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Reports | Confidentiality Agreements
 Confidentiality Agreements Affecting Lawyers' Disclosure of Legal Concepts
The Law Society is aware that members are asked from time to time by other law firms, accounting firms and other professional/business advisors to sign confidentiality agreements intended to prevent the lawyers or their law firms from disclosing the legal concepts and structures underlying certain concepts, usually tax plans, supposedly developed and being promoted by the other firm or advisor. Under some of these agreements, the client is to be charged a fee simply for the privilege of obtaining disclosure of the concepts; the client would be charged an additional fee should it decide to implement the concept.
While beyond the scope of this article, there are serious concerns whether members of the profession in Alberta could ever ethically propose such agreements to their clients, or even prospective clients. The duty to disclose all information which may assist clients and to fully advise them on matters relevant to the lawyer's retainer may not permit the imposition of such restrictions. This is especially so for existing clients.
There appears to be an increasing trend for other professionals and advisors to market tax plans and other advantageous concepts and to employ confidentiality agreements as a feature of the marketing strategies. The confidentiality agreements preclude the lawyer or law firm signing the same from disclosing the particular legal concepts and structures to other clients without the consent of the accounting or other firm. This may then severely handicap the lawyer or the law firm in the representation of other clients for whom the concepts and structures may also be useful, or preclude them from acting for other clients altogether where such concepts and structures might be considered beneficial to such other clients.
Such an agreement, if executed, should be regarded as an enforceable agreement. It should be recognized that it binds the lawyer or law firm in accordance with its terms to maintain confidentiality over the concept and structures concerned. Depending on the definition assigned to such terms as “Confidential Information”, this may well extend to situations in which members of the law firm independently develop the same concept or structures on their own or learn of them independently from other sources. Indeed, as the agreement is executed before disclosure of the legal concepts and structures, the lawyer or his/her partners and associates may already be aware of those concepts and structures. At a minimum, if the agreement is to be executed, it should be carefully scrutinized in order to ensure reasonable limits on its operation if possible.
Most important and dependent upon the extent to which disclosure is prohibited, lawyers should recognize that such agreements may give rise to a conflict of interest in respect of other clients for whom such concepts and structures would have been proposed or at least raised absent such an agreement and will, therefore, restrict a lawyer or law firm in respect of representing subsequent clients for whom that same issue arises or could arise.
Chapter 6, Rule 7 of the Alberta Code of Professional Conduct provides:
A lawyer must not act when there is a conflict or potential conflict between lawyer and client unless the client consents and it is in the client’s best interests that the lawyer so act.
Although under the terms of action of these confidentiality agreements and without breaching the same may be possible for the lawyer to generally alert another client to the fact that there may be a concept to which the lawyer has been made privy and which could benefit the other client should the other client agree to sign a confidentiality agreement, in the situation under consideration, the subcommittee was of the view that it would be very difficult if not impossible for the other clients to give informed consent to the lawyer acting despite the conflict because the lawyer would be precluded from disclosing the information which the client would need to know before consenting. In addition, it would be very difficult for the lawyer to conclude that it is in the client’s best interests for the lawyer to act or continue to act when the lawyer is precluded from applying all of her or his legal knowledge in representing the client. It may force sending all such clients to other law firms for advice.
Chapter 8, Commentary G-1 provides in part:
When advising a client, a lawyer has a duty, …, to disclose to the client all information in the lawyer’s possession that must be disclosed to enable the lawyer to properly carry out the representation. In some cases, this may compel the lawyer to decline to act rather than breach the confidence of another client.
Chapter 7, the Commentary on rule 6(b) provides:
(T)here is generally an obligation to disclose to a client all information that must be disclosed to enable the lawyer to properly carry out the representation. A lawyer must decline to act in a matter, therefore, or must withdraw from an existing representation, if all of the following circumstances are present:
- the lawyer is in possession of confidential information of a current or former client that is material to that matter or representation;
- the current or former client will not consent to disclosure of the information to the other client or potential client (see Rule #8(e)); and
- it is impossible to properly carry out the representation without making such disclosure or, alternatively, the client or potential client in that matter is unwilling to accept legal advice based on the information without actually being privy to the information and therefore insists on disclosure.
Under these circumstances, the lawyer is unable to act in the best interests of that client and cannot represent or continue to represent the client.
A lawyer who signs a confidentiality agreement undertakes a contractual obligation to the other firm/advisors to keep the legal concepts and structures of the tax or other plan confidential. If it is impossible to properly carry out the representation of another client without disclosing the legal concepts or structures that are subject to the confidentiality agreement, the lawyer ought to decline to act or withdraw and cannot advise the client why except to say that a confidentiality obligation prevents him or her from acting. The lawyer should also consider advising the client that the other firm/advisors may be in a position to provide the advice that is needed in the circumstances.
Even if the law firm or lawyer declined to sign such an agreement, the agreement executed by the client may make the client liable to the other firm/advisors should the lawyer or law firm learn of the concept and structures through that client and then make use of the same for other clients. In other words, the terms of some confidentiality agreements appear to impose liability on the client for any actions of its lawyer or law firm, as well as other advisors, which would have constituted a breach of the agreement if the lawyer or law firm itself had signed the agreement (even though the lawyer or law firm does not sign the agreement, or even see the agreement). Lawyers should be alert to the need to advise their clients of the potential liability to which such agreements can give rise. Lawyers should also recognize the conflict presented for themselves if the client has entered into such an agreement even if the lawyers refuse to execute that agreement. In this regard, as a lawyer might not be provided with a copy of the confidentiality agreement by his/her client, he or she must be particularly alert to raising such issues with the client if engaged to provide legal advice to implement the legal concepts and structures so proposed.
In this regard, while the information on this practice has not been collected in a systematic fashion, the advice received from several lawyers was that clients have on occasion declined to execute such agreements and that the other firms or advisors have nonetheless waived execution of a confidentiality agreement as a condition to releasing information on the legal concepts and structures to the client and its legal and other advisors.
In those instances in which a lawyer is considering executing a confidentiality agreement, the subcommittee noted a number of considerations. Among other exceptions to or limits on the obligation to maintain confidentiality, lawyers should consider explicit exceptions for:
(i) their or their firm’s own prior knowledge of the legal concepts or similar concepts and structures;
(ii) information of the concepts and structures gained from other, non-confidential sources;
(iii) information on the concepts and structures in the public domain (including publication in any book or article);
(iv) knowledge of the concepts and structures independently developed by the law firm without use of the confidential information;
(v) information disclosed by the other firm/advisors to any party without requiring a confidentiality agreement (a form of most favoured nations clause); and
(vi) the ability to advise clients that there is a tax or other plan accessible from the other professional firm or advisors.
Consideration might also be given to adding a clause limiting damages to the amount of the fees which the other firm/advisors might otherwise have received from parties for the use of the confidential information.
The foregoing is not intended to be comprehensive but to be of assistance to members of the profession when encountering, or reviewing and negotiating, such agreements.
The confidentiality agreements in question also raise a number of broader ethical and public policy issues. The Benchers continue to monitor these developments and how other professional bodies are responding to the conflict issues for their members. It remains a live issue whether the profession should take the position that lawyers should not sign such agreements because they restrict their ability to use knowledge of the law for the benefit of all clients. The Benchers will also be considering whether members of the profession in Alberta should be expressly prohibited from proposing such agreements to clients or prospective clients. If you wish to comment on this issue, please forward your comments to:
Dale Spackman, Q.C., Bencher and Chair, Corporate & Commercial Advisory Committee
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