Category Archives: Lawyers’ Obligations

What are the obligations of a lawyer

Self represented parties and sharp practice by counsel. Should we be thinking differently?

War is the means by which nation states have sometimes resolved their differences. Litigation is the means by which people in our society sometimes resolve their differences. In both cases, there is value in prescribing the rules of engagement.

As wars between sovereign states have become less common and wars between sovereign states and insurgencies have become more the norm, the traditional rules of war seem to have become less relevant. This is presumably because rules that work to govern combat between traditional armies don’t effectively address asymmetric disputes where conventional militaries face off against “guerrillas”, “terrorists” or “freedom fighters” (the language depending on perspective and context).

Of course litigation is not and should not be conducted like a war.

My point is that necessary rules of engagement can be based on principles that no longer apply in some circumstances. Our professional conduct rules may face a similar challenge as the rules of war as the conduct rules appear to be premised on the assumption that all parties are represented by counsel and are comparably resourced.

Perhaps more importantly, life is not mostly about rules. Social norms are often more important than rules both between nations and within societies. We know from recent events that destabilizing important social norms is corrosive and threatening. But the reverse is also true. Making clear what is fair and acceptable is valuable. If we are going to deal properly with access to justice and SRLs, we need to be clear that treating people properly and not taking advantage of their vulnerability matters.

The 2nd National-Self Represented Litigants Project Dialogue

I recently attended the 2nd National-Self Represented Litigants Project Dialogue (the “Dialogue”) at the University of Windsor. In attendance were self-represented litigants, lawyers, judges and academics. This conference was held five years after the first SRL Dialogue which addressed the research undertaken by Professor Julie Macfarlane about self-represented litigants (SRLs).

One of the topics raised by SRLs at the Dialogue was sharp practice by counsel. These SRLs made clear that they consider that they were commonly being dealt with unfairly by opposing counsel. One lawyer at the Dialogue suggested that this was because the conduct rules were written by lawyers for lawyers.

I disagreed saying that it seemed to me that our approach to legal ethics was premised on the assumption that all participants in the adversarial process are represented by professional advocates – and that our approach can be problematic where that assumption does not apply.

Legal ethics in the adversarial system where parties are not evenly matched

In litigation

Essential to Canadian legal ethics is that advocates will resolutely advance their client’s interests subject to ethical obligations intended to ensure that the administration of justice works properly. For example, ethical rules require that counsel not “deliberately refrain from informing a tribunal of any binding authority that the lawyer considers to be directly on point and that has not been mentioned by another party” and not “make suggestions to a witness recklessly or knowing them to be false”[1].

Adversarial systems, by their nature, work best where the protagonists are similarly resourced. An independent adjudicator is best able to reach a fair decision where competition between adversaries ensures that all relevant evidence and arguments are tested. Where parties are very differently resourced, the adversarial process works less well. This is the stuff of movies where a human David takes on a corporate Goliath in court. Davids win in movies but not so much in real life.

The David and Goliath problem can exist where David is represented by counsel. Even having experienced counsel does not necessarily overcome having insufficient resources to conduct investigations, retain experts and prepare for trial. The unfortunate reality is that some Goliaths conduct strategic wars of attrition. Even where that does not occur, being out-gunned is problematic in an adversarial system.

A David and Goliath problem can arise where a represented party engages with another party who can’t afford counsel. This appears to be most common in family law proceedings. While it is of course commonly the case that neither party is represented, it is common for one family law litigant be represented while their opposing party is not. This also occurs in other civil litigation between individuals and in civil litigation between individuals and business.

It was striking to hear from SRLs attending the Dialogue of their perception was that they commonly experience sharp practice in dealing with the advocates on the other side. Of course, this is anecdotal information. It may be that SRLs who experience sharp practice are more motivated to become engaged and to report their experiences. It may be that there is another side to the story. It may be that SRLs may consider some conduct to be sharp practice which actually is not. But it makes sense to think that SRLs are more vulnerable to sharp practice and the stories told seemed to me to reflect real problems.

If we accept that SRLs are more vulnerable to sharp practice and that some advocates seek to advance their clients’ interests by taking unfair advantage of their greater expertise and client resources, the question arises whether ethical rules premised on representation adequately protect the administration of justice where the adverse party is self-represented.

Probably more importantly, if the administration of justice is going to work properly where SRLs are involved, it is important that counsel take care to act properly.

Demand Letters

A similar issue arises where lawyers make demands for payment for relatively small amounts on behalf of well-resourced clients against parties who are unlikely to seek representation. Amy Salyzyn wrote about this several years ago in her column Bully Lawyers & Shoplifting Civil Recovery Letters: Who’s Going to Stop Them? and in her journal article Zealous Advocacy or Exploitative Shakedown?: The Ethics of Shoplifting Civil Recovery Letters. The Toronto Star has recently addressed this issue in an article which quotes Alice Woolley saying that “There’s an exploitation of power here”.

A problem arises where the amount in issue, say a few hundred dollars, is not enough to merit the cost and trouble of seeking legal advice and the demand for payment is either without legal merit or of dubious merit. The problem is compounded where there is no real prospect that the claimant will commence proceedings and have the merits of the claim fairly adjudicated. While many recipients of such demands will ignore them, some will pay on demand out of fear or ignorance.

Where the recipient of a dubious demand letter seeks legal counsel, the recipient can elect to pay or not pay on an informed basis. Where a demand is adjudicated, a dubious demand can be dealt with on the merits and, where appropriate, costs can be awarded against the claimant.

But where large numbers of dubious or improper demands are sent where legal representation is unlikely, there is a problem where payments are made out of ignorance or fear. It is not a sufficient answer to say that the courts will adjudicate such demands where proceedings will not be brought and adjudication will not occur. Economics underlie the problem. There is an incentive for a claimant to send a volume of demands if the cost of each demand is low and some demands are satisfied. There is little if any incentive for a claimant to actually commence litigation against any one potential defendant. It makes little practical sense for any recipient to engage legal counsel for a few hundred dollars to decide whether or not to pay a claim for a few hundred dollars.

Our adversarial system and our approach to legal ethics operate effectively where parties are represented by counsel and have reasonably comparable resources. But for Davids facing Goliaths, whether in litigation or before litigation, there can be problems.

The Conduct Rules and self-represented parties

Rule 5.1 of the Model Code (The Lawyer as Advocate) does not address dealing with represented and self-represented adverse parties any differently[2]. The requirements of Rules 5.1-1 and 5.1-2 simply do not address acting against self-represented parties[3].

Under Rule 7.2 (Responsibility to Lawyers and Others), Rule 7.2-9 provides that:

When a lawyer deals on a client’s behalf with an unrepresented person, the lawyer must:

(a) urge the unrepresented person to obtain independent legal representation;

(b) take care to see that the unrepresented person is not proceeding under the impression that his or her interests will be protected by the lawyer; and

(c) make it clear to the unrepresented person that the lawyer is acting exclusively in the interests of the client.

Rule 7.2-9(a) is of little value in addressing imbalance where a person is self-represented because the person cannot afford representation or because the cost of representation is disproportionate to the matters in issue. Where a person can’t afford representation, it is of no value to urge them to obtain representation. Beyond this, the rule simply ensures that SRL understand the role of opposing counsel.

That said, it is not entirely obvious how the conduct rules ought to be modified where one party is represented by counsel and the other is not. It is difficult to conceive of conduct rules that provide for constrained representation in an adversarial process when our entire ethical approach is premised on undivided loyalty.

What to do?

At a deeper level, the problem is less the conduct rules that the advocate must follow and more the use of the adversarial system to resolve disputes where some of the adversaries do not have sufficient resources for the adversarial system to work properly. And particularly in the family law context, it is seems more than odd to think that an adversarial approach is constructive where relationships must continue through custody and support and where emotion rather than reason is so often in play. It is the very adversarial system, rather than the conduct required of counsel therein, that appears to be the problem.

But assuming the adversarial system, we should question whether reform is appropriate to address the fact that the adversarial system and the conduct rules are built on the assumption that all parties are represented by counsel.

As to modified conduct rules, I’m not aware of any proposals that could effectively make the administration of justice work more effectively in this context[4]. I doubt that it would be useful to vaguely require counsel not to take “unfair advantage” if that means doing something other than acting in accordance with the existing rules. And if the existing rules should be modified in context, advocates should be told what that the modifications really mean[5].

Perhaps the answer is not so much the conduct rules themselves but rather their application. Where both parties are represented by counsel, the advocate knows that breach of the conduct rules may well be identified by opposing counsel. There is greater disincentive to breach. And some breaches will be less likely to have an adverse effect on the administration of justice where there is effective adversarial competition.

If this is so then three points seem to me to emerge. The first is that there could be value in commentary in the conduct rules to the effect that a lawyer or paralegal is required to take special care to fully comply with the conduct rules where the adverse party is an SRL[6].

This might help set stronger social norms which could be valuable.

The second and third relate to the concurrent jurisdiction of the courts and the law societies in addressing the conduct of advocates[7]. As Chief Justice McLachlin said for the Court in Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39 at paras. 13 and 15:

… The courts’ purpose in exercising their supervisory powers over lawyers has traditionally been to protect clients from prejudice and to preserve the repute of the administration of justice, not to discipline or punish lawyers.

… The purpose of law society regulation is to establish general rules applicable to all members to ensure ethical conduct, protect the public and discipline lawyers who breach the rules — in short, the good governance of the profession.

Notably, not all sharp practice in litigation will engage the jurisdiction of the court over proper administration of justice. For example, where litigation does not follow a dubious demand letter, the court will have no jurisdiction. Even if improper conduct does engage the jurisdiction of the court, a judge may conclude that it is better not to “to criticize or complain about an advocate’s uncivil conduct in court” given “the simple reality that refraining from such action in a given case may permit the proceeding to advance more efficiently”[8].

Similarly, the law societies do not necessarily investigate and prosecute all professional misconduct. Give the volume of conduct investigated, relatively few conduct proceedings are commenced. Law societies are understandably reticent to adjudicate the propriety of legal claims. Law societies tend to defer investigation and prosecution of alleged misconduct in a proceeding until after the proceeding is completed to better ensure that complaints are not used as tactical weapons in proceedings and to avoid interfering with the administration of justice.

For an SRL who is uncertain about the process and see themselves as outsiders, this may contribute to a greater lack of confidence about the process itself. It may seem like protection of the advocate by the system. This may also result in fewer disincentives against improper practice. Those who are prepared to operate close to, or over, the line may be more prepared do so.

Assuming the adversarial system, the question is whether courts and law societies should be more willing to address alleged sharp practice where the opposing party is an SRL. There seem to be credible reasons to think so. There may be procedural mechanisms, just as an ombudsperson in the courts, who could assist. The risk on the other hand is that complaints could compromise the litigation process, whether intentionally or because the SRL is not well positioned to assess impropriety, thereby making an already inefficient and expensive process more so.

As is so often the case, the ultimate answer requires thoughtful balancing. But it does appear that the current balance may not best ensure the proper administration of justice[9].

