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lundi 9 juillet 2012

10 essential judgments for corporate lawyers concerning conflicts of interest and how best to avoid them

by Ashley Kandestin, Articling Law Student, 
De Grandpré Chait S.E.N.C.R.L./LLP
Among the first things that students learn about at the École du Barreau are the underpinnings of the lawyer-client relationship, and specifically the duty of loyalty owed by all lawyers to their clients. This relationship is fiduciary in nature, meaning that a lawyer must always act in the best, and more importantly, the sole, interest of its client. This duty of undivided loyalty is what should guide lawyers in accepting mandates from existing or from potential clients. Conflicts of interest must be avoided at all costs, for the moment that a lawyer is at risk of putting either personal interests or those of a third party or another client above those of the client for whom the lawyer acts in a given situation, the fiduciary duty is compromised and the pillar of the relationship crumbles.

Articles 3.06.06 and following of the Code of Ethics of Advocates, R.R.Q., c. B-1, r. 3 (Code of Ethics) are the cornerstones of this rule:

“3.06.06. An advocate shall avoid any situation of conflict of interest.

3.06.07 An advocate is in a conflict of interest where, in particular:

(1) he represents conflicting interests;

(2) the interests he represents are such that he might tend to favour certain among them or that his judgment and loyalty may be unfavourably affected;

(3) he acts as the advocate of a syndic or of a liquidator, except as an advocate of a liquidator appointed under the Winding-up Act (R.S.Q., c. L-4), and represents the debtor, the company or the partnership that is winding up, a secured creditor or a creditor whose claim is contested or has represented one of these persons in the 2 preceding years, unless he discloses in writing to the creditors or the inspectors any previous contract for professional services received from the debtor, the company or the partnership or from their creditors during that period.

In all cases in which an advocate engages in his professional activities within a partnership or joint-stock company, conflict of interest situations shall be assessed with regard to all clients of the partnership or joint-stock company.”

“3.06.08 To decide any question relating to a conflict of interest, consideration must be given to the higher interests of justice, the explicit or implicit consent of the parties, the extent of prejudice for each of the parties, the time elapsed since the origin of the situation that could give rise to the conflict, as well as the good faith of the parties.”

In corporate matters, the diverging interests of a corporation’s many players create a climate for potential disputes or litigation. Corporate lawyers must be wary about representing parties with opposing interests. A law firm representing a corporation in contractual matters, for instance, may find itself unable to represent the corporation and its directors against an oppression remedy exercised by certain shareholders, given the diverging interests of the parties and the confidential information to which the lawyers may have been privy. 

Conflicts can only be identified on a case by case basis, depending on the interests of the parties and the nature of the professional relationships the lawyer or the firm had with the corporation in the past. The following is a brief overview of rulings on conflicts of interest, beginning with the most general decisions, and then moving on to decisions rendered specifically within a corporate context.

1. Macdonald Estate v. Martin, [1990] 3 S.C.R. 1235, AZ-91111018

In this decision, Justice Sopinka defines the three competing values at play when deciding if a lawyer should be disqualified to act on behalf of a client by reason of conflict of interest. They are described as follows:

“There is first of all the concern to maintain the high standards of the legal profession and the integrity of our system of justice.  Furthermore, there is the countervailing value that a litigant should not be deprived of his or her choice of counsel without good cause.  Finally, there is the desirability of permitting reasonable mobility in the legal profession.  The review of the cases which follows will show that different standards have been adopted from time to time to resolve the issue.  This reflects the different emphasis placed at different times and by different judges on the basic values outlined above.” (Page 1243)
The evaluation of the conflict is twofold. First, it must be decided if the lawyer was given any confidential information by a client that may be relevant to the matter in which it is sought to disqualify the lawyer. Second, the court must decide if there is a risk that the lawyer will use this information to the prejudice of its client. 

In regards to the first part of the test, a presumption exists to the effect that confidential information was imparted to the lawyer. The lawyer has the burden of proving to the court that the reasonably informed member of the public would believe that no such information was passed. Such a burden is difficult to discharge, making the presumption almost impossible to rebut.

Secondly, once it is found that a lawyer has received relevant confidential information, the lawyer cannot act against its old client. As Justice Sopinka writes: “In such a case the disqualification is automatic.  No assurances or undertakings not to use the information will avail.  The lawyer cannot compartmentalize his or her mind so as to screen out what has been gleaned from the client and what was acquired elsewhere.”

2. R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631

In this case, the Supreme Court puts an emphasis on the obligation of lawyers, as fiduciaries, to avoid conflicts of interest whether or not confidential information plays a role. Here, the interpretation of a lawyer’s duty of loyalty is more broad, with the accent put on the basic principles of confidence, trust, good faith, full disclosure to one’s client and independence. A lawyer, and even a law firm, cannot act simultaneously for two “masters” with opposing interests. 

[29] 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.”
3. Intersuivi inc. v. Logiciels Teamcoordination inc., J.E. 98-711 (S.C.)

