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Not enough firms to go around

|Written By Julius Melnitzer - Law Times

"Conflicts is not my favourite subject," says David McAusland, senior vice-president for mergers and acquisitions and chief legal officer at Alcan Inc. It's likely his distaste for the subject stems from his being forced to apply to have Farris Vaughan Wills & Murphy, a prominent Vancouver firm, removed as counsel for the District of Kitimat, B.C., in an action against Alcan.

McAusland is probably not alone in his distaste.

Since the landmark 2002 decision of the Supreme Court of Canada in R. v. Neil determined that a "business conflict" could also be a "legal conflict," the law reports have been rife with cases of clients or former clients seeking to remove law firms from acting against them.

In Neil, Justice Ian Binnie, writing for a unanimous court, declared that lawyers owe a duty of loyalty, as distinct from and in addition to a duty of confidentiality, to current clients. And that duty, absent informed consent, extended even to unrelated matters that directly affected existing clients adversely.

In Alcan's case, the trouble began when Farris Vaughan hired associate Christopher Gora from Lawson Lundell Lawson & McIntosh, where he had worked for three years as an articling student and associate. While there, Gora represented Alcan in matters related to the Kitimat action.

Farris accepted Kitimat's retainer in August 2002 but did not become aware of the conflict and did not alert Gora until February 2004. But the firm then immediately implemented ethical screens to isolate Gora from the Kitimat action.

Too little and too late, said the B.C. Supreme Court.

Farris's lack of knowledge that Gora had previously acted for Alcan was no defence to the motion for disqualification. And the 17-month gap between the potential for disclosure of confidential information and the implementation of protective measures meant that the firm had not taken all reasonable steps to ensure that no confidential disclosure would occur.

It's not known what McAusland's position on conflicts is generally. But it is significant that he was one of Canada's most highly regarded M&A practitioners and a former managing partner at Byers Casgrain (now Fraser Milner Casgrain LLP) before Alcan recruited him.

He has a reputation as a reasonable guy, and his background suggests that he understands the difficulties confronting law firms these days. But his distaste for the discussion of conflicts, likely honed by Alcan v. Farris Vaughan, hints at just how sensitive the issue has become

Indeed, the problem is an international one.

"Conflicts of Interest," a survey conducted in the United Kingdom in mid-2004 by Legal Week and Ernst & Young, found that 37 per cent of companies had encountered a conflict of interest situation with their legal advisers during the past 12 months.

The survey also found that 34 per cent had been forced to appoint new counsel as a result of a conflict over the past two years. Most disturbingly, three per cent had fired their lawyers for failing to disclose a potential conflict of interest.

In-house counsel, the authors concluded, are polarized when it comes to conflicts. Thirty per cent of respondents found it unacceptable that a firm work on both sides of a transaction. Forty per cent found it acceptable as long as they gave consent, and 20 per cent said whether consent was required depended on the circumstances. The final 10 per cent did not think consent was necessary.

Given a situation where a firm has previously acted for the other side on an unrelated transaction, 30 per cent of counsel responded that the situation represented an "ethical conflict" and 30 per cent felt there was a "commercial" conflict.

"As a rule of thumb, it would appear that approximately one-third of clients are applying a hard line towards conflicts," the study's authors conclude.

But in Canada, where Neil catches both "ethical" and "commercial" conflicts, the number of hardliners might be closer to 60 per cent.

"I take a hard line on legal and business conflicts because I don't want to end up having to get a new lawyer at some point in a lawsuit or a transaction," said an in-house lawyer at one of Canada's major insurance companies.

"Firms are throwing Chinese walls at the problem, but these are band-aid solutions that are increasingly going off in their faces. The real problem is that there's not enough firms to go around in Canada."

According to Brian Baynham of Vancouver's Harper Grey LLP, this attitude isn't a solitary one.

"We're beginning to see the ramifications of Neil," he said. "Previous and existing clients are insisting that their interests come before those of the new clients or the law firm itself."

Somewhere in the middle are companies like SAP Canada, represented by McCarthy Tétrault LLP.

"We have a list of companies for whom we will not allow our lawyers to act," said Barry Michael Fisher of Toronto, SAP's vice-president, general counsel, and corporate secretary. "But sometimes — like when we're negotiating a licensing agreement — we allow them to act on both sides, because we're better off dealing with lawyers who understand our industry and its pressure points."

Even more liberal are people like Claude Bergeron, vice-president for legal affairs at the Caisse de DépÙt.

"We retain the lawyer, not the firm," he explained. "The fact that a conflict might exist in principle because another lawyer in the firm is acting for someone else is not a consideration for us.

"If we know our lawyer well, we will trust him, and we will accept Chinese walls. We will not, however, accept that our own lawyer ever acts against us, except in special situations where we have waived the conflict in advance," said Bergeron.

"The reality is that we work with all the large firms and it is not reasonable for us to ask them to refrain from accepting any mandates at all against us."

Brian Leck, general counsel at the Toronto Transit Commission, takes a similar approach: "I'm not interested in creating headaches for lawyers. What I want to know is whether a real issue exists. If there is no confidential information that will come back to bite us, I'm not concerned about the technical side of whether a conflict exists."

The attitudes adopted by clients have much to do with the nature of their industry. "The major banks have policies that are fairly enlightened," said Winn Oughtred of Toronto, managing partner for professional matters at Borden Ladner Gervais LLP.

"There's no problem when we're talking about routine banking, such as loan transactions. But they don't want us to act against them in matters involving allegations of fraud, the reputation of the bank, and lender liability.

"And that's also no problem, because we don't want to be there in any event," said Oughtred.

A similar perspective exists in the forestry and investment banking sectors, where law firms regularly act for a number of major players. But not so where sensitive information is critical, where competitive tendering is common, or in concentrated industries where competitors are fractious and emotions run high.

"If you act for Molson's, you don't act for Labatt's," explained Garth Girvan of McCarthy Tétrault's Toronto office. "The same is true for the auto manufacturers."

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