_______________________

[1] Rule 5.1-2 of the Model Code of Professional Conduct

[2] The Commentary addresses dealing with unrepresented complainants in criminal and quasi-criminal proceedings which is a different matter

[3] Commentary 6 to Rule 5.1-1 contains an interesting but enigmatic reference to situations where the adversarial system does not operate effectively: “When opposing interests are not represented, for example, in without notice or uncontested matters or in other situations in which the full proof and argument inherent in the adversarial system cannot be achieved, the lawyer must take particular care to be accurate, candid and comprehensive in presenting the client’s case so as to ensure that the tribunal is not misled.” (Emphasis added)

[4] But I haven’t gone looking either.

[5] Alice Woolley has argued in Slaw that asking a prosecutor to “do justice” doesn’t really provide genuine guidance to a prosecutor who is to act as a strong advocate within the adversarial process.

[6] That said, I wonder if the implication of such guidance might be that full compliance with the conduct rules is not otherwise required.

[7] Groia v. Law Society of Upper Canada, 2018 SCC 27 at para. 55

[8] Groia v. The Law Society of Upper Canada, 2016 ONCA 471 at para. 108

[9] As always, this column reflects my personal views. It is written to raise rather than resolve the issues discussed.

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Contingent Fees, Portfolio Risk and Competition – Calls for reform

(first published on slaw.ca)

In theory, contingent fee pricing is an elegant way of providing access to justice at a fair and reasonable price. In this column, I try to look at both theory and practice and also at prospects for reform.

Time and materials

Let’s start with a different approach to pricing. Legal work can be done on a “time and materials” basis (to use language from another industry), on a fixed fee basis or on a contingent fee basis. These different approaches shift risk between suppliers and consumers of legal services.

Legal work is still largely priced on a “time and materials” basis. While time spent is not the only factor considered when setting price, it is ordinarily the dominant factor.

Fixed Fees

Legal work is increasingly offered on a fixed fee basis. Where available, this is attractive to clients because of the increased certainty that fixed fees offer. Fixed fees can also allow increased competition as clients can more easily shop for a better price.

Where a fixed fee is agreed, the lawyer has the risk that the work may take more time than anticipated. Given that the lawyer likely has an understanding of what is required based on past work and given that the lawyer can make up losses on some fixed fee matters by gains on other fixed fee matters, this risk is mitigated. Where fixed fees are fairly agreed, it would be inappropriate for the client to be charged an increased cost because it turned out that extra time was required and it would be inappropriate for the client to demand a rebate because it turned out that less time was required than was anticipated. Either fixed prices are agreed or not.

But all of this assumes an effective market. For lawyers and clients, there is significant information asymmetry. Clients cannot assess whether a particular fixed price makes sense as clients ordinarily cannot assess the cost of the work to be done and likely outcomes. However, where prices are generally available, clients can “shop” based on price. Where prices are transparent and price shopping is possible, clients need not make their own assessments because a competitive market does so for them.

Contingent Fees

Contingent fees have some similarity to fixed prices. The price of the legal work is fixed as a percentage of the ultimate recovery. However, contingent fees add a further complexity as no fee is charged where there is no recovery.

There are two risks facing clients and lawyers, or paralegals, where personal injury and other disputes are to be resolved. There is the risk of non-recovery where liability is in issue. There is uncertainty as to the amount of the net recovery as both the amount of the recovery and the cost of obtaining recovery are uncertain. Because disputes can be settled at any stage (and are usually resolved by settlement rather than judicial decision), the cost of resolving a dispute is much more uncertain than, for example, the cost of completing a residential real estate transaction.

For the lawyer or paralegal, the risk inherent in contingent fees is mitigated by their expertise in assessing the risk inherent in particular matters and by their “portfolio” of cases. The situation of the client is very different. The client has no ability to assess the viability of their own case. The client has no portfolio through which to manage risk.

Portfolios of risks

While perhaps not obvious, investment by portfolio in the financial world offers the same risk management as having a portfolio of cases in the contingent fee world. A simple example shows the main advantage. Imagine a $1,000 bet based on a single coin toss. Heads you win $1,100. Tails you lose. There is a 50% chance of a complete loss. But imagine the same bet made on a portfolio of ten coin tosses. The probability of a complete loss drops to a little less than one in one-thousand and profit becomes very likely.

In the contingent fee context, a single contingent fee case can be very risky. But where work done in the losing cases can be recouped in the winning cases, risk is better managed. To make a very simple example, if there is a portfolio of cases each of which has a 50% chance of success and each of which requires a fixed amount work and disbursements worth $10,000, charging $20,000 for each case that is successful is a very low risk proposition even though the prospect of payment for any particular case is only 50/50.

Contingent fee work is more complicated than betting on coin tosses. The probability of success varies from case to case. The work and disbursements required in any given case is uncertain and difficult to accurately predict. More becomes known as the matter progresses. The outcome of a case is most uncertain at the outset. Assessing the amount of work to be done is also most uncertain at the outset of the matter. For a lawyer or paralegal, a contingent fee case is like a financial investment but with the added complexity that the amount to be invested is uncertain.

Modern portfolio theory says that risk is reduced by having a portfolio of risks. Before this was well understood, it used to be that trustees were only legally permitted to make certain “safe” investments. The idea was that the “prudent investor” would not make risky investments. However, we now know that a portfolio of higher risk investments can be low risk as a whole. The winners pay for the losers. The risk of having all losers is very much reduced by portfolio investment. Indeed, modern portfolio theory shows that a diverse portfolio of higher risk investments is likely to be more profitable than a portfolio of lower risk investments. But the investor must be able to enjoy the fruits of the winning investments for the portfolio to do its magic.

Contingent fees and markets

Injured people typically cannot afford the cost of the legal services required for their case. Borrowing the money to pay the cost of doing the necessary work is risky unless the case is not. Even assuming that recovery is quite likely, there is uncertainty as to the cost of obtaining recovery. Some cases settle quickly at low cost. Some cases go to trial or appeal. Contingent fees move this risk from the client to the lawyer or paralegal who can better assess the risk and reduce the risk by having a portfolio of cases.

But the contingent fee system will not work fairly in the real world unless there is an effective market in which contingent fees are set. Obviously, clients have limited insight into their cases. Otherwise, they would not need legal experts to assist them. Clients have no insight into the portfolio of cases maintained by their lawyers or paralegals. Where there is information asymmetry and a market which is not truly competitive, the party with superior information will have an advantage in setting prices. This either results in higher prices where the party with superior information is the supplier or by diminished demand from consumers or both.

It seems pretty clear that we do not have an effective market for contingent fees. While the problem of information asymmetry can be addressed by active bidding by informed suppliers for work, there is no good evidence of robust bidding being common. The significant growth of brand advertising appears to show that injured people have difficulty knowing who to approach for legal services. There is, at best, limited market information available to consumers or suppliers as to the costs of obtaining recovery. Unlike commodity products such as tomatoes or motor vehicles, assessing the expected value of a particular matter is not easy and requires information and expertise. We cannot directly assess whether the existing market is competitive as we have no information as to the profitability of the portfolios.

Ensuring fair and reasonable contingent fees

So how do we currently address the prospect of unfair and unreasonable contingent fees? The first way is by regulating the agreement entered into at the outset. The Solicitors Act establishes certain requirements and, in some circumstances, allows the parties to agree on a different approach with judicial approval. The second way is by considering, after the work is done, whether the contingent fee agreement and the contingent fee are fair and reasonable. For those who cannot represent themselves, the court must approve the ultimate fee. For others, the supervision of the court may be invoked by the assessment process.

The recent case of Evans Sweeny Bordin LLP v. Zawadzki, 2015 ONCA 756 considered judicial supervision of contingent fees and started with the proposition that “A contingency fee agreement is enforceable only if it is both fair and reasonable”.

The question of fairness and reasonableness could be considered based only on what was known at the outset of a matter. In theory at least, a contingent fee agreement that fairly and reasonably reflects the risk of non-recovery and of uncertainty in the cost of recovery would not need to be the subject of after the fact examination. Otherwise, the cases that are more lucrative for the lawyer or paralegal would not pay for the less lucrative cases and, as a result, lawyers and paralegals would decline to take on the higher risk or higher cost cases.

Nevertheless and as Evans Sweeny Bordin LLP makes clear, fairness is currently addressed after the fact, but as of the date of the contingency fee agreement. and reasonableness is addressed after the fact. For the later reasonableness assessment, the Court of Appeal cited with approval its earlier decision in Henricks-Hunter v. 814888 Ontario Inc. (Phoenix Concert Theatre), 2012 ONCA 496 which set out the following factors to be considered in the test for reasonableness:

(a) the time expended by the solicitor;

(b) the legal complexity of the matter at issue;

(c) the results achieved; and

(d) the risk assumed by the solicitor.

The Court of Appeal in Henricks-Hunter followed Raphael Partners v. Lam (2002), 61 OR (3d) 417 (OCA) which held that:

The factors relevant to an evaluation of the reasonableness of fees charged by a solicitor are well established. They include the time expended by the solicitor, the legal complexity of the matter at issue, the results achieved and the risk assumed by the solicitor. The latter factor includes the risk of non-payment where there is a real risk of an adverse finding on liability in the client’s case.

It is clear that our current approach to contingent fees provides for after-the-fact assessment and does not presume that a competitive market will result in reasonable contingent fees.

Calls for Reform – are caps the answer?

There has been much recent public controversy about contingent fees. There are private members bills calling for a cap on the percentage of recovery that may be charged. There are articles in the media decrying situations where the lawyer recovers more than the client or recovers an unusually high proportion of the recovery. The volume of advertisements on buses, taxis, television, the internet and elsewhere, without reference to price, may suggest that personal injury work is lucrative and worth substantial spending to attract work.

Unfortunately, the prescriptions may not address the disease or its symptoms. Following from the discussion above, where a limit is set on the percentage of the recovery that may be taken as a fee, the logical response may be not to take on riskier cases. Again assuming a competitive market and a diverse portfolio, the higher return winners pay for the higher risk losers. The policy problem is that we simply have no idea of the actual risk of the portfolio as a whole or its elements and we have no basis from which to conclude what percentage is unreasonable representing an uncompetitive market and what limit would fairly protect injured people and what limit would cause some injured people to lose access to justice because their cases will not be taken on. In an uncompetitive market, setting a limit can be tantamount to fixing a tariff as the cap becomes a signal to consumers who have no better information and may foster tacit collusion among firms.

There is another problem as well. For some cases which are vigorously defended, the cost of taking the case to trial is comparable to the amount in issue or even more. For those cases, a lawyer would generally be foolish to take on a case destined for trial if the potential recovery assuming success simply cannot fund the work required. But there are exceptions. A personal injury lawyer needs to be credible with defence counsel and insurers. Showing that cases will be tried if necessary makes settlement of other cases more likely. The threat of trial must be a credible threat to have value.

But it is said that there are areas of practice where the practical effect of limiting the contingent fee to a capped portion of the damages recovery would be that injured people would be denied access to justice. These are areas of practice where the risk and cost of obtaining recovery at trial is not commensurate with the damages award. even though it can be commensurate with the costs award together with a proportion of the damages award. Where there is a significant likelihood that a trial will be required, a lawyer is unlikely to accept a case where there isn’t a prospect of recovery of the lawyer’s risk-adjusted investment.

