The Final Report of the CBA Task Force on Conflicts of Interest: The triumph of common sense over formalism

In August 2008, the CBA Task Force on Conflicts of Interest released its Final Report, setting out 21 recommendations designed to modernize the Canadian bar’s ethical rules on dealing with conflicts of interest.

As I indicated here previously, the CBA adopted all 21 recommendations at the Canadian Legal Conference on August 18, 2008.

The Task Force has done an excellent job of articulating the ethical principles upon which our rules on conflicts of interest are based.  By keeping those principles firmly in mind, the 21 recommendations will streamline and modernize our rules on conflicts of interest, while maintaining the protection that the underlying principles have always provided clients.

Properly understood, the clarity that the recommendations offer has the potential to lead to a better understanding both on the part of the public and the profession of the expectations surrounding the legal retainer.

Recommendations

All 21 recommendations are reproduced from the full Report at the end of this article.  I strongly encourage lawyers and the public to read through the full Report, despite its length – the Executive Summary simply does not do it justice. 

My thoughts on some of the highlights are below.

Acting against a former client in an unrelated matter

See Recommendations 3 through 6 in the Final Report.

That a lawyer cannot act against a current client, whether or not the retainers are related, is uncontroversial.  Likewise the lawyer’s duty not to act against a former client in a matter related to his or her prior retainer.

The controversial question is whether the lawyer can act against a former client in a matter unrelated to the former retainer.

In the United States, the American Bar Association Model Rules provide a simple answer: the lawyer would be prohibited from acting.  The same prohibition exists in Alberta and British Columbia.  Arguably, the rules are the same in the rest of Canada, by virtue of the Supreme Court’s rulings in MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235, and R. v. Neil, [2002] 3 S.C.R. 631.

The difficulty is that in neither case was the Court’s reasoning on the question necessary to its decision.  The question was not addressed either in written or oral argument.  In Neil, the lawyer was not even a party to the appeal.

In any event, the rule is inconsistent with practice in the United Kingdom, Australia and New Zealand.

Although it is easy to articulate reasons for a blanket prohibition, a blanket prohibition does not recognize the reality of modern legal practice, not every client is equally susceptible to the mischief the rule is intended to prevent.

If the client is an individual, or a small business, then the American Bar Association’s reasoning (that the clients are likely to lose confidence in the profession, since they are likely to wonder whether they have their lawyer’s complete loyalty) is justified.

The situation is quite different, however, in the situation involving clients whose business involves frequent litigation – as would be the case for banks and insurance companies.  In those cases, the client expects to hire various firms for various purposes, and the rule has the effect of restricting the availability of lawyers with specialized knowledge or experience.

The Task Force’s recommendations would deal with the situation where a lawyer is asked to act against a former client in an unrelated matter, by applying the principle that a lawyer should be prohibited from acting where there is a “substantial risk of material adverse effect on representation”.

The principle recognizes the needs of both “professional litigants”, who use many different law firms for different purposes, and the needs of individual clients and small business, who have a more dependent relationship with counsel.

In addition, it makes the lawyer’s expertise more widely available.  Often, smaller clients would benefit by retaining a lawyer with knowledge and experience likely to be acquired only in firms that are retained by larger clients.  Those lawyers would now be free to act for the smaller clients, provided that they do not act in matters related to any prior retainers for the larger clients.

The danger that the profession could become perceived as mercenary for acting in matters involving former clients is adequately mitigated by the principle that the Task Force proposes, whereby the lawyer is prohibited from acting where there is a substantial risk that the representation will be materially and adversely affected by the new retainer.

The Task Force recommendations represent a deft balance between the needs of a diverse set of clients, while protecting the public interest and the profession’s reputation.

Space sharing and lawyer mobility between firms

See Recommendations 9 through 12 in the Final Report.

Currently, the rules governing lawyers who move between firms, where the lawyer’s current and former firms act on opposing sides of a matter created significant difficulties, both for the lawyers involved, and for the parties.

Often such a move was met with an application to disqualify the lawyer’s new firm on the basis that the firm was in a “conflict of interest”.  Generally, the allegation was that the new firm was, as a result of the lawyer’s move, in possession of privileged information that could be used to the old firm’s client’s prejudice.

Once again, when a lawyer in that situation moves to a small firm, the risk that privileged information might be passed on is significantly greater that if the lawyer moves into the office of a larger firm at an office in a different city.  The two circumstances should not be treated in the same way.

Again, the Task Force recommendations would apply the principle that the new firm is disqualified only where there is a substantial risk of a material and adverse effect on the representation.

The courts’ approach to these situations would be to require the new firm to discharge the burden of rebutting the presumption that confidential information would be passed along, and the burden has always been heavy.

Instead, it would appear that the burden will be on the moving party to show that there will be a substantial risk.  The answering party would bear a tactical burden of showing that adequate measures are in place to prevent the release of confidential information.

In the end, the Task Force recommendations provide a more principled approach to what is often a difficult situation.

Similarly, many lawyers operate as sole practitioners, but share space with other lawyers.  These arrangements vary in design, but there may or may not be a common reception area, common staff, equipment and facilities.

Rather than apply the present blanket prohibition that all lawyers in all such arrangements are to be treated as a single firm, and therefore disqualified from acting against the clients of any lawyer in such an arrangement, the Task Force recommendations would mandate that the arrangement that the lawyers have would be examined individually to determine if client confidences are adequately protected.

In the end, the vast majority of cases will involve situations where the lawyers would still be disqualified from acting against the clients of other lawyers in the space sharing arrangement; however the approach to disputes of this kind will take on a more transparent analysis.

The “near client”

See Recommendations 13 through 17 in the Final Report.

