Superior Court of Justice – Ontario (Commercial List)

CITATION: Krates Keswick Inc. v. A. Farber & Partners, 2016 ONSC 1619

COURT FILE NO.: CV-16-11278-00CL

DATE: 2016-03-09

RE: KRATES KESWICK INC., Applicant

AND:

A. FARBER & PARTNERS, Respondent

BEFORE: HAINEY J.

COUNSEL: Gordon McGuire, for the Applicant Robert J. Drake, for the Respondent

HEARD: March 4, 2016

ENDORSEMENT

Background

[1] The Applicant, Krates Keswick Inc. (“KKI”) moves for an order declaring that Goldman Sloan Nash & Haber LLP (“Goldman”) is precluded from representing A. Farber & Partners (“Farber”) in this proceeding. Goldman brings a cross-motion for an order removing it as counsel for KKI in eight other litigation proceedings.

[2] In November 2014, Crates Marine Sales Limited and related companies (“Crates Marine”) filed Notices of Intention to Make a Proposal pursuant to the provisions of s. 50.4(1) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3.

[3] In December 2014, Farber was appointed by the court as receiver to carry out a court-approved sale of Crates Marine’s assets. KKI entered into an Agreement of Purchase and Sale dated February 8, 2015, pursuant to which it acquired all of Crates Marine’s assets, except its real property.

[4] Farber was represented throughout Crates Marine’s receivership by Goldman.

[5] On April 20, 2015, shortly after the assets were transferred, KKI engaged Goldman to represent it in eight other litigation proceedings that had been commenced by Farber when it was acting as Crates Marine’s receiver. Some of these actions are still ongoing (the “Other Litigation”).

[6] Goldman has continued to represent Farber in Crates Marine’s receivership.

[7] In June 2015, a dispute arose in Crates Marine’s receivership between KKI and Farber in relation to Farber’s withholding of post-closing receipts to which KKI maintains it is entitled. After attempts at negotiation failed, KKI commenced this proceeding against Farber in February 2016, seeking an order directing payment to it of the post-closing receipts (the “Funds Dispute”).

[8] KKI submits that Goldman has a conflict of interest representing Farber in the Funds Dispute. Farber and Goldman submit that because of the terms of a retainer agreement between KKI and Goldman, Goldman may continue to represent Farber in the Funds Dispute. Goldman also submits that it should not continue to represent KKI in the Other Litigation and seeks an order removing it from the record in those proceedings.

Retainer Agreement

[9] The solicitor/client relationship between Goldman and KKI in relation to the Other Litigation is governed by a retainer agreement dated April 20, 2015 (the “Retainer Agreement”). The Retainer Agreement provides a “Description of Mandate” in paragraph 1 listing the eight litigation matters in respect of which Goldman was retained on behalf of KKI. Paragraph 1(c) provides as follows:

We confirm that (i) we are not providing legal advice or services except as described above, and (ii) once our work on this matter has been completed (see Section 8 below), we will not advise you as to subsequent legal developments relating to this matter.

[10] Paragraph 7 of the Retainer Agreement is relevant to the issues I must decide. It provides as follows:

7. Our continued representation of the Receiver

(a) We have been asked to act for you in the matters referred to in this engagement letter (which were formerly proceedings commenced and controlled by the Receiver) in view of your purchase of, among other things, the rights asserted in those matters from the Receiver. We are also continuing to act for the Receiver in fulfilling the rest of its obligations. You are currently represented by Chaitons LLP in connection with matters relating to the receivership and bankruptcy of the companies for which the Receiver is appointed. We understand that there are currently no contentious issues between you and the Receiver. However, because of the potential for conflict that arises whenever we are representing more than one client in the same matter for which each client has separate and potentially conflicting interests, we can only accept such an engagement if (i) we believe that we can provide competent and diligent representation to you, and (ii) we have your informed consent [to] the terms of this retainer as they relate to conflicts.

(b) We believe that we will be able to provide competent and diligent representation to each of you in a joint retainer because we are fully versed in the subject matter of the actions and applications at issue.

(c) Because we continue to act for the Receiver on other matters, under our professional and ethical obligations, if a conflict develops between you and the Receiver that cannot be resolved, you agree in this engagement that we may continue to act for the Receiver, including against you in matters unrelated to the matters referred to in this engagement (and for those unrelated matters you will seek other counsel to represent you. You agree that you will not assert that our representation of you prevents us from acting for the Receiver.

