Ontario Superior Court of Justice, Divisional Court
Court File No. 73/02
R.A. Blair R.S.J., Lane and J. de P. Wright JJ.
Counsel:
Sheila Block and Peter Balasubramanian, for appellant, Jeff Wu.
Warren Mueller, Q.C., and Robby Bernstein, for respondents, Skye Properties Ltd., Roycom Entrepreneurs Ltd. and Roycom Entrepreneurs Real Estate Fund Limited Partnership.
John L. Finnigan, for respondents, John Roy, Lou Maroun, Roycom Securities Ltd. and Roycom Realty Ltd.
No one appearing for respondents, Jasper Avenue Limited Partnership, 390525 Alberta Ltd., Jasper Avenue G.P. Inc., John Hampson and David G. Williams.
The judgment of the court was delivered by
R.A. Blair R.S.J.:—
Overview
1Thomas J. Dunne Q.C. and the Gowlings law firm were disqualified by court Order from continuing to represent Mr. Wu and about 100 other investors in these proceedings. The proceedings are complex. They have been working their way towards trial for over seven years. All that time Mr. Dunne has been counsel for the investors.
2The trial was to have commenced in January 2002. However, the Gowlings law firm — of which Mr. Dunne is a member — merged with another law firm, Smith Lyons, effective September 1, 2001. The disqualification Order arose out of this merger.
3The Respondents in this case assert that Smith Lyons owes them a duty of good faith arising out of an earlier legal retainer relating to matters that are central to these legal proceedings, and a contractual duty to co-operate with them in the defence of the investors' claims. They therefore argue that the merged firm is disqualified from acting against their interests.
4Farley J. granted an order removing Mr. Dunne and Gowlings as solicitors of record for the investors in the proceedings [reported 2001 28075 (ON SC), 21 B.L.R. (3d) 125]. This is an appeal from that Order, by leave of the Honourable Madam Justice Dunnet granted on February 26, 2002 [reported 2002 62444 (ON SCDC), 58 O.R. (3d) 154].
5The appeal raises difficult issues concerning conflicts of interest that may arise upon the merger of law firms and concerning the interests and values that must be balanced in considering such conflicts.
FACTS
6The claim and counterclaim arise in the context of a tax shelter investment known as the Jasper Avenue Limited Partnership (the "Jasper Partnership"), which owned and managed a twin tower condominium complex in Edmonton, Alberta. Mr. Wu and the other investors (together"the Investors") acquired limited partnership units that were offered for sale by way of an Offering Memorandum dated June 30, 1989.1 In doing so they became limited partners in the Jasper Partnership.
7The purchase price for the units was structured in a way that involved a small cash deposit, a 27.5 per cent "Equity Loan or Cash" deposit, and a First and Second secured loan for the balance of the purchase price. Two of the respondent Promoters, Roycom Entrepreneurs Limited and Skye Properties Limited, provided Cash Flow Loans to fund cash flow deficiencies and also to cover payments on the First Secured Loan. The Second Secured Loan was funded by Roycom Entrepreneurs.
8There were problems with the project. The First and Second Secured Loans were not paid when they matured in 1994. In 1997 Roycom Entrepreneurs and Skye Properties demanded repayment of the Cash Flow Loans. The Investors did not pay. Roycom Entrepreneurs and Skye Properties sued. Mr. Wu and the other investors responded by launching a claim of their own against all of the Respondents alleging that the loans were null and void on the basis that the Offering Memorandum was misleading and the Respondents (grouped genetically as "the Promoters") knew it. They seek $30 million in damages for misrepresentation, deceit, conspiracy to injure and breach of fiduciary duty in relation to the offering and the Offering Memorandum.2
9The Smith Lyons law firm was retained by the Promoters and the Jasper Partnership to provide advice and guidance on the limited partnership investment including its legal, corporate and financial structure, and to prepare the necessary documents including the Offering Memorandum. It billed one of the Respondents, Roycom Securities Limited, the sum of $51,638.26 for its services in this regard, and was paid that amount by the Jasper Partnership. Justice Farley found that Smith Lyons was acting for the Jasper Partnership and for the Promoters.
10The Promoters have not instituted proceedings against Smith Lyons. However, they have put them on notice of a potential claim over in the event that the Investors' allegations concerning the Offering Memorandum succeed at trial, and they have entered into a Standstill Agreement with the law firm concerning the outstanding action. In the Standstill Agreement the Promoters agreed not to institute proceedings against Smith Lyons with respect to matters in issue in the Investors' action, and Smith Lyons agreed to waive any limitation period or argument based upon delay in the event the Promoters are required to institute such proceedings. Smith Lyons further agreed:
... to provide reasonable cooperation without charge, except for actual disbursements, to counsel for [the Promoters] in defending against the allegations made by the investors in the Actions.
11Mr. Dunne has been counsel to the Investors throughout these proceedings. At a moment in time he merged his firm, Armstrong Dunne, with Gowlings. This did not create a problem with respect to the proceedings. The subsequent Gowlings/Smith Lyons merger (creating the "Merged Firm") gave rise to the conflict of interest dilemma that is at the heart of this appeal, however.
12The potential conflict problem was recognized by the Merged Firm itself. An internal memorandum dated October 5, 2001 circulated to all lawyers, students and staff; stated: Gowling Lafleur Henderson LLP ("Gowlings") has acted for and continues to act for a number of individuals who invested in a limited partnership known as the Jasper Avenue Limited Partnership (the "Jasper Avenue Limited Partners") and commenced an action against Skye Properties Limited, Roycom Entrepreneurs Limited, Jasper Avenue Limited Partnership, 390525 Alberta Limited, Jasper Avenue G.P. Inc., John Hampson, David G. Williams, John Roy, Lou Maroun, Roycom Realty Limited, Roycom Securities Limited and Roycom Entrepreneurs Real Estate Fund Limited Partnership. Smith Lyons LLP ("Smith Lyons") has acted in the past but no longer acts, or after September 1, 2001 will not act, for the Jasper Avenue Limited Partnership and Jasper Avenue G.P Inc. ("the Jasper Avenue Partnership"). Each of these clients has imparted confidential information to individuals at Gowlings or Smith Lyons, as the case may be. in the course of their respective retainers, and each client expects that such information will be maintained in strict confidence. In a situation like the present where Gowlings and Smith Lyons have agreed to merge effective September 1, 2001 and where one firm (Smith Lyons), prior to the merger, advised but no longer acts, or will no longer act for one or more members of the The [sic] Jasper Avenue Partnership and where the other firm (Gowlings), prior to and after the merger, acted and continues to act for the Jasper Avenue Limited Partners, which clients may have an adversity of interest, it is imperative that the confidential information imparted to the respective firms be protected so that it is never used against the provider of that information. [Underlining added.]
