Court dismisses attempt by former CEO to disqualify corporation’s law firm

By Andrew Crabtree

Corporate counsel and companies ought to be aware of a recent decision from the BC Supreme Court which demonstrates the risk to a company in having its legal counsel disqualified due to a conflict of interest when it terminates an employee who had authority to provide instructions to legal counsel. As a precautionary measure, corporate counsel may want to expressly inform their instructing clients that they represent the company and not the representative’s interests.

The former CEO of Sagebrush Holdings Inc. commenced litigation against Sagebrush based on events surrounding his departure. He subsequently filed an application to disqualify Sagebrush’s counsel on the basis that he had personal or business relationships with at least nine partners at the law firm, which created a conflict of interest. On that basis, the law firm ought to be disqualified and prevented from representing the company any further. The court rejected this argument and relied, largely, on the fact that there was no evidence that the firm acted for the CEO in his personal capacity.

In reaching its decision, the court reviewed the legal principles relating to conflicts of interest and disqualification. The court reviewed the recent Supreme Court of Canada decision in McKercher v. CN Rail and noted that a law firm cannot act for a client whose “immediate interests” are adverse to those of another existing client, absent their consent. As outlined above, the law firm was never in a solicitor-client relationship with the CEO in his personal capacity, and so there was no issue as to whether existing clients of the firm had adverse interests.

The court also acknowledged that disqualification could nevertheless result if the law firm and CEO were in a “near client” relationship. A “near client” relationship could exist where there was a commonality of interest or a close association with the CEO and the law firm. Where a “near client” relationship is found to exist, courts can disqualify the law firm based on the confidential character of the relationship and the expectation of confidentiality. In such cases, the applicant has an interest in protecting that confidence even if it was not, in the strict sense, a client of the lawyer.

The court noted that this rule cannot be raised tactically. In order to prevent tactical abuses, the court stated that it is insufficient for the client baldly allege that the lawyer obtained confidential information such as litigation philosophy. There has to be relevant confidential information that could be used against the client. It is expected that a law firm may learn about the character of a client, including litigation risk tolerance and planning strategy and tactics. Without more, this information will generally not lead to disqualification.