The Supreme Court of Canada has ruled that a Saskatchewan law firm retained by Canadian National Railway Co. violated its duty of loyalty when it surprised the railroad and filed a potential $1.75-billion class action alleging that CN and other defendants overcharged 100,000 Western farmers to transport their grain.
Legal observers said Friday's unanimous decision in the case, closely watched by lawyers across the country, clarifies the murky rules that govern law firms and conflicts of interest.
At issue was the question of when a law firm can act against an existing client. In its ruling, the Supreme Court overturned a Saskatchewan Court of Appeal decision and declared that McKercher LLP was in a conflict of interest when it launched the massive class action in 2008 while it was still working for CN on three unrelated legal files, a move the railway called a "betrayal."
But the Supreme Court declined to endorse CN's call for McKercher to be thrown off the class-action case, instead sending the dispute back to Saskatchewan's Court of Queen's Bench, which originally agreed with CN and disqualified McKercher, for reconsideration.
The profession has been debating the issue of conflict-of-interest for more than a decade, after the Supreme Court's 2002 ruling in a case called R v. Neil established a so-called "bright-line rule" banning law firms from acting for any client with an immediate legal interest in direct conflict with that of an existing client, unless both clients consent.
Critics said the Neil decision created confusion. It sparked a battle between the Canadian Bar Association, which argued for more flexible rules, and the country's law societies, which regulate lawyers.
In Friday's decision, written by Chief Justice Beverley McLachlin, the court stopped short of throwing McKercher off the class action itself, saying the law firm had no access to relevant confidential information from CN. And the ruling says other factors, such as whether the law firm in a conflict believed it was acting in good faith, need to be considered in any move to disqualify a client's legal counsel.
Malcolm Mercer, a lawyer with McCarthy Tétrault LLP who acted for the Canadian Bar Association in its intervention in the case, said the Supreme Court's ruling wisely limits the scope of the conflict rules by requiring courts to consider whether or not a client should have had the "reasonable expectation" that a law firm would not act against it: "It addresses many of the concerns that the CBA had. … Clients won't lose their lawyers without there being a good reason."
Allan Hutchinson, a law professor at York University's Osgoode Hall Law School in Toronto, said the Supreme Court failed to take into account the power that huge clients like CN – which consults more than 50 law firms – can wield. By retaining so many law firms, a large company can make it difficult for potential opponents to find suitable lawyers to take on their case, he said.
"From an access-to-justice point of view, it is problematic, because more vulnerable plaintiffs are going to be left out in the cold, unable to find sophisticated and experienced counsel," Prof. Hutchinson said.
Adam Dodek, a professor at the University of Ottawa's faculty of law who advised the Federation of Law Societies of Canada on its intervention in the case, said such concerns were a red herring, noting the number of class-action firms acting for plaintiffs across the country.
He said the decision makes clear that the so-called "bright line rule" for lawyers on conflicts remains in force: "I think the court has adopted a stricter legal standard … and that should give the public confidence in the duty of loyalty that they are owed, and can expect from, their lawyer."
Lawyers for CN and McKercher could not be reached.