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Developing a Conflict Checking System for Your Law Firm

By Janice Mucalov, LL.B.

WHAT IS A CONFLICT OF INTEREST?
  Supreme Court of Canada Cases
  Professional Rules and Guidelines
  Thorny Conflicts of Interest

DEVELOPING A CONFLICT CHECKING SYSTEM
  Is a Manual Conflict Checking System OK?
  Adopt a Computerized System
  Fields to Include in a Computerized System
  Set up a Comprehensive Database
  Opening and Closing Files

USING YOUR CONFLICT CHECKING SYSTEM
  Establish a Conflict Checking Procedure
  Conduct Conflict Checks at Key Trigger Points
  Circulate “New Client” Lists Around the Firm
  Send Non-Engagement Letter When You Decline to Act
 
WHAT HAPPENS IF A CONFLICT IS IDENTIFIED?

CONFLICT MANAGEMENT SOFTWARE:  WHAT SYSTEM TO GET?
  “Stand-alone” vs. Integrated Programs
  Leading Products

 MANAGING A CONFLICT OF INTEREST
  Waiving a Conflict With Informed Consent
  Erecting an Ethical Screen
  Guidelines for Establishing Ethical Screens 
  Limiting Your Firm’s Retainer

CASE CITATIONS

ADDITIONAL RESOURCES

INTRODUCTION

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Conflicts of interest have become a growing headache for Canadian lawyers in recent years. And it’s not just large firms that are suffering; conflicts are beleaguering solo and small-firm practitioners too. Indeed, conflicts of interest – be they potential or actual, obvious or hidden, direct or imputed – are one of the most frequent cause of claims against lawyers.

The key to minimizing (and sometimes managing) conflicts is to develop and use a good conflicts checking system. And if you already have a system in place, which hopefully you do, then the ideas and tips that follow here should help in fine-tuning your system for optimum performance – and protect you against a possible claim.

WHAT IS A CONFLICT OF INTEREST?

The definition of a conflict of interest basically encompasses the two underlying duties of confidentiality and loyalty, says Gavin MacKenzie, Treasurer of the Law Society of Upper Canada, and a partner at Heenan Blaikie in Toronto who practices in professional liability.

A lawyer’s duty of confidentiality requires that if you acquire confidential information from a client, you cannot then act against that client.

The duty of loyalty requires that you cannot act against the interests of an existing firm client.

Supreme Court of Canada Cases

CBA Task Force on
Conflicts of Interest

The CBA has launched an expert task force that will develop practical guidelines, advice and solutions to help lawyers and law firms serve their clients better.

For more information, visit:
www.cba.org/cba/groups/conflicts

These duties formed the basis for two important Supreme Court of Canada decisions dealing with conflict problems.

In 1990, the Supreme Court handed down its decision in MacDonald Estate v. Martin, which involved the duty of confidentiality.

Then, in 2002, R. v. Neil was decided. It dealt with the duty of loyalty and set out a “bright line” test. The test establishes “a general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client – 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.”

On June 1, 2007, the rules became even more complex when the Supreme Court of Canada decided the case of Strother v. 3464920 Canada Inc. The Court provided additional guidance to the Canadian profession on how to avoid conflicts of interest, underscoring the importance of retainer letters that document the scope of a lawyer’s mandate.

Professional Rules and Guidelines

These cases have resulted in the adoption of rules and guidelines by provincial law societies and professional bodies.

For example, Chapter 5 of BC’s Professional Conduct Handbook outlines in detail a lawyer’s duty of confidentiality, specifying among other things, that a lawyer “shall hold in strict confidence all information concerning the business and affairs of the client acquired in the course of the professional relationship” and “shall not disclose to one client confidential information concerning or received from another client in a different matter.”

And as a direct result of R. v. Neil, the Canadian Bar Association adopted a commentary to Chapter V on “Impartiality and Conflict of Interest Between Clients” in its Code of Professional Conduct, reiterating the bright line test.

All lawyers should be familiar with the professional rules that apply to them and the trio of Supreme Court of Canada cases dealing with conflicts of interest.

Thorny Conflicts of Interest

Some conflicts are obvious – you can’t represent two sides in a dispute. And you know it’s foolish to represent a client on a matter where you have a personal interest (other than the expectation of getting paid your legal fees). But other conflicts are more subtle, and can trip up the unwary.

