2014 ONSC 3819, 2014 ONSC 3819

CITATION : 7102763 Canada Inc. and 2242869 Ontario Inc., 2014 ONSC 3819 COURT FILE NO.: 13-59696 DATE: Motion heard June 17, 2014 SUPERIOR COURT OF JUSTICE - ONTARIO RE: 7102763 Canada Inc. and 2248269 Ontario Inc. BEFORE: Master Pierre E. Roger COUNSEL: Ronald Price, for the Plaintiff/Respondent Joseph Griffiths, for the Defendant/Moving Party [ 1 ] The defendant brings this motion seeking an order removing Rasmussen Starr Ruddy LLP (RSR) as lawyers for the plaintiff. Background information [ 2 ] The defendant is a roofing contractor carrying on business in Ottawa as Grimes Roofing.

Grimes has been in business in Ottawa for quite some time; however, the defendant was incorporated on May 5, 2010. [ 3 ] As part of its initial organization, the defendant passed a resolution, on May 5, 2010, appointing the law firm of RSR as its corporate lawyers and designating their offices as the location at which the corporate minute book would be maintained and kept. At that time, Dale Drevniok was the sole shareholder. [ 4 ] In September 2011, Mr. Drevniok sold his shares in the defendant to Daniel Bisson. RSR acted on the share purchase agreement and drafted same, receiving instructions from Drevniok.

The account for legal fees incurred for the preparation of the share purchase agreement was rendered to Mr. Drevniok and was paid for by Mr. Drevniok. [ 5 ] RSR has been corporate counsel for Drevniok and his companies since at least 2010. One of those companies was the defendant. [ 6 ] The shareholder and directing mind of the plaintiff is Drevniok. In this action, the plaintiff’s claims include a claim that the defendant owes to the plaintiff $400,000.00 pursuant to a promissory note purported to have been executed by the defendant on September 23, 2010.

The note is dated September 23, 2010, and the statement of claim makes reference to that date, seeking interest therefrom. However, it is clear on this motion, as outlined later, that the promissory note was only prepared by RSR late in 2012 or early in 2013 – in close proximity to their account for legal fees for preparing the promissory note, dated February 13, 2013. The defendant’s position in the action is apparently that, to the extent that any monies were advanced to it by the plaintiff, which it denies, such monies have been repaid in full. [ 7 ] The statement of claim was issued on December 20, 2013.

It seeks significant damages totalling about $950,000.00 (including the promissory note referred to above). A notice of intent to defend was delivered on January 13, 2014. A case conference was held on March 4, 2014, to

schedule this motion. [ 8 ] RSR indicates that it drafted the promissory note upon instructions it received from the plaintiff and that it rendered its legal fees account to a corporation related to the plaintiff (see: Exhibit E). RSR indicates that it did not provide any legal advice to the defendant with respect to the preparation or execution of the promissory note, and that all discussions and instructions relating to the terms and conditions of the promissory note and associated security came from Mr. Drevniok, as the principal and directing mind of the plaintiff.

Considering the plaintiff’s admission, through its counsel, that the promissory note was only prepared in late 2012 or early 2013, atwhich point Drevniok was no longer a shareholder of the defendant, I accept the above (that RSR did not provide legal advice to thedefendant on the note). [9] The evidence indicates that, from September 2011 to December 2013, RSR acted for the defendant on a small number of limitedoccasions, on instructions received from Bisson. The evidence indicates further that RSR did not define the scope of its retainers with thedefendant.

However, RSR was, on a limited number of occasions, in communication with Bisson, acting at times on his behalf (toincorporate another corporation of which he is the principal) and, at other times, on behalf of the defendant. Further, the evidence is thatthe minute book and seal of the defendant were held by RSR. In October 2013, RSR advised Bisson that no further work would becompleted for Bisson or for the defendant until such time as two outstanding accounts were paid and that it would provide the requestedlegal services after payment.

The email dated October 16, 2013, confirms this, stating: “Once those accounts have been paid I willprepare the documents relating to the resignation [of Barjolin as director of the defendant]”. [10] On December 12, 2013, following the refusal of RSR to perform additional work for the defendant until outstanding accountsrelating to the incorporation of 235 (his other company) were paid, Mr. Bisson attended at RSR, paid the outstanding accounts for 235and retrieved the minute books and seals for both the defendant and 235.

