) ) JAMES RICE Applicant – v. –, 2013 ONSC 1200

CITATION : Rice v. Smith et al., 2013 ONSC 1200 COURT FILE NO.: 6873/12 DATE: 2013/02/25 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) JAMES RICE Applicant – and – BARRY SMITH, CHUNG-LIE TING and BLS TEXTILES INC. Respondents ) ) ) ) ) ) ) ) ) ) )))) Mavis J. Butkus, for the Applicant John W. Findlay, for the Defendants ) ) ) HEARD: January 30, 2013 Leach j. [ 1 ] Before me is a motion by the Applicant for an order removing John W.

McDonald (“McDonald”) as lawyer of record for all of the Respondents. [ 2 ] In the alternative, the Applicant seeks an order removing McDonald as lawyer of record for the corporate Respondent, BLS Textiles Inc. (“BLS”).

Background [ 3 ] The motion is brought within the larger context of an application to address and resolve various issues stemming from a serious dispute between the only three shareholders and directors of BLS: the Applicant James Rice (“Rice”), and the individual Respondents Barry Smith (“Smith”) and Chung-Lie Ting (“Ting”). [ 4 ] Litigation of the application has not yet progressed to examinations in relation to the extended affidavit and documentary evidence filed by the parties, and the substantive merits of the application, (including underlying factual disputes), are not before me for resolution.

These reasons accordingly should not be taken as any binding determination in that regard. [ 5 ] However, by way of background: • BLS is incorporated federally, pursuant to the laws of Canada, and is based in Cambridge, Ontario.

It apparently was founded by Smith in late 2005 or early 2006, and initially focused on the sale and marketing of textiles, including high performance fabrics like Kevlar. • Ting joined BLS at some point between 2006 and 2008, during which time the company’s operations included, to some extent at least, production of body armour components. • Rice joined BLS in 2008, after spending many years with the Canadian Armed Forces and in private business acquiring and developing experience and expertise relating to terminal ballistics and armour protection for personnel and vehicles. • The formal corporate arrangements put in place in 2008, (by way of a share purchase agreement, a unanimous shareholders’ agreement, director election by the shareholders, and corporate by-law enactment), resulted in the following BLS shareholdings: Smith 37.5 percent; Ting 37.5 percent; and Rice 25 percent.

All three individuals were directors of BLS. All three individuals also continued to work for the company in various officer and employee capacities. • The business of BLS grew rapidly through extensive production and supply of products used by police for vehicle and personnel protection, and it now annually generates many millions of dollars in sales. However, relations between the shareholders deteriorated over the course of 2010 and 2011. The reasons for this are disputed. In broad terms:

o The Applicant contends that the shareholders’ respective efforts and involvement in the operations of BLS were disproportionate and inequitable, resulting in friction that was compounded by disagreements concerning corporate financing and future business plans. All of this is said to have prompted unsuccessful discussions and proposals, (explored and developed with appropriate professional assistance), concerning further share sale and purchase arrangements.

These included efforts by Ting to obtain a business valuation, (as a prelude to overall sale of BLS or a sale of Ting’s interest in the company), and efforts by Rice to investigate and propose his purchase of the shares held by Smith and Ting; a possibility discussed at a meeting or meetings between Rice, Smith and McDonald in November of 2011.

When these various discussions and proposals failed, and relations became acrimonious, Smith and Ting allegedly abused their majority shareholding to exclude Rice and effectively appropriate his interest in BLS, relying on various baseless allegations of misconduct. o The Respondents contend that Rice wrongly breached his fiduciary duties owed to BLS, breached corporate confidence and/or otherwise misappropriated confidential information of BLS, violated BLS rights of intellectual property (including patent rights), and interfered with the contractual relations of BLS.