My point is not to argue in this column that there should or should not be a cap on the percentage fee. My point is that the question is tricky and that a cap may have unintended consequences and may not actually address the genuine issue at hand.

Some further thoughts about reform

As for the current after-the-fact assessment approach, there is value in that approach assuming that it is well done. At least in theory, assessing risk-return is a legitimate check on reasonableness. But there are at least two glaring problems1. The first is that an after-the-fact reasonableness assessment that looks only at the risk/return of the particular case fails to reflect that portfolio risk is less than the risk of any individual case. Absent portfolio information, there is a very real potential that after-the-fact reasonableness assessment is a Potemkin assessment. It looks real but isn’t. On the other hand, after-the-fact reasonableness assessment also fails to reflect the reality that only the “winners” get assessed. Portfolio information addresses this as well.

The second problem is that “successful” plaintiffs can have no idea whether their particular contingent fee is reasonable as they do not have the information that the courts have said is required for that assessment. They do not know the time expended by the solicitor, the legal complexity of the matter at issue, or the risk assumed by the lawyer. All that they know is the result achieved. There is no current obligation to disclose the other requisite information. There is no obligation to recommend an independent opinion or an assessment for cases where these factors suggest unreasonableness. That is not to say that responsible lawyers and paralegals will not take these factors into account in setting their ultimate fees. But a fiduciary cannot be permitted to withhold information that is necessary to hold the fiduciary accountable. The system should empower clients who do not know that they should be unhappy with their fees. It would be better if the system did not cause clients who ought to be happy with their fees to become unhappy. But it is surely unacceptable to hold back relevant information because the information may be misused.

Standing further back, can we make the contingent fee system more transparent and accordingly more competitive with the intent that a fair contingent fee agreement may be more reliably seen to generate a reasonable contingent fee? The answer must surely be yes. But this requires that portfolio information be gathered from lawyers and paralegals and aggregated so that injured people can have a better idea of the contingent pricing offered to them, so that lawyers and paralegals can better compete for work and so that society, through the courts, the government and the Law Society, can genuinely understand the risks and rewards involved in contingent fee work.

It is to be expected that lawyers and paralegals will resist reforms that impose costs on them, limit their returns and create uncertainty as to whether their contracts will be honoured. Cries of “bureaucracy” and “freedom of contract”2 will be heard. But it is necessary that the interests of injured people be kept firmly in mind rather than just the competing voices of advocates and insurers.

But it would be best if creative solutions could be found that maintain access to justice for injured people through contingent fees while better ensuring that substantive justice is obtained – that the amount taken from the compensatory recovery of an injured person is not unreasonable taking into account the risks and costs involved.

1 Noel Semple kindly reviewed a draft of this column and provided a number of helpful comments and suggestions. Noel raises a third glaring problem which is that risk is often not appreciated after the fact. What was reasonably seen to be risky at the outset may well not seem risky when the results are known. The reverse can be true as well.

2 Despite that our current contingent fee system requires after-the-fact assessment for fairness and reasonableness and the relative vulnerability of clients, some still argue that any reform should be on the basis on caveat emptor.

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Yet again the question is where were the lawyers?

(First published on slaw.ca)

Jasminka Kalajdzic recently highlighted a New York Times column entitled Panama Papers Show How Lawyers Can Turn a Blind Eye. The column reported that Ramón Fonseca, one of the founders of the Panamanian firm Mossack Fonseca, “told The New York Times that the lawyers did nothing wrong in helping their clients set up shell companies”. Mr. Fonseca was quoted as saying:

We are like a car factory who sells its car to a dealer (a lawyer for example), and he sells it to a lady that hits someone. The factory is not responsible for what is done with the car

The New York Times columnist was highly critical of the American rules of professional conduct in similar contexts. He wrote:

Rather than seeking to keep clients from violating the law, it appears that some lawyers are willing to go right up to the line of legality in their representation. By keeping themselves ignorant about what may be going on, these lawyers have been able to maintain the facade that they are not involved in potentially illegal activities, even though they are often the prime enablers of misconduct. Has the legal profession lost its moral compass? The answer is that the ethical rules governing lawyers do not put much of a barrier in the way of helping clients engage in transactions that would appear questionable but do not violate any specific laws, so it is not clear whether lawyers pushing to the edge of the law are acting improperly.

The columnist noted the ABA Model Rules of Professional Conduct and said that the Model Rule 1.2(d) is seriously flawed in permitting lawyers to keep themselves ignorant in order to be compliant with the rule:

Model Rule of Professional Conduct 1.2(d), issued by the American Bar Association, says that a lawyer should “not counsel a client to engage, or assist a client in conduct that the lawyer knows is criminal or fraudulent.” Note how the rule is premised on the lawyer’s knowledge, and many lawyers are expert at keeping themselves ignorant about exactly what is taking place to maintain plausible deniability. Moreover, that same rule says that “a lawyer may discuss the legal consequences of any proposed course of conduct,” so exploring the limits of the law can be permissible.

Canadian professional conduct rules are quite different than those considered in New York Times column. Rule 3.2-7 of the Federation of Law Societies Model Code is somewhat broader than ABA Model Rule 1.2(d).

When acting for a client, a lawyer must never knowingly assist in or encourage any dishonesty, fraud, crime or illegal conduct, or instruct the client on how to violate the law and avoid punishment.

The Federation Model Rule refers to dishonesty and illegal conduct as well as fraud and crime. Whether dishonest and illegal conduct includes conduct that is not criminal or fraudulent is uncertain. Illegal conduct could include statutory breach ranging from quasi-criminal to breach of codification of private rights and obligations. Indeed, illegal conduct might arguably include civil misconduct. For a discussion in a somewhat similar context, see Dublin v. Montessori Jewish Day School of Toronto (2007), 85 OR (3d) 511 but also Blank v. Canada (Justice), 2015 FC 956.

More importantly, the concept of knowing assistance in the Canadian professional conduct rules has not been limited to actual knowledge. Canadian discipline cases have concluded that knowing assistance includes constructive knowledge as well as actual knowledge. As the Law Society Appeal Panel (as it then was) said in Purewal v. The Law Society of Upper Canada, 2009 ONLSAP 10:

[31] “Willful blindness” and “recklessness” are two states of mind that are tantamount to knowledge. Put another way, they serve as proxies for proving actual knowledge. But their meaning must be correctly understood: Sansregret v. The Queen (1985), 18 C.C.C. (3d) 223 (S.C.C.); Law Society of Upper Canada v. Steven Michael Mucha, 2008 ONLSAP 5. [32] “Willful blindness” means that a licensee actually suspects the dishonest activity, but deliberately refrains from making further inquiries for fear of confirming those suspicions. “Recklessness” means that a licensee is aware of the risk that the activities in which he/she is participating or assisting are dishonest, but continues on despite the risk.

The New York Times column cogently shows why rules of professional conduct permitting turning a blind eye to criminal or fraudulent client conduct would be inappropriate. Purewal and many other discipline cases come to the same conclusion.

The Rules of Professional Conduct in Ontario go further. Rule 3.2-7.1 prohibits negligent facilitation of dishonesty, fraud, crime or illegal conduct. Rule 3.2-7.2, requires lawyers to “make reasonable efforts to ascertain the purpose and objectives of the retainer and to obtain information about the client necessary to fulfill this obligation”. Of course, knowing assistance is a more serious ethical breach than negligent facilitation. But both are contrary to the Rules of Professional Conduct.

So all is well! Canadian Codes and Rules of Professional Conduct do not permit “lawyers to keep themselves ignorant in order to be compliant with the rule”.

But not so fast. How did the Panama Papers case arise? Was it by client complaint? Of course not. Tax haven clients want secrecy. The facts of the Panama Papers were disclosed by unlawful hacking. Assuming unlawful client conduct, why would any client complain about lawyer assistance unless the secret was already out?

Much has been written about the Law Societies’ complaints-driven and reactive approach to regulating professional conduct. As the Panama Papers case (and the GM, Volkswagen, Enron, Watergate and other cases) makes clear, this reactive complaint-driven regulatory approach simply does not work where lawyers facilitate unlawful client conduct. Where client misconduct is somehow found out, the question is often “Where were the lawyers?” Our reactive complaint-driven regulatory approach increases the risk that, time and time again, we will have to ask the same question.

There is a second point that may be made. In Canada, we have robust protection of lawyer-client communications. Canadian solicitor-client privilege is as robust as it can be and more robust than comparable privileges in many (if not all) other countries. As the Supreme Court of Canada has made clear, solicitor-client privilege in Canada is as close to absolute as possible. This heightens the importance of effective Law Society regulation as only Law Societies can hold effectively lawyers to account as they are entitled to examine (and are required to protect) privileged communications.

This leads to a third point. In Canada, there are two exceptions and one exclusion to solicitor-client privilege. The “innocence at stake” and “public safety” exceptions are irrelevant in cases involving client misconduct in the commercial sphere. The “crime-fraud” exclusion may relevant as Alice Woolley discusses in her column Volkswagen Legal Advice and the Criminal Communication Exclusion to Confidentiality and Privilege.

In Descôteaux et al. v. Mierzwinski, [1982] 1 SCR 860, the Supreme Court described the crime-fraud exclusion in terms which would seem to avoid the risk of shielding crimes and frauds facilitated by lawyers:

Communications made in order to facilitate the commission of a crime or fraud will not be confidential either, regardless of whether or not the lawyer is acting in good faith.

However, the exclusion is of limited application in fact as it is necessary that there be prima facie proof of fraud before the crime-fraud exclusion applies. See Laquerre c. Société canadienne d’hypothèques et de logement, 2013 QCCA 95.

If lawyer misconduct only surfaces if and when the clients complain to the Law Society, or when there is otherwise prima facie proof of facilitated crime or fraud, then there is a high degree of protection of client misconduct facilitated by lawyers and a much reduced risk of lawyers being called to account for wrongful facilitation.

While somewhat heretic, this examination suggests that the scope of Canadian solicitor-client privilege may be too broad given its vigour. Solicitor-client privilege is justified by the need for clients to be able to reveal their deepest and darkest secrets in order to obtain effective legal assistance. This is undoubtedly the case where, for example, a lawyer defends an accused person. But it is not so clear that the same robust protection is required, or even appropriate, in the context of a residential real estate transaction, an internal corporate investigation or perhaps even tax planning. Other than where life, liberty and the security of the person are involved, it is not obvious why the nearly absolute version of solicitor-client privilege is genuinely required as opposed to a lesser protection as applies, for example, to protect the adversarial process (litigation privilege) or settlement discussions (settlement privilege).

While Canadian law and legal ethics is not vulnerable to the same attack as made in the New York Times column, it is difficult to have confidence that there is full compliance with our professional conduct rules. There is real incentive to cloak unlawful activity with the nearly absolute protection of solicitor-client privilege. A reactive primarily complaint-driven regulatory process will rarely examine that which the client, protected by a nearly absolute privilege, does not want examined.

