Skye Properties Ltd. v. Wu, 2002 ONSCDC 62444

Skye Properties Ltd. et al. v. Wu Wu v. Skye Properties Ltd. et al. [Indexed as: Skye Properties Ltd. v. Wu]

58 O.R. (3d) 154

[2002] O.J. No. 734

Docket No. 73/02

Ontario Superior Court of Justice

Divisional Court

Dunnet J.

February 26, 2002

Professions -- Barristers and solicitors -- Conflict of interest -- Law firm removed as counsel on eve of trial on basis of disqualifying conflict of interest -- Leave to appeal granted -- Motions judge failed to apply applicable Rules of Professional Conduct and refused to consider whether motion brought for tactical purpose -- Good reason existed to doubt that motions judge applied appropriate legal test -- Appeal raised issues of importance such as whether rigid bright line test should be adopted without requirement of balancing all relevant circumstances and whether evidence that motion to disqualify was brought for tactical advantage should be disregarded.

The defendant brought an application for leave to appeal an order removing the defendant's counsel on the basis of a disqualifying conflict of interest.

Held, the application should be granted.

Rule 2.05(4) of the Rules of Professional Conduct is a clear direction by the Law Society of Upper Canada that a balancing approach, requiring a consideration of all relevant factors, should be adopted before determining whether a disqualifying conflict of interest exists. The motions judge failed to apply the applicable Rules of Professional Conduct and refused to consider whether the motion was brought for a tactical purpose. There was good reason to doubt that the motions judge applied the appropriate legal test in allowing the motion for disqualification. Further, the issues raised in this matter transcended the private dispute between the parties and addressed issues important to the development of the law of disqualifying conflicts. One such issue was whether the court should adopt a rigid "bright line test" articulated by the motions judge, without the requirement of balancing all relevant considerations, or whether it should adopt the approach embodied in the Rules of Professional Conduct, including the good faith of the parties, the existence of prejudice and the public interest. Another important issue was whether the court should disregard evidence that a motion to disqualify is being brought for a tactical advantage. The finding of the motions judge that screens must be in place before the conflict arises in order to be effective also conflicted with other cases in Canada.

APPLICATION for leave to appeal an order of Farley J. (2001), 2001 28075 (ON SC), 57 O.R. (3d) 46 (S.C.J.) removing solicitors from record.

Cases referred to Canada Southern Petroleum Ltd. v. Amoco Canada Petroleum Co. (1997), 1997 ABCA 71, 193 A.R. 273, 135 W.A.C. 273, 144 D.L.R. (4th) 30, 48 Alta. L.R. (3d) 382, [1997] 5 W.W.R. 395, 7 C.P.C. (4th) 26 (C.A.); Canadian Pacific Railway Co. v. Aikins, MacAulay & Thorvaldson (1998), 1998 5073 (MB CA), 123 Man. R. (2d) 281, 157 D.L.R. (4th) 473, 159 W.A.C. 281, [1998] 6 W.W.R. 351, 23 C.P.C. (4th) 55 (C.A.); Carlingwood Motors Ltd. v. Nissan Canada Inc. (2001), 2001 28249 (ON SC), 52 O.R. (3d) 242, 13 B.L.R. (3d) 199, 3 C.P.C. (5th) 134 (S.C.J.); Chapters Inc. v. Davies, Ward & Beck LLP (2001), 2001 24189 (ON CA), 52 O.R. (3d) 566, 10 B.L.R. (3d) 104 (C.A.), affg (2000), 2000 22673 (ON SC), 10 B.L.R. (3d) 91 (Ont. S.C.J.); Essa (Township) v. Guergis (1993), 1993 8756 (ON SCDC), 15 O.R. (3d) 573, 52 C.P.R. (3d) 372 (Div. Ct.), revg (1993), 1993 8467 (ON SC), 12 O.R. (3d) 97 (Gen. Div.); Inron Contracting Ltd. v. Whitebread (2001), 2001 28014 (ON SC), 56 O.R. (3d) 372 (S.C.J.); MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235, 70 Man. R. (2d) 241, 77 D.L.R. (4th) 249, 121 N.R. 1, [1991] 1 W.W.R. 705 , 48 C.P.C. (2d) 113 (sub nom. MacDonald Estate v. Martin & Rossmere Holdings, Martin v. Gray, Gray v. Martin); Sharp Electronics of Canada Ltd. v. Battery Plus Inc. (2000), 48 C.P.C. (4th) 128 (Ont. S.C.J.); Winford Insulations Ltd. v. Andarr Industries Inc. (1998), 1998 ABQB 1124, 243 A.R. 1, 34 C.P.C. (4th) 392 (Q.B.)