These allegations are based, in part, on Rice’s sharing of otherwise confidential BLS information, (such as financial statements and plans), with his banker, accountant and lawyers. • In any case, it is common ground that, during a meeting on March 12, 2012, (attended by Rice, Smith, Ting and McDonald), Rice’s employment by BLS was terminated, in circumstances addressed in more detail below.

Although apparently excluded thereafter from any involvement in the business operations of BLS, or any formal director or shareholder communications or meetings, Rice formally remains a director and shareholder of the company. • The application herein was commenced by Rice on May 9, 2012. It seeks minority shareholder oppression remedies pursuant to sections 214 and 241 of the

Canada Business Corporations Act , R.S.C. 1985, c.C-44., (“CBCA”), because the majority shareholders (Smith and Ting) allegedly have conducted the business affairs of BLS in a manner that is oppressive, unfairly prejudicial to and unfairly disregards the interest of Rice.

In essence, Rice alleges that Smith and Ting have abused their majority shareholding interest to wrongfully terminate and exclude Rice from the operations of BLS, while simultaneously refusing any further financial compensation for his termination or financial interest in the company, (e.g., by way of repayment of his outstanding shareholder loans and/or purchase of his shares). The notice of application formally names Smith, Ting and BLS as respondents.

However, a review of the notice of application and supporting affidavit makes it clear, I think, that Rice’s formal complaints of misconduct really are directed at Smith and Ting alone, and that the company has been added as a named respondent only because it obviously would be a party affected by a number of oppression remedies permitted by the CBCA and sought by Rice; (e.g., appointment of a liquidator or receiver/manager to wind up the company’s affairs, sell its assets, and distribute its property). • Shortly after service of the application record, McDonald delivered a notice of appearance on behalf of Smith, Ting and BLS.

This was followed by delivery of a responding motion record on or about June 4, 2012. These documents made it clear that McDonald was intending to act as lawyer of record for all three of the Respondents. • Active litigation of the matter then was delayed for a time pending attempts to mediate a resolution.

However, a mediation carried out on August 21, 2012, was unsuccessful. • By way of a letter dated August 28, 2012, (prior to the next formal return of the application following the failed mediation), McDonald was advised that Rice would be taking steps to restrain McDonald’s further formal representation of the Respondents in the litigation, based on his involvement in “critical meetings” between the parties in November of 2011 and March of 2012, and McDonald’s “direct participation in the events leading to Mr Rice’s ouster from the company”.

The letter apparently failed to prompt any steps by the Respondents to secure new legal representation. • On September 17, 2012, Rice initiated the motion now before me, seeking McDonald’s removal as lawyer of record. • On October 18, 2012, the Respondents served their responding motion record, which contains an affidavit sworn by McDonald the day before.

McDonald was cross-examined on that affidavit on January 8, 2013. [ 6 ] It is also important to note that, at some unspecified point during the above chronology, the parties came to agree that proper resolution of this matter will require the documentary and oral discovery procedures normally associated with an action, as well as a trial. McDonald currently intends to represent all of the Respondents at that trial.

McDonald Involvement [ 7 ] Affidavits sworn by Rice in support of his application and present motion detail McDonald’s involvement in events leading to the present litigation, and that evidence is not contradicted by the Respondents or McDonald. (To the contrary, the Respondents and McDonald emphasize their agreement with that evidence as a suggested reason why it is unnecessary to remove McDonald as the Respondents’ lawyer of record.) [ 8 ] McDonald himself nevertheless supplemented Rice’s evidence during the course of cross-examination on his affidavit. [ 9 ] In the result, the largely undisputed evidence before me includes the following: i.

McDonald attended and actively participated in a dinner meeting between Rice and Smith in Cambridge on November 28, 2011, at which there were extended discussions concerning the possibility of Rice purchasing Smith’s shares in BLS. This included review of how the shares would be valued, (by reference to the business valuation previously commissioned by Ting), how the transaction might be structured, (upfront cash payment and a form of vendor take-back financing, coupled with further post-sale compensation to Smith through consulting arrangements), and how it generally might be financed by Rice.