I wonder when the next “where were the lawyers” column will be published. Given recent history, it won’t be long. But more importantly, I wonder how many articles will never get to be written.

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Boiling frogs, Privilege and Professional Conduct

[First published on slaw.ca]

Forty years ago, the confidentiality rule now found in the Federation of Law Societies Model Code was first adopted in the CBA Code of Professional Conduct. The confidentiality rule makes passing reference in the commentary to privilege and makes clear that the confidentiality rule must be distinguished from solicitor-client privilege. The Model Code does not expressly require that lawyers uphold solicitor-client and litigation privilege.

I expect that Canadian lawyers would generally accept that proper professional conduct includes upholding solicitor-client and litigation privilege. After forty years, it is appropriate to question whether the Codes and Rules of Professional Conduct ought to say just that and to ensure that the confidentiality rule and privilege work sensibly together [i].

Solicitor-client privilege and litigation privilege are fundamental for Canadian lawyers

Over the last two decades, the Supreme Court of Canada has repeatedly emphasized the importance of solicitor-client privilege. Most recently, Justice Cromwell wrote in Canada (Attorney General) v. Federation of Law Societies of Canada, [2015] 1 SCR 401 that:

[82] … The centrality to the administration of justice of preventing misuse of the client’s confidential information, reflected in solicitor-client privilege, led the Court to conclude that the privilege required constitutional protection in the context of law office searches and seizures: see Lavallee. Solicitor-client privilege is “essential to the effective operation of the legal system”: R. v. Gruenke, [1991] 3 S.C.R. 263, at p. 289. As Major J. put it in R. v. McClure, [2001] 1 S.C.R. 445, at para. 31: “The important relationship between a client and his or her lawyer stretches beyond the parties and is integral to the workings of the legal system itself” (emphasis added [by Cromwell J.]).

Canadian law now recognizes litigation privilege as a privilege separate and apart from solicitor-client privilege. In Blank v. Canada (Minister of Justice), [2006] 2 SCR 319, Justice Fish wrote that:

[27] Litigation privilege, on the other hand, is not directed at, still less, restricted to, communications between solicitor and client. It contemplates, as well, communications between a solicitor and third parties or, in the case of an unrepresented litigant, between the litigant and third parties. Its object is to ensure the efficacy of the adversarial process and not to promote the solicitor-client relationship. And to achieve this purpose, parties to litigation, represented or not, must be left to prepare their contending positions in private, without adversarial interference and without fear of premature disclosure.

Solicitor-client privilege and litigation privilege are undoubtedly of fundamental importance in the work of Canadian lawyers. Solicitor-client privilege protects communications between Canadian lawyers and their clients in support of the lawyer-client relationship and the legal system. Litigation privilege protects our adversarial system of which lawyers are a very important part.

Given the importance of solicitor-client privilege and litigation privilege, few would likely doubt that Canadian lawyers have an ethical obligation to uphold these important privileges. Yet the Model Code and the Law Society Codes and Rules of Professional Conduct (the “conduct rules”) contain no such express requirement.

This is surprising but explicable as a matter of history.

The source of the ethical confidentiality rule

Over forty years ago, the Canadian Bar Association Special Committee on Legal Ethics delivered its Preliminary Report on the Code of Professional Conduct. The Special Committee proposed the following Confidentiality Rule:

The lawyer has a duty to hold in strict confidence all information acquired in the course of the professional relationship concerning the business and affairs of his client, and he should not divulge any such information unless he is expressly or impliedly authorized by his client or required by law to do so.

Despite its age, this Confidentiality Rule should look familiar to Canadian lawyers. The Federation of Law Societies Model Rule 3.3-1 today provides that:

A lawyer at all times must hold in strict confidence all information concerning the business and affairs of a client acquired in the course of the professional relationship and must not divulge any such information unless:

(a) expressly or impliedly authorized by the client;

(b) required by law or a court to do so;

(c) required to deliver the information to the Law Society; or

(d) otherwise permitted by this rule

There is no difference between the Confidentiality Rule adopted by the CBA in the 1970s and Model Rule 3.3-1 which reflects the conduct rules across Canada in 2016.

The 1970s Confidentiality Rule addressed privilege in the commentary indicating that:

This ethical rule must be distinguished from the evidentiary rule of solicitor and client privilege with respect to oral or documentary communications passing between the client and his lawyer. The ethical rule is wider and applies without regard to the nature or source of the information or the fact that others may share the knowledge.

This commentary is effectively repeated in Model Code as follows. The only change in the Model Code commentary is a limited recognition of the significant evolution of solicitor-client privilege in Canadian law since the 1970s.

This rule must be distinguished from the evidentiary rule of lawyer and client privilege, which is also a constitutionally protected right, concerning oral or documentary communications passing between the client and the lawyer. The ethical rule is wider and applies without regard to the nature or source of the information or the fact that others may share the knowledge.

It is perhaps explicable that the 1970s CBA Code did not include an ethical obligation of Canadian lawyers to uphold a mere, albeit important, evidentiary privilege. But the law of privilege has evolved materially since then reflecting fundamental policy objectives of signal importance to Canadian lawyers and our legal system.

Evolution of Canadian law since the 1970s

The modern evolution of solicitor-client privilege can be seen to have started Solosky v. The Queen, [1980] 1 SCR 821. As Justice Dickson, as he then was, wrote:

Recent case law has taken the traditional doctrine of privilege and placed it on a new plane. Privilege is no longer regarded merely as a rule of evidence which acts as a shield to prevent privileged materials from being tendered in evidence in a court room. The courts, unwilling to so restrict the concept, have extended its application well beyond those limits.

In 1982, the Supreme Court again addressed and advanced solicitor-client privilege in Descôteaux et al. v. Mierzwinski, [1982] 1 SCR 860.

The next significant case in the Supreme Court of Canada addressing lawyer-client confidences was MacDonald Estate v. Martin, [1990] 3 SCR 1235. Justice Sopinka, for the majority, established the modern principles for protecting confidential information attributable to a solicitor-client relationship. Significantly, Justice Sopinka invited the “governing bodies” to consider adopting conduct rules for confidentiality screens to displace the presumption that lawyers who practice together will discuss their cases. This was done in the 1990s. The conduct rules now include rules governing transferring lawyers and confidentiality screens.

Since MacDonald Estate, there has been deep consideration of solicitor-client privilege and litigation privilege in the Supreme Court of Canada as can be seen from the following lengthy (and incomplete) case list:

  • Smith v. Jones, [1999] 1 SCR 455
  • R. v. Campbell, [1999] 1 SCR 565
  • R. v. McClure, [2001] 1 SCR 445
  • R. v. Brown, [2002] 2 SCR 185
  • Lavallee, Rackel & Heintz v. Canada (Attorney General), [2002] 3 SCR 209
  • Maranda v. Richer, [2003] 3 SCR 193
  • Foster Wheeler Power Co. v. Société intermunicipale de gestion et d’élimination des déchets (SIGED) inc., [2004] 1 SCR 456
  • Pritchard v. Ontario (Human Rights Commission), [2004] 1 SCR 809
  • Goodis v. Ontario (Ministry of Correctional Services), [2006] 2 SCR 32
  • Celanese Canada Inc. v. Murray Demolition Corp., [2006] 2 SCR 18
  • Blank v. Canada (Minister of Justice), [2006] 2 SCR 319
  • Canada (Privacy Commissioner) v. Blood Tribe Department of Health, [2008] 2 SCR 574
  • R. v. Cunningham, [2010] 1 SCR 331
  • Ontario (Public Safety and Security) v. Criminal Lawyers’ Association, [2010] 1 SCR 815
  • Attorney General of Canada v. Federation of Law Societies, [2015] 1 SCR 401

Yet while the law of solicitor-client privilege and litigation privilege has significantly evolved, the conduct rules have not changed in response other than to add a transferring lawyer rule[ii]. The confidentiality rule is unchanged over more than 40 years. The conduct rules do not explicitly require lawyers to uphold these privileges.

This is reminiscent of the old story of the frog in the pot of boiling water[iii]. If we were starting out to draft confidentiality rules in 2016, it is difficult to imagine that lawyers would not be required to uphold the privileges that are so fundamental to the work of lawyers and the legal system. While the changes in the law of privilege are very significant, they have developed over a prolonged time. It is understandable that the conduct rules have remained unchanged.

So what?

Readers can be forgiven for asking why any of this matters. Lawyers who abuse privilege can generally be held accountable under the ethical confidentiality rule and also under other more general conduct rules. But there is advantage in clarity so that lawyers are guided by the conduct rules rather than the conduct rules being a trap for the unwary. It is also clear that teaching law students and lawyers about confidentiality under the conduct rules and about legal privilege is difficult and confusing given the current rules. I doubt that many really understand the interplay of these obligations.

There are other advantages to changing the conduct rules to expressly include an obligation to uphold these privileges. The amendment process would necessarily cause apparent inconsistencies between the ethical confidentiality rule and the privileges to be addressed. For example:

  • Solicitor-client privilege does not protect information covered by the crime-fraud exclusion. Does the ethical confidentiality rule cover or exclude that information? Does privilege permit disclosure while the conduct rules prohibit disclosure?
  • The “innocence at stake” exception to solicitor-client privilege is not reflected in the conduct rules. Does the ethical confidentiality rule prohibit use of confidential information where solicitor-client privilege yields to protect life, liberty and security of the person?
  • The conduct rules allow lawyers to use client information to protect themselves from claims by third parties even where the innocence-at-stake exception does not apply. Do the conduct rules permit that which solicitor-client privilege does not? [iv]
  • The conduct rules protect confidential information under the former client rule and the transferring lawyer rule. Does this/should this include information that is not privileged?
  • The law of privilege protects the privileged information of third parties even by disqualifying lawyers who do not act for them[v]. The conduct rules only address confidentiality in terms of client protection. Should the conduct rules expressly address protection of third party privilege?

There may be other issues that would emerge from a careful review of the conduct rules. While the answers to some of the questions just posed seem obvious, the answer to others may be less clear.

But after forty years, the context of the conduct rules has gradually changed over time such that what was appropriate forty years ago may not be appropriate now. It would be hyperbolic to say that the water is now boiling [vi], but we are in quite a different world so far as protection of information in the legal system is concerned. It is worth reconsidering a rule which pre-dates the careers of most of the lawyers now in practice.

________________________________

[i] Privilege being the jurisdiction of the courts, it would be for the law societies to reconcile the confidentiality rule rather than to pretend to the authority to change privilege

[ii] Strictly speaking, the former client rule also changed in response to MacDonald Estate

[iii] Apparently, frogs actually do notice gradual temperature increases and try to escape from the pot. Perhaps lawyers and law societies can react to gradual change as well?

[iv] Gavin Mackenzie, Lawyers and Ethics: Professional Responsibility and Discipline, 4th ed. (Toronto: Carswell, 2006) at 3-15 to 3-17

Adam Dodek, Solicitor-Client Privilege in Canada: Challenges for the 21st Century, (Discussion paper for the CBA, 2011) at pp. 11 and 12

See also Wilder v. Ontario Securities Commission (2001), 53 OR (3d) 519 (OCA) at paras. 33 and 34. Professor Dodek suggests that Sharpe JA may treat the Rules of Professional Conduct as authorizing defensive use of privileged information.