13A significant issue on this appeal, however, is whether the potential conflict was recognized and dealt with by means of appropriate screening mechanisms soon enough. The merger was effective, and the Merged Firm began its merged operations, on September 1, 2001. No "ethical wall" or screening mechanism was put in place with respect to the Investors' action and the connection between Smith Lyons and the Promoters until October 5, 2001 — the date of the memorandum cited above and the date when the two firms physically integrated their offices. No issue is taken with the adequacy of the ethical wall put in place by the Merged Firm at that time and continuing thereafter.
THE POSITIONS OF THE PARTIES
14The Appellants submit that the Motions Judge erred in the following respects:
a) He failed to hold that Smith Lyons never possessed information that could be considered confidential to the Promoters;
b) He found that because there was no ethical wall in place on September 1, 2001, Gowlings and Mr. Dunne could not continue to represent the Investors, since the strong inference that lawyers who work together share confidences together had not been displaced on the evidence;
c) In so finding, he applied the wrong test, namely a "bright line test" that an ethical wall must be in place on the effective date of the merger, instead of considering all the relevant circumstances and balancing the interests of the parties and the interests of justice as contemplated in rule 2.05(4) of the Law Society's Rules of Professional Conduct, and,
d) He refused to consider whether the motion to disqualify had been brought solely for tactical purposes to oust the opposing party's counsel on the eve of a complex trial in order to put pressure on the Investors to settle to their disadvantage.
15On the other hand, the Respondents argue that the Motions Judge was correct in law, that he neither disregarded, misapprehended nor failed to appreciate relevant evidence, and that his findings are all reasonably supported by the evidence and are in any event entitled to deference. More particularly, they submit:
a) that the Merged Firm is now acting against its former clients (the Promoters and the Limited Partnership) in a lawsuit arising from the very matter in which present members of the Firm (the Smith Lyons group) were retained (i.e., drafting and advising on the Offering Memorandum);
b) that the Merged Firm is acting as counsel for the Investors who are attacking a document drafted by other members of the same Firm — an attack that may ultimately result in an action against those other members in the Merged Firm if the Investors are successful in their litigation;
c) that by virtue of their retainer and advice to the Promoters and the Jasper Partnership in connection with the Offering Memorandum, Smith Lyons — and therefore the Merged Firm — owes a continuing duty of loyalty to the Promoters, and by virtue of the Standstill Agreement owes a contractual duty to co-operate with the Promoters, in defending against the Investors' attack on the Offering Memorandum;
d) that the Merged Firm has a conflicting personal interest in the outcome of the Investors' litigation because, as counsel for the Investors it is being paid to help them succeed, whereas its potential $30 million liability to the Promoters will disappear if the Investors lose;
e) that there was at least the potential for confidential information to have passed during the period between the effective date of the merger and the erection of the ethical walls to prevent that from happening, and therefore on the principles enunciated in Martin v. Gray3 (1990), 1990 32 (SCC), 77 D.L.R. (4th) 249 (S.C.C.), and applied by Farley J., the disqualification order was properly made; and finally,
f) that Farley J. did not apply a simple "bright line test", but rather balanced all of the necessary and appropriate factors in arriving at his decision.
THE STANDARD OF REVIEW
16On questions of law, the standard of review on appeals from orders of a judge is correctness. With respect to the judge's findings of fact and to the application of legal principles to those facts, the standard is whether or not the judge was "clearly wrong": see, for example, Stein v. "Kathy K" (The Ship), 1975 146 (SCC), [1976] 2 S.C.R. 802, 62 D.L.R. (3d) 1. The judge must have acted on a wrong principle, disregarded or misinterpreted or failed to appreciate material evidence, made a finding not reasonably supported by the evidence, or drawn an unreasonable inference from the evidence: Cosyns v. Canada (Attorney General) (1992), 1992 8529 (ON SCDC), 7 O.R. (3d) 641, 88 D.L.R. (4th) 507 (C.A.); Equity Waste Management of Canada v. Halton Hills (Town) (1997), 1997 2742 (ON CA), 35 O.R. (3d) 321 (C.A.).
17In my view, Farley J. made none of those errors.
LAW AND ANALYSIS
No Confidential Information
18The Appellants argue that Smith Lyons was not privy to any confidential information regarding the offering and the Offering Memorandum concerning which the Investors, as limited partners, are not entitled to access. They base this submission on two grounds, namely,
(i) that Smith Lyons were solicitors for the limited partners as well as for the Promoters in respect of the offering and the Offering Memorandum, and therefore that the solicitors did not receive any "confidential" information from the Promoters because the limited partners were entitled to access that information as well; and,
(ii) that the provisions of the Limited Partnerships Act4 give the limited partners the right to have access to all books and records of the Limited Partnership and the right to be given true and full information concerning it.
19I do not accept these submissions.
20Smith Lyons was not acting as solicitor for the limited partners.
21The Offering Memorandum itself makes it quite clear that those responding to the offer should obtain their own legal advice and that Smith Lyons was the solicitor for the Jasper Partnership. Smith Lyons sent its account for services rendered to Roycom Securities Limited, one of the Promoter Respondents, and the account was paid by the Jasper Partnership out of proceeds from the offer. It is not accurate in law to say that because the law firm was paid from moneys that came from the limited partners the law firm was acting for the limited partners. Smith Lyons' account was paid with money that came indirectly from the Investors, but Smith Lyons was not paid by the Investors. The funds came to the Jasper Partnership from the Investors as the purchase price for their units, and as a result of which they became limited partners in the Jasper Partnership. However, the funds belonged to the limited partnership and it was the Jasper Partnership that paid the account rendered by Smith Lyons to the Promoters.