Rules and regulations referred to Rules of Professional Conduct, Law Society of Upper Canada, rule 2.05(4)

Sheila R. Block, for defendant (plaintiff by counterclaim). Ronald E. Carr, for plaintiffs and defendants by counterclaim Skye Properties Ltd., Roycom Entrepreneurs Ltd. and Roycom Entrepreneurs Real Estate Fund Limited Partnership. John L. Finnigan, for defendants to counterclaim John Roy, Lou Maroun, Roycom Realty Ltd. and Roycom Securities Ltd. Lois B. Roberts, for defendants to counterclaim Jasper Avenue Limited Partnership, Jasper Avenue G.P. Inc. and 390525 Alberta Ltd.

[1] Endorsement of DUNNET J.: -- The defendant and plaintiff by counterclaim ("Wu") seeks leave to appeal to the Divisional Court from the order of Farley J., dated December 8, 2001, removing the law firm of Gowling Lafleur Henderson LLP ("Gowlings") incorporating the practice of Smith Lyons LLP ("Smith Lyons") and the law firm of Armstrong Dunne (collectively "the merged firm") as counsel for Wu.

[2] The action and counterclaim concern disputes arising out of a tax shelter investment known as the Jasper Avenue Limited Partnership ("the Jasper Partnership"), which owned and managed a condominium complex.

[3] About 100 individuals, of whom Wu is representative in the actions, participated by investing with the Jasper Partnership as limited partners. Most of the investments were made through loans arranged by Roycom Entrepreneurs Limited and Skye Properties Limited ("the promoters"), a plaintiff and defendant by counterclaim.

[4] When the limited partners defaulted on the loans, the promoters commenced approximately 100 individual actions against them to collect on the outstanding debt.

[5] The limited partners brought a counterclaim against the promoters for a declaration that the loans were null and void. They allege that the offering memorandum, by which the 100 individuals were invited to participate in the Jasper Partnership, was misleading and the promoters knew it. They seek damages in the amount of $30 million on allegations of misrepresentation and material omissions in the offering memorandum.

[6] Smith Lyons were the solicitors for the Jasper Partnership and by extension, were also the solicitors for the limited partners in connection with the offering memorandum. Smith Lyons drafted the offering memorandum and is potentially exposed to the promoters for negligence, if the limited partners are successful in their counterclaim.

[7] After the litigation began, the promoters put Smith Lyons on notice of a potential claim over in the event that the limited partners' allegations succeeded at trial. As a result of this potential exposure, and unknown to the limited partners, a standstill agreement was entered into between Smith Lyons and the promoters. The standstill agreement provides that Smith Lyons will cooperate in assisting the promoters in defending against the limited partners' action. The agreement was not disclosed to the limited partners by the promoters.

[8] Thomas J. Dunne, Q.C., has been representing the 100 individual investors for seven years. Mr. Dunne's firm merged with Gowlings, and Gowlings then merged with Smith Lyons on September 1, 2001. In the result, the lawyers who drafted the offering memorandum became partners with the lawyers who were prosecuting a substantial claim for damages, based upon allegations of fraud and misrepresentation in connection with the offering memorandum.

[9] At that time, however, Gowlings and Smith Lyons continued to occupy separate physical buildings until October 2001. Following notice from the promoters of their concern about a conflict of interest, an ethical wall was put in place in the merged firm on October 5, 2001.

[10] At the time of the motion, examinations for discovery of each of the individual investors had been completed and the case was on the eve of trial.

[11] In granting the motion, the learned judge held:

(a) Smith Lyons was the "substantial equivalent of counsel or quasi-counsel" for the promoters, in part due to the cooperation and assistance which Smith Lyons provided pursuant to the standstill agreement;

(b) The limited partners were unaware of the standstill agreement until service of the motion to disqualify;

(c) The conflict arose on the effective date of the mergers;

(d) Notwithstanding the physical separation of Gowlings and Smith Lyons between September and October and even if there was no actual sharing of confidential information, failure to implement ethical walls at the time of the effective merger automatically resulted in disqualification;

(e) The disqualification resulting from the failure to implement timely ethical walls is a bright line test;

(f) In the circumstances, it was unnecessary to get into the "question of whether this motion was brought for the purpose of a tactical advantage".

[12] The motions judge concluded that since the merged firm failed to erect an ethical wall before the merger on September 1, 2001, he drew the inference that confidential information had been shared and he disqualified the merged firm.

[13] In relying upon the principles enunciated in MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235, 77 D.L.R. (4th) 249, the motions judge considered the passage at p. 1262 S.C.R., p. 269 D.L.R., supra, where Sopinka J. held that the legal profession is a self-governing body and the legislature has entrusted to it and not to the court the responsibility for developing standards that will satisfy the need to maintain confidence in the integrity of the profession.

[14] Sopinka J. goes on to describe the court's role as merely supervisory and concludes that it would be wrong to shut out the governing body of a self-regulating profession by the imposition of an inflexible and immutable standard in the exercise of a supervisory jurisdiction. He anticipated that the Canadian Bar Association, which took the lead in adopting a Code of Professional Conduct in 1974, would again take the lead in determining whether institutional devices "such as Chinese walls and cones of silence" are effective and would also develop standards for the use of those institutional devices in matters giving rise to a conflict of interest.