I addressed this question in Professional Conduct Rules and Confidential information versus Solicitor-Client Privilege: Lawyers’ Disputes and the use of Client Information, (2015) 92 Can. B. Rev. 595

[v] Celanese Canada Inc. v. Murray Demolition Corp., [2006] 2 SCR 189 and Stewart v. Humber River Regional Hospital, 2009 ONCA 350

[vi] Or, to mix metaphors, that we are not in Kansas anymore!

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Candid but unsure

[First published on slaw.ca]

The principal duties owed to clients are well known: commitment, confidentiality, candour and competence.[i] Much has been written and debated about commitment and confidentiality. Their nature and scope are reasonably well understood. Competence and its legal twin negligence are conceptually simple enough, albeit fact-specific.

Candour is another matter. Candour seems straight-forward. Simply be honest with your clients, tell them what you know and all will be well. But this naïve approach is problematic. As is often the case in legal ethics, difficult issues arise because duties can collide. Candour and confidentiality can be irreconcilable duties and confidentiality is pervasive for lawyers. By way of example, a prospective client discloses information that shows that you cannot act because there is a conflict. Confidentiality and solicitor-client privilege require that you keep the information confidential. Candour may require that you disclose the information to your existing client. Through no one’s fault, candour and confidentiality may irreconcilably conflict without any perfect solution being available.

For those in firms, candour is something of a strange beast. Clients retain firms. Firms owe duties of commitment, confidentiality and candour to their clients. Firms are responsible for the quality of the services provided to their clients. But it is practically impossible to require that every firm member disclose all that they know that is relevant regarding every matter for every client of the firm. In a firm of any size, there would be no time to do anything else if everyone was required to consider every retainer in the firm and what they know that is relevant. No one would suggest that candour requires this. Perhaps the obligation is that those involved in the representation must disclose what they know. This is workable. But perhaps the obligation is that there be disclosure of what is known to be known by other lawyers with no obligation to search out the unknown knowns. But there is little clarity available on what the duty of candour actually means for a firm as opposed to an individual.

While candour is a duty for the benefit of our clients, there are circumstances where clients don’t expect and don’t want candour. I recall a number of years ago a very complicated commercial problem in which a number of sophisticated businesses retained highly expert experienced lawyers The lawyers were retained because of their deep knowledge of the clients, the industry, the problem and the law. Separate counsel for each client, whose interests were well aligned, would not have been viable. I have little doubt the lawyers did not share everything that they knew about each client’s predicament with every other client. I have no doubt that this was what the clients wanted and needed. While likely not recognized at the time, this was at least arguably a breach of the joint retainer rule in the Rules of Professional Conduct.

The Court of Appeal for England and Wales recently addressed candour in Goldsmith Williams Solicitors v E.Surv Ltd, [2015] EWCA Civ 1147[ii]. The relevant facts are straight-forward. A solicitor acted for the purchaser of a residential property and for the mortgage lender. The solicitor knew of a recent transaction at a price that cast doubt on whether the fair market value of the property was reflected in the current purchase price. This is relevant information to a mortgage lender as the fair market value of the mortgaged property, which is security for the loan, is material to the risk of the loan.

What was of interest and surprise in Goldsmith Williams was that the Court of Appeal considered the case on the basis of the scope of the retainer between the parties.[iii] As Sir Stanley Burton put it:

Like [the trial judge], I consider that the question whether the Solicitors were under [a duty to disclose] in the present case depends on whether, properly construed, that duty was excluded by, or was inconsistent with, the terms of the Solicitors’ retainer… .

That candour in a joint retainer can be limited by agreement in England should be a surprise for Canadian lawyers. As the Model Code of Professional Conduct provides:

3.4-5 Before a lawyer acts in a matter or transaction for more than one client, the lawyer must advise each of the clients that:

(a) the lawyer has been asked to act for both or all of them;

(b) no information received in connection with the matter from one client can be treated as confidential so far as any of the others are concerned; and

(c) if a conflict develops that cannot be resolved, the lawyer cannot continue to act for both or all of them and may have to withdraw completely.

Model Rule 3.4-5 does not contemplate that clients in a joint retainer can agree that information will be treated as confidential. The reasoning from Goldsmith Williams cited seems inconsistent with our Codes and Rules of Professional Conduct.

There is a distinction made in Goldsmith Williams which might be the basis for a more nuanced approach to the duty of candour. Specifically, reference was made to Mortgage Express Ltd v Bowerman & Partners, [1996] 2 All ER 836 (ECA) in which Millett LJ considered another case of a solicitor acting both for a purchaser and a mortgage lender. Millett LJ said:

… A solicitor who acts for more than one party to a transaction owes a duty of confidentiality to each client, but the existence of this duty does not affect his duty to act in the best interests of the other client. All information supplied by a client to his solicitor is confidential and may be disclosed only with the consent, express or implied, of his client. There is, therefore, an obvious potentiality for conflict between the solicitor’s duty of confidentiality to the buyer and his duty to act in the best interests of the mortgage lender.

No such conflict, however, arose in the present case. It is the duty of a solicitor acting for a purchaser to investigate the vendor’s title on his behalf and to deduce it to the mortgagee’s solicitor. He has the implied authority of his client to communicate all documents of title to the mortgagee’s solicitor. …

Our Codes and Rules of Professional Conduct avoid the conflict to which Millett LJ refers by requiring that confidences not be kept in joint retainers. The English approach appears permit the duty of confidentiality to continue but recognizes that conflicts may arise to be dealt with on that basis. However, Millett LJ goes on to say that there is implied authority to communicate all title documents to both clients in the case at bar.

The distinction may be seen as being between information only relating to client decisions in the matter in which the solicitor is retained and information relating to the legal work of the solicitor. In Goldsmith Williams, the solicitor was not retained to advise as to the value of the security but rather to deal with title. The price and date of the prior transaction was relevant to the value of the security but not to title. This information was relevant to the mortgage lender’s decision-making in the transaction but not to the legal work for which the solicitor was retained.

Building on this distinction, it seems to me that there are at least three categories of information to which the duty of candour applies in Canada. Before reading Goldsmith Williams, I had thought that there were two.

The first category is information about the lawyer-client relationship rather than the subject-matter of the retainer. Canadian National Railway Co. v. McKercher LLP, [2013] 2 SCR 649 provides a convenient example. A lawyer who sues his or her client for another client has a duty of disclosure in that regard whether or not a deemed conflict exists. A client is entitled to fire their lawyer whether or not the lawyer is acting properly and is entitled to disclosure of information that might cause the client to do so. Similarly, clients are entitled to know when their lawyers may be in a conflict of interest or may have been negligent in their work.

The second and third categories are in respect of the subject matter of the retainer. The second category is information about the legal issues and work. Clients are entitled to disclosure of the work done for them, the basis of legal advice given to them and information relevant to their decisions and instructions on legal issues.

The third category is information relevant to the matter in respect of which legal assistance is sought but not to the legal work per se[iv]. The distinction between information relating to the value of the mortgaged property and to title to the mortgaged property illustrates the difference between the second and third category.

Thought of in this way, it is less surprising that a duty of disclosure with respect to information going to the value of mortgage security might be affected by the agreement between the parties. An analogy may be drawn to conflict waivers. Conflicts can be waived but only if the result is not a material adverse effect on client representation. Where a solicitor is not retained to deal with the value of the mortgage security, the solicitor’s representation of the client is not affected by non-disclosure of information going to value even though the client’s interests are affected.

On the other hand, failing to disclose a prior mortgage would obviously materially impair the very work entrusted to the solicitor namely ensuring that the expected mortgage is conveyed to the mortgage lender.

Read with these distinctions in mind, Model Rule 3.4-5 is perhaps somewhat enigmatic. The Model Rule says that “no information received in connection with the matter from one client can be treated as confidential so far as any of the others are concerned”.

This very bald statement can’t mean exactly what is says. It cannot be intended to refer to information that is irrelevant to the joint retainer. But does it refer to information relevant to the client’s decision-making in respect of the joint retainer which is not related to the legal representation and issues?[v]

Separate from the joint retainer rule, our Codes and Rules of Professional Conduct require candour in all matters but, unlike avoiding conflicts, there is no provision for consent otherwise. Does the scope of the candour rule include information relevant to client decision-making but not to the legal representation and issues? If so, can the client agree otherwise.

Reflecting back on the “very complicated commercial problem” with a number of clients with a common problem, I’m now less convinced that there was a problem as it appears that the information in issue related to the clients’ commercial decision-making rather than to the legal representation and issues and the clients would have been appalled to have their commercial information shared. While I’m uncertain about the actual operation of the conduct rules in this context, I’ve less doubt that the clients should have been able to decide for themselves subject to ensuring that legal representation was not compromised as a result.

On the other hand, a presumption that such information should be disclosed absent express consent might be salutary. There are far too many cases where lawyers have withheld information that clients would have expected to have disclosed. This is particularly true in cases of mortgage fraud where lawyers have not disclosed prior property flips, unpaid deposits and doubtful credits . In this context, it is worth underscoring Model Rule 3.4-15 which applies irrespective of the joint retainer rule and the duty of candour:

3.4-15 When a lawyer acts for both the borrower and the lender in a mortgage or loan transaction, the lawyer must disclose to the borrower and the lender, in writing, before the advance or release of the mortgage or loan funds, all material information that is relevant to the transaction.

Our current approach to candour may be an example of over-enthusiastic embrace of well-intentioned principles. Clearly, lawyers must be honest and candid with their clients. But saying no more than that raises its own problems. Clients must be protected by conduct rules but conduct rules should not unnecessarily limit client choices in their own best interests.

 

______________________

[i] One can quibble whether avoidance of conflicts is included in commitment or is a separate duty. Competence is required under the Codes and Rules of Professional Conduct while the obligation at law is not to be negligent.

[ii] Thanks to Harvey Morrison for pointing out the case.

[iii] In Commerce Capital Trust Co. v. Berk (OCA) (1989), 68 OR (2d) 257, Justice McKinlay wrote for the Court “… when a fiduciary relationship exists (as it undoubtedly does in this case, given the solicitor-client relationship), one then looks to the nature of any alleged breach of that fiduciary relationship to determine liability. In this case, the alleged breach was the non-disclosure of the facts which have been outlined above. If the undisclosed facts are “material”, then there can be no “speculation” by the court as to what course the client mortgagee would have taken had full disclosure been made.” It is interesting that Canadian courts have considered candour in this context as a matter of fiduciary obligation while the English courts appear to have considered disclosure as a matter of the duty of care.

[iv] Of course, these are not necessarily water-tight compartments.