On that same day, presumably before he obtained the minutebook, he sent an email to RSR to confirm who was the director and shareholder of the defendant. [11] When Mr. Bisson attended to pick up the corporate minute books, he did not indicate that he would be returning them, nor did hereiterate his earlier request that RSR prepare for the defendant corporation resolutions to remove a director and replace him with Mr.Bisson. On the other hand, he did not indicate that he was terminating his or the defendant’s relationship with the law firm.

Shortly after,in December 2013, RSR received instructions from Drevniok and proceeded to issue the statement of claim in this action on December20, 2013. [12] As indicated above, an account for the September 2010 promissory note was rendered by RSR on February 20, 2013, in theamount of $514.24. That account was rendered to a corporation related to the plaintiff but was somehow paid by the defendant.

AlthoughRSR has no information as to why this account was actually paid by the defendant, I accept as quite probable the explanation that theaccount was eventually handed to the defendant for payment pursuant to some unknown arrangements, as the account for the promissorynote prepared by RSR for the plaintiff was in fact paid by the defendant. [13] It is clear, from the evidence, that the defendant and a company related to the defendant (235) have retained other counsel in twoongoing actions before this court and that RSR was not contacted nor retained by the defendant in these matters.

It is also clear, from theaffidavit of Ms. Authier, sworn May 30, 2014, and from the evidence presented on this motion, that a very few and rather small legalservices were provided by RSR to the defendant from 2011 up until 2013. I will outline these in my analysis.

It is also clear that the May5, 2010, corporate resolution which provides that RSR are the defendant’s solicitors was never amended, that the minute book and sealof the defendant remained with RSR until December 12, 2013, that the defendant and its sole shareholder (Bisson) considered RSR to beits corporate lawyers, and that up until December 2013, subject to its account receivable policy, RSR acted for the defendant whenever itwas consulted by the defendant through its sole shareholder, Bisson.

Analysis: [14] This case involves consideration of the duty of loyalty in circumstances where RSR did not receive, from prior retainers with thedefendant, any confidential information relevant to this ongoing action against the defendant. Consequently, this is not a case dealingwith confidential information. This is a case dealing with the duty of loyalty owed by lawyers to their clients. That duty was articulatedby the Supreme Court of Canada in R. v. Neil, 2002 SCC 70 , [2002] 3 S.C.R. 631 and, more recently, in Canadian NationalRailway Co. v. McKercher LLP, 2013 SCC 39 , [2013] 2 S.C.R. 649.

The duty of loyalty includes: (1) a duty to avoidconflicting interests; (2) a duty of commitment to the client’s cause; and (3) a duty of candour: see McKercher at para. 19. [15] Avoiding conflicts of interest is a broad concept. It includes protecting clients from risks of harm, for example: when the firm hasreceived relevant confidential information from prior work for a past or current client. Such cases are exemplified by the facts and issuesraised in Macdonald Estate v. Martin, (SCC), [1990] 3 S.C.R. 1235.

As indicated by Justice Binnie in Neil, at para. 17,“While the Court is most often preoccupied with uses and abuses of confidential information in cases where it is sought to disqualify alawyer from further acting in a matter, as in McDonald Estate, supra, the duty of loyalty to current clients includes a much broaderprinciple of avoidance of conflicts of interest, in which confidential information may or may not play a role”. As noted earlier, the issuesraised in the case at hand are not about relevant confidential information imparted from a prior retainer.

However, the duty to avoidconflicting interests is broader and includes what has been coined as the bright line rule. Indeed, as indicated further by Justice Binnie inNeil, at para. 29, “The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directlyadverse to the immediate interests of another current clients – even if the two mandates are unrelated – unless both clients consent after

receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.” Was the defendant a current client? [ 16 ] This motion was argued on the basis that the defendant was, at the time that the statement of claim was issued, a current client of RSR, and that, as a result, RSR had duties owed to the client.

This motion was not argued on the basis of what duties, other than the duty of confidentiality, might be owed to a former client. [ 17 ] Whether a client is a current client is a factual question to be assessed by considering all relevant evidence, including the relationship history and any ongoing relationship. [ 18 ] I was not provided with any case or authority on this point but note that the Ontario Rules of Professional Conduct provide some guidance.

At rule one, they provide: “client” includes a client of the law firm of which the lawyer is a partner or associate, whether or not the lawyer handles the client’s work Commentary A solicitor and client relationship is often established without formality. For example, an express retainer or remuneration is not required for a solicitor and client relationship to arise. Also, in some circumstances, a lawyer may have legal and ethical responsibilities similar to those arising from a solicitor and client relationship.

