Referrals Carry Liabilty
The Supreme Court of Canada examined the role of a lawyer in a referral of a financial advisor to a client.
You probably already suspect the problem. The financial advisor absconded with the money. Naturally, this had nothing at all to do with the lawyer except for the “introduction” and “vote of confidence”.
In Salomon v. Matte-Thompson 19 March 2019 the Supreme Court of Canada placed liability upon the lawyer for the referral.
The following excerpts may be found from the Judgment:
Note: Indenting, paragraphs and headings are mine. References to the appeal process and procedural issues are omitted, focus is placed simply upon the law related to the legal liability of a lawyer in a referral arrangement.
In 2003, a lawyer introduced two clients to his financial advisor and personal friend, and recommended that they consult him. In the following four years, the clients ended up investing over $7.5 million with the recommended financial advisor’s investment firm.
Over the course of those four years, the lawyer repeatedly endorsed the recommended advisor as a financial advisor and encouraged his clients to make and retain investments with the investment firm. In 2007, the recommended advisor and his associate disappeared with the savings of around 100 investors, including those of the lawyer’s clients.
The clients instituted legal proceedings, claiming that the lawyer and his law firm were professionally negligent in two ways:
1) first by breaching their duty to advise them and
2) second, by disregarding their duty of loyalty to them.
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.
They must be convinced that the professionals or advisors to whom they refer clients are sufficiently competent to fulfill the contemplated mandates.
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 the instant case, the lawyer had done far more than merely make a referral. It was the entirety of his conduct that led the Court of Appeal to hold the lawyer and his law firm liable in the circumstances. The Court of Appeal’s decision did not broaden the basis of liability for lawyers who refer clients to other professionals or advisors.
A lawyer’s duty to advise is threefold, encompassing
duties to inform,
to explain, and
to advise in the strict sense.
It is inherent in the legal profession and exists regardless of the nature of the mandate. Its exact scope depends on the circumstances, including the object of the mandate, the client’s characteristics and the expertise the lawyer claims to have in the field in question.
When lawyers do provide advice, they must always act in their clients’ best interests and meet the standard of the competent, prudent and diligent lawyer in the same circumstances.
Any advice lawyers give that exceeds their mandate may, if wrongful, engage their liability.
When properly assessed as a whole, as the Court of Appeal did, the evidence reveals that the lawyer’s advice and reassurances were all part of a single continuum, and that placing them in separate silos would be artificial.
The lawyer breached his duty to advise by recommending a non-diversified investment in offshore hedge funds to clients whose primary goal was to preserve the capital, by recommending financial products without performing due diligence and by repeatedly reassuring his clients that their investments gave them security of capital.
As mandataries, lawyers also have a duty to avoid placing themselves in situations in which their personal interests are in conflict with those of their clients.
The duty to avoid conflicts of interest is a salient aspect of the duty of loyalty they owe to their clients.
The duty of loyalty shields the performance of the lawyer’s duty to advise clients from the taint of undue interference.
In the instant case, the Court of Appeal was justified in finding that the lawyer’s personal and financial relationship with the recommended advisor had placed him in a conflict of interest and that he had neglected his clients’ interests.
The trial judge adopted an unduly restrictive approach in analyzing the principles relating to conflicts of interest, which tainted her entire analysis concerning the breach of the lawyer’s duty of loyalty.
A proper consideration of the evidence as a whole leads to the conclusion that this very close relationship affected the lawyer’s objectivity in advising his clients.
The lawyer’s divided loyalties led him to neglect his clients’ interests: he disregarded his duty of confidentiality regarding his communications with them and teamed up with the recommended advisor in an attempt to convince them not to withdraw their investments.
More than one fault can cause a single injury so long as each of the faults is a true cause, and not a mere condition, of the injury. A fault is a true cause of its logical, immediate and direct consequences.
This characterization is largely a factual matter, which depends on all the circumstances of the case. A person who commits a fault is not liable for the consequences of a new event that the person had nothing to do with and that has no relationship to the initial fault.
Two conditions must be met for the principle of novus actus interveniens to apply.
First, the causal link between the fault and the injury must be completely broken.
Second, there must be a causal link between that new event and the injury.
A client’s ability to rely on advice given by his or her lawyer is central to the lawyer-client relationship and a client’s acceptance of a lawyer’s negligent advice cannot shield the lawyer from liability.
Fraud committed by a third party also does not shield from liability persons who failed to take required precautions.
Where the risk of a decline in market prices or fraud by a third party materialize, and where lawyers have failed to abide by the standards of professional conduct that are meant to protect their clients against these very risks, they may be liable for their clients’ investment losses.
Taken together, the lawyer’s faults with respect to both
1) his duty to advise and
2) his duty of loyalty
were a true cause of the losses suffered by his clients. The fraud did not break the chain of causation — no losses would have been suffered without the faults first committed by the lawyer.
The failure here on the part of the lawyer was the inappropriate referral, followed by continuing reassurances. This case has significant implications for the real estate profession. Referrals made by a registrant in favour of another are usually associated with payment of a referral fee which can easily run in the range of 25% to 35% of the gross commission. That’s significant. Be careful! Do your research! Know the person to whom you are referring business!
The significant situation with respect to real estate referrals is participation in the gross commission. With participation, there is a whole new and higher level of liability.
Brian Madigan LL.B., Broker