placed behind ethical screens (i.e., Chinese walls) until it can be determined that they have not imported any conflicts of interest into the firm.

Mergers or lateral hires have been abandoned by our firm because the conflicts of interest were too problematic.

The firm has lost attorneys who left because they were repeatedly conflicted out of new business by conflicts of interest elsewhere in the firm.

LAWYERS’ OUTSIDE INTERESTS

Lawyers in the firm are barred from investing with clients or serving on their boards of directors.

Lawyers must get permission from the firm to serve on any other (nonclient) corporate or not-for-profit boards, to make other investments, or to trade in the securities of nonclients.

Lawyers must submit an annual list of all directorships, board memberships, personal or familial investments, holdings, or other business interests. (Lists are entered into the conflicts database.)

The firm has policies regarding spouses or significant family members who are lawyers, judges, regulatory officials, and the like (e.g., spouses cannot practice within 100 miles of the firm) or who work for clients or client adversaries.

PROPHYLACTIC MEASURES

Before taking a new matter, partners will evaluate potential future business from which the firm may be conflicted out by the prospective matter. The firm has procedures to insure that a bird in hand will sometimes be declined in favor of potential future business.

The firm has procedures so that colleagues do not take cases against prospective clients or marketing targets for which business has not yet been secured.

The firm has policies about positional conflicts and joint representation.

At the outset, the firm will disclose to a prospective client any conflicts of interest that are likely to emerge later in the case, explain how the firm will respond to them, and secure a waiver—rather than remain silent when taking the engagement and deal with the conflict if it detonates down the road.

The firm often seeks so-called advance consents, in which clients agree that they will not move to disqualify the firm for taking advantage of future opportunities that are adverse to their interests, but unrelated to the matter for which they engaged the firm or any of the confidences they shared with their lawyers. There are matters that we will decline without an advance consent.

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All waivers of conflicts are formal written documents signed by clients; they are never obtained orally or take the firm of written memoranda placed in the file that summarize such conversations with clients. Unsophisticated clients are advised to consult with other lawyers before signing a conflicts waiver.

The firm frequently erects ethical screens or Chinese walls in response to potential conflicts (whether from lateral hiring or adversities of interest among clients).

Ethical screens in the firm require that:

a) all coworkers be notified of the screen, cautioned not to talk to their quarantined colleague about the case, and admonished that all conversations take place in private;

b) access to files be restricted;

c) files be segregated, labeled, and locked;

d) passwords be placed on affected computer files;

e) confidential procedures for interoffice mail be specified;

f) screened lawyers sign a pledge to abide by the screen;

g) a party responsible for supervising the screen be named;

h) and all personnel be periodically reminded of the existence of the screen.

The firm has implemented procedures to expedite the transformation of “current” into “former” clients (e.g., sending clients a “close-out” letter or “final bill”; archiving case records; removing clients from the firm mailing list; or sending an engagement letter that specifies the conditions under which the engagement will be considered completed) and a mechanism to periodically review open cases.

The firm has spun off practice areas that continually create conflicts with other departments, eschewed mergers or rapid growth, or opened branch offices rather than growing internally at least in part to lessen its vulnerability to conflicts of interest.

The firm gives compensation credit to lawyers for new business that had to be turned away because of conflicts of interest elsewhere in the firm.

The firm holds seminars (or sends lawyers to seminars) on conflict of interest for newly hired attorneys and periodic updates for all staff.

The firm works closely with its malpractice insurer to devise loss-prevention strategies.

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Simon Chester, Heenan Blaikie LLP 1

Conflicts Conflicts in Canadain Canada

The AgendaThe AgendaStakes high and getting higherStakes high and getting higherManaging conflictsManaging conflictsClient identificationClient identificationMigrating lawyers Migrating lawyers Information barriersInformation barriersPriorities for actionPriorities for action

Why Conflicts Matter Why Conflicts Matter

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Simon Chester, Heenan Blaikie LLP 2

Stakes are Stakes are getting highergetting higher

Hurt the firm

• Harm to clients

• Harm to professional reputation

• Significant money

• Embarrassment

ConflictsLitigation

Gowlings Faskens

McC

arth

y

Tétr

ault

Oslers

Davis & Co

Stikemans

Davies Ward Beck

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Who are Who are you?you?

Survey the audienceSurvey the audience

Work settingWork settingPrivate law firmPrivate law firmInhouseInhousecounselcounselInsurerInsurerLaw Society / Law Society / Bar AssociationBar Association

Size of Size of organizationorganization

Under 20Under 202121--100100Over 101Over 101

WhereWhereAtlantic CanadaAtlantic CanadaQuebecQuebecOntarioOntarioWestern Western CanadaCanada

Conflicts RoleConflicts RoleManagementManagementConflicts Conflicts PartnerPartnerNo roleNo role

Your Experience in OctoberYour Experience in October

Handled migrating Handled migrating lawyerlawyerConstructed Constructed information barrierinformation barrierDismantled information Dismantled information barrierbarrier

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Managing the Conflicts Process

LawPro Value of Conflict of Interest Claims 1996 - 2005

42%

33%

3%

2%

5%4%

11%

Real Estate Corporate Wills / Estates PlaintiffDefence Family Other

LawProLawPro Conflict ClaimsConflict Claims

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 20050

20

40

60

80

100

120

140

160

180

Total Value Number of Claims

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Stakes high Stakes high –– and getting higherand getting higher

Tougher Tougher standards from standards from courtscourts–– Canadian law Canadian law

moves closer to moves closer to USUS

–– Litigation as Litigation as contact sportcontact sport

–– More motions to More motions to disqualifydisqualify

Regulators Regulators looking hardlooking hard–– But just catching But just catching

up to courtsup to courtsTougher Tougher remediesremedies–– Disgorgement by Disgorgement by

fiduciariesfiduciaries–– DisqualificationDisqualification

Canadian Conflicts Survey

How Many Lawyer Hours on Conflicts?