During the course of these conversations: a. McDonald’s comments made it clear that he already was privy to certain confidential information, (such as the business valuation obtained by Ting).

b. It also clearly was understood that Rice would need to investigate the feasibility of the contemplated proposal by consultation with his professional advisors and prospective lenders. Indeed, McDonald went so far as to expressly indicate to Rice that this should be done. Smith and McDonald knew, at the time of the meeting, that Rice necessarily would provide his advisors and prospective lenders with information such as the BLS financial statements, business plan and business valuation. c. McDonald also expressly opined to Smith that the contemplated buyout “was exactly what Smith should be seeking”.

This comment and the nature of the discussions strongly suggest that McDonald was there to advise Smith personally, (which was the perception of Rice at the time). However, McDonald took the position during his subsequent cross-examination that he had attended the meeting in question only as BLS corporate counsel, and was not yet acting for Smith personally. ii. McDonald also attended and actively participated in the meeting on March 12, 2012, during which Rice was formally terminated as an officer and employee of BLS.

Although the meeting also was attended by Smith and Ting, there is no dispute that McDonald immediately “took charge of the meeting”; e.g., informing Rice of his termination for cause, articulating the alleged grounds for termination, taking possession of Rice’s keys, and indicating what Rice then should do regarding removal of his personal effects and further contact. (It seems that Smith and Ting said little or nothing at the meeting.) McDonald also then sent Rice a letter later that day, confirming what had been done. iii.

McDonald had known Smith for years prior to his retention as corporate counsel by Smith and Ting. However, McDonald indicates that his only solicitor-client relationship has been with BLS, (at least prior to his going on record as lawyer for all three Respondents in this litigation). McDonald also has confirmed that his related legal services, (including those provided in relation to Rice’s termination and all subsequent efforts to oppose Rice’s application), have been and are being paid entirely by BLS. McDonald has “never submitted a legal bill to Mr Smith or Mr Ting”. iv.

In his professed role as BLS corporate counsel, McDonald freely acknowledges that he did not and has not consulted with or taken instructions in whole or in part from Rice, (e.g., about suggestions or suspicion of misconduct by Rice), despite his awareness that Rice was and is a director and shareholder of the company. In McDonald’s opinion, there was “no requirement to consult with him”, and “no reason to” do so. McDonald similarly was of the “opinion that it was unnecessary” to attend any formal shareholder or director meetings to consider Rice’s termination.

Generally, McDonald has confirmed that he saw and sees no conflict as corporate counsel in accepting instructions from only two of the three directors and officers to terminate the third. More generally, it seems that, throughout his involvement with BLS, his opinions and advice to the corporation and its directors normally have been verbal and undocumented, and delivered only to two of the corporation’s three directors and shareholders. v. McDonald took an active role in personally investigating Rice’s alleged misconduct, and McDonald actually was the one who made the decision to terminate Rice.

In that regard, McDonald generally described the decision making and execution process in the following terms: “I said, ‘We will terminate him.’ They didn’t want to be involved in it. I said, ‘No problem. I’ll do it.” [ 10 ] It is also noteworthy that, during cross-examination on McDonald’s affidavit, various requests by the applicant’s counsel for disclosure from the Respondents and their current lawyer of record were met with assertions of confidentiality and privilege. Overview of positions [ 11 ] Rice takes issue with McDonald’s continued representation of the Respondents on two grounds: i.

McDonald’s involvement in key events and communications underlying the litigation inherently prevents his taking the matter to trial. Doing so inevitably would trigger longstanding policy concerns of fairness and propriety associated with a lawyer assuming the dual role of counsel and witness. ii. In disputes of this nature, (between majority and minority shareholders of a corporation), a lawyer may not properly represent both the corporation and one group of shareholders, to the exclusion of the other group of shareholders.

