ETHICAL SCENARIO #1 I. FACT PATTERN

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1 ETHICAL SCENARIO #1 I. FACT PATTERN Mary White is a lawyer with the law firm of Green LLP. She primarily practices in the area of corporate law but has been known to provide long-term clients with other services when required. One of her clients is Communique Ltd., a Canadian telecommunications company. Communique Ltd. has a number of shareholders, with no single controlling shareholder. On April 1, 2010 Mary received a telephone call from the CEO of Communique Ltd., Mr. Gauthier. Mr. Gauthier and his wife have won a trip to India which is scheduled to depart in two weeks. His wife, for her peace of mind, wishes to have their wills updated prior to departure. Mr. Gauthier realizes that it is short notice but he has appreciated all the hard work that Mary had done in the past for his company. He asks Mary to prepare and update both his and his wife s wills. Mr. Gauthier, in passing, mentions that upon his return there will be an upcoming commercial transaction which will require Mary s attention. Mary, cognizant of the importance of developing client relationships, agrees and arranges for the drafting and execution of the wills. Upon his return from India, Mr. Gauthier contacts Mary and informs her that Communique Ltd. has been sold to a large multi-national corporation, WorldCorp. He would like Mary and Green LLP to assist in completing the transaction. Mr. Gauthier advised Mary that as a condition of the sale, he would be resigning his role at Communique Ltd. and would be pursuing new opportunities. As a senior executive, he is entitled to compensation upon leaving Communique Ltd. Mr. Gauthier asks that Mary White structure such compensation in a way that minimizes any potential tax consequences. Mary advises Mr. Gauthier that having Communique Ltd. pay compensation in return for a non-competition agreement is an attractive method for reducing tax liability. 1 Based on her advice, Mr. Gauthier, secures from the Communique Ltd. Board of Directors noncompetition payments that totaled $75 million dollars. Mary advises Mr. Gauthier and Communique Ltd. that these payments do not need to be disclosed to WorldCorp due to privacy reasons. The Communique Ltd. and WorldCorp transaction has recently come under scrutiny by the Canadian Press. While the mainstream media is mainly concerned with the potential competition aspects and the loss of a Canadian industrial leader, one legal blog has 1 This is no longer the case. 1

2 mentioned they have concerns that Green LLP may have in the course of their relationships with Communique Ltd. and Mr. Gauthier committed some ethical errors. II. ISSUES 1. Did Mary White and/or Green LLP commit any ethical errors? 2. If so, what could Mary White have done to prevent such ethical breaches? 3. If so, what could Green LLP done to prevent such ethical errors? 4. Would your response be different if Mr. Gauthier owned more than 50% of Communique Ltd.? III. ANALYSIS 1) Did Mary White and/or Green LLP commit any ethical errors? Mary White and Green LLP have been exposed to allegations of ethical errors as a result of representing two different clients, Mr. Gauthier and Communique Ltd., who have competing interests. Chapter V of the Code of Professional Conduct of the Law Society of Saskatchewan states that: The lawyer shall not advise or represent both sides of a dispute and, save after adequate disclosure to and with the consent of the clients or prospective clients concerned, shall not act or continue to act in a matter when there is or is likely to be a conflicting interest. A conflicting interest is described in the commentary as: one that would be likely to affect adversely the lawyer s judgment or advice on behalf of, or loyalty to, a client. In the scenario, Mr. Gauthier and Communique Ltd. have competing interests concerning any non-compete payment. Mr. Gauthier desires to maximize the amount of the package and minimize the tax consequences of any payment; Communique Ltd. is more concerned with maximizing sale proceeds (thus minimizing the non-compete payment) and ensuring that the sale transaction proceeds smoothly. The conflicting interest is obvious. In addition, lawyers owe their clients a duty of loyalty. 2 This duty relates not only to avoiding conflicting interests but also encompasses a commitment to the client s cause, and 2 R. v. Neil [2002] 3 S.C.R