22Justice Farley found on the evidence that "[w]hile the limited partnership has paid for the services of Smith Lyons in relation to establishing and selling the limited partnership interests to the investors, it is obvious that Smith Lyons was in reality providing legal services (including advice) to the moving parties and their allies" (i.e. the Promoters) [para. 1]. He also found that "[t]hat relationship would be obvious to the investors and their counsel who had been working on this litigation for the past six plus years" [para. 1]. There was ample support in the Record for those findings, and there is no basis for interfering with them. Consequently, it cannot be said the information provided by the Promoters to Smith Lyons was not "confidential" because the limited partners (i.e., the Investors) were their clients as well and the information belonged equally to them.
23Nor do I think the provisions of the Limited Partnerships Act are of assistance to the Appellants in dispelling the confidential-information-exchange argument. Those provisions entitle the limited partners to have access to the books and records of the Limited Partnership and to be given "true and full information concerning all matters affecting the limited partnership" [s. 10(b)]. This would encompass information about the Jasper Partnership and its operations. The affidavit of Mr. Maroun makes it clear, however, that Smith Lyons received a great deal of confidential information from the Promoters concerning matters lying behind the Jasper Partnership and its operations. According to Mr. Maroun, the law firm was retained to and did provide advice and guidance "as to how the investment concept could be brought to market under Ontario law" and about the investment in general"including its legal, corporate and financial structure" and including the preparation of the Offering Memorandum and other necessary documentation.
24Mr. Maroun went on to say (affidavit, para. 10):
In the course of our dealings with Smith Lyons there was a complete and free exchange of information and documents relevant to the investment. We disclosed to Smith Lyons the history of the Jasper Avenue property, the business plan, the corporate strategy, financial projections and all other information relevant to bringing the limited partnership syndication investment to market. Smith Lyons was privy to our most intimate thoughts, concerns and strategies on the investment and was provided with any and all information required to fulfil its mandate. Smith Lyons was not simply a scribe for the deal but rather acted as our trusted confidential advisor. The Smith Lyons lawyers were integral members of the deal team and provided advice and guidance on all aspects of the transaction including the legal, corporate and financial structure of the investment. Smith Lyon[s] drafted most of the material contracts including the OM, the Limited Partnership Agreement, the Agency Agreement and the like.
25The provisions of the Limited Partnerships Act would entitle the limited partners to access to the Offering Memorandum, the Limited Partnership Agreement, the Agency Agreement and the like, and to true and full information concerning them and the Jasper Partnership. I do not think, however, that those provisions entitle them to confidential information provided to Smith Lyons by the Promoters concerning the genesis and development of the investment concept and how it could be brought to market in the form of a limited partnership, or concerning the Promoters' business plan, corporate strategy, financial projections and other information relevant to the limited partnership syndication of the investment to market. It is not information concerning "matters affecting the [Jasper Partnership]"; rather, it is information about the Promoters' ideas and background information concerning the promotion of that limited partnership. This latter information may very well touch the heart of the Investors' complaints regarding the Offering Memorandum and may therefore be very pertinent to the litigation. The fact that some or all of it may be subject to disclosure through the discovery process in the lawsuit does not deprive it of its confidential nature in the hands of the Smith Lyons (and, now, the Merged Firm) lawyers, however: see Ford Motor Co. of Canada, Ltd. v. Osier, Hoskin & Harcourt (1996), 1996 8070 (ON SC), 131 D.L.R. (4th) 419 (Ont. Gen. Div.), at 439. Indeed, the existence of this information in the hands of those lawyers points to the very need for the provision in the Standstill Agreement requiring Smith Lyons to co-operate and assist the Promoters in the defence of the Investors' claims.
The "Bright Line" Concept and the Need for Ethical Walls
26Justice Farley concluded that the disqualification order should issue "based upon the ratios and principles" [para. 3] contained in a well-developed line of jurisprudence commencing with the decision of the Supreme Court of Canada in Martin v. Gray, supra, and including the decision of Winkler J. in Ford Motor Co. of Canada, Ltd. v. Osier, Hoskin & Harcourt, supra, and that of the Manitoba Court of Appeal in York Investments Ltd. v. Winnipeg (City), 1991 12068 (MB CA), [1991] M.J. No. 171 (QL), 3 W.A.C. 311. He reviewed those authorities. He referred to the Law Society of Upper Canada's amended Rules of Professional Conduct dealing with transfers of lawyers as between firms and mergers of firms and, in particular, to rule 2.04(5)(b)(i) concerning "the adequacy and timing of the measures taken to ensure that no disclosure of the former client's confidential information to the partners or associates having carriage of the new matter will occur" [para. 5].
27After citing from various passages in the judgment of Sopinka J. in Martin v. Gray, Farley J. concluded with the following comment [para. 6]:
Clearly Sopinka J. was of the view that "the preservation of the confidentiality of information imparted to a solicitor, the confidence of the public in the integrity of the profession and in the administration of justice will be maintained and strengthened" had priority over the other elements when the balance was to be drawn. Indeed in my view, that balance is easily accommodated by the prudently alert lawyers who contemplate a merger — they institute the ethical wall which is to be in place and effective at the time that there could be any sharing of confidential information, which absent unusual circumstances should be as of the effective date of the merger. This is a rather bright line test. [Emphasis added.]
28The Appellants argue that this reference to a "bright line test" indicates Farley J. applied the wrong test in resolving the motion. They submit he applied a test that requires the ethical wall to be in place at the effective date of the merger to the exclusion of balancing the other factors concerning the interests of the parties and the interests of justice called for in the Rules of Professional Conduct. If that were indeed what Farley J. did, there might be some force in the Appellant's position. However, I am not persuaded that is what he did in the circumstances. Instead, I think his reference to "a rather bright line test" is simply a common sense indication that it should be brightly obvious to "prudently alert lawyers who contemplate a merger" that the balancing of the various factors is best accommodated by ensuring that an adequate and effective screening mechanism is in place the moment the merger is effective and the possibility of the sharing of confidential information amongst the members of the merged firm exists.
