Richard Hames, a founding shareholder of a construction company, wants to retire but is in dispute with the rest of the shareholders about the terms of his withdrawal from the enterprise. The shareholders’ lawyer, Mark Klaiman, had previously represented Hames and his company.
But while Hames claimed Klaiman was in a conflict of interest due to his former retainer with him, the court didn’t readily agree.
In McKercher, the court made it clear that “it is not sufficient for the former client to make bald assertions that the lawyer had obtained confidential information,” Superior Court Justice David Brown wrote in Hames v. Greenberg on July 24.
“The client must demonstrate that the information must be capable of being used against it in some tangible manner and that the previous retainer could have yielded relevant confidential information that could be used against the client.”
In Brown’s view, Hames wasn’t able to establish that Klaiman had the kind of information that could jeopardize him in the current litigation.
Hames mentioned a luncheon meeting in which he, Klaiman, and the other shareholders had a discussion about an ongoing litigation matter. The evidence didn’t suggest anything said over the lunch was confidential, according to Brown.
“More significantly, that conversation did not take place in circumstances where Hames could reasonably expect his discussion with Klaiman in the presence of the other shareholders would be treated as confidential as against those shareholders. It was a non-confidential conversation,” wrote Brown.
“I therefore find that no prior retainer or relationship in which confidential information was disclosed existed between Klaiman, on the one hand, and Hames and the family trust on the other.”
Brown also dismissed the applicants’ argument that Klaiman could be a witness in the case. Based on the evidence before him, the judge said there was no “real basis” to conclude that that “probably, or even likely,” would happen.
“I therefore see no reason to disqualify him from acting as lawyer of record for the non-corporate respondents in this proceeding,” he wrote.
Although the judge referenced McKercher, older case law would have led Brown to the same conclusion, says Simon Chester, a litigator at Heenan Blaikie LLP whose work focuses on conflicts of interest and professional responsibility.
“While the McKercher case is very important, Justice David Brown would have decided this case exactly the same way six months ago,” says Chester.
Still, Chester says Hames offers important lessons for lawyers. One of those lessons is that parties must raise issues of conflicts of interest in due time, he notes.
In McKercher, the Supreme Court stated that parties shouldn’t bring the issue of conflicts of interest for “tactical reasons.”
The rule is that “there are legitimate interests that need to be protected by conflict rules but you can’t sit on your rear end and tolerate a conflict and assert it when it’s convenient,” says Chester.
“You’ve got to do it in a timely fashion because every conflict case involves depriving another party of a choice of counsel.”
In the most recent case, Hames waited a year before raising a conflict allegation.
In another key message, the court highlighted an area of conflict of interest Klaiman wasn’t able to circumvent. Although he can represent the shareholder respondents, he’ll have to recuse himself as counsel for the corporate respondents, Brown ruled.
“As the case law establishes, the interests of the respondent shareholders are not identical to the interests of the respondent corporations, corporations of which Hames and the family trust remain shareholders and of which Hames remains a director,” the judge wrote.
“In those circumstances Klaiman cannot represent both the shareholders and corporate respondents; a conflict exists between their respective legal interests.”
Shareholder disputes require lawyers to take extreme care in identifying who their clients are, Chester notes.
“You’ve got to be really, really careful in shareholder fights because you’ve got to remember who your client is and who your client is not,” he says.
“It’s really important to remember that if you’re acting for a corporation, corporation interests are different from shareholders.”
In an important distinction from McKercher, Hames involved a lawyer who previously had a retainer with the opposing party rather than representing the two sides concurrently, says Malcolm Mercer, a partner with McCarthy Tétrault LLP’s litigation group.
“We’ll have to see how McKercher gets applied when a lawyer is in a matter directly adverse to the interest of a current client,” says Mercer.
“Those issues don’t arise here because it’s not a current client.”
For the courts, it’s tricky to find out whether the lawyer in question knows any confidential information that could be used against a former client because in the process of that query, that very secret information might surface, says Mercer.
For more, see "McKercher 'makes it easier' for counsel to argue they're not in conflict."