3 candour related to the retainer. Green LLP, by accepting Mr. Gauthier and Communique Ltd. as clients, had a duty of loyalty to both. The firm was incapable of meeting this duty as Mary White was unable to speak candidly about the non-compete agreement with either client without betraying the interests of the other. 2) If so, what could Mary White have done to prevent such ethical breaches? Refer to another firm One way to have prevented the ethical breach would have been to refer Mr. Gauthier to another firm when Ms. White was approached to draft his will. Had she done so, the only client she would be representing at the time of the purchase of Communique Ltd. would be the corporation itself. This would have avoided any conflict of interest from the beginning. When Mr. Gauthier approached her for advice regarding his compensation package, she could have once again referred him to another solicitor in order to avoid the conflict. Her only duty of loyalty would then be to Communique Ltd. There could be difficulties with that approach, however, as Mr. Gauthier at that point was a client to whom Green LLP owed a duty of loyalty. Retainer Letter A detailed retainer letter could have been prepared for Mr. Gauthier when he approached Mary White to draft his will. This retainer letter would state that she has only been retained for the purpose of preparing Mr. Gauthier s will and that the scope of their relationship as solicitor and client is limited to that one transaction. The letter should specify that Green LLP acts for Communique Ltd. and the preparation of the will for Mr. Gauthier will not limit Green LLP s ability to act for Communique Ltd. in other matters, including matters in which Communique Ltd. is adverse in interest to Mr. Gauthier. Mr. Gauthier would, presumably, be a sophisticated client who could appreciate the limitations on his personal engagement of Green LLP. Thus, when Mr. Gauthier approaches Mary White for advice concerning the structure of his compensation package, she can ask that he seek legal representation elsewhere as she is legal counsel for Communique Ltd. who will have adverse interests to him. In addition, as the retainer letter would have restricted the scope of Mary White s representation of Mr. Gauthier, she would not have required his permission prior to acting for Communique Ltd. Again, at the time of the purchase transaction Green LLP s sole duty of loyalty would be to Communique Ltd. 3

4 Consent The Law Society s interpretation of Chapter V requires adequate disclosure to enable the client to make an informed decision about whether to have the lawyer act despite the existence or possibility of a conflicting interest. Before the lawyer accepts employment from more than one client in the same matter, the lawyer must advise both the client and the potential client that the lawyer has been asked to act for both of them, that no information received in connection with the matter from one can be treated as confidential and that, if a dispute develops that cannot be resolved, the lawyer cannot continue to act for both of them and may have to withdraw completely. Mary White has previously acted for both Mr. Gauthier and Communique Ltd. in the past. Without a retainer letter limiting the scope of the representation of Mr. Gauthier, it can be argued that both Mr. Gauthier and Communique Ltd. are her clients when she accepted the invitation to provide legal assistance in the sale of Communique Ltd. As such, she owed a duty of loyalty to both parties. The adverse interests between Mr. Gauthier and Communique Ltd. are too divergent for Green LLP to represent both parties. As Mr. Gauthier is a client of Green LLP, the firm would require his permission in order to continue to act for Communique Ltd. If he refuses to grant permission, Green LLP may be required to send Communique Ltd. to seek legal representation elsewhere. While this is unlikely in the circumstances, since Mr. Gauthier has an interest in completion of the sale, it is a potential risk. 3) If so, what could Green LLP have done to prevent such ethical errors? Obviously, firms should have in place risk management systems designed to minimize potential ethical errors, including conflicts of interest checking processes, and, depending on the size of the firm, a conflict of interest committee or a firm member with special responsibilities for conflict of interest matters. The firm should also have designed standard form letters: a. One to be signed by clients where the firm is requested to act for both clients where a conflict of interest would exist. The letter should recite the principles found in Commentary 5 of Chapter V, namely: i. the lawyer has been asked to act for both clients, ii. no information received in connection with the matter from one can be treated as confidential so far as the other, 4

5 iii. iv. if a dispute develops that cannot be resolved, the lawyer cannot continue to act for both and mat have to withdraw completely, and in cases where the lawyer has a continuing relationship with one, disclosing that relationship, and should provide for signature by both clients. b. One of the type referred to above, to clarify limited retainers. It is a natural reaction for lawyers to wish to help people with issues such as the emergency will for the Gauthiers. It is helpful, to restrain those instincts, for the firm to have a policy that forbids the representation of two clients whose interests may diverge later on in a commercial transaction. This policy should cover a range of potential conflicts of interest, including, among other things, warning of the dangers of acting for employees of clients (on a personal basis) when the employee might, at a later date, be engaged in an employmentrelated dispute with that client. 4) Would your response be different if Mr. Gauthier owned more than 50% of Communique Ltd.? There would still be a conflict of interest even if Mr. Gauthier had more than 50% of Communique Ltd. s shares. The only difference is that in a closely controlled corporation, where the other shareholders are family members, the fundamental interests are less likely to be so divergent as to preclude acting for both, and it is possible to get informed consent from all participants to such representation. 5