29I agree with that sentiment.
30It is an important feature of this case that no ethical wall was in place at the time the Gowlings/Smith Lyons merger became effective on September 1, 2001. The trial date for the lawsuit — January 2002 — was fast approaching. It is a complex lawsuit. Preparations for trial must have been well underway and known to those involved. Not until after the firms had integrated their physical operations after the Thanksgiving weekend on October 5th were screening procedures introduced.
31There is abundant authority for the proposition that, absent sufficient explanation, the screening mechanism must be in place when the conflict first arises: see, Ford Motor, supra, at 441; York Investments, supra; Saint John Shipbuilding Ltd. v. Bow Valley Husky (Bermuda) Ltd. (2002), 2002 NBCA 41, 18 C.P.C. (5th) 216 (N.B.C.A.), at 237-38, and Feherguard Products Ltd. v. Rocky's of B.C. Leisure Ltd., 1993 2975 (FCA), [1993] 3 F.C. 619 (C.A.). That is because the principles enunciated in Martin v. Gray are not easily satisfied if such is not the case. The test is whether a reasonably well-informed person would be satisfied, on the basis of clear and convincing evidence, that all reasonable measures have been taken against risk of disclosure: Martin v. Gray, supra, at 267 and 269. "Clear and convincing evidence" can include institutional mechanisms such as ethical walls — particularly where, as in Ontario, the governing body of the legal profession has adopted rules of professional conduct that approve their use. Nevertheless, those ethical walls should be in place at the time the possibility of conflicting sharing of confidential information first arises.
32In Ford Motor, supra, Winkler J. concluded (at 441-42):
Thus, for the period prior to the perfection of the screen, Osiers did not meet the requirements set down by Sopinka J. It is settled law, as can be seen from the decision of the Manitoba Court of Appeal in York Investments, supra, the Federal Court of Appeal in Feherguard Products, supra, and from the Law Society of Upper Canada commentary to Rule 29,5 that the screening mechanism must be put in place when the conflict first arises, in this case the time at which the impugned retainer commenced. Failure to fulfil this requirement is fatal to the continuation of the Osier, Hoskin retainer on the fair value proceedings. For if the screen is not in place for a material period of time, in the instant case a substantial one, there is no "clear and convincing" evidence within the meaning of Martin v. Gray, with the result that the inference must be drawn that relevant confidential information was conveyed. To adopt the words of Huband J.A. in York Investments: "The appropriate measure cannot be put in place after the event and still satisfy the public concern that no breach of confidentiality will take place." [Underlining added.]
33Here, the potential for the sharing of conflicting confidential information first arose the moment the Gowlings/Smith Lyons merger became effective. The Investors are seeking the not-insignificant amount of $30 million in damages — enough to ensure the lawsuit captures the attention not only of the law firm prosecuting it on behalf of the claimants (Gowlings) but also that of the law firm potentially exposed to liability in that amount because of an eventual claim over (Smith Lyons, now part of Gowlings). The trial of these complex proceedings was looming only four months later, and preparations — including the exchanges between counsel and those involved in assisting in the preparation of the claim and the defence — were actively underway. Lawyers talk in such situations, or, at least, the reasonably well-informed person might think that they would talk.
34As Sopinka J. noted, in Martin v. Gray, supra, at 269:
There is, however, a strong inference that lawyers who work together share confidences. In answering this question [i.e., the question whether confidential information will be misused], the court should therefore draw the inference, unless satisfied on the basis of clear and convincing evidence, that all reasonable measures have been taken to ensure that no disclosure will occur by the "tainted" lawyer to the member or members of the firm who are engaged against the former client. Such reasonable measures would include institutional mechanisms such as Chinese walls and cones of silence.
35Sopinka J. went on to say that such institutional measures must first be accepted and adopted by the governing bodies of the profession before the courts will accept them as satisfactory, and encouraged the professional bodies to develop and adopt such approved mechanisms. That, of course, has happened now, with the adoption by the Law Society of Upper Canada of what is currently rule 2.05(4) of its Rules of Professional Conduct. In addition, the Canadian Bar Association prepared a Task Force Report6 in response to the comments of Sopinka J. in Martin v. Gray. The recommendations of that Task Force were adopted by the CBA in August 1993. They approved the use of screening mechanisms and set out criteria to be applied by lawyers and firms setting up such mechanisms.
36The question presented to Farley J. was whether in the circumstances of this case the screening mechanisms put in place by the Merged Firm was adequate to overcome the "strong inference" that lawyers who join together to work together share confidences in doing so. He concluded that they were not, given the nature of the competing and conflicting interests and the lack of any sufficient explanation as to why the mechanisms had not been put in place at the time of the merger. In my opinion this conclusion is fully supported on the Record.
37The only explanation proffered by the Appellant was that the merging firms had not physically integrated their files and their offices until October 5, 2001 — the date on which the memorandum referred to above was circulated and the ethical wall put in place — and that affidavits were filed saying that prior to the physical integration there was no sharing of confidential information of Smith Lyons' clients and Gowlings' clients regarding this matter. Farley J. correctly held that this was not sufficient. I have already alluded to the significance of the Investors' claim not only to the Gowlings contingent of the Merged Firm but also to the merging Smith Lyons group, and to the fact that preparations were actively underway for the pending trial. In addition, the separation of lawyers and files in different buildings is not an impediment to communication between the lawyers. Telephones, cell phones, faxes and e-mail — all the paraphernalia of modern business and practice — make communications very easy. Moreover, the authorities are clear that affidavits of lawyers simply attesting to the fact that no confidential information has been communicated or shared are not in themselves sufficient in such circumstances: see Martin v. Gray, supra, at 270; Saint John Shipbuilding, supra, at 237.
38In short, the evidence before Farley J. was inadequate to justify a departure from the general rule that appropriate screening mechanisms must be in place at the time the first potential conflict arises, namely (in the circumstances of this case), when the merger of the two law firms became effective.