(d) We recommend that you take the opportunity to consult with independent legal counsel [which may include your in-house counsel] regarding the terms of this joint representation.

(Emphasis added)

Funds Dispute

[11] As indicated above, the Funds Dispute arose between Farber and KKI in June 2015. Goldman wrote to KKI’s legal counsel at the time, Chaitons LLP, on June 29, 2015, outlining Farber’s position.

[12] On October 29, 2015, KKI’s new legal counsel, John Adair, responded to Goldman’s June 29, 2015 letter rejecting Farber’s position. He concluded with the following paragraph:

Finally, I trust that your client also understands the damage its refusal to deliver the funds will do to the professional relationships involved.

[13] This paragraph of Mr. Adair’s letter presumably referred to the fact that Goldman was representing Farber in the Funds Dispute and KKI in the Other Litigation pursuant to the Retainer Agreement.

[14] On November 4, 2015, in response to Mr. Adair’s letter, Goldman wrote to KKI stating, in part, as follows:

It appears that a conflict is now arising between (among others) KKI and the Receiver on the issues set out in the letter of John J. Adair dated October 29, 2015. …

It seems that, at least for the time being, no resolution is possible, which unfortunately compels us to conclude that the state of this conflict requires that we withdraw from continued representation of KKI for the matters set out in the Retainer Agreement, as contemplated by section 7(d) of that agreement.

[15] The conflict issue remained unresolved until January 5, 2016, when Mr. Bissell of Goldman e-mailed Mr. Allan Lyons, General Counsel of KKI, and stated, in part, as follows:

You and I have been discussing this conflict issue for a bit. Keeping the conflict issues on hold hasn’t been a problem so far, because there has not been anything that needs to be done on those. It now seems, however, that some of them will need attention before long, so we should probably try to get to the bottom of this (and letting this drag on too long is probably inadvisable in any event).

So the proposition and question I had for you was whether KKI would consider consenting to GSNH’s continued representation of KKI notwithstanding GSNH’s representation of Farber in the Funds Dispute. If so, then the conflict issue is resolved.

(I should, for completeness’ sake, note that continuing to act for KKI notwithstanding the Funds Dispute would also require the consent of Farbers as our other client in this scenario. I have already obtained that consent, though, because I did not want to waste your time going down this road if Farber were not going to do so.)

[16] In response, Mr. Adair wrote Goldman on January 6, 2016, and stated, in part, as follows:

… my client objects to your continued representation of Farber in the Funds Dispute. …

Would you please advise me at your earliest convenience whether you will remove yourself (and your firm) from the record as counsel to Farber in the Funds Dispute? My client intends to bring a motion for that relief should you refuse to do so.

Issues

[17] I must decide the following two issues:

1. Is Goldman disqualified from representing Farber in the Funds Dispute?

2. Should Goldman be removed from the record for KKI in the Other Litigation?

Analysis

[18] It is important to note that KKI does not allege that Goldman received any confidential information from it in relation to the Funds Dispute. KKI submits that Goldman is nonetheless disqualified from continuing to represent Farber in respect of the Funds Dispute notwithstanding that it did not receive any confidential information from KKI. It also submits that Goldman should continue representing KKI in the Other Litigation.

[19] Farber and Goldman submit that the terms of the Retainer Agreement govern this situation. They argue that Goldman and KKI, who are sophisticated litigants, turned their minds to the possibility of a situation such as this. They both agreed in the Retainer Agreement that Goldman could continue to represent Farber in any disputes arising in the context of the receivership. I agree with this submission for the following reasons.

[20] It was convenient and cost-effective for KKI to engage Goldman as counsel in respect of the Other Litigation because Goldman was knowledgeable about these various proceedings. KKI had legal counsel advising it about the Retainer Agreement. Mr. Lyons, who is KKI’s General Counsel, presumably approved KKI entering into the Retainer Agreement and must have understood the implications of paragraph 7(c) for KKI in the event a dispute in the receivership between Farber and KKI were to arise.

[21] The Retainer Agreement clearly contemplates that a dispute could arise between KKI and Farber in connection with the receivership. The Agreement specifically provides that if this occurs Goldman will continue to represent Farber and KKI will retain other legal counsel to represent it. In my view, there is no ambiguity concerning these terms. I do not accept KKI’s submission that the words “in matters unrelated to the matters referred to in this engagement” contained in paragraph 7(c) of the Agreement are not clear. I am satisfied that KKI and Goldman intended that this paragraph would apply to a circumstance such as this.