Doing so inherently and unavoidably raises conflict of interest concerns already manifest in this case. [ 12 ] The Respondents and McDonald emphasize the importance of protecting and preserving the right of litigants to select their own representation, and the need to restrain assaults on that right through challenges that may be motivated by adversarial tactics rather than principle. In that regard, they argue in particular that “the timing of this motion is questionable and entirely too late”. They also argue that the applicant’s stated concerns are baseless, for reasons that include the following: i.

At this point, they say, the applicant has failed to establish any likelihood of McDonald being a witness at trial. The Respondents and McDonald are not challenging the applicant’s evidence as to what occurred during the meetings in November of 2011 and March of 2012. Moreover, Smith and/or Ting can and will be called as witnesses, available for cross-examination, in relation to those events and/or the investigation that was relied upon before and after Rice’s termination to justify his exclusion from the corporation, (even if that investigation was carried out by McDonald).

Given such considerations, and what they view as the unsettled nature of the issues in dispute, the Respondents contend that the current motion is, at the very least, premature. ii. The Respondents deny the existence of any actual or prospective conflict of interest. In that regard, they emphasize that McDonald has “never acted for Rice”, and consistently has avoided any interaction with Rice, (e.g., by retainer agreements, emails, reporting letters, accounts or meetings with Rice or his advisors), that would suggest otherwise.

At all times, McDonald has instead taken his advice from, and reported to, the majority shareholders who effectively control the corporation.

As those shareholders have the ability to select legal representation and determine legal instructions in any event, regardless of what Rice may think as a minority shareholder, the Respondents say that forcing BLS and the majority shareholders to obtain separate legal representation would create nothing but unnecessary complication and expense. [ 13 ] For the reasons that follow, I believe the concerns raised by Rice are significant and have merit, and that they necessitate McDonald’s removal as lawyer of record for any respondent in this litigation.

Conflict of Interest and Lawyer Removal – General Principles [ 14 ] Our courts repeatedly have emphasized the right of litigants not to be deprived of their counsel of choice without good cause. [ 15 ] In particular, deprivation of preferred counsel imposes inherent hardship on a litigant, and such relief therefore should be ordered only where it is necessary to prevent the imposition of a more serious injustice, and the risk of real mischief. [1] [ 16 ] However, the courts’ respect for preferred representation is tempered by ongoing concern to maintain the high standards of the legal profession and the integrity of the justice system, and this includes the courts’ inherent jurisdiction to remove from the record lawyers who have a conflict of interest. [2] [ 17 ] In the exercise of that jurisdiction, courts are not bound by the codes of professional conduct to which lawyers must adhere.

However, those codes reflect centuries of experience, are persuasive, and their importance has been recognized by the Supreme Court of Canada. [3] [ 18 ] One specific conflict of interest concern, (identified by almost identical provisions and commentaries in the codes of professional conduct adopted by the Canadian Bar Association and the Law Society of Upper Canada), is addressed by the long- established prohibition on a lawyer simultaneously acting as counsel and witness.

In particular, a “lawyer must not in effect become an unsworn witness or put the lawyer’s credibility in issue”, and the “lawyer who is a necessary witness should testify and entrust the conduct of the case to someone else”. [4] [ 19 ] The particular conflict of interest prohibition dealing with “lawyer as witness” is intended to prevent the inevitable conflict of interest a lawyer otherwise would have between the duty owed to his or her client, and duties of independence otherwise owed to others, especially the Court. [5] In particular, lawyers are independent officers of the court, and a trial judge must be able to rely upon counsel for a high degree of objectivity and detachment.

