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Beware of the duty of loyalty

Beware of the duty of loyalty

A recent judgment of the Quebec Superior Court[1] from Mr. Justice Stephen Hamilton could have important consequences for how lawyers conduct initial meetings with potential clients[2].

The case of Jennings v. Bazinet[3] involves a shareholders dispute. In December 2015, one of the parties, Michel Bazinet approached a representative of Dentons, Pierre Lortie, who was not a lawyer. Mr. Lortie, while a member of Dentons, is a business advisor. Furthermore Mr. Bazinet approached Mr. Lortie with a view to possibly having him sit on the board of the company in question and be somewhat of a mediating presence during the tense times, given the relationship between the shareholders.

The meeting lasted approximately 45 minutes. No terms of a mandate were agreed to and to the extent that anything was agreed to, Mr. Bazinet and Mr. Lortie agreed to keep in touch. Mr. Lortie did no conflict search and did not discuss the matter with anyone else within Dentons. There were no further discussions between the two.

Approximately one month later, Mr. Bazinet found out when he was served with proceedings that Dentons was acting for Jennings. An ethical wall was immediately put in place within the firm.

In spite of this, Mr. Bazinet presented a motion to disqualify on the basis that confidential information had been disclosed and the ethical wall had been put in place too late.

Mr. Justice Hamilton reviewed the principles based on the criteria of MacDonald Estate and concluded that the ethical wall put in place by Dentons was effective and not too late. Accordingly, he dismissed the argument based on the risk that confidential information disclosed by Bazinet would be used against him.

However, Mr. Justice Hamilton then turned to the issue of the duty of loyalty (an argument not raised in the motion). He concluded:

In the present matter, the court has found that Bazinet was a client of Dentons. Section 72 does not require that Bazinet be a client of the lawyer within the firm. While that mandate was in place, Dentons accepted a mandate from Jennings to sue Bazinet. In doing so, Dentons breached its duty of loyalty to Bazinet. The fact that the mandate from Bazinet and a mandate from Jennings deal with exactly the same matter only worsens the breach.

Again Dentons did not act deliberately. They did not know about the prior mandate because no file had been opened.

While it is clear that an ethical wall can resolve the problem of confidential information received from a former client, an ethical wall is not adequate to resolve the loyalty issue. A law firm that decides to sue to an existing client must obtain consent from that client whether in advance or at the same time that the issue arises.

Mr. Justice Hamilton then moves on to determine whether disqualification is the remedy and concludes:

Dentons did not deliberately breach its duty of loyalty, but did so unknowingly as a result of a failure to open a file. The conflict was discovered within a couple of weeks.

Moreover it is clear that Jennings will suffer a prejudice if Dentons is disqualified and he is required to hire a new lawyer. This prejudice is always present when a lawyer is disqualified. The prejudice is lessened in the present case by the fact that the case is at an early stage. The risk of prejudice to Bazinet is limited because the court is considering at this stage only the prejudice arising from the breach of the duty of loyalty.

The overriding factor in this case and in most cases is the higher interests of justice. In the present matter the court considers that higher interests of justice require that Dentons be disqualified. If the court allows Dentons to continue to act despite the existing relationship with the Bazinet at the time that Dentons instituted proceedings against him on behalf of another client in exactly the same matter, the reputation of lawyers and of the legal system itself in the eyes of the reasonable person will be hurt.

While it should be noted that leave to appeal this judgment has been granted, the decision nonetheless could have important consequences for the conduct of initial meetings with potential clients.

Clearly there is a premium in engaging in a conflict search immediately, before engaging in any discussion with the potential client.  This can often be a problem for national and international firms, however, where is can take time to obtain the results from the search, which may result in the potential client going elsewhere.  

It was already accepted law that the fact that a formal mandate is not concluded is not a determining factor in matters regarding the disclosure of confidential information. However, I would argue (and did) that the same cannot be said of the duty of loyalty which should not arise where a) there is no risk of confidential information being disclosed and b) no formal mandate was concluded.

In addition, the Supreme Court of Canada notes in McKercher that disqualification is not always the automatic remedy in the case where there is a breach of the duty of loyalty.

Nonetheless, the message is clear that lawyers need to be careful before enthusiastically wanting to listen to the potential clients’ problems and solve them and that a conflict search is truly a preliminary matter to be performed in all cases. 

[1] IMK was involved in representing Dentons.
[2] Leave to appeal the decision was granted on May 18th.  The appeal will be heard on October 7th, 2016
[3] http://citoyens.soquij.qc.ca/php/decision.php?ID=8857E44975BABA2F28600F9DD83E4C06&page=7

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