For example, a lawyer may meet with a prospective client in circumstances that impart confidentiality, and, although no solicitor and client relationship is ever actually established, the lawyer may have a disqualifying conflict of interest if he or she were later to act against the prospective client. It is, therefore, in a lawyer’s own interest to carefully manage the establishment of a solicitor and client relationship.” [ 19 ] I also note that the Code of Conduct of the Law Society of Alberta provides additional information relating to the existence of a lawyer-client relationship.

The commentary under rule 2.04 clearly distinguishes between duties owed to former and current clients and provides: “A client is a current client if the lawyer is currently acting for the client, and may be a current client despite there being no matters on which the lawyer is currently acting.

In determining whether a client is a current client, notwithstanding that the lawyer has no current files, the lawyer must take into consideration all the circumstances of the lawyer-client relationship, including, where relevant: • the duration of the relationship; • the terms of the past retainer or retainers; • the length of time since the last representation was completed or the last representation assigned; and • whether the client uses other lawyers for the same type of work.” [ 20 ] From the evidence, using the above for guidance, t he relationship, contact and communications between RSR, the defendant and Bisson were the following: a.

Since its incorporation in 2010, the defendant has not amended its resolution that RSR is its corporate counsel, and its minute book and seal remained with RSR until December 12, 2013. b. No written retainer was provided to this court on this motion.

c. After the transfer of shares in 2011, it does not appear that RSR ever drafted any corporate resolution for the defendant. d. In April 2012, a legal opinion was provided to the defendant on a tendering issue. The account was rendered and the file was closed once the account was paid. e. On June 6, 2012, Bisson contacted RSR about a possible litigation matter relating to non-payment on a contract. RSR was not retained to perform work in that matter and no file was opened. f. In July 2012, Bisson contacted RSR requesting a family law lawyer.

Bisson was referred to a lawyer in another firm who practices family law. g. The defendant paid $1,259.39 to RSR via a cheque from Grimes dated October 23, 2012, and paid $514.24 on February 20, 2013 (the latter for the promissory note). h. In November 2012, Bisson contacted RSR regarding a project in Newfoundland. He was advised that RSR could not act for 224 and that counsel in Newfoundland would need to be retained. RSR offered to prepare a demand letter, but RSR was never retained to prepare such a letter nor did it prepare any lien documents.

Emails about this were exchanged between Bisson and RSR in November and December 2012. i. In January 2013, RSR acted for Bisson personally and incorporated a new company, 2351295 Ontario Inc. An account was rendered for this by RSR and it was paid by Bisson on December 12, 2013, when he attended at RSR. j. The promissory note which forms the basis of the litigation between the plaintiff and the defendant was prepared at the request and on the instructions of the plaintiff late in 2012 or early in 2013, and for some reason the account of RSR for this was paid by the defendant. k.

In March 2013, Bisson contacted RSR to request information as to whether he was a director of 224. l. In July 2013, Bisson contacted RSR regarding a possible litigation matter. RSR was never retained to perform any work in that matter and no file was opened. m. In October 2013, Bisson sent an email to RSR requesting that documentation be prepared relating to the resignation of Barjolin as the sole director of 224.

As indicated above, RSR refused to perform the work because there remained outstanding accounts owing in relation to both the incorporation of and the registration of the business name for his other company, 2351295 Ontario Inc., but it indicated that it would complete the work once the accounts were paid. n. Following the purchase of the shares of 224, aside from the request received in October 2013 (described above), RSR was not asked and did not perform work to update the minute book of the defendant 224. o. RSR did not act on any litigation matter for the defendant, 235 or Bisson. p. On December 12, 2013, Mr.

Bisson attended at the offices of RSR, paid the outstanding accounts relating to 2351295 Ontario Inc., and picked up the minute books for both 224 and 2351295 Ontario Inc. q. Neither RSR nor Bisson communicated to the other an intention to terminate any lawyer-client relationship prior to the statement of claim being issued in this matter. r. 224 has taken no issue with RSR acting for Thomas Fuller Construction in action no. 13-1171, where the position of Thomas Fuller is adverse to the interests of 224. s. 224 never contacted RSR in relation to action no. 13-1171. t.