[v] To be clear, I do not suggest that the duty of candour does not apply to information that could affect the client’s commercial assessment of the risks of in the matter in which the lawyer is acting. see The Law Society of Upper Canada v Nguyen, 2015 ONSC 7192 . My limited point is that confidentiality may not necessarily be waived with respect of any and all relevant information by Rule 3.4-5. A lawyer who is possessed of information that cannot be disclosed because of a duty of confidentiality and must be disclosed because of a duty of candour cannot continue to act without resolving the conflict in a proper way. Ignoring either duty is not acceptable.

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Keeping client confidences and acting with commitment

“Lawyers must keep their clients’ confidences and act with commitment to serving and protecting their clients’ legitimate interests. Both of these duties are essential to the due administration of justice.”

Canada (Attorney General) v. Federation of Law Societies of Canada, 2015 SCC 7 at para. 1

This recent decision of the Supreme Court of Canada resolves nearly fifteen years of litigation regarding the lawyer’s role in protecting against anti-money laundering and anti-terrorist financing. This decision is significant to those interested in legal ethics on several points.

Solicitor-client privilege

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “Act”) and the regulations thereunder (collectively the “Regime”) require that lawyers collect, record and retain certain client information. The Act authorizes search and seizure of documents in the possession of lawyers. The Court concluded that the Regime to be contrary to section 8 of the Charter for failure to provide sufficient protection to solicitor-client privilege.

A number of significant points were made by the majority. The first is the reiteration from Lavallee[i] at para. 36 that “A law office search power is unreasonable unless it provides a high level of protection for material subject to solicitor-client privilege”. The Court responded to the submission that Lavallee did not dictate the outcome in this case because the search and seizure power in question was not “seeking evidence of criminal wrongdoing” but was rather “in connection with an administrative law regulatory compliance regime” by stating inter alia that:

… the reasonable expectation of privacy in relation to communications subject to solicitor-client privilege is invariably high, regardless of the context. The main driver of that elevated expectation of privacy is the specially protected nature of the solicitor-client relationship, not the context in which the state seeks to intrude into that specially protected zone.

While the Court accepted that “… when a search provision is part of a regulatory scheme, the target’s reasonable expectation of privacy may be reduced”, the Court said at para. 44 that:

The core principle of the [Lavallee] decision is that solicitor-client privilege “must remain as close to absolute as possible if it is to retain relevance”: This means that there must be a “stringent” norm to ensure its protection, such that any legislative provisions that interfere with the privilege more than “absolutely necessary” will be found to be unreasonable: …[ii]

While considered in the context of an Act which “has a predominantly criminal law character” whose “regulatory aspects serve criminal law”, it appears that the Court has more generally diminished or eliminated the relevance of the reason for the search and seizure and has emphasized that what is relevant is that solicitor-client privileged information is not protected in the search and seizure[iii].

Independence of the profession

The majority of the Court of Appeal for British Columbia concluded that on one of the principles of fundamental justice relevant to section 7 of the Charter is “the independence of the Bar”. The majority concluded that the Regime deprives lawyers and clients of their liberty interests in a manner which does not accord a principle of fundamental justice namely the independence of the Bar.

Justice Cromwell, for the majority, differentiated between a broad and a narrow version of independence at para. 77 as follows:

According to the broad version, the independence of the bar means that lawyers “are free from incursions from any source, including from public authorities”: … The narrower, more focused version, is anchored in concern about state interference with the lawyer’s commitment to the client’s cause. This narrower version, as I see it, boils down to the proposition that the state cannot impose duties on lawyers that interfere with their duty of commitment to advancing their clients’ legitimate interests. …

The majority of the Court of Appeal placed “great stress on independence of the bar as it relates to self-regulation of the legal profession”. Justice Cromwell was not prepared to decide whether self-regulation of the profession is a principle of fundamental justice either stating at para. 86 that:

While the Court of Appeal and the Federation place great stress on independence of the bar as it relates to self-regulation of the legal profession, I do not find it necessary or desirable in this appeal to address the extent, if at all, to which self-regulation of the legal profession is a principle of fundamental justice. As LeBel J. [has] pointed out… self-regulation is certainly the means by which legislatures have chosen in this country to protect the independence of the bar … But we do not have to decide here whether that legislative choice is in any respect constitutionally required. Nor does the appeal require us to consider whether other constitutional protections may exist in relation to the place of lawyers in the administration of justice.

Some will regret that the Court did not find self-regulation to be constitutionally protected thereby avoiding other forms of regulation such as in Australia and England where self-regulation has been lost. While I am a supporter of self-regulation, my view is that this is the better result. Good self-regulation may well be the best approach but other forms of independent regulation would be better than bad self-regulation. If the profession does not regulate well then there should be a risk of loss of self-regulation. And there is no doubt that lawyers are conflicted by their self-interest in some important respects. This conflict is mitigated to some extent by the risk of loss of self-regulation – and loss of self-regulation could be necessary depending on the nature and extent of self-interested self-regulation.

The duty of commitment as a principle of fundamental justice

The majority concluded at para. 103 that the narrow version of independence of the bar is a principle of fundamental justice stating:

In the context of state action engaging s. 7 of the Charter, … (subject to justification) the state cannot impose duties on lawyers that undermine the lawyer’s compliance with that duty, either in fact or in the perception of a reasonable person, fully apprised of all of the relevant circumstances and having thought the matter through. The paradigm case of such interference would be state-imposed duties on lawyers that conflict with or otherwise undermine compliance with the lawyer’s duty of commitment to serving the client’s legitimate interests.

It is on this point that the majority and the minority (the Chief Justice and Justice Moldaver) disagreed. The minority did not accept that commitment was a principle of fundamental justice and were inclined to the view that considering protection of solicitor-client privilege as a principle of fundamental justice provided a better resolution of the section 7 analysis. The minority concluded at para. 119 that:

In our view, this “principle” lacks sufficient certainty to constitute a principle of fundamental justice: …The lawyer’s commitment to the client’s interest will vary with the nature of the retainer between the lawyer and client, as well as with other circumstances. It does not, in our respectful opinion, provide a workable constitutional standard.

In considering whether the duty of commitment is a legal principle, as opposed to an important interest or a policy goal, Justice Cromwell observed at para. 91 that:

… The duty of commitment to the client’s cause has been recognized by the Court as a distinct element of the broader common law duty of loyalty and thus unquestionably is a legal principle:

However, Justice Cromwell took care to emphasize that the scope of the duty of commitment is limited. At para. 93, he provided some examples of the bounds of the duty:

Of course the duty of commitment to the client’s cause must not be confused with being the client’s dupe or accomplice. It does not countenance a lawyer’s involvement in, or facilitation of, a client’s illegal activities. Committed representation does not, for example, permit let alone require a lawyer to assert claims that he or she knows are unfounded or to present evidence that he or she knows to be false or to help the client to commit a crime. The duty is perfectly consistent with the lawyer taking appropriate steps with a view to ensuring that his or her services are not being used for improper ends.

On the question of whether there is sufficient consensus permitting the conclusion that the duty of commitment is a fundamental principle, Justice Cromwell said at paras. 96 and 97 that:

Clients — and the broader public — must justifiably feel confident that lawyers are committed to serving their clients’ legitimate interests free of other obligations that might interfere with that duty. Otherwise, the lawyer’s ability to do so may be compromised and the trust and confidence necessary for the solicitor-client relationship may be undermined. This duty of commitment to the client’s cause is an enduring principle that is essential to the integrity of the administration of justice. In Neil, the Court underlined the fundamental importance of the duty of loyalty to the administration of justice. The duty of commitment to the client’s cause is an essential component of that broader fiduciary obligation. …

The duty of commitment to the client’s cause is thus not only concerned with justice for individual clients but is also deemed essential to maintaining public confidence in the administration of justice. Public confidence depends not only on fact but also on reasonable perception. It follows that we must be concerned not only with whether the duty is in fact interfered with but also with the perception of a reasonable person, fully apprised of the relevant circumstances and having thought the matter through. The fundamentality of this duty of commitment is supported by many more general and broadly expressed pronouncements about the central importance to the legal system of lawyers being free from government interference in discharging their duties to their clients.

It is particularly noteworthy is that independence from obligations and government interference that might interfere with service of legitimate client interests is seen as important not just to the trust and confidence of individual clients but also to public confidence in the administration of justice.

It is also noteworthy that Justice Cromwell has placed commitment both as a principle essential to the administration of justice and as a fiduciary obligation. This suggests that Neil, McKercher and Federation of Law Societies may be seen as establishing that the lawyer’s duty of loyalty is founded both in fiduciary law and in the law protecting the administration of justice.

In paras. 81, Justice Cromwell notes two types of harm to clients:

The duty of lawyers to avoid conflicting interests is at the heart of both the general legal framework defining the fiduciary duties of lawyers to their clients and of the ethical principles governing lawyers’ professional conduct. This duty aims to avoid two types of risks of harm to clients: the risk of misuse of confidential information and the risk of impairment of the lawyer’s representation of the client …

In paras. 82 and 83, Justice Cromwell discusses the common underlying basis for protection of solicitor-client privilege and commitment stating inter alia that:

The question now is whether another central dimension of the solicitor-client relationship — the lawyer’s duty of commitment to the client’s cause — also requires some measure of constitutional protection against government intrusion. In my view it does, for many of the same reasons that support constitutional protection for solicitor-client privilege. “The law is a complex web of interests, relationships and rules. The integrity of the administration of justice depends upon the unique role of the solicitor who provides legal advice to clients within this complex system”: … These words, written in the context of solicitor-client privilege, are equally apt to describe the centrality to the administration of justice of the lawyer’s duty of commitment to the client’s cause. A client must be able to place “unrestricted and unbounded confidence” in his or her lawyer; that confidence which is at the core of the solicitor-client relationship is a part of the legal system itself, not merely ancillary to it: The lawyer’s duty of commitment to the client’s cause, along with the protection of the client’s confidences, is central to the lawyer’s role in the administration of justice.

Echoing the reasons of Justice Binnie in Neil, Justice Cromwell has placed client confidence in their lawyers as “part of the legal system itself” and not “merely ancillary” to it. The protection of client confidences and commitment to the client’s cause are clearly said both to be central to the lawyer’s role in the administration of justice. These are important statements that will no doubt be repeated in future case law and not just in Charter cases.

The application of section 7 of the Charter

In order for section 7 of the Charter to be engaged, it is necessary that state deprivation of a person’s life, liberty or security be in issue.

Justice Cromwell finds that the liberty interests of the lawyer are engaged by the Regime as “The scheme limits lawyers’ liberty by punishing with imprisonment the failure to comply with its requirements”. Justice Cromwell reasons that “It is not necessary to determine whether the liberty interests of clients are infringed”. The Court of Appeal however also found that the liberty of the client was in issue as a purpose of the Regime is to establish a paper trail for enforcement purposes including criminal law sanction.

The reliance by the majority on the lawyer’s rights is curious. One might think that analysis of the right not to be deprived of liberty except in accordance with the principles of fundamental justice would consider fundamental justice as it relates to the deprivation. It seems a strained interpretation to consider principles of fundamental justice that protect third parties under section 7.

