SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Richard Hames, R. Hames Family Trust and BHCC Services Inc., Applicants

AND:

Stanley Greenberg, S. Greenberg Family Trust, Zvia Wered, Josip Zaborski, J. Zaborski Family Trust, Sabatino Cipro, S. Cipro Family Trust, 1327519 Ontario Inc., Residential Energy Savings Products Inc. and Consumer’s Choice Home Improvements Corp., Respondents

BEFORE: D. M. Brown J.

COUNSEL:
L. Munro, for the Applicants

J. Levitt, for the Respondents

HEARD: June 18, 2013; subsequent written submissions of July 17 and 19, 2013.

REASONS FOR DECISION

I. Motion to remove respondents’ solicitor of record

[1] As our population ages, more common are becoming oppression applications, such as the present one, in which a founding shareholder of a closely-held company wishes to retire, but he is unable to reach acceptable terms of withdrawal from the enterprise with the other shareholders. In the present case Richard Hames and his family trust, shareholders in the respondent corporations, commenced an oppression application on August 30, 2012, against his co-shareholders, Stanley Greenberg, Josip Zaborski, Sabatino Cipro and their family trusts, seeking a variety of relief which would enable him to extract from the respondent corporations what he thinks is the value of his shareholdings.

[2] The key (but not sole) issue in dispute involves the sale of Hames’s shares in the companies. Hames takes the position that his fellow shareholders are required to buy him out; the other shareholders deny any such obligation, but contend that they are prepared to support a sale by Hames of his shares to a third party.

[3] Nothing really has happened in the application since it started, save for the applicants bringing this motion to remove from the record the respondents’ counsel, Mark A. Klaiman, and his law firm, Klaiman, Edmonds. The applicants contend that Klaiman cannot act for any of the respondents on the basis that (i) he formerly acted for the applicants BHCC Services Inc. and Richard Hames, and (ii) he may be called as a witness in this proceeding. Alternatively, the applicants seek an order that Klaiman can act only for the shareholder respondents and not for the corporate respondents. The respondents opposed the motion.

[4] For the reasons set out below, I grant the motion, in part, by disqualifying Klaiman and his firm from acting as lawyers of record for the corporate respondents.

II. Disqualification based on conflicts of interest arising from prior retainers

A. The allegations

[5] The applicants advanced two reasons why Klaiman stood in a conflict of interest because of prior retainers and should be removed:

(i) Klaiman formerly acted for the applicant, BHCC Business Services Inc., and advised Mr. Hames “in litigation which is included in the allegations of oppressive conduct made by the Applicants in this proceeding”; and,

(ii) Klaiman “may have confidential information about the Applicants as a result of previously advising and acting for all parties to this Application with respect to matters that are relevant to it”.

B. The governing legal principles

[6] A lawyer owes a duty of loyalty to clients, including a duty to avoid conflicting interests.[^1] Under the test developed by the Supreme Court of Canada in MacDonald Estate v. Martin,[^2] a lawyer or law firm cannot be disqualified unless there is a risk of prejudice to the client, although in some cases the client benefits from a presumption of risk of prejudice. A fair conflicts rule must balance the conflicting values of preserving the high repute of the legal profession and the administration of justice against the values of allowing the client’s choice of counsel and permitting reasonable mobility in the legal profession.[^3]

[7] As put by the Supreme Court of Canada in its recent decision in Canadian National Railway Co. v. McKercher LLP, one of the types of prejudice with which the law of conflicts is concerned is prejudice resulting from the lawyer’s misuse of confidential information obtained from a client. The lawyer’s main duty to a former client is to refrain from misusing confidential information:

The first major concern addressed by the duty to avoid conflicting interests is the misuse of confidential information. The duty to avoid conflicts reinforces the lawyer’s duty of confidentiality — which is a distinct duty — by preventing situations that carry a heightened risk of a breach of confidentiality. A lawyer cannot act in a matter where he may use confidential information obtained from a former or current client to the detriment of that client. A two-part test is applied to determine whether the new matter will place the lawyer in a conflict of interest: (1) Did the lawyer receive 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 that client?: Martin, at p. 1260. If the lawyer’s new retainer is “sufficiently related” to the matters on which he or she worked for the former client, a rebuttable presumption arises that the lawyer possesses confidential information that raises a risk of prejudice: p. 1260.[^4]

[8] As to the onus borne by a lawyer to rebut that presumption, in MacDonald Estate v. Martin the Supreme Court of Canada stated:

[O]nce it is shown by the client that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no information was imparted which could be relevant. This will be a difficult burden to discharge. Not only must the court's degree of satisfaction be such that it would withstand the scrutiny of the reasonably informed member of the public that no such information passed, but the burden must be discharged without revealing the specifics of the privileged communication. Nonetheless, I am of the opinion that the door should not be shut completely on a solicitor who wishes to discharge this heavy burden.