39Counsel for the Appellant submit that in Ontario the test in these types of situations "has shifted from a bright line application of Martin v. Gray to a broad interests of justice test" as set out in rule 2.05(4) of the Law Society of Upper Canada's Rules of Professional Conduct.7 That rule states:
2.05(4) Where the transferring member actually possesses relevant information respecting the former client that is confidential and that, if disclosed to a member of the new law firm, may prejudice the former client, the new law firm shall cease its representation of its client in that matter unless
(a) the former client consents to the new law firm's continued representation of its client; or
(b) the new law firm establishes that it is in the interests of justice that it act in the matter, having regard to all relevant circumstances, including:
(i) the adequacy and timing of the measures taken to ensure that no disclosure to any member of the new law firm of the former client's confidential information 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.
40The purpose of that rule is to ensure that all relevant considerations are taken into account when a lawyer transfers from one firm to another and confidential information concerning a client of the receiving firm is at stake. The rule also covers situations where firms merge. I do not read it, however, as altering the law as articulated by the Supreme Court of Canada in Martin v. Gray, supra, nor, indeed, do I think it could.
41Sopinka J. outlined the test to be applied in this way (supra, at 267):
In dealing with the question of the use of confidential information we are dealing with a matter that is usually not susceptible of proof. As pointed out by Fletcher Moulton L.J. in Rakusen,8 "that is a thing which you cannot prove" (at p. 841). I would add "or disprove". If it were otherwise, then no doubt the public would be satisfied upon proof that no prejudice would be occasioned. Since, however, it is not susceptible of proof, the test must be such that the public represented by the reasonably informed person would be satisfied that no use of confidential information would occur. That, in my opinion, is the overriding policy that applies and must inform the court in answering the question: Is there a disqualifying conflict of interest . . .
Typically, these cases require two questions to be answered: (1) Did the lawyer receive the confidential information attributable to a solicitor-and-client relationship relevant to the matter at hand? (2) Is there a risk that it will be used to the prejudice of the client?
42At the outset of his analysis of the policy considerations in play when determining whether a disqualification order should be made for conflict of interest reasons, Sopinka J. said this (supra, at 254):
In resolving this issue, the court is concerned with at least three competing values. There is first of all the concern to maintain the high standards of the legal profession and the integrity of our system of justice. Furthermore, there is the countervailing value that a litigant should not be deprived of his or her choice of counsel without good cause. Finally, there is the desirability of permitting reasonable mobility in the legal profession. [Emphasis added.]
43These values are all inherent in rule 2.05(4), which is not surprising since the rule itself was developed in response to the principles enunciated by Sopinka J. in Martin v. Gray. I do not accept the argument that because the Law Society of Upper Canada, as the governing body of the profession in Ontario, has promulgated a conduct rule regarding the transfer of lawyers and the protection of confidential information in such circumstances, the courts are restricted to considering only the criteria and factors set out in the rule in exercising their jurisdiction to determine whether a disqualifying order should issue. The Supreme Court of Canada did not intend to cede the courts' inherent and supervisory jurisdiction over conflict of interest situations in legal proceedings to the governing bodies of the profession. What Sopinka J. did in Martin v. Gray was to urge those governing bodies to determine whether institutional devices such as ethical walls are effective as reasonable measures "to ensure that no disclosure will occur by the 'tainted' lawyer to the member or members of the firm who are engaged against the former client",9 and to develop standards for the use of such devices. He concluded his analysis with these words (at 270):
These standards will, in my opinion, strike the appropriate balance among the three interests to which I have referred. In giving precedence to the preservation of the confidentiality of information imparted to a solicitor, the confidence of the public in the integrity of the profession and in the administration of justice will be maintained and strengthened. On the other hand, reflecting the interest of a member of the public to retain counsel of her choice and the interest of the profession in permitting lawyers to move from one firm to another, the standards are sufficiently flexible to permit a solicitor to act against a former client provided that a reasonable member of the public who is in possession of the facts would conclude that no unauthorized disclosure of confidential information had occurred or would occur. [Emphasis added.]
44The Law Society rule must be read and applied in the context of that direction, which informs the circumstances in which the governing professional bodies across the country were directed to develop their standards. The reverse is not the case.
45In Chapters Inc. v. Davies, Ward & Beck LLP (2001), 2001 24189 (ON CA), 52 O.R. (3d) 566, the Court of Appeal upheld an order disqualifying Davies, Ward & Beck from continuing to act for Trilogy Enterprises Ltd. on an offer to purchase shares of Chapters. The offer contemplated an eventual merger of Chapters and Indigo Books and Music Inc., for whom the law firm had earlier acted in a competition brief. The Court of Appeal upheld the Motion Judge's decision in that case on the basis of the principles set out in "the seminal case" of Martin v. Gray. It made no mention of the Law Society of Upper Canada's Rules of Professional Conduct.
46I do not mean to suggest by these comments that a balanced approach assessing the various factors outlined in rule 2.05(4) is not appropriate in cases such as this. I am simply suggesting that those factors are themselves reflective of the principles enunciated in Martin v. Gray. Generally speaking, those who, in good faith, comply substantially with the new Law Society Guidelines can expect to withstand judicial scrutiny, although in terms of ethical walls the law is clear that such mechanisms must be effectively put in place at the time the potential conflict first arises. The "interests of justice" balancing approach articulated in rule 2.05(4) is, in my view, just another way of arriving at an appropriate equilibrium amongst those principles.
47I note that under the rule the onus is on the new firm to establish it is in the interests of justice that it be permitted to continue acting. It is clear from Justice Sopinka's decision in Martin v. Gray, and in the jurisprudence following it, that the necessary balancing exercise gives a certain "precedence to the preservation of the confidentiality of information imparted to a solicitor" (supra, at 270). This is quite consistent with the structure of rule 2.05(4), which is based upon the premise that where the transferring member possesses confidential information respecting a former client that, if disclosed to the new firm, may prejudice the former client, the new firm shall cease its representation of the client, unless the new firm satisfies the onus.
