Québec – Arbitration counsel not disqualified, despite opposing party paying underlying transaction fees – #771

In Glen Eagle Resources Inc. c. GEM Global Yield, 2023 QCCS 3144, the Court determined that a law firm was not disqualified from acting as counsel in annulment and enforcement proceedings when it acted for one party, but  a portion of the legal fees were paid by the opposing party in the transaction giving rise to arbitration. But it raises a potential red flag for counsel.

Background to dispute – Glen Eagle Resources Inc. (“Glen Eagle”) and GEM Global Yield LLC and GEM Yield Bahamas Ltd (collectively, “GEM”) were parties to a Share Subscription Agreement dated March 12, 2020 (the “Agreement”), pursuant to which GEM was to acquire some of Glen Eagle’s shares for $25 million, subject to the approval of the TSX Venture Exchange (“TSX”). Ultimately, the TSX did not approve the purchase, and GEM could not purchase the shares. The Agreement contemplated that Glen Eagle would pay a penalty if the transaction failed. Glen Eagle refused to pay the penalty, asserting that GEM had not performed its obligations under the Agreement. The parties disputed the penalty payment in arbitration. In an award rendered on September 8, 2022 (the “Award”), the arbitrator determined that Glen Eagle was liable for the penalty payment. 

Following the Award, Glen Eagle sought to annul the Award and GEM sought to homologate (enforce) the Award. As part of these proceedings, Glen Eagle applied to disqualify the law firm that was acting as GEM’s counsel.

The basis of Glen Eagle’s disqualification application was that the Agreement had been written by a lawyer at the law firm at the request of his clients, GEM, but Glen Eagle had paid the law firm approximately $21,000 in fees associated with drafting the Agreement. As a result, Glen Eagle asserted that there was an attorney/client relationship between it and the law firm, thus creating a conflict of interest.

The disqualification application – The Court dismissed Glen Eagle’s disqualification application. It noted in particular that the application did not seem sincere or serious due to Glen Eagle’s significant delay in bringing it. It focused particularly on the fact that Glen Eagle had appeared three times before the Court, ready to proceed on the merits of the annulment and enforcement proceedings, without bringing or mentioning the disqualification application at all.

In addition, the Court found that the mere fact that Glen Eagle had paid some of the legal fees did not create an attorney/client relationship. The contract confirmed that the law firm was counsel to GEM, and the term sheet and engagement letter prepared for the transaction specified that Glen Eagle would pay “legal fees incurred by GEM“. Moreover, in its application to annul the Award, Glen Eagle stated that the law firm was “counsel for the opposing party” and that it was not represented by lawyers during the negotiations for the Agreement. Thus, merely paying the legal fees incurred by the other party did not create a lawyer/client relationship, and there was no basis to disqualify the law firm. 

In his conclusion, the Court was very critical of the use of a disqualification application for strategic purposes or to delay a hearing on the merits, which the Court said appeared to be the case here. 

Contributor’s Note

This case addresses a unique subject matter – as far as I am aware, this is the first time that Arbitration Matters has covered an attempt to disqualify counsel in enforcement and annulment proceedings. However, the factual underpinnings are not unique, and may be relevant to any case in which a law firm acts as both transaction counsel and arbitration counsel. Here, the Court relied upon Glen Eagle’s assertion that it was not represented by counsel in the transaction and was quite critical of Glen Eagle’s delays in bringing its application to disqualify the law firm. However, in different circumstances, a relationship between transaction counsel and the opposing party could endanger the law firm’s ability to represent the client in arbitration or subsequent enforcement/annulment proceedings. 

This case serves as a helpful reminder for transaction counsel and arbitration counsel alike to be mindful of any arrangements, whether fee-based or otherwise, that may give rise to a relationship between the law firm and the opposing party. On the other hand, merely a perceived attorney/client relationship will not necessarily give rise to a basis for disqualification. Counsel should consult their local rules of professional conduct!