1.  Acting for non-clients

Conflicts involving acting for non-clients are one example. MacKenzie points out that law firms have been disqualified in a few cases because they acquired confidential information from someone else, not the client. If your firm acts for a bank and obtains information about a customer in the course of that file, expect to be prohibited from acting against that customer in another matter. The duty of loyalty you owe to a corporate client may also pass through to the company’s shareholders in certain situations.

2.  Imputed conflicts

Imputed conflicts are another example. A conflict of interest can be imputed to you although you may have had no direct involvement in the matter. This type of conflict typically arises with “migrating lawyers” – when a lawyer who previously acted for a party later joins a new firm, and that firm is currently representing a client whose interests are adverse to the lawyer’s previous client.

For example, in Alcan Inc. v. Farris, Vaughan, Wills & Murphy, a Vancouver law firm was disqualified from continuing to act for the District of Kitimat in its lawsuit against Alcan Inc. because a lawyer, who had previously represented Alcan at another firm, later joined the Vancouver law firm – even though he had no involvement in the Kitimat action and never discussed any information relating to Alcan with anyone else at the firm he joined. The BC Supreme Court found that the lawyer nevertheless had confidential information about Alcan which was directly relevant to the Kitimat action; the preservation of the integrity of the justice system required removing the Vancouver firm from the record.

The merger of two law firms can also create imputed conflicts.

3.  Failure to document non-representation of parties

A third type of conflict problem arises if you don’t document one-time office consultations and the consequent non-representation of a party. Jim Calloway, Director of the Oklahama Bar Association’s Management Assistance Program, who has written extensively on conflicts of interest, gives this example:  “Suppose a husband contemplates dissolution of his marriage and consults the lawyer. During the consultation, the husband discloses confidential information. The husband then decides not to proceed with the dissolution. Two years later the wife comes to the lawyer seeking dissolution. If the lawyer accepts the wife as a client, the lawyer will have a conflict of interest. This could happen easily if the lawyer forgot about the consultation with the husband and did not maintain a record of consultations in the conflict system.”

DEVELOPING A CONFLICT CHECKING SYSTEM

Is a Manual Conflict Checking System OK?

The historical conflict checking system involves a set of index cards to track the names of people and entities; some solo or small firms may still have a manual system. A card is completed with the client’s name at the top and a list of conflict names (e.g., related and adverse parties) below. Additional cards are then completed for each conflict name, with the conflict name at the top, and the relationship of that person or business entity to the client underneath. All cards are placed in a box in alphabetical order. When a new client contacts the firm, the client’s name is checked against the names in the index card system to see if a potential conflict exists.

But this manual system is both time-consuming and inefficient. As well, the cards can easily be lost, notes Calloway.

“We’re beyond the days where it’s okay to have a manual conflict checking system,” says MacKenzie. “Every practicing lawyer should have a computerized data base for identifying clients and transactions.” However, a lawyer wouldn’t be guilty of misconduct if they don’t have a computerized system, he adds.

Adopt a Computerized System

A computerized database stores the same information as a manual system on records (the equivalent of cards) in fields (the equivalent of entries on the cards). When setting up the database, the fields to appear on each record are created. When a new record is created for a client matter, the fields automatically appear and prompt the user to enter the appropriate information.

The beauty of a computerized conflict checking system is that it’s much faster and easier to check than a manual system. Also, there is much less user error with a computerized system, notes Calloway.

Fields to Include in a Computerized System

The Law Society of Upper Canada recommends that your computerized database should include the following fields:

  • Date Opened:  (the date that the file was opened)
  • Matter Name:  (name of the file)
  • File Number:  (the number assigned to the file)
  • Client Name:  (the name of the client)
  • Lawyer:  (name of lawyer responsible)
  • Description of matter:  (brief description of the matter to allow individual searching to determine if there is a conflict without having to examine the actual file)
  • Conflict Names:  (names of related and adverse parties and their relationship to the client)
  • Date Closed:  (date file was closed)
  • Closed File Number:  (number assigned to closed file)
  • Date Destroyed:  (the date when the file was destroyed).

From “Practice Tips,” Member Resource Centre, The Law Society of Upper Canada: http://mrc.lsuc.on.ca/pdf/pmg/conflictchecking.pdf.


