News Article

A clear message about conflict of interest

Posted: June 06, 2012

In a recent decision concerning a bailiff firm and its insurer, the Quebec Superior Court made it very clear conflicts of interest must be avoided. When an insurer mixes self-interest with the best interest of its client, the client's interests are not served ó and the insurer pays the price.

The case, Taillefer v Continental Casualty Company, involves a complicated set of facts pertaining to a bailiff firm, Paquette & Associés, and Continental, the provider of its professional liability insurance. The case evolved from the Cinar scandal, in which, in 1998, Cinar president Ronald Weinberg and other executives of the Montreal-based animation company were charged with 36 counts of fraud related to $120 million stashed in a Bahamian bank account. (For background on the Cinar scandal, click here.)

As the case against Weinberg progressed through the courts, the court authorized the sale of Weinberg's properties. In 2006, Paquette invested the proceeds in asset-backed commercial paper (ABCP). Unfortunately for Paquette and Weinberg's creditors, by the time the Court of Appeal authorized the distribution of the proceeds, the ABCP had disappeared in the 2008 market meltdown. In May 2009, Paquette was forced to borrow close to $4.5 million to satisfy the creditors.

The crux of Taillefer revolves around what happened next. As law firm Norton Rose Canada LLP outlines in its update, Paquette asked its professional liability insurer to indemnify it for the ABCP loss and to assume the costs incurred in defending its interests in the lawsuits that led to the situation. The insurers, however, refused to cover the loss, leading to a dispute before the Quebec Superior Court.

The facts of this case are complicated but that does not mean that we cannot learn something from this jurisprudence. The court ultimately decided against the insurer largely because of the insurer's conduct from the time it was informed of a possible claim against Paquette. Most important for the court, the insurer gave Paquette contradictory information, sometimes even in the same communication. During one such instance, the insurer told Paquette that it was appointing a law firm to defend Paquette's interests in the case but that the same attorneys also had a mandate to defend the interests of the insurer.

In view of this, Justice Jean-Yves Lalonde of the Quebec Superior Court concluded that the insurer created a confusing and ambiguous situation by appointing counsel with these dual mandates. This placed the attorneys retained by the insurer in a conflict of interest situation and asked them to act in a manner that was contrary to their duty to protect Paquette's interests. The court ultimately found in favour of Paquette.

As the Supreme Court of Canada stated in the leading judgment on the issue of conflict of interest, Neil (2002), a conflict arises when there is a substantial risk that the lawyer's representation of the client will be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to another client, a former client or a third person.

As this decision clearly reveals, conflicts of interest must be avoided not only to avoid putting the administration of justice into disrepute, but also to avoid the massive fiscal and legal ramifications that might arise.

Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.