The Supreme Court of Canada Gives Firms a Retainer Playbook in Canadian National Railway Co v McKercher LLP

Can law firms represent clients with conflicting legal interests? The Supreme Court of Canada has unanimously said no in its latest judgment on the law of professions, Canadian National Railway Co v McKercher LLP, 2013 SCC 39 [McKercher].

The issue in this case was whether McKercher LLP (McKercher) could represent Canadian National Railway Co. (CN) while concurrently representing another client in a class action against CN. The Court held that this concurrent representation jeopardized McKercher’s ability to effectively represent CN. What emerges from this judgment is a useful playbook for firms on how to avoid retainers that would breach a law firm’s duty of loyalty.

Hello, Goodbye

McKercher, a Saskatchewan law firm, represented CN on several small matters. Without notifying CN, McKercher accepted a retainer to act for another client in a $1.75 billion class action against CN. McKercher then terminated most of its retainers with CN. When CN found out about McKercher’s involvement in the class action, it cancelled the remaining retainer. CN also applied to strike McKercher as the solicitor of record in the class action on the ground that its concurrent representation was a conflict of interest.

Disqualification or Implied Consent?

The motion judge granted this application and disqualified McKercher from acting as counsel in the class action (Wallace v Canadian Pacific Railway, 2009 SKQB 369). He found that McKercher breached its duty of loyalty to CN by placing itself in a conflict of interest. Observing that CN felt an understandable “sense of betrayal” (ibid at para 48), the motion judge held that McKercher’s involvement in the class action would substantially impair the firm’s ability to represent CN in ongoing retainers.

The Saskatchewan Court of Appeal (SKCA) overturned the motion judge’s disqualification of McKercher from the class action (Wallace v Canadian Pacific Railway, 2011 SKCA 108). Characterizing CN as a large corporate client that was not vulnerable to or dependent on a smaller firm like McKercher, the SKCA found that CN had given McKercher implied consent to act for an opposing party in unrelated legal matters.

The SKCA did find that McKercher had breached its duty of loyalty to CN for terminating its existing retainers. However, the SKCA ruled that disqualifying McKercher from the class action was not appropriate because McKercher’s continued involvement in the class action would create a risk of prejudice to CN.

Synthesizing Neil’s “Bright Line”

The Court uses McKercher as a platform for clarifying the contents of a lawyer’s duty of loyalty and its requirement that a lawyer avoid conflicts of interest. The “bright line” rule for determining whether a conflict of interest exists was laid out in R v Neil, 2002 SCC 70 [Neil]: “[A] lawyer, and by extension a law firm, may not concurrently represent clients adverse in interest without obtaining their consent—regardless of whether the client matters are related or unrelated” (McKercher at para 8).

Holding that this case turns on the scope of the Neil’s “bright line” rule, the Court goes on to clearly articulate four elements that delineate its application:

1. The rule applies only when the immediate interests of the clients are directly adverse.
2. The rule applies only when the interests that are adverse are legal in nature.
3. The rule cannot be raised tactically. The Court’s concern here is that an institutional client may attempt to retain a firm in an effort to prevent that firm from acting against it in the future.
4. The rule does not apply when “it is unreasonable for a client to expect that its law firm will not act against it in unrelated matters” (ibid at para 37). The Court notes that this is an exceptional aspect of the rule and that it would usually only apply to governments that retain criminal or civil practitioners. This qualification means that a government could not use the rule to disqualify such a practitioner from acting against it in unrelated matters.

The Court is very clear in this decision that there is a conflict of interest if the rule applies. It is not a rebuttable presumption or an invitation to the parties to point to contextual factors: “Where applicable, the bright line rule prohibits concurrent representation” (ibid at para 29).

If the rule does not apply, the analysis must then shift to an assessment of whether the lawyer’s concurrent representation of clients “creates a substantial risk that the lawyer’s representation of the client would be materially and adversely affected” (ibid at para 38).

The Line Must Be Drawn Here

The Court held that McKercher’s actions fall “squarely” within the bright line rule, devoting only one paragraph to apply the above four elements. Since McKercher did not obtain CN’s consent, the bright line rule was breached as soon as the firm accepted the class action retainer.

The Court additionally found that McKercher breached its duty of commitment to the client’s cause and its duty of candour to CN. McKercher breached its commitment to the client’s cause by terminating its retainers with CN in order to act against CN in the class action matter. Also, McKercher breached its duty of candour to CN by failing to disclose that it intended to accept the class action retainer. In fact, CN found out about McKercher’s involvement in the class action when it read the firm’s name under the “Solicitor of Record” heading after being served with the class action statement of claim.

Observing that this decision “recast[s] the legal framework for judging McKercher’s conduct and determining the appropriate remedy” (ibid at para 67), the Court held that this matter should be sent back for trial.

A Retainer Playbook

The Court’s quick application of its conflict of interest framework suggests that it viewed this case as cut and dried. The facts favoured such a clear finding: Faced with the prospect of a plum class action against a large institutional client with deep pockets, McKercher seemed to go turncoat and drop the client.

However, the Court’s decision to remit this matter back to trial shows it was cognizant that it was synthesizing previous judgments into a new description of the scope of the bright line rule. This decision is both a warning to firms to not skirt the boundaries of their duty of loyalty and a useful guide for determining exactly where those boundaries lie.

This decision also represents a green light for concurrent representation where there are no immediate legal interests that are directly adverse. By describing the boundaries within which concurrent representation is permissible, the Court is recognizing that a single firm can provide effective representation to two clients who may have conflicting non-legal interests or indirectly conflicting legal interests.

This recognition is only fair. It gives clients the latitude to spread around their legal work while it allows law firms to accept a variety of retainers without fear of being tactically struck as the solicitor of record. In short, this decision seems to support the economic functioning of national law firms and institutional clients. The refined Neil “bright line” test will give law firms a useful guide for navigating this web of legal and economic interests, but it will also give courts a good measuring stick the next time a firm gets caught with its hand in the cookie jar.