Set up a Comprehensive Database

At the heart of a good conflict checking system is a comprehensive database. Not only are the names of clients plus other parties to transactions and lawsuits important, but as R v. Neil highlights, the computerized records should also include non-clients from whom you or the firm may have acquired confidential information. This way, when a lawyer is consulted, the names of the parties can be run through the system to see if a duty of confidentiality or loyalty – and a potential conflict – is raised.

To have a fulsome and robust database for identifying possible situations in which a conflict might arise, the system could include the names of:

  • current and former clients (including former, maiden and alternative names)
  • family members of clients
  • adverse parties
  • other parties involved in the matter or who become involved after the file is opened (plus information on their relationship with the client)
  • one-time office consultations
  • people and entities who the firm has declined to act for
  • potential clients who asked the firm to respond to a request for a proposal
  • clients previously represented by lawyers who join the firm after practising elsewhere
  • lawyers and staff in the firm, including family members (plus information on any significant investments in the client’s business as well as any organizations in which they have a major interest)

For corporate and business entities, make sure to also include:

  • proper corporate and business names
  • any trade or alternative names under which the entity carries on business
  • names of the parent or controlling shareholder of a corporate client
  • proper and business names of other relevant affiliated companies
  • names of officers and directors of the corporate client, any subsidiaries and the parent company
  • partners’ names of a partnership client

Specific matters will also require the addition of other information. For example, for an insurance matter, the names of the insured(s) as well as the insurer(s) should be recorded. A litigation file will require entering the names of expert witnesses, any guardian ad litem, insurers, spouses, and so on, depending on the type of file.

Opening And Closing Files

A separate file should be opened for each new matter on which a client retains you. Avoid creating the “Client re:  General” file. As MacKenzie notes, by keeping a general file open for someone who hasn’t consulted your firm for some time, R. v. Neil may prevent you from accepting a retainer to act against that client. When a matter is concluded, close the file as promptly as possible, and send a letter to the client confirming that your solicitor/client relationship on the particular matter has come to an end.

USING YOUR CONFLICT CHECKING SYSTEM

Establish a Conflict Checking Procedure

Assign responsibility for conflict checking to specified staff. The person responsible should check the potential client’s name and other conflict or adverse parties’ names, including spelling variations, against the names in your firm’s database. The names checked and the date should be recorded in a client intake sheet or separate “conflicts check” form. Requiring the responsible individual to sign or initial the document will help ensure that the person is accountable, suggests Calloway. Write down your conflict checking procedure, and give all employees a copy.

Conduct Conflict Checks at Key Trigger Points

A conflicts check should be conducted at three key points in time in the client relationship:

  • when a potential client first contacts your office for legal services
  • after the first consultation and before opening a file
  • after your firm has been retained, when a new party enters the matter or transaction

The first preliminary check will determine whether you should even meet with a potential client. Then after your first meeting, you’ll have more information about other parties involved in the matter, so you can undertake a more thorough conflicts check. Subsequent checks are necessary as new information arises (e.g., the addition of new parties).

As well, a conflicts check needs to be done when the firm considers hiring a new lawyer, as that lawyer may have worked on files that present a conflict with your firm’s clients. The new lawyer should review a list of the firm’s clients and compare that with their list. Also make sure the new lawyer’s list of clients is added to your firm’s conflict system.

Circulate “New Client” Lists Around the Firm

As a back-up and an ancillary means of identifying potential conflicts, smaller firms can circulate a list of new clients and matters to all lawyers and staff on a regular basis, e.g., weekly or monthly. Each person should review this list for possible conflicts. Regular “conflicts memos” will help to identify potential conflicts that aren’t picked up by a regular conflicts search.

Send Non-Engagement Letter When You Decline to Act

As conflicts can arise when a lawyer declines to act for a party, it’s critical that you send a non-engagement or non-representation letter whenever you decide not to represent a potential client. Without this documentation, the potential client might later claim that they relied on you for legal representation, or that you received confidential information from them which could preclude you from acting against their interests in future.

Your letter should clearly advise the person:

  • that you are not representing them
  • that there are statutes of limitations that apply which must be met
  • that the person should find another lawyer to act for them and protect their interests 
  • that you have not received any confidential information from them (assuming this is the case)

After your letter has been sent, confirm with the person that they actually received it, and document this fact.

WHAT HAPPENS IF A CONFLICT IS IDENTIFIED?

A potential conflict of interest has popped up. Now what?

