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Superior Court clarifies corporate conflicts

|Written By Robert Todd

The Superior Court of Justice has given the red light to a legal argument that could have kept lawyers from acting against any client loosely affiliated with a company they work for.

Jasmine Akbarali says there wasn’t much case law that ‘talked about what sorts of obligations you might owe to a subsidiary of your client.’

Lerners LLP lawyer Jasmine Akbarali, who represented the plaintiff in McKenna v. Gammon Gold Inc. with colleague Earl Cherniak, says the key issue in the case was “Who is your client?

What is the scope of ‘client?’

“There really wasn’t much out there in terms of case law that talked about what sorts of obligations you might owe to a subsidiary of your client,” she says.

“It was an interesting question, and it had a lot of potential to really revamp or expand the kinds of duties that lawyers would owe, because if you suddenly owe a duty to every

member of a corporate family because you have done or are doing work for one member of that family, where does it end? . . . The potential for expansion of who is your client was incredible.”

The court agreed with Cherniak and Akbarali’s argument. They said firms should not have to treat an entire corporate family as a client if their relationship is with one company within that entity.

“We said they had as much to do with each other as blowing out a candle had to do with putting out a forest fire,” says Akbarali.

The legal question arose in a securities class action against defendants including Gammon Gold Inc., noted Justice Joan Lax’s judgment. The case involves accusations of prospectus misrepresentation and stock options manipulation, and is being prosecuted by Siskinds LLP.

Two of Gammon Gold’s public share offering underwriting syndicates - BMO Nesbitt Burns Inc. and TD Securities Inc. - are among the defendants in the class action. They opposed Siskinds’ decision to prosecute the action.

The syndicates argued Siskinds was in a conflict of interest as the Bank of Montreal and Toronto Dominion Bank had retained it on unrelated matters. The banks argued the firm should be barred from the case “because it is prosecuting an action against its own clients, or against entities whose interests are inextricably entwined with its clients in breach of its retainer and of duties owed to them,” wrote Lax.

The underwriters argued they are clients or ‘near-clients,’ said Lax, as they are subsidiaries of the banks and the general public views them as a single entity. They said Siskinds was acting contrary to its contractual, common law, and professional requirements, wrote the judge.

But Lax said the motion to oust Siskinds was simply tactical.

“The underwriters and the banks are separate and sophisticated business and legal entities that are individually governed and autonomous.”

Nesbitt and TD Securities can’t be viewed as the “alter egos” of BMO and TD Bank, wrote the judge, because they do business largely with their own employees and with the guidance of different boards of directors. They have created separate legal and business entities for their member companies, said Lax.

“They cannot ignore this separation when it is convenient or provides tactical advantage, but maintain the separation when it is to their advantage to do this,” she wrote.

The judge noted the banks told Siskinds it would not be getting any future work from them after refusing to withdraw from the Gammon Gold class action.

But, she added, “it is telling that they did not remove their existing files. If the banks had any real concern about Siskinds’ loyalty to them or the impairment of their solicitor-client relationship, they would have terminated the retainers.”

Lax also cited Justice Ian Binnie’s rationale in the Supreme Court of Canada’s 2007 ruling in Strother v. 3464920 Canada Inc. Binnie objected to the practice of bringing conflict motions for purely tactical reasons.

“If a lawyer’s duty of loyalty can be challenged in these circumstances, this would have serious and unwelcome consequences for access to justice and for the right of a litigant to counsel of his or her choice,” wrote Lax. The judge said Siskinds is one of the few firms prosecuting class actions, which she characterized as a “new and developing area of law.”

Counsel for the defendants declined Law Times’ requests for comment on the case.

Akbarali notes the Canadian Bar Association is expected to amend its rules of professional conduct next month to adopt recommendations from its task force on conflicts of interest.

If Lax’s ruling stands, lawyers must now look for courts’ opinions on where the line will be drawn on this issue, says Akbarali.

“Something like Bank of Montreal and BMO Nesbitt Burns is one thing, whereas a mom-and-pop shop and a holding company and an operating company might be entirely different,” she says. “So it will be interesting to see how that gets fleshed out in the future.”

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