This is perhaps results-driven reasoning. Framing the issue in terms of lawyer liberty establishes a much broader protection than would focus only on client liberty. The lawyer-focused approach protects clients from loss of commitment by the state by means that deprive the lawyer of life, liberty of security of the person (but not where lesser means are used). On the other hand, a client-focused approach only protects against loss of commitment where the client’s life, liberty or security of the person is at risk of deprivation.

Leaving aside the logic of the reasoning, the effect is to establish that the state may not, without proper justification, interfere with the duty of commitment owed to clients by means of loss of loss of life, liberty or security of the lawyer. It seems logical that Charter scrutiny of impaired commitment is a engaged where a client’s loss of life, liberty or security is at risk of deprivation by the state even where commitment is impaired by means not involving the lawyer’s life, liberty or security of the person.

However (and obviously), there is no Charter protection of the duty of commitment where deprivation of the life, liberty or security of neither the lawyer nor the client is in issue.

Still, framing the duty of commitment as a principle of fundamental justice is an important statement of policy that will no doubt inform the common law and statutory interpretation even where Charter rights are not in issue.

________________________

[i] Lavallee, Rackel & Heintz v. Canada (Attorney General), 2002 SCC 61, [2002] 3 S.C.R. 209

[ii] Citations in this and following quotes are omitted.

[iii] Justice Cromwell took care at para. 68 to say “I add this. The issues that would arise in the event of a challenge to professional regulatory schemes are not before us in this case. Different considerations would come into play in relation to regulatory audits of lawyers conducted on behalf of lawyers’ professional governing bodies. The regulatory schemes in which the professional governing bodies operate in Canada serve a different purpose from the Act and Regulations and generally contain much stricter measures to protect solicitor-client privilege.”

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Too much information!

Discussions of legal ethics and protection of information often don’t distinguish between confidential information and privileged information. The seminal case of Macdonald Estate v. Martin[i] provides a good example. As Justice Sopinka put it:

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?

Of course, not all confidential information received by a lawyer in the context of a solicitor and client relationship is privileged. While confidential communications between lawyer and client for the purposes of obtaining and providing legal assistance are protected by solicitor-client privilege, confidential communications with third parties are generally not.

And when Macdonald Estate was decided, the Canadian courts had not yet clearly delineated between solicitor-client privilege and litigation privilege. We now understand that confidential communications with third parties for the dominant purpose of litigation are generally protected by litigation privilege but not by solicitor-client privilege[ii].

The Canadian law of privilege is also clearer with respect to “common interest” which, in certain circumstances, permits privileged information to be shared on a confidential basis without waiver of privilege. Sharing privileged information between parties in litigation with a common interest is the obvious example but sharing privileged information with a view to completing commercial transactions is another[iii].

The Macdonald Estate principles have been applied in new circumstances over the last two decades. Macdonald Estate itself was a transferring lawyer case in which the “virus” of confidential information came with a transferring lawyer who had previously acted on the other side in ongoing litigation.

The Court of Appeal for Ontario applied the Macdonald Estate principles to acting against former clients in Chapters Inc. v. Davies, Ward & Beck LLP [iv]. In Celanese Canada Inc. v. Murray Demolition Corp.[v], a law firm was disqualified to ensure that privileged information of the opposing party improperly acquired through an Anton Pillar order was not accessed. In Stewart v. Humber River Regional Hospital[vi], the Court of Appeal for Ontario disqualified a law firm that had learned privileged information from the opposing party in litigation as a result of retaining an expert witness previously retained by the other side.

These cases demonstrate that what is in issue is the protection of the administration of justice rather than just the duties owed by lawyers to their clients. In Macdonald Estate, Celanese and Humber River, the law firm was disqualified at the instance of the opposing party and not at the instance of their own client. Justice Goudge made this point clearly in Humber River when he said at paras. 23 and 24:

The starting point is that the courts have an inherent supervisory jurisdiction that extends to the removal of solicitors from the record where their conduct of legal proceedings would adversely affect the administration of justice (MacDonald Estate, at p. 1245 S.C.R.).

Where solicitor-client information comes into the possession of the opposing party, this creates a serious risk to the integrity of the administration of justice. …

While the cases have not yet examined whether the Macdonald Estate principles apply with equal vigour to litigation privileged information as to solicitor-client privileged information, one would think that the same result would apply despite the greater protection applied to solicitor-client information as the integrity of the administration of justice requires that the opposing party not have access to either type of privileged information.

While not yet decided so far as I am aware, I would expect that the Macdonald Estate principles would apply to protect privileged information obtained under the “common interest” exception as well. For example, if a lawyer were to receive privileged information about ongoing litigation in the context of a failed asset purchase, it would seem to follow that the lawyer could not turn around and act for the opposite party in that litigation.

But do the Macdonald Estate principles apply to confidential information that is not privileged? Reviewing Macdonald Estate, Justice Sopinka refers throughout to confidential information rather than to privileged information although he does refer to “confidential information attributable to a solicitor and client relationship”. This phrase is somewhat ambiguous. It would seem to apply to lawyer-client communications. Yet a lawyer receiving non-privileged but confidential information from an opposing party in a transactional matter will have received confidential information as a result of a solicitor and client relationship.

Given the policy analysis in Macdonald Estate, it seems to me that Justice Sopinka was intending to refer to solicitor client privileged information. As he said in discussing the Legal Ethics – Policy Considerations:

… Nothing is more important to the preservation of this relationship than the confidentiality of information passing between a solicitor and his or her client. The legal profession has distinguished itself from other professions by the sanctity with which these communications are treated. The law, too, perhaps unduly, has protected solicitor and client exchanges while denying the same protection to others. This tradition assumes particular importance when a client bares his or her soul in civil or criminal litigation. Clients do this in the justifiable belief that nothing they say will be used against them and to the advantage of the adversary. Loss of this confidence would deliver a serious blow to the integrity of the profession and to the public’s confidence in the administration of justice.

From this, the point of MacDonald Estate can be seen as being to ensure that a client’s privileged information be protected by disqualification against being used against them and that non-privileged confidential information was not intended to be protected. It is also reasonable to conclude that it is only the privilege-holder who is protected under the Macdonald Estate principles.

While this may all seem a bit arcane, the questions of the nature of the information properly protected under MacDonald Estate principles and who is entitled to protection are recently raised in two separate contexts.

The first is the recent amendment of the transferring lawyer rule in the Federation of Law Societies’’ Model Code of Professional Conduct. Model Rule 3.4-17 previously defined confidential information to mean “information that is not generally known to the public obtained from a client”. Practically, this meant solicitor-client privileged information as information obtained from third parties was not included in the definition. This definition is no longer used and Model Rule 3.4-18 is now triggered when either (emphasis added):

(a) It is reasonable to believe the transferring lawyer has confidential information relevant to the new law firm’s matter for its client; or

(b) the new law firm represents a client in a matter that is the same as or related to a matter in which the a former law firm represents or represented its client (“former client”); (ii) the interests of those clients in that matter conflict; and (iii) the transferring lawyer actually possesses relevant information respecting that matter.

While perhaps not intended, the transferring lawyer rule is engaged whenever a transferring lawyer has relevant confidential information, whether privileged or not, whether or not obtained from a client and whether or not obtained in the context of a lawyer-client relationship. The transferring lawyer model rule, as amended, may now have a much broader ambit. While it is seems obviously good to protect confidential information, it is important to recognize that the transferring lawyer rule can result in disqualification of the lawyer in an existing matter. It is startling to think that a client could lose his or her lawyer to protect information that is not privileged and not necessarily learned in the course of any lawyer client relationship.

The second is a recent case in which leave to appeal a disqualification order was recently granted by the Ontario Divisional Court in Performance Diversified Fund v. Flatiron et al[vii]. In Flatiron, an employee consulted a lawyer about employment issues and, in that context, apparently disclosed confidential information about the business of the employer. The law firm was disqualified on the motion of the employer. This raises interesting questions.

If viewed as a matter of the law of confidential information, it is understandable that the court could intervene to protect against the misuse of an employer’s confidential information disclosed by an employee to a third party. But if viewed as a matter of the law of privileged information or the protection of the administration of justice, it is difficult to see why the employer would have right to seek to protect the privilege rights of the employee. Relevant confidential information is ordinarily accessible by discovery in litigation while privileged information is not. The employer’s confidential information did not become privileged by communication by the employee to his lawyer.

My view is that the Macdonald Estate principles properly apply, given their policy basis, to the protection of privileged information at the instance of the privilege-holder. Where privileged information is not at issue and where the rights of a privilege-holder are not put at risk, the administration of justice is not imperilled if the lawyer continues to act – and there is no basis to require that another party be deprived of the lawyer of their choice – who may well be expensive to replace.

This discussion may illustrate what may be seen as a lack of clarity in our thinking around protection of information under the law of lawyers and the Model Code. Some protected information under the Model Code need not even be confidential information (e.g. Model Rule 3.3-1). Some protected information may not need to be privileged (e.g. Model Rule 3.4-18(c)). The Model Code does not distinguish between confidential information and privileged information and is thought by some to imply that privileged information may be used where the law of privilege would not permit its use (e.g. Model Rule 3.3-4(b) and (c)).

It seems to me that our ethical rules and the law could benefit from greater precision so that we protect what is properly protected in support of the administration of justice.

_________________________

[i] Macdonald Estate v. Martin, [1990] 3 SCR 1235

[ii] Blank v. Canada (Minister of Justice), [2006] 2 SCR 319

[iii] General Accident Assurance Company v. Chrusz (1999), 45 OR (3d) 321 (OCA)
Maximum Ventures Inc. v. De Graaf, 2007 BCCA 510

[iv] Chapters Inc. v. Davies, Ward & Beck LLP (2001), 52 OR (3d) 566

[v] Celanese Canada Inc. v. Murray Demolition Corp., [2006] 2 SCR 189

[vi] Stewart v. Humber River Regional Hospital, 2009 ONCA 350

[vii] Performance Diversified Fund v. Flatiron et al, 2014 ONSC 6892

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Bright Line Rule

A Bright Line Rule of Limited Scope

A decade ago, the Supreme Court of Canada introduced a new conflicts rule into Canadian law. The rule was fashioned from the ABA Model Rules of Professional Conduct. This new “bright-line rule” generated substantial controversy within the profession. In July, the Supreme Court released its decision in McKercher which both restated and reformulated the “bright line” rule[i].

The “bright-line rule” as first articulated in Neil provided that a lawyer could not act in a matter directly adverse to the immediate interests of a current client without proper consent. The impact of this rule was said to be somewhat limited by the proposition that professional litigants, such as governments and chartered banks, could be taken as “broad-minded” such that their informed consent could be implied. Also, the Court emphasized judicial discretion as to remedy. Not all “bright-line” crossings would have consequences. For example, where a complaint was viewed by the court as tactical, a remedy could be denied.

The policy basis for the “bright-line rule” was reasonably clear. The rule guarded against impairment of client representation. The lawyer-client relationship might be compromised where a lawyer acted in a matter directly adverse to the immediate interests of his or her client. On the other hand, the lawyer might be tempted to “pull punches” so as not to offend the adverse client. The existing “substantial risk” principle might not fully protect against these risks.