The fact that a potential conflict has been identified doesn’t necessarily mean that there is indeed an actual conflict, or that the firm cannot act. Someone has to make a decision – and it shouldn’t be the lawyer involved, so the decision can be made objectively without regard to business considerations. Ideally, a designated conflicts or ethics partner (or for a larger firm, a committee of three partners) should be responsible for determining whether the firm can accept the new client or retainer, and if so, on what terms. This decision should be final.

If it’s decided that there is likely to be an unmanageable conflict of interest, the potential client should be advised immediately and a non-representation letter sent out.

CONFLICT MANAGEMENT SOFTWARE:  WHAT SYSTEM TO GET?

“Stand-alone” vs. Integrated Programs

There are some “stand-alone” conflict checking programs that function independently of other computer software systems. SeaBILL’s “Conflict Checker,” for example, retails online for $299.95 US with an additional $249.95 US to upgrade to the unlimited simultaneous user network option (www.seabill.com/cc.html).

But “relatively few firms are using stand-alones now,” says Dan Pinnington, director of PracticePRO at Lawyer’s Professional Indemnity Company in Ontario. Cost is one reason.

The other reason is that most smaller firms are using their existing accounting or practice management software. “Firms are getting closer to the ‘integrated whole’ approach to lawyers’ desktop software – integrating accounting, case management, document management, financial management, etc., all in one program and linked to other applications,” says Pinnington. Typically, performing a conflict of interest check with a case management program is as simple as pushing a button after you’ve entered the name you are searching.

Note, however, that:  “The use of a stand-alone database makes it more likely that non-client information like witnesses and one-time office consultations will be included,” says Calloway. “In particular, it is sometimes hard to account for one-time consultations within the practice management software system.”

Larger firms, says Pinnington, “are starting to use their customer relationship management (CRM) software for conflict checks, as that’s where there’s a large body of client-related information.”

Leading Products

Thomson Elite and ADERANT, leaders in financial and billing software, are also the market leaders in conflict of interest software, according to the International Legal Technology Association’s 2004 technology survey. The Thomson Elite product is called “Conflicts Manager” (www.elite.com/solutions/products/conflicts-manager.asp) and the ADERANT product is part of ADERANT’s time and billing program (www.aderant.com).

The 2006 survey by the American Bar Association’s Legal Technology Resource Center lists the following product brands as the most widely used for conflict of interest programs (all part of larger case management and/or time and billing software):

  • Juris –  accounting and case management software (www.juris.net)
  • PCLaw (for solo and small firms) and PCLaw Pro (for larger firms) – integrated time/billing, accounting, and practice management software for law firms; the practice management component encompasses conflicts searches (www.pclaw.com)
  • Tabs 3 – billing and financial software (www.tabs3.com)
  • Thomson Elite – billing and financial software (www.thomsonelite.com)
  • Time Matters – practice management program (www.timematters.com)
  • Tussman – legal time and billing software (www.tussman.com)

MANAGING A CONFLICT OF INTEREST

In many cases, you won’t be able to act for a party. But some conflicts of interest can be managed.

Waiving a Conflict With Informed Consent

The rules of professional conduct allow lawyers to act in the vast majority of cases, despite actual or likely conflicts of interest, if the firm has the informed consent of the affected client(s) or former client(s), i.e., there is a waiver of the conflict of interest.

Indeed, it may not always be practical to turn down a potential client out of concern of acting against the interests of a former client. The Supreme Court of Canada, for example, has recognized that in small communities, there may not be other lawyers who can act on the other side of a transaction (McCauley v. McVey).

Note, however, that the consent of a client is unlikely to be effective if you act against that client in a matter substantially related to your earlier representation of that client – even if the client is sophisticated or received independent legal advice concerning their consent (Chiefs of Ontario v. Ontario and Re Universal Market Integrity Rules; Re Credit Suisse First Boston Canada Inc.).

On the other hand, as MacKenzie notes, you have less reason to be concerned about the validity of a waiver, if you seek it promptly after being approached by another client or potential client about a new mandate that’s completely unrelated to any matter on which you’ve previously acted for the client whose informed consent you are seeking. In fact, Justice Binnie’s judgment in R v. Neil specifically allows a law firm to act in these circumstances.