As of December 12, 2013, the defendant had retained other counsel in a litigation matter as evidenced by an email of Bisson. u. An action was commenced by Merkley Supply against the defendant and against Bisson and Barjolin personally. In that matter, Mr. Griffiths contacted the lawyer for Merkley Supply on November 15, 2013, and left a voicemail advising that he had been consulted by one of the defendants in connection with that matter. v. An action was commenced by Ottawa Fastener Supply Inc. against Bisson personally and his other corporation, 2351295 Ontario Inc. In that matter, Mr.

Griffiths emailed the representative for Ottawa Fastener on November 15, 2013 and advised that he was representing the defendants. [ 21 ] From the above, I conclude that the defendant was a current client of RSR at the time that this action was issued.

I make this finding based on the relationship (albeit of a minor nature) between the defendant and RSR; on the fact that the defendant, through Bisson, contacted RSR for legal advice and appears to have considered RSR to be its corporate counsel; and, principally, on the basis that the defendant retained or attempted to retain RSR in October 2013 to prepare corporate resolutions regarding a change in the directorship of the defendant.

RSR did not refuse this retainer but indicated, as per its account receivable policy, that it would prepare the documents relating to the resignation once the outstanding accounts had been paid. Bisson then attended the office of RSR on December 12, 2013, to pay the accounts. Although he did not then provide further instructions, he also did not explicitly sever the relationship. [ 22 ] I am unable to conclude that the relationship was implicitly terminated by the actions of Bisson on December 12.

In the circumstances of this relationship, the length of time between the request to prepare these corporate resolutions, Bisson attending to pay

the accounts and at the same time removing the minute books and the time when the action was issued is very brief and, in these circumstances, simply too short for such a conclusion. It is well established that a lawyer or a law firm cannot terminate a client relationship to avoid its duty of loyalty (see McKercher, supra, at para. 55) and, consequently, it seems appropriate to require some reasonable cooling-off period, the duration of which will vary according to the circumstances.

Overall, it seems that the defendant considered RSR to be its corporate lawyers, and that RSR, at least until it received instructions to sue the defendant, considered the defendant to be a client. If there had been more time between the removal of the minute books and the start of the action, at some point one might infer that the defendant had terminated the relationship; however here, as indicated, that period, in between, is just too brief.

Is there a disqualifying conflict of interest? [ 23 ] As the defendant was a current client, a duty of loyalty was owed by RSR to the defendant, which, as indicated above, includes (1) a duty to avoid conflicting interests; (2) a duty of commitment; and (3) a duty of candour (see McKercher, supra, at para 19). Avoiding conflicting interests includes the duty of confidentiality, which is not at issue on this motion, and the bright line rule, which is at issue.

As indicated in McKercher , the bright line rule cannot be rebutted or otherwise attenuated, but nor is it a rule of unlimited application or scope. [ 24 ] First, the bright line rule only applies where the immediate legal interests of clients are directly adverse. This is clearly the case in this action. [ 25 ] Next, the rule cannot be raised by a party who seeks to abuse it, such as for tactical reasons or intentionally creating situations that will trigger the rule, as described at para. 36 of McKercher .

In this case, the motion was brought at an early stage and I find no convincing evidence that the defendant seeks to abuse the bright line rule or that this motion is brought for tactical purposes, recognizing of course that tactical decisions are to some extent an important part of civil litigation but I am not convinced that, in this case, tactical advantage is a driving factor. [ 26 ] Finally, as indicated in McKercher , “…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” (para 37).

Such circumstances are to be the exception, but the court may consider relevant factors in making this finding, which is obviously assessed on an objective basis. Such factors include: the nature of the relationship, the terms of the retainer, the types of matters, or anything else that may be relevant in “determining whether there was a reasonable expectation that the law firm would not act against the client in unrelated matters.” Professional litigants are one possible example, as indicated in Neil .

However, it seems clear from the nature of the client in McKercher and from the factors to be considered as indicated in McKercher , that this narrow exception is not limited to professional litigants.

As indicated in McKerche r, “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” ( McKercher at para 37). “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.” ( McKercher at para. 37).

However, “In most cases, simultaneously acting for and against a client in legal matters will result in a breach of the bright line rule, with the result that the law firm cannot accept the new retainer unless the clients involved grant their informed consent”. ( McKercher at para. 39) [ 27 ] Having considered all of the evidence presented on this motion, with the most relevant portions outlined above, I come to the conclusion that, in the circumstances of this case, it is not reasonable for the defendant to expect that RSR could not act against it in unrelated matters.

