Canada: Seller Beware! The Buyer May Use Your Own Privileged Documents Against You In A Court Of Law

The law of evidence in Quebec draws heavily on common law. Case law from courts in the rest of Canada and in the United States relating to solicitor-client privilege may therefore be relevant in Quebec.

Quebec-based counsel should thus be aware of two decisions handed down in 2013 by Delaware and Alberta courts, namely, a decision of the Alberta Court of Queen's Bench in NEP Canada ULC v MEC OP LLC¹ and a decision of the Delaware Court of Chancery in Great Hill Equity Partners v Sig Growth Equity Fund².

Both these decisions deal with the treatment of solicitor-client privilege in a share purchase transaction. Both cases involved a parent company selling the shares of a subsidiary to a third party. Following the transaction, the third party and the subsidiary merged. In both cases, after the merger, the third party discovered privileged communications about the transaction involving counsel for the subsidiary and the parent company on the subsidiary's server.

Based on these privileged documents, the third-party buyer sued the parent company for damages, alleging that misrepresentations were made at the time of the sale. The parent company naturally objected to use of such privileged documents. However, the courts found that the privilege which had initially belonged to the parent company and its subsidiary had passed to the merged company that was now controlled by the third-party buyer. Therefore, the buyer could use the seller's privileged information to sue the seller for damages.

How can one avoid such a sticky situation? The courts suggested that a clause could have been added to the contract of sale specifying that privileged information relating to the transaction was excluded from the sale. This indeed appears to be the simplest solution. Otherwise, the parent company and its subsidiary should be careful to ensure that no privileged information is left on the subsidiary's server or that the parent company and the subsidiary are not represented by the same counsel.

It remains to be seen whether the Quebec courts would take the same approach as the Alberta and Delaware courts. In the meantime, caution would be advisable.

Footnotes

1. 2013 ABQB 540.

2. C.A. NO. 7906 (NOV. 15, 2013).

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