If you decide to act against a client or former client with their consent, make sure:

  • that you fully disclose the relevant facts and implications of the client’s waiver
  • that the client seeks independent legal advice if the issue is complex or the client is unsophisticated
  • that the client’s consent is in writing

Erecting an Ethical Screen

In some instances, it may be possible to set up an ethical screen or wall when an imputed conflict of interest arises. The idea is to prevent the involved lawyer or lawyers (and staff) from being exposed to confidential information relating to a matter currently or previously handled by other lawyers or staff (e.g., a new lawyer who has left one firm to join your firm).

Whether or not this will provide protection against being disqualified from acting depends on how effective the screen is. The larger the firm, the less chance of contact between screened and non-screened lawyers. The physical layout of the office and proximity of the involved lawyer to the screened lawyer is another factor.

The most commonly followed standards for erecting an ethical screen are the guidelines developed by a Canadian Bar Association task force (see below).

Guidelines for Establishing Ethical Screens

1. The screened lawyer should have no involvement in the law firm’s representation of its client.

2. The screened lawyer should not discuss the current matter or any information relating to the representation of the former client (the two may be identical) with anyone else in the law firm.

3. No lawyer in the law firm should discuss the current matter or the previous representation with the screened lawyer.

4. The current matter should be discussed only within the limited group that is working on the matter.

5. The files of the current client, including computer files, should be physically segregated from the law firm’s regular filing system, specifically identified, and accessible only to those lawyers and support staff in the law firm who are working on the matter or who require access for other specifically identified and approved reasons.

6. No lawyer in the new law firm should show the screened lawyer any documents relating to the current representation.

7. The measures taken by the law firm to screen the transferring lawyer should be stated in a written policy explained to all lawyers and support staff within the firm, supported by an admonition that violation of the policy will result in sanctions, up to and including dismissal.

8. Affidavits should be provided by the appropriate law firm lawyers setting out that they have adhered to and will continue to adhere to all elements of the screen.

9. The former client, or if the former client is represented in that matter by a lawyer,
that lawyer, should be advised:
(a) that the screened lawyer is now with the law firm, which represents the
current client, and
(b) of the measures adopted by the law firm to ensure that there will be no
disclosure of confidential information.

10. The screened lawyer’s office or work station and that of the lawyer’s secretary should be located away from the offices or work stations of lawyers and support staff working on the matter.

11. The screened lawyer should use associates and support staff different from those working on the current matter.

* Adapted from the CBA Code of Professional Conduct (Chapter V)


Limiting Your Firm’s Retainer

A potential conflict of interest may also be managed by imposing limitations on your firm’s retainer.
 
MacKenzie notes that, as a result of R. v. Neil, some firms may turn down requests for legal services from smaller clients out of fear this will prevent them from acting for larger clients on more major matters in future. But you may be able to act for these smaller clients – with their agreement – if you make it clear up front that your acceptance of the retainer doesn’t preclude you from acting against them on unrelated matters, either during the retainer or after.

Just make sure you send a carefully drafted retainer letter recording the client’s agreement and the scope and duration of the retainer. You may also want to specifically include a clause that your firm is free to act for competitors of the client.

CASE CITATIONS

Chiefs of Ontario v. Ontario, (2003), 63 O.R. (3d) 335.

MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235.

McCauley v. McVey, [1980] 1 S.C.R. 165

R v. Neil, [2002] 3 S.C.R. 631.

Re Universal Market Integrity Rules; Re Credit Suisse First Boston Canada Inc., decision of the Ontario Securities Commission, June 24 2004.

3464920 Canada Inc. v. Strother, [2005] B.C.C.A. 35.

Additional Resources

Conflict-Checking Systems: Three Great (and Cheap) Ways to Effectively Manage Conflict Checking, by Todd C. Scott, American Bar Association “GP/Solo Law Trends and News”

Conflict Checking Systems from A to Z, by Jim Calloway, Director of the Oklahoma Bar Association Management Assistance Program

Conflict of Interest Systems, State Bar of New Mexico 

Managing Conflict of Interest Situations, Practice Pro (Lawyers Professional Indemnity Company)

Selecting and Creating a Conflict Checking System, the Law Society of Upper Society of Canada

Janice Mucalov is a freelance writer in Vancouver.

Comments/Discussion

Great article - more practical and not-often-discussed issues like these are appreciated.

By: Anonymous
Posted: 07-13-07
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In this document, any reference to "jurist" or "lawyer" includes, where appropriate, "Québec notary".
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