Before 2002, Mr. Thompson and his wife, Mrs. Thompson had been operating restaurant franchises in Ontario and Quebec. They have established four companies for the purpose of operating the restaurants (“Companies”). In 2002, they sold all of their restaurant franchises but one. With that one exception, the Companies remained owners of the real estate only.
In 2003, Mr. Thompson passed away. Mr. Thompson left two wills, in which he created three trusts for his grandchildren and one trust (“Trust”) for most of his assets, including his shares in the Companies. The wills named Mrs. Thompson as the income beneficiary of the Trust until her death. The wills also named Mrs. Thompson, Mr. Gemmill (Mr. Thompson’s lawyer in Ontario) and Mr. Miller (brother-in-law of Mr. Thompson) as the trustees and executors under the wills. The capital of the Trust was to be distributed to the children of the couple after Mrs. Thompson’s death. The purpose of this arrangement was to provide Mrs. Thompson with financial security while preserving the capital for the children.
Mrs. Thompson consulted Me Salomon, a lawyer for their business operations in Quebec since 1989 for advice regarding the interpretation and implementation of the wills. She was uncomfortable with her dual position as an income beneficiary and a trustee of the Trust, and concerned about how she could maintain her lifestyle without spending the children’s capital. Mrs. Thompson does not have sophisticated knowledge of the investment world.
In September 2003, Me Salomon introduced Mrs. Thompson to Mr. Papadopoulos, a financial advisor and the directing mind of Triglobal. Me Salomon had met Mr. Papadopoulos in 2001 when he himself was looking for a personal financial advisor. They become close friends. Me Salomon personally invested in three funds promoted by Triglobal, one of which is iVest Fund. Me Salomon recommended Triglobal and its iVest fund to Ms. Thompson. Me Salomon described iVest as “an excellent vehicle wherever security of capital is important”.
Replying on the advice from Me Salomon, in 2004, Ms. Thompson invested a large amount of her personal savings with Triglobal.
From 2003 to 2006, Me Salomon was involved in a reorganization of the Companies.
Beginning in April 2006, Mrs. Thompson expressed concern to Me Salomon regarding the investments, including iVest. Mrs. Thompson wanted more information on the nature of the investments and had been having difficulty communicating with Triglobal. But Me Salomon always promptly reassured her or informed Mr. Papadopoulos, who would himself reassure her.
At the end of 2006, Mr. Miller requested the redemption of the investments from Mrs. Thompson and Triglobal.
In May 2007, the La Presse Affaires magazine published an article that questioned investments made through Triglobal in iVest and Focus.
In 2006 and 2007, Me Salomon had received payments from Mr. Papadopoulos totalling $38,000. No service was ever rendered by Me Salomon for these payments. Me Salomon claimed that these payments constituted a “gift” to help him renovate his apartment.
In September 2007, Me Salomon received $10,000 from Mr. Papadopoulos. Me Salomon testified that these payments represented a redemption of his own investment, but in an email written by Mr. Papadopoulos at that time, they were referred to as commissions.
In December 2007, Mrs. Thompson asked for complete redemption. But by then, Triglobal had ceased doing business and their assets had been frozen. The iVest funds and some other funds, such as Focus that Mrs. Thompson has invested in turned out to be parts of a Ponzi scheme. Mrs. Thompson lost $1,188,068 in Focus and iVest. Gloablly, almost $100 million was lost in the fraud by approximately 100 investors.
Main Issue to Analyse
Did the Quebec Court of Appeal err by improperly expanding the professional obligations of lawyers who refer their clients to independent advisors?
1. The relationship between lawyers and their clients can usually be characterized as a contract of mandate stipulated in art. 2138 of the Civil Code of Québec, which reads as follows:
Art. 2138 C.c.Q. A mandatory is bound to fulfill the mandate he has accepted, and he shall act with prudence and diligence in performing it.
He shall also act honestly and faithfully in the best interests of the mandator, and shall avoid placing himself in a position where his personal interest is in conflict with that of his mandator.
2. In Harris (Succession de), 2016 QCCA 50, the Quebec Court of Appeal limits the obligations owed by a referring lawyer to his or her client. In Harris, the Quebec Court of Appeal emphasizes that lawyers who refer clients to other professionals or advisors have an obligation of means, not one of result. In para. 45 of the decision, the Supreme Court of Canada summarizes the principles articulated in Harris as follows:
“Lawyers who refer clients to other professionals or advisors have an obligation of means, not one of result. Although lawyers do not guarantee the services rendered by professionals or advisors to whom they refer their clients, 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 question. Referring lawyers must be convinced that the professionals or advisors to whom they refer clients are sufficiently competent to fulfill the contemplated mandates…Just as referral is not a guarantee of the services rendered by the professional or advisor to whom the client is referred, it is also not a shield against liability for other wrongful acts committed by the referring lawyer.”
3. In the meantime, the Supreme Court of Canada reminds us that there is an important distinction between the facts in Harris and the facts in the instant case. Whereas Harris involved a mere referral, Me Salomon was not merely referred Mrs. Thompson to Mr. Papadopoulos. In the present case, Me Salomon recommended the iVest fund to Mrs. Thompson in 2003; Me Salomon promoted, endorsed and encouraged Triglobal’s products to Mrs. Thompson; Me Salmon reassured Me Salomon when she expressed concerns about her investment a few months before Triglobal’s collapse in 2007. Further, Me Salomon even took commissions from Mr. Papadopoulos for the referral. The Supreme Court of Canada found that Me Salomon “turned a blind eye to a conflict of interest which resulted in him serving two masters” and sacrificed Mrs. Thompson’s interests. Therefore, the Quebec Court of Appeal does not err in finding Me Salomon liable in the circumstances.
Conclusion: Main Takeaways
1. It is worth to mention that a salient aspect of the duty of loyalty lawyers owe to their clients is to avoid placing themselves in situations in which their personal interests are in conflict with those of their clients.
2. “Just as referral is not a guarantee of the services rendered by the professional or advisor to whom the client is referred, it is also not a shield against liability for other wrongful acts committed by the referring lawyer.”
3. In this case, the Supreme Court of Canada finds that the Quebec Court of Appeal had properly applied the standards of appellate review, as imposed by Housen v. Nikolaisen, 2002 SCC 33 for intervening and reversing the trial judge’s decision.
(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention.)