Justice Dalphond explains in this case that the Code of Ethics is a legally binding norm that constitutes the law in Quebec. The Code of Ethics is more than an internal rulebook of the Barreau, and it reaches far beyond disciplinary hearings. Courts must apply the Code of Ethics’ rules in order to preserve the integrity of the justice system.

La prévention des conflits d'intérêts et le devoir de loyauté de ''l'avocat envers son client sont nécessaires à la qualité et à la réputation de l'administration de la justice (Succession MacDonald c. Martin, [1990] 3 R.C.S 1234, et Morissette-Paré c. Gestion des rebuts DMPInc., J.E. 97-516 (C.A.)).

Conscient de cette nécessité, le Barreau du Québec a mis en place depuis longtemps un Code de déontologie des avocats (R.R.Q. 1981, c. B-1, r. 1), lequel a été amendé suite au prononcé de l'arrêt Succession MacDonald afin de répondre aux exigences énoncées par la Cour Suprême en matière de conflit d'intérêts. Dans l'arrêt Castor Holdings Limited (syndic de), [1995] R.J.Q. 1665, la Cour d'appel a reconnu à la page 1669, que le Code de déontologie semblait «rencontrer tous les principes dégagés par les tribunaux».

Ce Code de déontologie est plus qu'un simple règlement interne adopté par la profession, dont le respect est imposé aux avocats par les instances du Barreau. En effet, il est devenu suite à son adoption par le Gouvernement du Québec conformément à l'article 16 de la Loi du Barreau (L.R.Q., ch. B-1) et à l'article 95 du Code des professions (L.R.Q., ch. C-26), «un acte normatif, de caractère général et impersonnel édicté en vertu d'une loi et qui, lorsqu'il est en vigueur, a force de loi», conformément à la Loi sur les règlements (L.R.Q. ch. R-18.1, art. 1). Or, ce règlement, le Tribunal en a une connaissance d'office (art. 2897 C.c.Q.).

Il s'ensuit que les dispositions du Code de déontologie concernant les conflits d'intérêts, le devoir de loyauté, et l'inhabilité d'un procureur assigné comme témoin, font partie du droit en vigueur au Québec et que le Tribunal doit les appliquer. (Il se peut donc que la situation soit différente au Québec, de celle d'autres provinces où les normes de conduite édictées par le Barreau local n’ont pas nécessairement force de loi).(Page 3)

4. Strother v. 3464920 Canada inc., 2007 SCC 24, [2007] 2 R.C.S. 3

A lawyer can adequately represent two corporations that compete against one another commercially. Commercial conflicts are not necessarily legal ones, and a lawyer’s ability to represent its client’s legal interests will not necessarily be compromised, despite the lawyer’s knowledge of both corporations’ confidential information.

[59] The spectre is flourished of long-dormant files mouldering away in a lawyer’s filing cabinet that are suddenly brought to life for purposes of enabling a strategically minded client to assert a conflict for tactical reasons. But a court is well able to withhold relief from a claim clearly brought for tactical reasons. Conflict between concurrent clients where no confidential information is at risk can be handled more flexibly than MacDonald Estate situations because different options exist at the level of remedy, ranging from disqualification to lesser measures to protect the interest of the complaining client. In each case where no issue of confidential information arises, the court should evaluate whether there is a serious risk that the lawyer’s ability to properly represent the complaining client may be adversely affected, and if so, what steps short of disqualification (if any) can be taken to provide an adequate remedy to avoid this result.”

In this case, the Court of Appeal dismissed a judgment that granted a motion to disqualify a law firm from representing a corporation in the context of an oppression remedy. This case highlights the fact that the appointment of separate lawyers for the corporation and for the majority shareholders can be “both superficial and unnecessary”, specifically in cases in which the interests of the co-defendants converge or where the majority shareholders appointed the board of directors, who in turn are the ones giving instructions to the lawyer.

[26] En matière de déclaration d’inhabilité, les faits importent. Chaque cas est un cas d’espèce. S’agit-il ici d’un cas qui commande de faire exception et de mettre en place des mesures pour procéder au remplacement des avocats de l’appelante? Avec égards, je ne le crois pas.

[27] Le juge de première instance n’a abordé la requête en inhabilité que sous l’angle du recours entre l’actionnaire minoritaire et les actionnaires majoritaires. En matière de recours entre actionnaires, je conviens que le rôle de l'avocat qui représente la société est limité, mais une dimension non négligeable semble avoir ici échappé à l’attention : le recours intenté contre l’appelante n’en est pas un qui oppose uniquement les actionnaires entre eux et où la société n’est que mise en cause.”

Inspired by the reasoning of Cogismac International, justice Gascon reiterates that it is not simply because a lawyer has represented a corporation that it may not act on behalf of one faction of its shareholders in the context of an oppression remedy. Without a clear demonstration a lawyer’s lack of impartiality, and without establishing that a true divergence of interests exists among a lawyer’s several clients, a demand for disqualification will not be granted.
[27] La Cour d'appel l'a affirmé dans deux arrêts récents. Dans une situation comme celle qui prévaut dans ce dossier, il n'y a pas de règle absolue et inflexible voulant que chaque fois où il y a litige entre une société et des factions opposées de son actionnariat, la société et ses actionnaires doivent être représentés par des avocats distincts.