48Justice Farley was clearly alive to the need to balance the various principles enunciated in Martin v. Gray (see Reasons, para. 6). I can find no error in his having concluded that the burden had not been met "based upon the ratios and principles contained in" [para. 3] that case and those following it, and that the balance tipped in favour of a disqualifying order in the circumstances of this case. The "strong inference that lawyers who work together share confidences" was not displaced by "clear and convincing evidence that all reasonable measures ha[d] been taken to ensure that no disclosure" had occurred [Martin v. Gray, at p. 269]. The Court was entitled to, and did, draw the inference necessary to impose the disqualification order.
49Farley J. concluded the informed reasonable person "would appreciate that the role of Smith Lyons was the substantial equivalent of counsel or quasi counsel" [para. 1]. Counsel for the Appellant attacked this conclusion, which related to the firm's obligation under the Standstill Agreement "to provide reasonable cooperation ... in defending against the allegations made by the investors". It was acknowledged before the Motions Judge that this obligation included "assisting and advising" the Promoters with respect to the proceedings. Smith Lyons was never on the record for the Promoters in the proceedings. The firm was therefore never "counsel" for them, and the Appellant submits there is no such concept as "quasi-counsel". However, it seems likely to me the reasonably well-informed and objective person would conclude that lawyers with a contractual obligation to provide assistance in the defence of an action were effectively equivalent to a legal representative of the party being sued. While the reference to "quasi-counsel" may not be a term of legal art, the substance of Farley J.'s inference is that their obligation to co-operate in defending against the allegations of the Investors put the Smith Lyons part of the Merged Firm in a position of conflict with the Gowlings part of the Merged Firm. The former's commitment to the Promoters created a concurrent and inconsistent obligation to that owed by the latter to the Investors. There are thus two conflicting and adversarial groups of parties being advised within the same law firm in the same proceedings.
50The evidence supported this conclusion, which brings me to a consideration of a broader basis than simply the protection of confidential information upon which the disqualification Order may stand.
Conflict of Interest Independent of the Confidential Information Issue
a) Conflicting Interests Touching Both Sides
51The Merged Firm has significant conflicting obligations — albeit in ways that differ in capacity and degree — towards both groups of parties in the proceedings. It is participating, or may be obliged to participate, on both sides of the dispute. Furthermore, it has diverging interests internally as to the outcome of the litigation: as counsel for the Investors, its interest is in seeing that they are successful; as potential defendants in a $30 million claim over by the Promoters, its interest is in seeing that the Investors fail. How can the public's confidence in the profession and its faith in the integrity of the administration of justice be maintained if the Merged Firm is permitted to continue to represent the Investors in such circumstances? In my view, they cannot be.
52It is fundamental that a lawyer who has acted for a client or persons involved with or associated with the client may not act against that client or associated person in the same or any related matter. This principle is enshrined in rule 2.04(4) of the Law Society of Upper Canada's Rules of Professional Conduct.
53Smith Lyons acted for the Promoters and gave legal advice and provided other legal services in connection with the preparation of the Offering Memorandum. Allegations of deceit, misrepresentation and negligence with respect to the preparation of the Offering Memorandum lie at the heart of the Investors' claims against the Promoters. Quite apart from its obligations under the Standstill Agreement, Smith Lyons owes a continuing fiduciary duty to its former clients in relation to that legal advice and those legal services. It cannot put itself in a position where it, or its new merged entity, is in conflict with those continuing duties.
54Ms. Block and Mr. Balasubramanian argue, nonetheless, that Law Society rule 2.05(4) was put in place specifically to deal with the growing number of law firm mergers and to clarify that in the circumstances outlined therein a law firm may, indeed, act against a former client if it is in the interests of justice that it do so. While that may be true where the conflict in issue relates to the possession and potential use of confidential information, I do not believe the rule was designed to eviscerate the general ethic that a lawyer or a firm cannot act on both sides of the same matter against a client or former client.
55The decision of the New Brunswick Court of Appeal in Saint John Shipbuilding Ltd. v. Bow Valley Husky (Bermuda) Ltd., supra, is instructive in this regard. In that case the Gowlings law firm in Ottawa was retained to act for the plaintiff in an action arising out of the construction and sale of an offshore drilling rig to the defendants. Bow Valley retained Alan Hunter of the Calgary firm, Code Hunter, as one of its counsel to defend the action. Subsequently, Gowlings and Code Hunter merged. For reasons that are unclear, the conflict of interest was not discovered for about a year and a half. When it did emerge, Saint John Shipbuilding requested that Mr. Hunter withdraw from the case. As Drapeau J.A. noted"[n]ot only did Gowlings not accede to Saint John Shipbuilding's request, it opted to continue acting for both Bow Valley and Saint John Shipbuilding in the ongoing litigation" (supra, at p. 221) [emphasis in original].
56The New Brunswick Court of Appeal overturned the decision of the motions judge who had declined to grant an order disqualifying Mr. Hunter from continuing to act as counsel for Bow Valley and other defendants (by this time the Gowling firm had ceased to act for the plaintiff). It did so on a number of grounds, including the application of Martin v. Gray principles and the ineffectiveness of screening mechanisms that had been put in place (or, rather, that had not been put in place in a sufficiently timely fashion). However, the primary ground upon which the appeal was allowed related to Gowlings' simultaneous representation of both sides in the ongoing litigation — a ground that was explicitly stated to be based upon "principles of the law of conflicts that pre-date [Martin v. Gray] and have survived its arrival on the jurisprudential scene" (supra, at 228). At pp. 229-30 Drapeau J.A. said:
When the rule against the simultaneous representation of adverse parties is contravened, the implementation of Chinese walls and cones of silence is an exercise in futility. That is so because the conflict that results is not umbilically tied to any imputation of confidential information; the lawyer's duty of loyalty to the client and the best interests of the administration of justice are more than sufficient to compel immediate disqualification.
There can be no judicial tolerance whatsoever for the simultaneous representation of litigants who are adverse in interest. See Triple "A" Electrical Ltd. v. Custom Homes Ltd. (1994), 1994 10288 (NL SC), 120 Nfld. & P.E.I.R. 18 (Nfld. T.D.), per Hickman C.J.T.D., at paras. 11-20. In that regard, I make mine the following observations by P.M. Perell, Conflicts of Interest in the Legal Profession (Toronto, Ont.: Butterworths, 1995) at 44:
. . . [where clients are opponents in the same or a related dispute and the lawyer purports to act for both sides] the . . . situation is straightforward, and it is obvious that a lawyer would have a conflict of interest. . .