Certain areas of legal practice are have always presented the lawyer with a danger of being found to have owed fiduciary duties to unforeseen parties.  A good example is estate and trust law, where drafting a will may open the lawyer to liability claims from the beneficiaries of an estate.  Likewise, business and corporate practice present the danger that the person consulting the lawyer may come to believe that his or her interests are being protected by the lawyer, notwithstanding the lawyer’s retainer on behalf of the contact’s corporation.

The Task Force recommendations make it clear that the lawyer-client relationship exists only between the lawyer and is the person who consults the lawyer and on whose behalf a lawyer renders or undertakes to render legal services, unless that person can reasonably conclude that the lawyer has agreed to provide legal services to him or her also.

Thus, the lawyer owes no fiduciary duties to near-clients, affiliated entities, directors, shareholders, employees, or family members unless there is objective evidence to demonstrate that they had a reasonable expectation that a lawyer-client relationship would be established.

Lawyers are still well-advised to clarify this situation in writing with an appropriately worded letter, however these recommendations clarify the relationship and serve to outline what can be expected from the lawyer and the retainer.

Conclusion

Overall, the Task Force has provided some very clear principles upon which to base clearer, more streamlined rules governing conflicts of interest.

The profession now has an excellent opportunity to educate the public about the role we play in protecting the interests of our clients and the benefits we offer to the public – provided that the meaning and importance of these revisions can be properly communicated.

 

Appendix – Recommendations of the CBA Task Force on Conflicts of Interest

Conflicting Interests

That the CBA Code of Professional Conduct be amended to:

1.             recognize that a “conflicting interest” is any one of a “conflict of duty and interest”, a “conflict of duty and duty” and a “conflict of duty with relationship” ;

2.             define a “conflicting interest” to mean an interest that gives rise to a “substantial risk of material and adverse effect on representation”;

3.             provide that, except after adequate disclosure to and with the consent of the client, a lawyer may not act in a matter in which a conflicting interest is present;

4.             provide that a lawyer may act in a matter which is adverse to the interests of a current client provided that

a.             the matter is unrelated to any matter in which the lawyer is acting for the current client; and

b.             no conflicting interest is present;

5.             clarify that the duty of loyalty owed to a client after a retainer has been completed prohibits a lawyer from attacking the legal work done during the retainer or from, in effect, changing sides on a matter that was central to the prior retainer;

6.             recognize that a risk of misuse of confidential information is a potential failure to comply with the duty of confidentiality and is distinct from a conflicting interest;

7.             include a rule which explicitly delineates the different duties of loyalty and confidentiality owed to a client after a retainer has been completed; and

8.             re-affirm the requirement, both during a retainer and after a retainer has been completed, not to misuse confidential client information.

Confidentiality

That the CBA Code of Professional Conduct be amended to:

9.             provide that a delay in the erection of a confidentiality screen need not require a law firm to cease acting if it can be shown that no disclosure of confidential information occurred;

10.          adopt the Law Society of Upper Canada Rule 2.04 (5) which says: Where a lawyer has acted for a former client and obtained confidential information relevant to a new matter, the lawyer’s partner or associate may act in the new matter against the former client if

a.             the former client consents to the lawyer’s partner or associate acting, or

b.             the law firm establishes that it is in the interests of justice that it act in the new matter, having regard to all relevant circumstances, including

(i)           the adequacy and timing of the measures taken to ensure that no disclosure of the former client’s confidential information to the partner or associate having carriage of the new matter will occur,

(ii)          the extent of prejudice to any party,

(iii)         the good faith of the parties,

(iv)         the availability of suitable alternative counsel, and

(v)           issues affecting the public interest.

11.          include commentary to clarify the procedures that should be followed when professional, specialist and administrative staff transfer from one law firm to another.

That the guidelines on conflicts from transfer between law firms in the CBA Code of Professional Conduct be amended to:

12.          recognize that in the case of a merger of law firms the risk of a breach of client confidentiality does not occur by reason only of entering into a merger agreement and that any necessary screens should therefore be required only when the lawyers in the merged firm start working together or otherwise sharing client information.

Client

That the CBA Code of Professional Conduct be amended to:

13.          clarify that a client is the person who

a.             consults the lawyer and on whose behalf a lawyer renders or undertakes to render legal services or

b.             having consulted the lawyer, has reasonably concluded that the lawyer has agreed to render legal services;

14.          clarify that in the case of an individual who consults the lawyer in a representative capacity, the client is the corporation, partnership, organization, or legal entity that the individual is representing;

15.          clarify that the definition of client does not extend to near-clients, affiliated entities, directors, shareholders, employees, or family members unless there is objective evidence to demonstrate that they had a reasonable expectation that a lawyer-client relationship would be established;

16.          clarify that lawyers owe a duty of loyalty only to clients and that this duty should not be extended to others; and

17.          clarify that lawyers owe a duty of confidentiality to clients and that a similar duty of confidentiality may extend to near-clients and non-clients when they have disclosed confidential information to the lawyer in the course of the retainer, reasonably expecting that it would be protected, and the lawyer knows or ought to know that the information s confidential.

Engagement Letters

That the CBA Model Code of Professional Conduct be amended to:

18.          encourage strongly the use of engagement letters as the preferred way to

a.             define and determine the nature and scope of the lawyer-client relationship and

b.             clarify the expectations that lawyers and clients have regarding this relationship.

Conclusion

That the CBA:

19.          undertake the work necessary to transform the Task Force recommendations into rules and commentaries in the CBA Code of Professional Conduct; and

20.          communicate recommendation 11 with respect to the transfer of professional, specialist and administrative staff to their appropriate professional associations so they may consider adopting parallel provisions in their codes of conduct.

21.          forward the Task Force Report to the Federation of Law Societies of Canada for the Federation’s consideration in the development of its model code of conduct, noting the importance of having harmonized conflicts rules in place across Canada.