Such a finding is to be the exception rather than the norm, as stated by Binnie J. in Neil , at para. 28 , but the circumstances of this case fall within this narrow exception. Indeed, although the relationship between the defendant and RSR was long- standing, it was of a minor nature. The prior retainers were few in numbers, of limited scope and of short duration. There were and are no matter currently being handled by RSR for the defendant. This is not a case of a law firm actively acting for a client in one or in a number of other ongoing matters and, at the same time, attempting to act against that client.

Arguably, RSR did not have any active file for this client when the retainer was accepted. As well, up to as late as November 2013, the defendant consulted and retained other lawyers (not RSR) in a number of ongoing litigation matters and it did not give instructions to RSR to draft any resolution once Bisson paid his outstanding accounts, but rather took the corporate documents from the office of RSR at that time.

Considering all such circumstances, it is unreasonable for such a client to claim that it expected a law firm to owe to it a duty of exclusive loyalty and to refrain from acting against it in unrelated matters.

This case is different from the situation in McKercher – the lawyer-client relationship is simply not of the same nature. [ 28 ] As this case falls outside the scope of the bright line rule, in circumstances where there does not exist a risk of misuse of confidential information, the applicable test for the court next to consider is “…whether the concurrent representation of clients create a substantial risk that the lawyer’s representation of the client would be materially and adversely affected” ( McKercher, supra, at paras. 38, 40 and 41).

This requires a contextual analysis, examining “whether the situation is liable to create conflicting pressures on judgment” (see McKercher at para. 38). However, this is simply not such a case. In this case, as indicated above, there is no ongoing retainer between RSR and the defendant and no evidence of any substantial risk of such a conflict – there is no concurrent representation for and against the defendant by RSR– only representation against and no evidence of any substantial risk to effective representation.

[ 29 ] An argument was raised by the defendant that RSR might be called to give evidence about the terms and circumstances surrounding the execution of the promissory note. Indeed, although the promissory note is dated September 2010, it was in fact prepared by RSR pursuant to instructions received in December 2012, with the draft promissory note provided to the financial officer of the plaintiff in January 2013. It seems, at best, a possibility that RSR will ever be required to testify on this issue as this evidence will most likely be available from the parties and signatories of the note.

Such a possibility is not sufficient - see for example: Widrig v. Cox Downie (1992), 144 N.S.R. (2d) 320 (S.C.

T.D.), at para. 27, where the court states: “I do not agree that the court should grant an application to eliminate possibilities.” The possibility that RSR may be called to testify, in these circumstances, can be addressed if and when it ever materializes. [ 30 ] The duty of commitment to the client’s cause and the duty of candour may have been breached when, arguably, the client/defendant was dropped to avoid a potential conflict and when no efforts were made to attempt to communicate with the clients about this developing situation without of course breaching any obligation of confidentiality (see McKercher at paras. 44, 46 and 47), such that I find that these two duties are engaged in this case.

The next question is: what should be the appropriate remedy. [ 31 ] Having considered the circumstances where disqualification may be required, I find that the only applicable circumstance is the third, to maintain the integrity of or public confidence in the administration of justice. As indicated by the Supreme Court, “In assessing whether disqualification is required on this ground alone, all relevant circumstances should be considered”: McKercher at para. 64. In this case, the bright line rule has not been breached.

The lawyer-client relationship has been terminated and there is no evidence of any risk of a misuse of confidential information. As such, “…there is generally no longer a concern of ongoing prejudice to the complaining party”: McKercher at para. 65. All relevant factors must then be considered, including the three factors that may be considered as outlined by the Supreme Court in McKercher . I find that the first two factors are neutralized by the third factor.

The evidence presented convinces me that RSR accepted the retainer in good faith, reasonably believing that this was outside the scope of the bright line rule and applicable law society restrictions. Casting a wider net and considering all circumstances of this motion supports a finding that this case does not require disqualification. When this motion was argued, no alternate remedy was suggested. Disposition [ 32 ] Consequently, this motion is dismissed.

I encourage the parties to agree on the issue of the costs of this motion and, if such an agreement is not possible, then both parties shall provide to my office (by email to my registrar) brief written submissions of no more than three pages, within the next 30 days. ___________________________ DATE: July 11, 2014 Master P. E. Roger