The author goes on to make the point, again at p. 44, that, although such a situation will inevitably create difficulties for the lawyer because of problems relating to the confidentiality of information, the "explanation for the lawyer's obvious conflict of interest lies in the idea of loyalty".
I would add that the simultaneous representation of adverse parties in ongoing litigation, if tolerated by the courts, would cause grievous damage to the public's perception of the administration of justice. In my view, disqualification is essential in any such situation for the preservation of the public's confidence in the legal profession and respect for the judicial system. [Emphasis added.]
57While I recognize the degree of involvement of Smith Lyons on behalf of the Promoters in relation to the Investors' claims is not at the same level as that of Mr. Hunter's representation of Bow Valley in the Saint John Shipbuilding case, there is much in the above reasoning that commends itself to me in relation to the Smith Lyons/Gowlings' merger and its implications for the continued representation of the Investors by Mr. Dunne and the Merged Firm. There remains the duty of loyalty between Smith Lyons and the Promoters with respect to Smith Lyons' advice and assistance in preparing and marketing the limited partnership units through the vehicle of the Jasper Partnership and the Offering Memorandum. As I have already noted, these issues are at the heart of the Investors' claims. How can one group of partners in the Merged Firm advance the interests of the Investors in that regard, while another group of partners simultaneously has a duty of loyalty to the defending parties in relation to those same issues?
58Moreover, the interests of different members in the Merged Firm conflict. Mr. Dunne and the original Gowlings partners in the Merged Firm have a duty and an interest in ensuring the Investors' success. The Smith Lyons partners in the Merged Firm have a duty towards the Promoters, as outlined above, but also have an interest in ensuring that the Investors do not succeed. If the Investors fail, the Smith Lyons partners are relieved of a potential $30 million liability. Consequently, the Merged Firm is in the untenable position where some of its members are prosecuting claims for the Investors while others of its members have a personal interest in seeing that the claims are dismissed.
59Ms. Block submits that this latter conflict is one for the Investors to accept or reject, as they see fit. As she said"they can vote with their feet and walk from Gowlings". At first blush, this is an appealing response. However, it is not a complete answer to the problem that arises from the existing conflict, in my opinion, because there is more to it than simply the option of the Investors. If they do not choose to walk — and all indications seem to be they do not intend to do so — where does that leave the Promoters in terms of the continuing duty of loyalty owed to them by the Smith Lyons group and in terms of the obligation of the Smith Lyons group to co-operate with them in the defence of the proceedings? Mr. Maroun has testified that he intends to call upon that obligation to cooperate. What happens if the Promoters do so either prior to trial or — even more troubling — in the event something arises in the middle of what will undoubtedly be a long trial? They must sit down with a Gowlings lawyer (formerly a Smith Lyons lawyer), perhaps in the Gowlings offices, and have confidence they are being given full co-operation and assistance in defending the claims of a group of Investors who may well be meeting at the same time in the same offices with another Gowlings lawyer. What if those lawyers are about to go off to a partners' meeting together, or to a firm social event, or to the golf course? What confidence — real or perceived — can the Promoters have in such a situation that the co-operation and assistance they are receiving in the defence of the Investors' claims are not tainted by the other Gowlings lawyers' loyalty to and interest in the advancement of the Investors' claims?
60In my view such a situation not only gives rise to an irreconcilable conflict, it would give rise to the perception of such a conflict in the eyes of the reasonably well-informed and objective lay person. The public's confidence in the legal profession and in the integrity of the administration of justice cannot withstand such a perception. The unlikely prospect that the Investors may opt to protect their interests by moving to another law firm is cold comfort to the Promoters faced with the conflict of interest as it presently exists.
b) Application of Law Society Rule 2.05(4)
61Even if I were in error in the above conclusions, I would not set aside the disqualification Order on the basis of a straightforward examination of the particular provisions of rule 2.05(4) of the Law Society of Upper Canada's Rules of Professional Conduct, having regard to all the circumstances.
62For the reasons outlined above, I agree with Farley J.'s finding that no ethical wall or screening mechanism was put in place in an adequate and timely fashion sufficient to ensure that no disclosure of confidential information would occur (subpara. (b)(i)), and to overcome the strong inference that confidential information may have been shared.
63The aspect of prejudice is part of a Martin v. Gray analysis as well as a criterion specifically referred to in rule 2.05(4)(b)(ii). In the circumstances of this case, the Investors may well be prejudiced if the disqualification Order stands, but both the Investors and the Promoters will be prejudiced if the Order is set aside. If the Order is set aside and Mr. Dunne and Gowlings continue to act for the Investors in the proceedings, neither the Investors nor the Promoters can be assured that they will have the undivided loyalty of Gowlings, the Merged Firm. Should the Promoters decide to call upon the former Smith Lyons members of the Firm for further cooperation in the defence of the Investors' claims, they will always be faced with the doubt — real or perceived — that the assistance is being shaded by the Firm's pursuit of the Investors' interests. Conversely, the Investors face the same dilemma when considering the implications of the former Smith Lyons' members' interest in avoiding a very substantial potential liability if they fail in their claims.
64If the disqualification Order stands, the consequences for the Investors are indeed unfortunate. Mr. Dunne has been their lawyer for over seven years on this case. It is a complex case. Appellants' counsel submit that "the right to counsel of choice takes on a greater importance in a case involving 100 parties who have been galvanized by that counsel for the purpose of litigation over the course of seven years" and that "it is questionable whether comparable counsel could reasonably be found [to replace Mr. Dunne] at all given the unique relationship which arises when one counsel represents almost 100 individuals for seven years".10 Admittedly, it will present some difficulties for the Investors to find another counsel — although they have now had over a year since the date of the Order to hedge against the possibility. No counsel — even one as capable as Mr. Dunne — is completely irreplaceable, however. When these consequences for the Investors are balanced against the difficulties alluded to above should Gowlings continue to act, and against the need to preserve public confidence in the profession and the administration of justice, I am satisfied that the Investors' admitted dilemma in needing to retain new counsel cannot carry the day.