0

500

1000

1500

2000

2500

3000

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I worry that conflicts of interest will I worry that conflicts of interest will make it tougher for our firm to:make it tougher for our firm to:

0%20%40%60%80%

100%

Enhance our client baseRetain important clientsGrow strategicallyRecruit talent through lateral hireIncrease profits per partnerShare knowledge within our firmRetain talented lawyers (who may go to boutique firms to escape the conflicts burden)

Best ways Best ways to protectto protect

Who is the Client?Who is the Client?

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Who is the Client?Affiliates?Controlling shareholder?Instructing individual?

Who pays you?

Who gives instructions?

Who retained you?

Who is the Client?Who is the Client?

Retainer letters, when Retainer letters, when appropriate, shouldappropriate, should

Identify scope and duration of firmIdentify scope and duration of firm’’s s retainerretainerSpecify possibility that firm may act for Specify possibility that firm may act for competitor of client and,competitor of client and,Specifically provide for termination of Specifically provide for termination of solicitorsolicitor--client relationship upon client relationship upon completion of matter on which firm is completion of matter on which firm is being retainedbeing retainedIf client is unsophisticated, client should If client is unsophisticated, client should obtain independent legal advice obtain independent legal advice

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S

Migrating LawyersMigrating Lawyers

What we What we do?do?What the What the

firm firm should should do?do?

Steps to Safeguard on Hiring

• Must recognize early

• Must address promptly

• Follow process

• Protocols in place

• Discussions with candidate

• E-mail announcements to firm about new hires

• Respond to e-mail asking about conflicts

• E-mail feeds a database for candidate interviews

Process can Process can protect firm, if protect firm, if done at right time done at right time -- too late, too badtoo late, too bad

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What are screens for?

So what’s a screen?

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Not … a solution for all ills

Not … a loyalty manager

Not … a substitute for consent

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Building a WallBuilding a Wall•• Must be institutionalMust be institutional•• Erected at right timeErected at right time•• Professional ethical rules Professional ethical rules

provide a checklist but think provide a checklist but think through each casethrough each case

•• RecordRecord--keepingkeeping•• Raise firm consciousnessRaise firm consciousness

Barriers & standard Barriers & standard protocolsprotocols

0102030405060708090

100

Barrier constructionBarrier dismantling

Elements of Barriers

0

5

10

15

20

25

Electronic security protocols limiting access to confidential information

Protocols limiting access to confidential files, which are physically segregated from regular filingsystemsRequirement for those with access to confidential information to acknowledge compliance

Objective oversight of effectiveness of screens

Formal training on rules and procedures governing ethical barriers

Physical relocation of those with access to confidential information

Audits of screens

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How many barriers in your firm?How many barriers in your firm?

0

2

4

6

8

10

None Fewer than 5 5 to 20 21 to 50 51 to 100 More than 101

Barriers in 2005Barriers in 2005

0123456789

10

None Fewerthan 5

5 to 20 21 to 50 51 to100

Over100

Erected Dismantled

Heenan Blaikie LLP Heenan Blaikie LLP Conflicts CommitteeConflicts Committee

221221 clients subject to Ethical Screensclients subject to Ethical Screens155155 active Ethical Screensactive Ethical ScreensIn 2005, In 2005, 6767 new Ethical Screensnew Ethical Screens

Ethical Screens

Montréal 3535

Toronto 3232

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Chinese WallChinese WallOrOr PotemkinPotemkin

Village?Village?

Walls workWalls workBut are largely But are largely

appearanceappearance

Clean Desk Clean Desk Policies?Policies?

In a law firm?In a law firm?

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You canYou can’’t be serioust be serious

Conflicts Priorities

02468

1012

Improving client and matter intake information

Dismantling screens

Better conflicts training

Ensure clients clearly consent to conflicts

Lobby for changes to professional rules concerning conflicts

Ensuring that completed files are properly closed

Developing a conflicts policy

Tighter screen procedures

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Ten practical tips

Top Ten TipsTop Ten TipsTalk to clientsTalk to clientsDevelop modelsDevelop modelsTrack successful walls in your Track successful walls in your provinceprovinceRetainer lettersRetainer lettersMore information on file openingMore information on file opening

The Dangers The Dangers of the Re of the Re General FileGeneral File

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Top Ten TipsTop Ten TipsAvoid re General FilesAvoid re General FilesStaff training Staff training Protocols for lateralsProtocols for lateralsDonDon’’t forget paralegals and t forget paralegals and secretariessecretariesThe UnexpectedThe Unexpected

Nobody expectsNobody expects

The Spanish The Spanish InquisitionInquisition

Sources of InformationSources of Information

PracticeProPracticePro Conflicts of InterestConflicts of InterestHttp://www.freivogelonconflicts.comHttp://www.freivogelonconflicts.comMacNairMacNair, , Conflicts of InterestConflicts of InterestLundy, Lundy, Barristers and Solicitors in PracticeBarristers and Solicitors in PracticeShapiro,Shapiro, Conflicts of Interest ChecklistConflicts of Interest Checklist

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Managing the FutureManaging the Future

The Conflicts The Conflicts

Simon Chester, Heenan Blaikie LLP

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