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Supreme Court of Canada Rules on Lawyer's Conflict of Interest Published in the June 2007 issue of Litigation Notes - View Article

Return to Main Menu >> Robert Strother was a successful tax partner at the law firm Davis & Company in Vancouver, British Columbia. He was one of the firm's largest billers and his most important client, accounting for more than 50% of his billings, was Monarch Entertainment Corporation ('"Monarch"). From 1993 to 1997. Monarch marketed tax-shelter investments which involved the financing of motion pictures. In November of 1996. the Federal Minister of Finance amended the Income Tax Act to close the loophole on which Monarch's tax shelter was based. Monarch consulted Strother, who advised them that he did not have a solution to their problem and as a consequence Monarch's business was effectively wound up. Towards the end of 1997. Strother became aware of an alternative form of tax vehicle, which also permitted investors to obtain a tax benefit in connection with their investments in film productions. Strother did not inform Monarch about this new vehicle. Instead, he went into business with Paul Dare, a former Monarch employee, for the purpose of marketing the new scheme. They incorporated a company. Sentinel Hill Entertainment Corporation ("Sentinel"). In January of 1998. they entered into an agreement whereby Strother would apply for an advance tax ruling and if the ruling were granted, would receive 55% of the first $2 million of profit and 50% thereafter. A favourable tax ruling was issued to Sentinel on October 6, 1998. This fact was not disclosed by Strother to Monarch, even though throughout 1998 he had continued to meet with Monarch executives and to discuss various possible alternatives to revive Monarch's taxshelter business. Furthermore. Strother did not disclose the exact nature of his interest in Sentinel to the partners of his law firm. He informed them only that he had an option to acquire shares of Sentinel, at a time when the agreement to provide him with a share of the company's profits was already in place. The managing partner of Davis & Company told Strother that he could not have an ownership interest in Sentinel without violating the rules of the Law Society of British Columbia. Strother resigned from Davis & Company in March of 1999. Between that time and September of 2001. when the new tax-shelter was also closed down by further amendments to the Income Tax Act. Sentinel closed transactions exceeding $4 billion, with profits approaching $130 million. Strother and Dare had together realized total profits in excess of $64 million. Davis & Company acted for Sentinel throughout this time and received fees in excess of $9 million. Monarch sued Strother and Davis & Company on the basis that they had breached a fiduciary duty to Monarch and should be required to disgorge all profits and legal fees that they had

realized. In the Supreme Court of British Columbia, Monarch's claim was dismissed. Monarch had had a written retainer agreement with Davis & Company which terminated in 1997 and the B.C. Supreme Court ruled that the relationship between Monarch and Davis & Company was governed exclusively by the terms of that agreement. After 1997 there was no continuing contractual requirement for Davis to act exclusively for Monarch and no obligation to provide any advice to Monarch that was not specifically sought. The British Columbia Court of Appeal reversed the trial judge on the question of Strother's duty to Monarch. It held that he had been in a clear conflict of interest and required him to disgorge all of the profits that he had earned as a result of his interest in Sentinel. With respect to the liability of Davis & Company, the Court of Appeal ruled that equity would not order an accounting or disgorgement by an innocent person who had not received any of the profits resulting from the wrong. However, on the principle of vicarious liability, the Court ordered Davis & Company to account for and disgorge the profits that it earned from acting for Sentinel Hill in breach of its duty to Monarch from and after January 1, 1998. (The Court of Appeal decision was the subject of a comment in the February, 2006 edition of Litigation Notes). The case went to the Supreme Court of Canada and judgment was rendered in June. The Reasons of the majority were written by Justice Binnie who began by reviewing the nature of the fiduciary obligation owed by a lawyer to his or her client. Although the relationship between a lawyer and client is generally a contractual one, "...fiduciary duties provide a framework within which the lawyer performs the work and include obligations that go beyond what the parties expressly bargained for". Fiduciary responsibilities include a duty of loyalty, of which an element is the avoidance of conflicts of interest. The beneficiary "...is entitled to expect that the fiduciary will be concerned solely for the beneficiary's interest, never the fiduciary's own". Justice Binnie went on to analyse the relationship between Monarch and Strother and concluded that although the written retainer agreement had terminated in 1997, Monarch continued to look to Strother for advice through 1998 and Strother had placed himself in a clear conflict of interest in taking a personal interest in Sentinel. His duty to Monarch was to inform them of the existence of a new tax-shelter vehicle which could have put them back in business. He elected not to do so because he had essentially become a competitor. While it was not open to him to disclose to Monarch any confidential information that he had obtained from Dare, he could have informed them that there may be alternative film financing vehicles available, which could not be disclosed for reasons of client confidentiality, but that Monarch should consult another law firm. There was no excuse for Strother to have failed to inform Monarch of the existence of the favourable tax ruling once it became public in October, 1998. The court therefore concluded that Strother had breached his fiduciary duties to Monarch and should be required to disgorge some of the profit that he had earned as a result of the breach. However, Justice Binnie pointed out that an accounting of profits is an equitable remedy and "...equity is not so rigid so as to be susceptible to being used as a vehicle for punishing defendants with harsh damage awards out of all proportion to their actual behaviour". Monarch were aware of the favourable tax ruling in early 1999 and could have entered the business themselves at that point. Thereafter, a significant amount of Sentinel's success arose from their own expertise and at that point all ties between Monarch and Davis & Company had been

severed, so that the "conflict was spent", The Court ordered that Strother disgorge the profits received between January 1, 1998 and March 31,1999. The Court held that Davis & Company did not breach any fiduciary duty to Monarch, because the partners of the firm did not know what Strother was up to. However, the Partnership Act of British Columbia creates a vicarious liability for the wrongful act or omission of any partner "acting in the ordinary course of the business of the firm or with the authority of his or her partners...". Clearly in this case Strother was not acting with the authority of his partners but after reviewing the relevant case law, the Court concluded that Strother's acts were so closely connected with the services normally provided by Davis & Company to Monarch that Davis & Company should have vicarious liability for his acts. Justice Binnie went on to point out that Davis & Company would undoubtedly seek to claim indemnity from Strother and that if, in the circumstances "...the.claim is allowed and the rogue partner can pay, the firm is protected". However, if the "...rogue partner cannot pay, the legislature has decided that there is no good reason why the loss or injury should be inflicted on the innocent client rather than the partnership which put the rogue partner in the professional position to do what he or she did." Davis & Company were therefore found vicariously liable for the sum found to be due by Strother to Monarch. Strother v. 3464920 Canada Inc., 2007 SCC 24 (CanLII)...