When someone hires services of a professional, there is an inherent duty on part of that professional to take care of the interests of his/her client, especially, when it relates to a profession that involves advising clients. But does this duty extend beyond the four walls of the contract and/or retainer agreement and/or the mandate against which the services of a professional (a lawyer) has been retained?
Lawyer’s Duty of Loyalty
The jurisprudence of the Supreme Court of Canada with respect to the duty of a lawyer stresses on the following three principals:
1. A duty to avoid conflicts of interest;
2. A duty to commit to the client’s cause/interests; and
3. A duty of candour (being honest, frank and open in giving opinions)
In Canadian National Railway Co. v. McKercher LLP, , the Supreme Court of Canada explained the above three dimensions, stating:
A lawyer’s duty of loyalty has three salient dimensions: a duty to avoid conflicting interests; a duty of commitment to the client’s cause; and a duty of candour. The duty to avoid conflicts is mainly concerned with protecting a former or current client’s confidential information and with ensuring the effective representation of a current client. The duty of commitment entails that, subject to law society rules, a lawyer or law firm as a general rule should not summarily drop a client simply to avoid conflicts of interest. The duty of candour requires disclosure of any factors relevant to the ability to provide effective representation.
And this duty extends beyond the boundaries of the solicitor client agreement, and any advise given outside the mandate, if wrongful, may attract liability. In Lenz v. Broadhurst Main, , Himel J. wrote for the Superior Court of Justice:
While the standard of care is related to the scope of the retainer, whether a lawyer’s duties extend beyond the limitations of the retainer must also be considered. Liability may hinge on the difference between a lawyer’s limited duty to remain within the confines of the retainer and his broader duty to protect the interests of his client.
In Saloman v. Matte-Thomson, , the Supreme Court of Canada upheld the decision of the Court of Appeal for Quebec, in an 8-1 majority, where a lawyer was held liable for advising his clients to invest with a financial company, and the clients ended up losing millions of dollars in a Ponzi scheme. The Court of Appeal and the Supreme Court both stressed that the decision does NOT broaden the duty of a lawyer under the Canadian Jurisprudence. It was rather the CONDUCT of the lawyer that made him liable in this instance. It was held that the lawyer did not merely give a referral in this instance, but gave repeated reassurances, over a period of four years (2003-2007) to maintain the investment in the company’s schemes, assuring his clients that the investment is safe, and the capital is secure. The Supreme Court Stated:
The relationship between lawyers and their clients can usually be characterized as a contract of mandate. Although lawyers, as mandataries, do not guarantee the services rendered by professionals or advisors to whom they refer their client, they must nevertheless act competently, prudently and diligently in making such referrals, which must be based on reasonable knowledge of the professionals or advisors in questions. Lawyers who refer clients to other professionals or advisors have an obligation of means, not one of result.
Referral is not a guarantee of the services rendered by the professional or advisor to whom the client is referred, but it is also not a shield against liability for other wrongful acts committed by the referring lawyer.
In brief, the facts of the case could be summarised in bullet points for ease of reference, as under:
The lawyer (appellant) advised his long-term clients to invest in an investment company in 2003.
One of the two partners in the investment firm was a friend of the lawyer. The allegations of the lawyer taking commissions from the investment firm were not satisfactorily proven to be not true. Also, the lawyer was using the pronoun “we” in some of the emails sent to his friend while talking about the investments.
In the following 4 years, the clients (respondents) invested over $7.5 million dollars with the investment firm.
Over the course of 4 years, the lawyer repeatedly endorsed his close friend as a financial advisor, encouraging the clients to keep the investments in his friend’s firm.
In 2007, both the partners in the investment firm, including his close friend, disappeared with the savings of around 100 investors, including those of the clients.
The Respondents alleged that the appellants (lawyer and the law firm) had been professionally negligent as they had breached their duty to advise the respondents by recommending, endorsing and encouraging inappropriate investments and that they had disregarded their duty of loyalty to the respondents by placing themselves in a conflict of interest.
The trial judge dismissed the claim concluding “Mr. Salomon had not committed any fault that was a cause of the respondents’ losses. In her view, although he had breached his professional standard of care by making his initial recommendation to the individual respondent, Ms. Matte-Thompson, with regard to her investments, there was no causal link between that fault and Ms. Matte-Thompson’s subsequent losses. The trial judge also found that Mr. Salomon had not been in a conflict of interest.”
The Court of Appeal for Quebec unanimously allowed the appeal reversing the trial judge’s decision and ordering the law and the law firm to compensate the clients for their loses. The Court of Appeal held that the respondents would have never invested money had Mr. Salomon acted as a “competent, prudent and diligent lawyer from the outset”. Court of Appeal further found that “Mr. Salomon had failed to advise the respondents as a competent, prudent and diligent lawyer would have done. Contrary to the trial judge, it held that Mr. Salomon was acting for both Ms. Matte-Thompson and 166 when he provided wrongful investment advice, and that his faults had continued throughout the period from 2003 to 2007.”
The Supreme Court of Canada, on an 8-1 majority, stated:
In the instant case, Mr. Salomon’s blind endorsement of Mr. Papadopoulos, his failure to perform due diligence and his baseless reassurances caused the respondents to be vulnerable to a potential fraud (see Beaulieu, at para. 41). The fraud did not break the chain of causation. No losses would have been suffered without the faults first committed by Mr. Salomon.
The Supreme Court further commented upon the Foreseeability of the loss, stating:
In the contractual context, art. 1613 C.C.Q. provides that “the debtor is liable only for damages that were foreseen or foreseeable at the time the obligation was contracted, where the failure to perform the obligation does not proceed from intentional or gross fault on his part”. This does not assist the appellants here.
This standard does not mean that it was necessary to be aware of or to suspect a potential fraud (see Beaulieu, at para. 41). The major risks associated with investment advice are a decline in market prices or fraud by a third party, either of which would result in the loss of the invested money. Where these risks materialize, and where the lawyers have failed to abide by standards of professional conduct that are meant to protect their clients against these very risks, they may be liable for their clients’ investment losses (C.A. reasons, at para. 146; see also Hodgkinson, at p. 452). This does not turn lawyers into insurers for their clients’ losses.
This is an interesting case where the decision was based on the CONDUCT of the Lawyer that was construed to be more than making a mere referral. And its not only about lawyers, rather in any professional world, one should be wary enough to make any referrals, especially the ones involving conflicts of interest.