[28] Selon la Cour d'appel, ni les exigences réglementaires de la déontologie, ni celles de la jurisprudence n'imposent une telle conclusion. Chaque situation commande plutôt une appréciation circonstancielle qui tienne compte, entre autres, du droit de chaque justiciable de choisir son avocat.

[29] À ce chapitre, la Cour d'appel énonce d'ailleurs ceci :
[19] Le droit du justiciable de retenir les services de l’avocat de son choix est un principe bien établi qui ne cède sa préséance qu’en cas de conflit d’intérêts réel ou, du moins, manifeste.

[30] De fait, la jurisprudence enseigne qu'avant de priver une partie de l'avocat de son choix, il faut des raisons graves, contraignantes et sérieuses. Un tribunal doit intervenir avec prudence avant d'écarter un avocat choisi par une partie.

In this decision rendered by the Tribunal des professions, on appeal from the Comité de discipline du Barreau du Québec, it is explained that a corporation is a juridical entity unto itself, with interests that may diverge from those of its shareholders. Once a dispute between shareholders arises, the corporation’s lawyer cannot represent the interests of one block of shareholders, to the detriment of another block, and all the while represent the company in the same matter. Loyalty cannot purportedly be owed to both the shareholders and to the company. Doing so would violate the rules set forth in R. v. Neil, that is, to avoid possible conflicts even before they arise.

[124] L'intimé en agissant de cette façon n'agit pas de façon à éviter de se placer en situation de conflit d'intérêts.

[125] Sa décision le prive de la liberté et de l'autonomie qu'il doit en tout temps conserver à l'égard de ses clients.

[126] Comment l'intimé pourra-t-il, en cours de mandat, mener adéquatement des interventions qui pourraient lui prouver, ou à tout le moins semer un doute chez lui, que ses clients Panzara et Manousos ont peut-être tort et que c'est M. Metzen, et possiblement la Compagnie, qui est victime de leur conduite?

[127] Comment l'intimé pourra-t-il objectivement prendre uniquement les intérêts de la Compagnie, sans aucune influence de la part de ses clients Panzara et Manousos?

8. Lixo Investments Limited v. Acmon Ltée, J.E. 99-1899 (C.S.)

After preparing a corporation’s unanimous shareholders agreement which included a non-competition clause, a lawyer cannot represent that corporation and its majority shareholders in respect of their demand for an injunction against the minority shareholder who violated the clause. Once again, the court reminds us that a lawyer having at one point acted in the interests of all of the shareholders of a corporation cannot later be pitted against the interests of a certain number of them. 

9. Hornstein v. Hornstein, J.E. 2006-284 (S.C.)

In the context of an oppression remedy, a lawyer whose colleague once sat on the board of directors of one of the corporations implicated in the litigation was allowed to remain on the file. The firm itself was not disqualified, despite the fact that one of its lawyers could potentially have been called upon to testify in the matter as a person having knowledge of boardroom discussions. The court preferred the fundamental right of a client’s choice of representation to article 3.05.06 of the Code of Ethics – which prohibits a lawyer from acting in a case “if it is evident he will be called as a witness” – mainly because it was not clear whether or not his testimony was in fact necessary. Article 3.05.06 is not absolute, and must be balanced with the client’s personal interests. 

[25] L’avocat membre d’un conseil d’administration d’une compagnie ne verra pas son témoignage devenir « essentiel » du simple fait qu’il est en mesure de témoigner quant aux délibérations de ce conseil. La nécessité du témoignage de l’avocat doit s’apprécier en rapport à l’ensemble des circonstances, en considération des autres alternatives à son témoignage, lesquelles permettraient de prouver le fait que l’on cherche à établir.
[26] Bref, le Tribunal ne pourra qualifier un témoignage d’« essentiel », de « nécessaire » ou même d’« utile », si les faits que l’on veut mettre en preuve, peuvent l’être par d’autres moyens. Le cas échéant, l’avocat dont le témoignage est envisagé pourra continuer à représenter lui-même son client. Dans un tel cas, la prochaine question, soit celle de l’inhabilité des membres du même cabinet, devient sans objet.” 
10. Miller Thomson v. Lapierre, 2012 QCCA 147

In this case, the Court of Appeal upheld the decision of Justice Nolet to disqualify a law firm from representing the directors and majority shareholders of a company against an oppression remedy exercised by a minority shareholder. In 2006 and in 2007, a lawyer of the firm imparted legal advice to the shareholder, an employee of the company, and prepared legal documents on his behalf (namely, his employment contract). It was thus decided that another lawyer of the same firm could not defend the directors nor the company against the shareholder’s oppression remedy, due to the passing on of privileged information and the obvious opposing interests involved.

[11] Je souligne également que le contexte du recours en oppression ajoute au caractère délicat de la situation d'autant, qu'en l'espèce, la requérante représentait non seulement les intérêts de la société, mais également ceux des autres actionnaires et dirigeants.”

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