Canada: The Cost Of An Ineffective Conflict Check System: $45 million!

On July 8, 2015, the Ontario Superior Court of Justice released its decision in the Trillium Motor World Ltd. v. General Motors of Canada Limited class action trial,¹ granting the plaintiffs damages in the amount of $45 million.

The liable party was not General Motors of Canada Limited (GMCL), but rather the law firm Cassels Brock & Blackwell, which the court held had been in conflict of interest following retainers with multiple parties involved in the 2009 post-economic downturn restructuring of GMCL's dealership network in Canada.

The damages were awarded in consideration of dealers' lost opportunity to obtain greater compensation from GMCL in connection with the restructuring and the winding down of a large number of GMCL dealerships.

Background

The class action arose as a result of GMCL's execution of a plan to reduce its large GM vehicle dealership network in Canada following the calamitous economic downturn commencing in the fall of 2008. Prior to that time, GMCL knew that it had too many dealers in a single market. The immediate effect of this over-dealering was a reduction in dealer profitability which in turn caused reluctance for investments in facilities and equipment. Combined with GM's general declining market share of the automobile market and multibillion losses in 2007 and 2008, and GM rapidly running out of cash, over-dealering had to be rectified in the context of any restructuring.

Once the likely depth of the economic downturn became apparent, GMCL engaged in restructuring planning, considered a CCAA proceeding and engaged with the Canadian and US governments for assistance. One of its restructuring plans was to rationalize its dealer network and terminate a large number of its dealership agreements with individual dealers across Canada. In May 2009, GMCL delivered Notices of Non-Renewal and Wind-Down Agreements to 240 GM dealers. If accepted, those Wind-Down Agreements – which carried with them compensation payable to the dealer – would terminate the dealer-GMCL relationships over a period of time. The dealers were given six (6) days to accept or decline the offers. Two-hundred-and-two of the 240 dealers accepted the Wind-Down Agreements. Saturn dealers were particularly affected by the restructuring plan in that all Saturn dealers received Wind-Down Agreements following the discontinuance of the Saturn brand.

In March 2009, the Saturn dealers retained the Cassels law firm through the Canadian Automobile Dealers Association ["CADA"] to provide advice as to their rights and options with respect to the discontinuance of the Saturn brand. Later in the same month, Industry Canada retained the Cassels firm to advise it on a potential commercial financing transaction to support GMCL and Chrysler. In April 2009, the Cassels firm opened a new file matter in its long-standing retainer with CADA to provide CADA with legal assistance concerning the problems GMCL and Chrysler were facing. In May 2009 the Cassels firm entered into a retainer with GMCL dealers in relation to potential CCAA proceedings even though the specific GMCL dealers had yet to be identified. This last retainer was also facilitated by CADA.

The result

The court found that the Cassels firm did not have an effective conflicts checking system in place – that is, a system which actually leads to lawyers discussing and resolving potential conflicts. Moreover, the firm did not heed the alarm bells going off in all quarters despite the deficiencies in its conflicts checking system, and did not respond appropriately to readily apparent conflicts amongst the dealers it was representing. 

Considering that one of the main issues in the matter was whether the Cassels firm had been retained by the GMCL dealers in relation to CCAA proceedings, the court reviewed the hallmarks and indicia of the formation of a solicitor-client relationship and reiterated that such a relationship is a question of fact considered in the circumstances of the case. No formal retainer letter or other document is necessary for a solicitor-client relationship to arise. No invoice need be sent to the client. No bill need be paid by the client. The underlying question to be answered to determine whether a solicitor-client relationship has been formed is whether a reasonable person in the position of a party with knowledge of all of the facts would reasonably form the belief that the lawyer was acting for a particular party. In this case, the court held that a retainer had been entered into and that the Cassels firm had mischaracterized the facilitation role played by CADA in the formation of that retainer: CADA was not the client, but the conduit through which the client, in this case a large group of GMCL dealers, dealt with its legal counsel.

Although the Cassels firm argued that its retainer, if there was one, was a limited retainer restricted to acting for the GMCL dealers in the event of a CCAA proceeding, the totality of the evidence considered led the court to conclude that the retainer was not limited to representation in a possible CCAA proceeding. We note that there was no written retainer agreement in connection with the GMCL dealer retainer. The retainer included pre-filing advice on issues relating to the restructuring of the dealer network. The Cassels firm had not understood that its retainer was as wide as found by the court and, consequently, did not provide pre-filing advice to the GMCL dealers.

The court also found the Cassels firm in conflict of interest in its acceptance of the GMCL dealers retainer and the Industry Canada retainer. The main issue was whether a conflict of interest analysis was carried out by the Cassels firm and, if so, whether the conflict of interest between the retainers was only hypothetical or real. The court found that Industry Canada's interests were adverse to the interests of the GMCL dealers. Industry Canada's interests were to have a restructuring plan in place which cut costs to its and GMCL's satisfaction while the interests of the GMCL dealers, and indeed that of the Saturn dealers, was to take a hard line on the negotiation of the Wind-Down Agreements in order to obtain maximum compensation from GMCL. Had the GMCL dealers retainer been limited to representation in CCAA proceedings, the conflict would not have arisen. The same cannot be said, however, of the Saturn dealers retainer. 

Although in some cases it is possible to "try to manage around" unexpected conflicts which arise in class action or CCAA litigation, the court held that this was not one of those cases. The conflicts of interest were apparent from the outset in a very significant potential CCAA filing wherein many of the dealers, GMCL and Saturn alike, stood to lose their livelihoods precisely because the Canadian Governments were demanding massive restructuring before they would offer financial support to GMCL.

The conflicts of interest and their effects were exacerbated when the Cassels firm failed to advise its dealer clients of its conflict of interest with respect to the Wind-Down Agreement and failed to get involved in the negotiation of the Wind-Down Agreements. The affected dealers were not advised to negotiate or prepare for the consequences of the Wind-Down Agreement and indeed were not prepared for the Wind-Down Agreements or their terms. The loss of chance the dealers suffered was the loss of the opportunity to negotiate the Wind-Down Agreement terms with GMCL as a group rather than individually. The court quantified the dealers' loss attributable to the firm's conflict of interest and inaction at $45 million.

The court's reasons highlight the difficulties inherent in avoiding conflicts of interest in class action and CCAA proceedings and the good sense of written retainer agreements which clearly define the representation which will be provided. 

The take away point from the decision for lawyers is that there is no substitute for serious conflict searches and conflict resolution discussions within law firms and between law firms and their clients without the minimization of potential conflicts through "business conflict" rationalizations and the use of conflict walls within firms. The take away for clients is quite simply this: get your retainer in writing to ensure your lawyers are representing you fully.

Failure to do so can and and likely will, be costly to all involved.

Footnote

1. 2015 ONSC 3824

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