That fundamental relationship is compromised, and the administration of justice and integrity of the system accordingly are undermined, where the objectivity and credibility of counsel necessarily are subjected to challenge in the course of determining the substantive merits of an underlying dispute. [6] [ 20 ] However, rather than approach the general “lawyer as witness” conflict of interest concern and prohibition as an absolute rule, our courts adopt a flexible approach and consider each case on its own merits, having regard to a variety of factors that, according to the circumstances of the case, may include the following: a. the stage of the proceedings; b. the likelihood that the witness will be called; c. the good faith (or otherwise) of the party making the application; d. the significance of the evidence to be led; e. the impact of removing counsel on the party’s right to be represented by counsel of choice; f. whether trial is by judge or jury; g. the likelihood of a real conflict arising or that the evidence will be “tainted”; h. who will call the witness; and i. the connection or relationship between counsel, the prospective witness and the parties involved in the litigation. [7] [ 21 ] The above principles focus on “lawyer as witness” conflict of interest concerns. [ 22 ] More generally, however, lawyers must not place themselves in any situation, or act or continue to act in a matter, where there is or is likely to be a conflicting interest.

This includes situations where a lawyer owes conflicting duties of representation and confidentiality to parties on both sides of a legal dispute. [8] [ 23 ] Of course, there are many varied circumstances in which such concerns might arise. [ 24 ] However, authorities repeatedly have identified corporate shareholder disputes as situations involving inherent conflicts of interest that effectively restrict a lawyer’s ability to extend joint representation. [ 25 ] In particular, as emphasized by the professional codes of conduct, a lawyer representing a corporate organization must remember at all times that the corporation has a legal personality distinct from its individual directors and shareholders, and that those interests may very well diverge, thereby preventing a lawyer’s continued involvement in an internal corporate dispute. [9] [ 26 ] In matters of legal representation, it accordingly is a fundamental error to regard a corporation as being synonymous with its majority directors and shareholders. [ 27 ] Doing so almost inevitably leads to a corporate lawyer’s disregard of obligations owed to the corporate body and structure as a whole, in favour of a particular corporate faction.

Most notably, the corporate lawyer effectively may ignore his or her obligation to seek litigation instructions from the corporation’s entire board of directors, and/or the lawyer’s corresponding obligation to share otherwise confidential and privileged litigation information with all of the corporation’s directors. [ 28 ] It also ignores possible and probable distinctions between the interests of the corporation and such a majority. For example, where conduct of the director or shareholder majority is the real focus of a litigation dispute with a director or shareholding minority,

(rather than any conduct of the corporation per se), corporate payment of the majority’s legal representation benefits the majoritydirectors and shareholders but not the corporation. It also results in a situation where the minority shareholders effectively are beingcompelled to pay, at least in part, the legal fees of opposing legal counsel. [29] The above concerns have been highlighted in numerous cases emphasizing a lawyer’s inability to jointly represent both acorporation and individual majority directors and shareholders in litigation focused on an internal corporate dispute. See, for example:Mottershead v.

Burdwood Bay Settlement Co., (BC SC), [1991] B.C.J. No. 2554 (B.C.S.C.), (“Mottershead”); Alles v.Maurice, [1992] O.J. No. 331 (S.C.J.); Edwards-MacLeod Properties Ltd. v. 1037661 Ontario Ltd., [2001] O.J. No. 145 (S.C.J.); andCanadian Arctic Trading House Ltd. v. Bronstein, [2007] O.J.

No. 3278 (S.C.J.). [30] The following comments from Mottershead case, at paragraphs 8-10, (expressly cited with approval by a number of theOntario authorities noted above)[10], exemplify the underlying concerns and conflict of interest rationale for restricting and preventingsuch joint representation: In my view, it is clear that Mr Davies and his law firm are in a conflict of interest. As corporate solicitor and counsel for the Company,Mr Davies’ duty is to the Company; as counsel for the three personal defendants, who are also the majority shareholders, his duty is tothose individuals.

The best interests of the Company are not necessarily those of the majority shareholders and directors. The Companyis a separate legal entity and it is no answer for Mr Davies to say that his instructions are from the individual majority shareholders aspersonal defendants are one and the same as those instructions which they provide as majority directors of the Company. The duty ofthe solicitor for the Company is to advise all of the directors so that they may make an informed decision as a board with respect to theinterests of the Company.

