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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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Comments

  1. Thank you for providing a great summary of this important SCC case. You have raised a very critical question, for the Federation and the Standing Committee on the Model Code of Professional Conduct, to address in the near future. The “bright-line” law has been refined (narrowed) and the court has outlined the legal rationale for these changes in the administration of justice. In particular, the issue of disqualification has been illuminated where substantial risk of mischief does not exist. The court has rendered legal advice which should help to “evolve” the commentary outlined in the Model Code. Wouldn’t ignoring the SCC’s legal decisions, in favor of an outdated commentary, show a total disrespect for the law? The Model Code of Professonial Conduct is only a useful guideline as long as it is legally relevant.