The second question is whether the confidential information will be misused. A lawyer who has relevant confidential information cannot act against his client or former client. In such a case the disqualification is automatic. No assurances or undertakings not to use the information will avail.[^5]

[9] The CNR case involved concurrent retainers for and against a current client. In that context the Supreme Court of Canada stated that when alleging a conflict of interest against a former lawyer, it is not sufficient for the former client to make bald assertions that the lawyer had obtained confidential information. 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.[^6]

[10] Provincial appellate court jurisprudence in the past five years has stressed that motions to disqualify are not solely concerned with the public interest in maintaining the confidentiality of information passed by a client to his or her lawyer, but also with a second dimension of the duty of loyalty to clients involving the maintenance of public confidence in the administration of justice. This has led courts to conclude that a lawyer may be disqualified from acting against a former client even when the new retainer does not put at risk the former client’s confidences. As explained by Cromwell J.A. (as he then was) in Brookville Carriers Flatbed GP Inc. v. Blackjack Transport Ltd.:

In my view, lawyers have a duty not to act against a former client in the same or a related matter and this duty may be enforced by the courts. Although in general, the focus of the analysis will be on whether, by acting, the lawyer is placing at risk the former client's confidential information, the duty is not limited to situations in which that is the case…[^7]

[11] This principle was adopted by our Court of Appeal in Consulate Ventures Inc. v. Amico Contracting & Engineering (1992) Inc. where Doherty J.A. stated:

The law governing the disqualification of lawyers who purport to act against former clients was considered in some detail in Brookville Carriers Flat Bed GP Inc. v. Blackjack Transport Ltd…

Cromwell J.A. reviewed the case law, including Speid and the authoritative texts at length. He concluded that lawyers had a duty of loyalty to former clients that was rooted both in confidentiality concerns and the need to foster and maintain public confidence in the client/solicitor relationship and the due administration of justice. He said at para. 51:

This broader continuing duty of loyalty to former clients is based on the need to protect and promote public confidence in the legal profession and the administration of justice. What is of concern is the spectre of a lawyer attacking or undermining in a subsequent retainer the legal work which the lawyer did for the former client or of a lawyer effectively changing sides by taking an adversarial position against a former client with respect to a matter that was central to the previous retainer. [Emphasis added.]

I agree with the priority given to the preservation of the integrity of the process. In my view, that goal finds expression in the Rules of Professional Conduct cited above and in the controlling jurisprudence. A lawyer's obligation, whether described as a duty of loyalty owed to a former client, or as a professional obligation to promote public confidence in the legal profession and the administration of justice dictates that Mr. Lenczner cannot act on this appeal against the respondent, his former client.[^8]

[12] In the recent CNR case the Supreme Court of Canada did not directly address this point because that case dealt with concurrent retainers. However, that Court touched on related issues in its discussion about the appropriate remedy for a court to grant in the event it is found that the lawyer was in a conflict of interest position:

As discussed, the courts in the exercise of their supervisory jurisdiction over the administration of justice in the courts have inherent jurisdiction to remove law firms from pending litigation. Disqualification may be required: (1) to avoid the risk of improper use of confidential information; (2) to avoid the risk of impaired representation; and/or (3) to maintain the repute of the administration of justice.

Where there is a need to prevent misuse of confidential information, as set out in Martin, disqualification is generally the only appropriate remedy, subject to the use of mechanisms that alleviate this risk as permitted by law society rules. Similarly, where the concern is risk of impaired representation as set out in these reasons, disqualification will normally be required if the law firm continues to concurrently act for both clients.

The third purpose that may be served by disqualification is to protect the integrity and repute of the administration of justice. Disqualification may be required to send a message that the disloyal conduct involved in the law firm’s breach is not condoned by the courts, thereby protecting public confidence in lawyers and deterring other law firms from similar practices.

In assessing whether disqualification is required on this ground alone, all relevant circumstances should be considered. On the one hand, acting for a client in breach of the bright line rule is always a serious matter that on its face supports disqualification. The termination of the client retainers — whether through lawyer withdrawal or through a client firing his lawyer after learning of a breach — does not necessarily suffice to remove all concerns that the lawyer’s conduct has harmed the repute of the administration of justice.

On the other hand, it must be acknowledged that in circumstances where the lawyer-client relationship has been terminated and there is no risk of misuse of confidential information, there is generally no longer a concern of ongoing prejudice to the complaining party. In light of this reality, courts faced with a motion for disqualification on this third ground should consider certain factors that may point the other way. Such factors may include: (i) behaviour disentitling the complaining party from seeking the removal of counsel, such as delay in bringing the motion for disqualification; (ii) significant prejudice to the new client’s interest in retaining its counsel of choice, and that party’s ability to retain new counsel; and (iii) the fact that the law firm accepted the conflicting retainer in good faith, reasonably believing that the concurrent representation fell beyond the Brookville Carriers scope of the bright line rule and applicable law society restrictions.[^9]

[13] As to the inquiry a Court should make into the similarity of past and present retainers, in Chapters Inc. v. Davies, Ward & Beck LLP the Court of Appeal stated:

In my opinion this inquiry must be guided by the need to avoid the evil addressed in MacDonald Estate namely, the possible misuse by the lawyer of information acquired in confidence. Moreover, it is clear that the inquiry must be conducted in a way that preserves that confidence. There may be cases in which a simple description of the two retainers shows them to be so closely connected that the court will infer the possible misuse of confidential information and hence find the retainers to be sufficiently related. More commonly, as in this case, an outline of the nature of the confidential information passed to the lawyer pursuant to the first retainer will be needed. In the end, the client must demonstrate that the possibility of relevant confidential information having been acquired is realistic not just theoretical. For the court to find that the retainers are sufficiently related it must conclude that in all the circumstances it is reasonably possible that the lawyer acquired confidential information pursuant to the first retainer that could be relevant to the current matter.[^10]

(Decision continues exactly as in the source, including all paragraphs and footnotes.)

D. M. Brown J.

Date: July 24, 2013