In shareholder litigation, there exists a potential conflict of interest between the personal interests of the individual parties both plaintiffsand defendants as shareholders and their fiduciary duties as directors of the Company. A solicitor acting both for the majorityshareholders and for the Company on the sole basis of the instructions of that same majority personifies that conflict. Moreover, a solicitor owes a duty of confidentiality to his or her client and information received from the majority shareholders in theircapacity as personal defendants would be privileged.

Sure a conflict arises when that solicitor receives privileged information in hiscapacity as solicitor for the majority shareholder defendants and declines to advise the board of directors which includes the minorityshareholders of that information notwithstanding his role as corporate solicitor and counsel for the defendant Company. [Emphasis added.] [31] In the same case, the court expressly noted, in paragraph 14, the following examples of “an actual conflict of interest, and notsimply the appearance of a conflict”, arising from such joint representation: a. payment of the majority shareholders’ legal costs as a corporate expense effectively then assessed against all of the corporation’sshares; b. provision of legal opinions to the majority shareholders and not to the minority shareholders, who are also directors; and c. refusal to disclose litigation-related documents and information to minority directors and shareholders of the corporation, on thebasis of purported solicitor-client privilege. [32] Where such conflict of interest concerns arise, the proper course is to require legal representation for the corporation, (if suchrepresentation is required), that is separate and distinct from the legal representation of the majority directors and shareholders.

Ideally,such representation should be chosen independently of the litigating individuals. However, if no agreement in that regard is possible,and no acceptable means is found to make such an appointment, any shareholder should be given leave to make an appropriateapplication to the court.

Similarly, if no means is found whereby corporate counsel may be properly instructed, the lawyer or lawyers inquestion may apply to the court for instructions.[11] Application – McDonald as “Lawyer and Witness” [33] Should McDonald’s involvement in the events underlying this litigation prevent his continued representation of theRespondents as lawyer of record, on the basis he is a potential witness? [34] Parties regularly act on the recommendations and advice of lawyers, who frequently communicate decisions made andpositions adopted by their clients.

Lawyer involvement in that limited sense should not necessarily disqualify continued lawyerinvolvement if a dispute evolves into formal litigation. Otherwise, a great many litigants automatically would be deprived of theirpreferred legal representation, in which they have invested considerable time and expense. [35] In this particular case, however, I think McDonald’s involvement clearly transcends any status as advisor or communicator ofdecisions taken by clients.

Nor was he merely a passive witness to the actions of others. [36] To the contrary, the evidence and McDonald’s own admissions indicate the following: a. McDonald was an active and major participant in at least two meetings of critical importance to this litigation; i.e., the meeting inNovember of 2011, (during which Rice arguably was given authority to share otherwise confidential information with third parties for alimited purpose), and the meeting in March of 2012, (during which Rice was terminated for reasons that are very much in dispute);[12] b.

McDonald was not only the principal actor but also the effective decision maker, as far as termination of Rice was concerned; and c. The Respondents justify their actions by reliance on the investigation personally carried out by McDonald into the activities ofRice.

[ 37 ] I agree with the Applicant’s submission that these are all critical events and matters that go to the heart of the substantive dispute between the parties. [ 38 ] The litigation realistically cannot be addressed and resolved without detailed examination of the circumstances in which Rice’s sharing of information with others outside BLS may have been anticipated and expressly authorized, and reasonable inferences that might be drawn from any similar disclosure to others already made by Ting and/or Smith.

In that regard, whether such disclosure was made to McDonald prior to his retention as lawyer for BLS is also relevant and important.