However, there were real problems with this rule as formulated. The rule applied in situations where there was no real risk of mischief. Naturally, clients preferred to keep control by making clear that express consent was always required thereby defeating the ability to imply consent. While flexibility in remedy could be helpful where a remedy was sought, remedial flexibility was limited if any assistance in day-to-day conflicts clearance. And some law societies adopted the “bright line” as a conduct rule without any of the remedial flexibility largely on the theory that the law societies must adopt rules set by the court.

In McKercher, CNR submitted that the “bright-line” rule was bright and plain. Disqualification should follow where a lawyer acted in a matter directly adverse to the immediate interests of a current client. The Federation of Law Societies essentially supported CNR’s position saying that this was the intent of the Federation’s Model Rule. McKercher submitted that informed consent should be implied because CNR was the archetypal sophisticated client and that implied consent should not trumped by ex post facto refusal. The Canadian Bar Association submitted that the “bright-line” rule should be seen as presumptive so as not to apply where it could be shown that there was no real risk of mischief.

The Court accepted none of these approaches and instead clarified and materially modified the “bright line” rule. First, the Court made clear that “the bright line rule applies only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting” and then only where the clients are adverse in legal interest. Mere adversity is not sufficient to engage the rule. Direct adversity to immediate legal interests in the matter is required. The Court observed, “The main area of application of the bright line rule is in civil and criminal proceedings”.

Second, the Court effectively replaced the unworkable concept of implied consent with a limitation to the scope of the rule. The “bright line” rule does not apply in unrelated matters where “it is unreasonable for a client to expect that its law firm will not act against it”. Recognizing that cases where this scope limitation applies will be exceptional, this is a fundamentally important change. The fiction of implied consent is replaced with objective examination of what a reasonable client would expect. The nature of the client is no longer the only issue. For example, the nature of the relationship between the law firm and the client, the terms of the retainer, as well as the types of matters involved, are properly considered.

Third, the Court moved the issue of tactical objections from a factor to be considered as to remedy to a limitation of the scope of the rule. The Court particularly noted that “The possibility of tactical abuse is especially high in the case of institutional clients dealing with large national law firms”.

While the Court clearly rejected the proposition that the “bright line” rule is presumptive, the changes made by the Court to the scope of the rule clearly reduce apparent over-breadth by permitting consideration of essentially the same factors that would be considered if the rule were presumptive. Assessing reasonable expectations permits examination of the nature of the lawyer-client relationship and whether the nature of adverse retainer is such that the existing representation might be compromised. Where there is no real risk of mischief, an objection will presumably be considered to be tactical. In saying that the rule mainly applies in litigation and that the possibility of tactical abuses is especially high where large clients deal with large law firms, the Court appears to be sending clear signals about the intended application of the rule.

I think that what the Court has done is both subtle and significant. Previously, over-breadth in the “bright line” rule was thought tempered by the belief that large clients would be reasonable and that courts could address remaining over-breadth in exercising discretion as to remedy. But conflicts must be cleared day-to-day and overwhelmingly practicing lawyers, not judges, have to decide conflicts. The assumption of broadmindedness on the part of large clients turned out to be wrong. Understandably, no client gives up control that might be used to advantage. As well, large clients faced the invidious proposition that consent might be implied irrespective of the nature of their relationship with the lawyer and the nature and effect of the adverse claim.

The Court in McKercher also addressed the disqualification remedy. The Court reaffirmed that crossing the “bright line” does not automatically mean disqualification. As the Court said at para. 61:

… the courts in the exercise of their supervisory jurisdiction over the administration of justice in the courts have inherent jurisdiction to remove law firms from pending litigation. Disqualification may be required: (1) to avoid the risk of improper use of confidential information; (2) to avoid the risk of impaired representation; and/or (3) to maintain the repute of the administration of justice.

According to the Court, disqualification requires consideration of potential mischief (using the language from MacDonald Estate) whether misuse of confidential information, impairment of representation or harm to the administration of justice. Even if the “bright line” rule applies where there is no risk of mischief despite its newly limited scope, it appears clear that disqualification will not be available absent risk of mischief.

While emphasis was not given to the point, the Court elected to consider disqualification as a matter of its supervisory jurisdiction over the administration of justice rather than as a matter of fiduciary law. I think this important because it is a further indication that the “bright line” rule mainly applies to litigation. While fiduciary remedies such as equitable compensation and disgorgement may ultimately be available, it will be an exceedingly rare case where these remedies could be practically available where disqualification was not. Fiduciary remedies will not likely be available absent some real risk of harm.

The Court in McKercher made clear that lawyers had to apply both the “bright line” rule and the “substantial risk”[ii] principle in clearing conflicts involving current clients. But as a practical matter given the reduced scope of the “bright line” rule, it is difficult to see circumstances where the “bright line” would be crossed without the substantial risk principle not also being engaged. It is even more difficult to contemplate disqualification absent substantial risk of mischief.

Neither conception of the “bright line” rule urged on the Court “won” or “lost” in McKercher. Indeed, winning and losing shouldn’t matter on policy issues. But the result is a workable rule that requires lawyers to carefully assess retainers adverse to current clients. The McKercher analysis allows thoughtful assessment of conflicts. But this is no invitation to lawyers to act in litigation against their current clients. To the contrary. And careful thought will continue to be required in transactional and advisory matters as well.

The bottom line for me is that an overbroad rule appears to have been transformed into a workable rule pursuant to which lawyers won’t be disqualified without good reason. I think that this is a good thing for both clients and lawyers.

What remains to be seen is the regulatory response to McKercher. The Federation of Law Societies immediately announced that the Model Code was consistent with McKercher. But the Federation argued in McKercher that the intent of the Model Code was to specifically prohibit retainers directly adverse to the immediate legal interests of current clients. While that proposition is controversial, it is not consistent with the narrowed scope of the rule established in McKercher nor with the judicial approach to disqualification. Perhaps the point is that the Model Code, in its commentary, attempts to describe the law and therefore evolves with the law. I think that is a fair read of the commentary but that remains to be seen.


[i] As noted in a previous column and for transparency, I acted for the Canadian Bar Association as intervener in McKercher. For better or worse, I have a view on all of this!

[ii] The “substantial risk” principle is the traditional fiduciary law sometimes called “ conflict of duty with duty” and “conflict of interest with duty”. The principle is that proper consent is required where a “conflict of interest” exists. A conflict of interest exists where there 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.”

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Candour

I Gotta Tell Ya, It’s Complicated! Candour Owed to Clients

In R. v. Neil, Justice Binnie stated that the duty of candour was an aspect of the duty of loyalty. As Justice Binnie put it, an aspect of the duty of loyalty is

a duty of candour with the client on matters relevant to the retainer

The fiduciary duty of candour was the basis for the earlier decision of the Supreme Court of Canada with respect to physicians in McInerney v. MacDonald,

While not previously said quite so plainly, it has long been clear that fiduciaries owe a duty of candour to their beneficiaries. As the B.C. Court of Appeal said in Ocean City Realty Ltd. v. A & M Holdings Ltd.2 (cited with approval by the Court of Appeal for Ontario in Raso v. Dionigi3):

The obligation of the agent to make full disclosure … includes “everything known to him respecting the subject matter of the contract which would be likely to influence the conduct of his principal” (Canada Permanent Trust Co. v Christie) or, as expressed in 1 Hals., 3rd ed, p. 191, para. 443, everything which “. . would be likely to operate upon the principal’s judgment”. ..

This fiduciary duty is mirrored in the Federation of Law Societies Model Code by Rule 3.2-2 which states:

When advising a client, a lawyer must be honest and candid and must inform the client of all information known to the lawyer that may affect the interests of the client in the matter.

But like many other statements of professional standards that seem obviously true when stated generally, it just isn’t quite that simple in real life.

Let’s start with an easy one. In intellectual property litigation, it is common for confidential information to be disclosed on the basis that the lawyers will have access to the adverse party’s confidential information but their clients will not. This is often, but not always, by court order. Despite the duty of candour, lawyers can withhold this material information to their clients. On one view of this, there is no issue because the client consent is required in the circumstances. But does that mean that the duty of candour can be waived? Is waiver of candour permitted in all circumstances or just in some?

A harder case is inadvertent receipt of privileged information. Here, the lawyer would not have the protected information had things worked out properly. Clearly, the administration of justice requires protection of privileged information4. Does candour require disclosure of what should never have been known? Is client consent required not to disclose?

Law society rules regulate joint retainers requiring that lawyers advise their joint clients that secrets can’t be kept between clients in a joint retainer. If candour can be waived by clients, does this rule apply where clients want secrecy between them for some matters in a joint retainer?

While law society rules are (mostly) about the duties of individual lawyers, fiduciary duties are owed by firms to their clients as well as by individual lawyers. Does the fiduciary duty of candour mean that the firm (i.e. every lawyer in the firm) must disclose everything known by the firm that is material? This is practically impossible of course in a firm of any size. But why isn’t it so nonetheless as a matter of principle? And what about confidentiality screens? If the duty of candour is owed in respect of everything known by the firm, aren’t confidentiality screens per se improper?

One might think that all of this would have been worked out in the jurisprudence somewhere but, if it has been, I can’t find it. So let me sketch out what seem to me to be some of the necessary nuances to the general rule.

First, there are some situations where the administration of justice requires that candour be limited. In these situations, any lawyer would be in the same position. If candour is not limited, justice cannot be done.

Second, it is important to be clear about the nature of the retainer. The duty of candour is limited to matters relevant to the retainer.

Third, candour probably can’t be waived. We know that actual conflicts, as opposed to potential conflicts, can’t be waived. Where representation will be materially impaired by a conflict, the conflict is not waivable. A client can only accept the risk of material impairment. If clients cannot agree to impaired representation for conflicts, the same should be true for candour. It follows that clients must have the information required to effectively instruct counsel and act on advice given by counsel. Further, the client must have the information required to assess whether the fiduciary lawyer has acted properly.

Fourth, it is unclear whether candour is owed by the firm or just by the lawyers involved in the representation. I think that it must be just the lawyers involved if only as a practical matter. Otherwise, every lawyer in a firm would have to understand every retainer of the firm and consider what information is relevant from every other retainer they have had and from any other source.

Fifth, being in the position of accepting a legal obligation of confidentiality (that is not inherent in the retainer as discussed above) is not an excuse for lack of candour but rather a real problem. The House of Lords put this nicely in Hilton v. Barker Booth and Eastwood:

… if a solicitor puts himself in a position of having two irreconcilable duties … it is his own fault.

Food for thought, I hope.

____________________________________

1 The duty of candour owed to clients is not to be confused with obligation of candour to the court. The scope of and the basis for these obligations are entirely different.

2 Ocean City Realty Ltd. v. A & M Holdings Ltd. (1987), 36 D.L.R. (4th) 94 (B.C.C.A.)

3 Raso v. Dionigi (1993), 12 OR (3d) 580 (O.C.A.)

4 Protection of the administration of justice sometimes requires disqualification of lawyers who inadvertently receive privileged information of the adverse party. But that is outside of the subject of this column.

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