[22] Against this background, I find that it is unreasonable for KKI to expect that Goldman will not continue to represent Farber in respect of the Funds Dispute and will continue to represent KKI in connection with the Other Litigation. This position is inconsistent with the terms of paragraph 7(c) of the Retainer Agreement.

[23] Despite Mr. McGuire’s able argument, I am of the view that the terms of the Retainer Agreement govern this situation and that KKI specifically agreed that Goldman could continue to represent Farber in a dispute such as the Funds Dispute. Further, under the circumstances, I am satisfied that Goldman should be permitted to be removed as KKI’s counsel in respect of the Other Litigation.

[24] The Supreme Court of Canada contemplated this type of situation in Wallace v. Canadian Pacific Railway, 2013 SCC 39. The Court held as follows at paragraphs 31 and 32:

31. The bright line rule holds that a law firm cannot act for a client whose interests are adverse to those of another existing client, unless both clients consent. It applies regardless of whether the client matters are related or unrelated. The rule is based on “the inescapable conflict of interest which is inherent” in some situations of concurrent representation: Bolkiah v. KPMG (1998), [1999] 2 A.C. 222 (U.K. H.L.), at p. 235, cited in Neil, at para. 27. It reflects the essence of the fiduciary’s duty of loyalty: “…a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position”: Bolkiah, at p. 234.

32. However, Neil and Strother make it clear that the scope of the rule is not unlimited. The rule applies where the immediate legal interests of clients are directly adverse. It does not apply to condone tactical abuses. And it does not apply in circumstances where it is unreasonable to expect that the lawyer will not concurrently represent adverse parties in unrelated legal matters. The limited scope of application of the rule is illustrated by Neil and Strother. This Court found the bright line rule to be inapplicable to the facts of both of those cases, and instead examined whether there was a substantial risk of impaired representation: Neil, at para. 31; Strother, at para. 54.

[25] The Court elaborated on this principle at paragraph 37 as follows:

37. Finally, the bright line rule does not apply in circumstances where it is unreasonable for a client to expect that its law firm will not act against it in unrelated matters. In Neil, Binnie J. gave the example of “professional litigants” whose consent to concurrent representation of adverse legal interests can be inferred:

In exceptional cases, consent of the client may be inferred. For example, governments generally accept that private practitioners who do their civil or criminal work will act against them in unrelated matters, and a contrary position in a particular case may, depending on the circumstances, be seen as tactical rather than principled. Chartered banks and entities that could be described as professional litigants may have a similarly broad-minded attitude where the matters are sufficiently unrelated that there is no danger of confidential information being abused. These exceptional cases are explained by the notion of informed consent, express or implied. [para. 28]

In some cases, it is simply not reasonable for a client to claim that it expected a law firm to owe it exclusive loyalty and to refrain from acting against it in unrelated matters. As Binnie J. stated in Neil, these cases are the exception, rather than the norm. Factors such as the nature of the relationship between the law firm and the client, the terms of the retainer, as well as the types of matters involved, may be relevant to consider when determining whether there was a reasonable expectation that the law firm would not act against the client in unrelated matters. Ultimately, courts must conduct a case-by-case assessment, and set aside the bright line rule when it appears that a client could not reasonably expect its application.

(Emphasis added)

[26] Under the circumstances of this case, I do not regard KKI’s position as reasonable because of the specific terms of the Retainer Agreement. KKI cannot expect to enter into an agreement that contemplates and specifically provides for Goldman’s continued representation of Farber against it if a dispute arises, and then seek to disqualify Goldman from doing exactly what was agreed to when a dispute, in fact arises. This is the type of situation in which the Supreme Court of Canada held that the “bright line” conflict rule does not apply because the “terms of the Retainer Agreement”.

Conclusion

[27] For the reasons outlined above, KKI’s motion is dismissed. Goldman is permitted to represent Farber in the Funds Dispute and is ordered removed as counsel of record for KKI in the Other Litigation.

Costs

[28] Farber is entitled to its costs of this motion. I urge the parties to settle the terms and the amount of costs. If they are unable to do so, they may file brief written submissions of not more than three pages with costs outlines.

HAINEY J.

Released: March 9, 2016