Matters relating to the nature and timing of that representation therefore may be of critical importance. [ 39 ] Similarly, the litigation requires fulsome exploration of the suggestion that Rice’s termination for cause was motivated by bad faith and ulterior motives; an inference that may be supported by the termination having been undertaken prior to any adequate investigation of alleged misconduct. [ 40 ] McDonald is a participant and witness whose evidence would be significant in relation to all these matters. [ 41 ] In that regard, it is not a sufficient answer to the identified “lawyer as witness” concerns to say: a. that the Respondents do not dispute the particular description of events set forth in Rice’s affidavit evidence; b. that the events of the termination meeting are confirmed by McDonald’s letter sent later that day; or c. that McDonald is an unnecessary witness because Smith and/or Ting can be called and cross-examined at trial to say what they observed on the relevant occasions, or simply confirm their reliance on information and documents stemming from McDonald’s investigation, communications and/or decisions. [ 42 ] The parties now agree that the matter necessarily must move beyond affidavit evidence, and on to a full trial. [ 43 ] Moreover, this fundamentally is a case where both sides allege that things are not what the other side professes them to be. (For example, Rice contends that his supposed termination for cause is really a baseless attempt, through abuse of majority shareholding status, to appropriate his interest in the company without compensation.

The Respondents contend that Rice’s sharing of information and documentation with third parties was not part of any authorized or bona fide effort to investigate a share purchase, but a component of deliberate attempts by Rice to undermine the integrity of BLS for personal gain.) [ 44 ] In such circumstances, it is not enough to suggest that the parties may agree on what was said or done on a particular occasion without giving each party full opportunity to go beyond statements and conduct; i.e., by way of fulsome cross-examination to explore and test context, authority, motive and credibility. [ 45 ] In my opinion, McDonald is a material witness, and I am satisfied that there is a legitimate and real probability of his being called as such at trial by Rice, if not by the Respondents. [ 46 ] I see no evidence before me of any bad faith in that regard, but a legitimate recognition of the issues in dispute, and the inevitable need of Rice to properly explore and challenge the basis of the Respondents’ conduct and position in the litigation. [ 47 ] In that regard, McDonald cannot be shielded from cross-examination by the Respondents’ reliance on McDonald’s own confirming letter, and/or a suggestion that Smith and/or Ting alone should be presented as witnesses to provide evidence of the conduct or statements of McDonald on which the Respondents relied. [ 48 ] Rice and his counsel should be permitted to cross-examine a material witness and participant directly. [ 49 ] If McDonald continues to represent the Respondents at trial, (which is his stated intention), and he is called as a witness, (which seems extremely likely), that would place counsel for Rice in the invidious position of having to cross-examine the counsel who is making the Respondents’ primary case. [ 50 ] Moreover, the court effectively would be confronted with the inappropriate task of having to consider and assess the conduct and motives of an active participant in underlying events who also then appears as counsel at trial. [ 51 ] Contrary to the suggestions of the Respondents, I also think the above concerns actually are being raised at a very early stage of the formal litigation, at a time when any detrimental impact on the Respondents of requiring new representation will be relatively modest. [ 52 ] Apart from an unsuccessful attempt at mediation and steps taken in relation to this motion, the parties’ actions in relation to the formal litigation have not progressed beyond the initial exchange of written application records. [ 53 ] The matter accordingly is at the threshold of the many additional steps required to ready the matter for trial now that the parties agree an action is required; (e.g., further pleadings, documentary production, oral discovery examinations, and trial preparation).

It certainly is not nearly as far along the litigation track as other matters where the court necessarily has intervened, (sometimes on the eve of trial), to address and remedy obvious “lawyer as witness” concerns. [13] [ 54 ] For all these reasons, the “lawyer as witness” matters raised by Rice are valid and serious, and present sufficient justification to compel McDonald’s withdrawal as lawyer of record in this litigation, for any of the Respondents. Application – McDonald Joint Representation of Respondents [ 55 ] The above analysis is sufficient to warrant McDonald’s removal as lawyer of record.