65For similar reasons the rule 2.05(4)(b)(iv) factor concerning the availability of alternative counsel does not outweigh the failure to put adequate screening mechanisms in place in a timely fashion, in the circumstances of this case.
c) The "Tactical Motive" Argument
66Appellants' counsel submit that Farley J. erred in refusing to consider whether the Promoters' motion to disqualify Mr. Dunne and Gowlings had been brought only for the purpose of tactical advantage. The trial was pending at the beginning of 2002, and losing Mr. Dunne as their counsel at that stage of the proceedings would be detrimental to the Investors in a number of ways. Skye Properties and Roycom Entrepreneurs sent a letter to the Investors on November 1, 2001, suggesting the proceedings be settled and pointing out, amongst other things, that the disqualification motion had been brought and that if the Promoters were successful the Investors "will be required to retain and bring a new lawyer up to speed before the trial starts on January 14, 2002, incurring substantial additional costs". This letter was written without the knowledge or involvement of counsel.
67In these circumstances, the Appellants argue, the disqualification motion should have been dismissed on the ground that it was brought simply for tactical purposes.
68Farley J. was not oblivious to this argument. He simply concluded it was unnecessary to deal with it because in his view the Promoters "must be successful based upon the ratios and principles contained in" [para. 3] Martin v. Gray, supra, and its progeny. In my opinion, he was entitled to take that view on the Record before him, and I would not set aside the disqualification Order on the basis that he declined to examine the "tactical purposes" argument.
69In any event, I do not think the tactical motive argument should succeed on the facts. Ms. Block argues that the timing of the motion is in itself suspect. It may be that the merger was well publicized in the legal profession media. However, the only evidence of when the clients became aware of the situation is that the motion was brought within a few days of Mr. Maroun becoming aware of the fact that Smith Lyons and Gowlings had merged. Moreover, given the complex nature of these proceedings, the "eve of trial" argument could equally have been made — and no doubt would have been — had the motion been brought on September 2, the day after the merger became effective. The motion could not have been brought before. The pending trial was then 4/12 months in the future, as opposed to the 3 1/2 months following the date when the motion was actually brought. When the motion was ultimately disposed of in December, Justice Farley very properly dealt with the "bringing a new lawyer up to speed before the trial starts on January 14, 2002" point by ordering that the trial would be adjourned.
70I agree that Courts should be vigilant in weeding out disqualification motions that are simply brought for purposes of gaining a tactical advantage by one side over the other. The authorities are clear that such a ploy will not be tolerated. For example, in Canadian Pacific Railway Co. v. Aikins, MacAulay & Thorvaldson (1998), 1998 5073 (MB CA), 123 Man. R. (2d) 281, 157 D.L.R. (4th) 473 (C.A.), Monnin J.A. stated, at para. 19:
The second issue is one that was not addressed by any of the parties, but it is one which must sound alarm bells for any court hearing a matter of this nature: the concept or practice of removal litigation. It is incumbent to ask if there is genuinely an issue of conflict, or is the issue simply being raised as a strategic tool where it might well advantage the party raising it simply to delay matters or for other positioning purposes.
See also Manville Canada Inc. v. Ladner Downs (1992), 1992 411 (BC SC), 63 B.C.L.R. (2d) 102, 88 D.L.R. (4th) 208 (S.C.), affirmed (1993), 1993 955 (BC CA), 76 B.C.L.R. (2d) 273, 100 D.L.R. (4th) 321 (C.A.); Sharp Electronics of Canada v. Battery Plus Inc. (2000), 48 C.P.C. (4th) 128 (Ont. S.C.) at 135.
71In the case before us, it was clear to Farley J. — and it is clear to me — that there is "genuinely an issue of conflict" as a result of the Gowlings/Smith Lyons merger.
DISPOSITION
72In conclusion, the following passage from the decision of Justice Sopinka in Martin v. Gray, supra (at pp. 255-56), is worth repeating:
Merger, partial merger and the movement of lawyers from one firm to another are familiar features of the modern practice of law. They bring with them the thorny problem of conflicts of interest. When one of these events is planned, consideration must be given to the consequences which will flow from loss of clients through conflicts of interest. To facilitate this process some would urge a slackening of the standard with respect to what constitutes a conflict of interest. In my view, to do so at the present time would serve the interest of neither the public nor the profession. The legal profession has historically struggled to maintain the respect of the public. This has been so notwithstanding the high standards that, generally, have been maintained. When the management, size of law firms and many of the practices of the legal profession are indistinguishable from those of business, it is important that the fundamental professional standards be maintained and indeed improved. This is essential if the confidence of the public that the law is a profession is to be preserved and hopefully strengthened. Nothing is more important to the preservation of this relationship than the confidentiality of information passing between a solicitor and his or her client. The legal profession has distinguished itself from other professions by the sanctity with which these communications are treated. The law, too, perhaps unduly, has protected solicitor and client exchanges while denying the same protection to others. This tradition assumes particular importance when a client bares his or her soul in civil or criminal litigation. Clients do this in the justifiable belief that nothing they say will be used against them and to the advantage of the adversary. Loss of this confidence would deliver a serious blow to the integrity of the profession and to the public's confidence in the administration of justice. [Underlining added.]
73For all of the foregoing reasons I would dismiss the appeal.
74If the parties are unable to agree as to costs, they may make brief written submissions in this regard within 30 days.
75Appeal dismissed.
Footnotes
- The offering was made without a prospectus by virtue of the "under $150,000" exemption under s. 71(1)(d) of the Securities Act, R.S.O. 1980, c. 466.
- The proceedings have since been consolidated as indicated in the title to the proceedings.
- Indexed as MacDonald Estate v. Martin.
- R.S.O. 1990, c. L.16, s. 10.
- Now Rule 2.
- See the Canadian Bar Association Task Force Report, Conflict of Interest Disqualification: Martin v. Gray and Screening Methods, February, 1993.
- Appellants' Factum, para. 52.
- Rakusen v. Ellis, Munday & Clarke, [1912] 1 Ch. D. 831 (C.A.).
- Supra, at p. 269.
- See Appellant's Factum, para. 76.