CONFLICTS OF INTEREST

Whenever a trust relationship exists, the common law imposes fiduciary (trust) duties on the person in the position of trust, i.e the trustee or fiduciary.  The fiduciary’s duties are the most onerous duties imposed by our law. 

These fiduciary duties are imposed on lawyers who receive confidential information from clients or potential clients.  Clearly a lawyer is in a fiduciary (trust) relationship with his or her clients.  As such, the lawyer must avoid situations where the lawyer has, or may develop, a conflict of interest.

This simple notion is based upon the fundamental principle that a lawyer must provide complete and undivided loyalty, dedication, full disclosure and good faith to all for whom he or she acts.

Lawyers are in a unique position because they and their clients enjoy an extremely high level of confidentiality-- lawyers are the only professionals who cannot be compelled to disclose confidential communications (except in highly unusual situations under court order).  The potential for abuse is obvious --thus the obligation on the lawyer to avoid any conflict of interest.

In the good old days, lawyers sometimes acted for both sides in various transactions. Looking back it was only in 1982 that the Ontario Court of Appeal recognized a conflict of interest in a lawyer purporting to act for both sides in the sale of a business.  This seems basic now.

Nevertheless, it is always startling to see some lawyers experiencing great difficulty in recognizing apparently obvious conflicts.  They may hold on tenaciously to files where, to any objective outsider, there is a clear conflict of interest.

What is a “Conflict of Interest”?

“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 lawyers’ duties to another current client, a former client, or a third person.”  R. v. Neil (2002) 3 S.C.R. 631.

The rules of engagement between lawyer and client have become increasingly complicated.  Each provincial law society has its own guidelines for avoiding conflicts of interest and each lawyer should be very familiar with those guidelines.  It is important too, to seek proper advice when the potential for a conflict of interest arises.

Nevertheless, neither the law society guidelines nor the advice given are binding on the courts.  

This article will briefly review the recent developments in the law of conflicts of interest. 

Over the past twenty years, three decisions of the Supreme Court of Canada have greatly  developed the law and raised the standards protecting clients’ confidential information. These include:

MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235

R v Neil [2002] 3 S.C.R. 631

Strother v. 34364920 Canada Inc. [2007] 2 S.C.R. 177

The MacDonald Estate case is the most important decision for the purposes of this paper.

This case involved a student then junior lawyer who assisted on a case.  When senior counsel became a judge, the young lawyer joined another firm.  As it happened this new firm had a client involved in litigation against counsel’s former client.   This young lawyer was not involved in the ongoing litigation which was about to be set down for trial.

The former client brought a motion for a declaration that opposing firm was ineligible to continue to act.  In effect the client said, this lawyer acted for me previously and now is seeking to act against me i.e.  there is a conflict of interest.

Naturally enough the other side wished to retain their longstanding counsel.  Affidavits were filed claiming that no breach of confidence had occurred.

The Supreme Court of Canada stated that in determining such a case, the court must consider three competing values, namely

a)      the concern to maintain the high standards of the legal profession and the integrity of the justice system;

b)      the concern that a litigant ought not to be deprived of his or her counsel of choice without good cause;

c)      the desirability of permitting reasonable mobility in the profession

Speaking for the majority Sopinka J. said as follows:

“Typically, these cases require two questions to be answered:  (1) Did the lawyer receive confidential information attributable to a solicitor and client relationship relevant to the matter at hand?  (2)  Is there a risk that it will be used to the prejudice of the client?”

The court held that once it is shown that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no such confidential information was shared.  The court also ruled that it should draw the inference that confidential information will be disclosed, unless satisfied otherwise of the basis of clear and convincing evidence

In this case the court disqualified the lawyer as she was in possession of confidential information, and there was insufficient evidence to rebut the strong inference of disclosure.

Counsel Need Not Be Retained for the Duty to Arise

Bell v Nash (1993) 83 B.C.L.R. (2d) 155 (B.C. C.A.) is an example of how a seemingly insignificant phone call may result in disqualifying counsel from acting.  In this case, an estranged wife telephoned a lawyer to retain him in matrimonial litigation. It was some time later that the lawyer realized he was already acting for her husband.

Because the wife had clearly disclosed confidential and relevant information to the husband's lawyer during their telephone conversation, the court enjoined the lawyer from continuing to act for the husband.

The decision, by today's standards, is not surprising.  That case followed the decision of  Manville Canada Inc. v Ladner Downs (1992) 63 B.C.L.R. (2d) 102 where the court  stated “ if the applicant has reposed confidence in a lawyer in circumstances which properly give rise to an expectation of confidentiality, that applicant has an interest in protecting that confidence even if it was not, in the strict sense, a client of the lawyer”.

In other words, it is not necessary for there to be a formal retainer between the applicant and the lawyer to bring into play the principles set forth in the MacDonald Estate. 

Cewe Estate

The recent decision of Mr. Justice Hinkson in Cewe Estate v. Mide-Wilson 2009 BCSC 975 is the latest example of the courts’ willingness to stand counsel aside on the basis of  conflict of interest.   Below is a greatly simplified version of the case.  This case should be read in full by counsel as it clearly enuniciates the various factors to be considered in determining a potential conflict. 

In June of 2008, Jack Cewe died leaving an estate worth over $100 million.  He had been predeceased by his wife, his daughter (and only child) and his grandson. 

Mr. Cewe’s daughter had been married to Carsten Mide.  They had a daughter Kirsten Mide-Wilson  who was thus a granddaughter to Jack Cewe.  

In late 1994 the Mr. Cewe had made a will, which designated the granddaughter Ms. Mide-Wilson as alternate beneficiary, in the event the death of Mr. Cewe’s wife and daughter.

That all changed in 2007-2008 when Mr. Cewe executed three wills and two Alter Ego trusts.  The new wills made relatively small bequests to the son-in-law and to the granddaughter with the great balance of the Cewe estate going to his two Trustees-- Mr. Cewe’s long time employee George and Mr. Cewe’s long time friend, Alice. 

These Trustees commenced proceedings to pronounce the validity of the latest 2008 will and the Alter Ego trusts.

The son-in-law Mr. Mide and granddaughter Ms. Mide- Wilson counterclaimed alleging lack of capacity and undue influence. 

Accordingly, the law firm preparing those documents quite properly declined to act further. 

The Trustees got new legal representation however the disappointed beneficiaries, Mr. Mide and Ms. Mide-Wilson, applied to remove the Trustees’ new lawyers on the basis of conflict of interest.

Two intervening matters occurred which were relevant to the court application.

1)      The lawyer who had drawn the 1994 wills had since joined the Trustees’ new law firm

2)      Two members of the Trustees’ new firm had been representing Mr. Mide and his company in Alberta litigation since 2006.  The firm had received substantial fees from him.

After an extensive review of the law the Court removed the new firm on the basis of conflict of interest.  It did so principally because the new firm now seeking to act against Mr. Mide had been representing him in the Alberta litigation for some time. 

Mr. Justice Hinkson found the new firm had a duty of loyalty to Mr. Mide which prevented them from acting against him and concluded that they could not simply to decide to prefer a new client over an existing one.  He ruled that to allow the law firm to continue to act would “represent a failure to maintain the high standards of the legal profession and the integrity of our system of justice”

Conclusion

Decisions such as Cewe Estate serve to underline the great onus on law firms to conduct careful screening processes to avoid possible conflicts of interest.  The recruitment of practising lawyers should also involve a careful screening process for potential conflicts.

Failure to do so may be very costly.  Apart from unrecoverable fees and disbursements it may involve a malpractice claim and a conduct review by the Law Society.