[ 56 ] However, for the sake of completeness, and because it has relevance to the retention of new Respondent counsel, I find that McDonald’s joint representation of BLS and the majority shareholders/directors also represents an impermissible conflict of interest. [ 57 ] In that regard, the situation before me manifests most if not all of the concerns highlighted in the Mottershead case and similar authorities. [ 58 ] In particular, while the Respondents put forward McDonald’s lack of interaction with Rice as a positive consideration, his fundamental approach to the parties and the dispute actually underscores precisely the sort of impermissible conflict of interest problems identified by the authorities in relation to disputes of this nature. [ 59 ] For example: a.

On what basis has McDonald, in his professed role as lawyer for BLS, consistently and deliberately failed to consult in any manner whatsoever with Rice, as one of the corporation’s directors and shareholders? b. On what basis can McDonald, in his professed role as lawyer for BLS, refuse to provide Rice, one of the corporation’s directors and shareholders, with prompt and complete disclosure of any and all litigation-related information and discussions McDonald has or will have via his interaction with Smith and Ting? c.

On what basis does McDonald, in his professed role as lawyer for BLS, justify billing the corporation for legal work done to defend the personal interests of Smith and Ting? [ 60 ] In my view, the real and only basis effectively relied upon by McDonald for his conduct is the one rejected by the authorities as inadequate and improper: the corporation’s solicitor has paid insufficient regard to the distinct legal personality of the corporation, (which should guide the corporate lawyer’s conduct), and has treated the corporation and its majority shareholders as being one and the same. [ 61 ] For the reasons outlined above, the authorities mandate that, in an internal corporate dispute such as the one now before the court, the corporation and the majority shareholders must have legal representation that is separate and distinct. [ 62 ] The circumstances demonstrate an actual conflict of interest in that regard, which also warrants McDonald’s removal as lawyer of record. [ 63 ] When the corporation retains new counsel, for purposes of this litigation, the lawyer in question therefore should not also represent Smith and/or Ting.

Conclusion [ 64 ] An order therefore shall go as follows: a. McDonald shall withdraw as lawyer of record for any respondent. b. The corporate Respondent, (which requires representation by a lawyer pursuant to Rule 15.01 unless and until leave is sought and obtained to do otherwise), henceforth must be represented by counsel separate from counsel retained by Smith and/or Ting, (assuming they choose to retain new counsel in preference to self-representation). c. Appointment of a new lawyer of record for BLS may be made either by agreement of the parties or by the court on the motion of any shareholder. d.

If new lawyers are appointed for BLS in one manner or another and no means is found whereby they can be properly instructed, (having regard to the obligation of corporate counsel to consult with and consider the views of all directors or, in appropriate cases, all shareholders), those lawyers may apply to the court for directions. Costs [ 65 ] Because my decision was reserved, the parties were unable to make any submissions regarding costs of the Applicant’s motion.

If the parties are unable to reach an agreement on costs in that regard: a. the Applicant may serve and file written cost submissions, not to exceed four pages in length, (not including any bill of costs), within two weeks of the release of this decision; b. the Respondents then may serve and file responding written cost submissions, also not to exceed four pages in length, within two weeks of service of the Applicant’s written cost submissions; and c. the Applicant then may serve and file, within one week of receiving any responding cost submissions from the Respondents, reply cost submissions not exceeding two pages in length. [ 66 ] If no written cost submissions are received within two weeks of the release of this decision, there shall be no costs of the motion. “ Justice Ian F.

Leach” Justice Ian F. Leach

Released: February 25, 2013 CITATION: Rice v. Smith et al., 2013 ONSC 1200 COURT FILE NO.: 6873/12 DATE: 2013/02/25 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: JAMES RICE Applicant – and – BARRY SMITH, CHUNG-LIE TING and BLS TEXTILES INC. Respondents REASONS FOR JUDGMENT LEACH J. Released: February 25, 2013