[15] Three years later, in Essa (Township) v. Guergis (1993), 1993 8756 (ON SCDC), 15 O.R. (3d) 573, 52 C.P.R. (3d) 372, the Divisional Court accepted the submissions of counsel for The Advocates Society that a court should approach the matter of a disqualifying conflict of interest by following a flexible approach concerning a variety of factors, including the good faith (or otherwise) of the party making the application. This approach has now become codified in the Rules of Professional Conduct established by the Law Society of Upper Canada.

[16] Rule 2.05(4) provides that where the elements of a conflict of interest exist -- that is, possession of confidential information by the impugned lawyer attributable to a relevant solicitor-client relationship, and even where the client does not consent to the impugned lawyer continuing to act, the new law firm may continue to act, if it 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.

[17] Rule 2.05(4) is a clear direction by the Law Society of Upper Canada that a balancing approach, requiring a consideration of all relevant factors should be adopted before determining whether a disqualifying conflict of interest exists.

[18] The inter-relationship between the Rules of Professional Conduct and the MacDonald principles has been expressly adopted in Inron Contracting Ltd. v. Whitebread (2001), 2001 28014 (ON SC), 56 O.R. (3d) 372 (S.C.J.) and Winford Insulations Ltd. v. Andarr Industries Inc. (1998), 1998 ABQB 1124, 243 A.R. 1, 34 C.P.C. (4th) 392 (Q.B.).

[19] In failing to apply the applicable Rules of Professional Conduct and in refusing to consider whether the motion was brought for a tactical purpose, there is good reason to doubt that the motions judge applied the appropriate legal test in allowing the motion for disqualification.

[20] The position of counsel for Wu is that there was evidence before the motions judge that the motion was tactical, including:

(a) the timing of the motion,

(b) lack of explanation for the timing,

(c) the presence of a tactical settlement letter written to the limited partners immediately after the motion was brought, and

(d) the failure of the promoters to disclose the existence of the standstill agreement.

[21] The requirement to make the inquiry into the good faith of the parties has been articulated 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.), at pp. 286-87 Man. R.; Chapters Inc. v. Davies, Ward & Beck LLP (2001), 2001 24189 (ON CA), 52 O.R. (3d) 566, 10 B.L.R. (3d) 104 (C.A.), at pp. 572-73 O.R.; and Sharp Electronics of Canada Ltd. v. Battery Plus Inc. (2000), 48 C.P.C. (4th) 128 (Ont. S.C.J.) at p. 135.

[22] Further, the issues raised in this matter transcend the private dispute between the parties and address issues important to the development of the law of disqualifying conflicts. In particular,

(a) Should the court adopt a rigid "bright line test" articulated by the motions judge, without the requirement of balancing all relevant circumstances; or should the court adopt the approach embodied in the Rules of Professional Conduct, including the good faith of the parties, the extent of prejudice and the public interest?

(b) Should the court disregard evidence that a motion to disqualify has been brought for a tactical advantage? If that is not the case, the profession would have the benefit of knowing that lawyers should exercise caution in bringing such motions. In addition, the public would be protected from tactical manoeuvres.

[23] The finding of the motions judge that screens must be in place before the conflict arises in order to be effective also conflicts with the reasoning in Canada Southern Petroleum Ltd. v. Amoco Canada Petroleum Co. (1997), 1997 ABCA 71, 193 A.R. 273, 144 D.L.R. (4th) 30 (C.A.) at p. 284 A.R., Inron Contracting Ltd. v. Whitebread, supra, at p. 377 O.R. and Carlingwood Motors Ltd. v. Nissan Canada Inc. (2001), 2001 28249 (ON SC), 52 O.R. (2d) 242, 13 B.L.R. (3d) 199 (S.C.J.) at pp. 249-50 O.R., reversing [2000] O.J. No. 5615 (Master). In light of the conflicts with other cases in Canada, it is desirable that leave to appeal be granted.

[24] In MacDonald at p. 1243 S.C.R., p. 254 D.L.R., Sopinka J. makes it clear that a court should be concerned with at least three competing values: maintaining the high standards of the legal profession and the integrity of our system of justice; that a litigant should not be deprived of his or her choice of counsel without good cause; and the desirability of permitting reasonable mobility in the legal profession.

[25] In my view, an appellate court should have the opportunity to consider whether a bright line test is appropriate, given the balancing language adopted in MacDonald more than ten years ago and the express language now used in the Rules of Professional Conduct. This is particularly so in a case where counsel has been removed in the absence of evidence of actual disclosure of confidential information and in the face of prejudice to 100 individual clients.

[26] Accordingly, I am satisfied that the moving party should be granted leave to appeal with respect to this emerging and important issue of professionalism and ethics.

[27] The motion is allowed. Costs are reserved to the panel hearing the appeal.

Application granted.