| Prof. Allan Hutchinson on Conflict
of Interest Crackdown
Conflict of interest crackdown: Strother spinoff: 'If you screw around
with fiduciary duties, look out' A British Columbia Court of Appeal ruling is just the latest in a series of judicial decisions showing zero tolerance for lawyers embroiled in conflicts of interest, an Osgoode Hall Law School professor said. The court ordered a former tax partner with a Vancouver law firm to pay a former client as much as $32-million received in a business relationship with a competing client. "This is clearly an indication that the courts are taking this very seriously and lawyers can't play fast and loose with these duties. And that if they do, the courts are going to come down hard on them," said Allan Hutchinson, Osgoode's associate dean of research and the author of Professional Responsibility and Legal Ethics. "This court, at least -- and it might go to the Supremes -- is saying if you screw around with fiduciary duties, look out." The judgment in January against Vancouver lawyer Robert Strother and his former law firm, Davis & Co., is likely to send chills through the managing partners of many of Canada's professional services firms. The appeal court, led by Madam Justice Mary Newbury, with Mr. Justice Hall and Oppal concurring, has ordered an independent accounting of how much Strother profited when he acted in a conflict of interest and must, therefore, disgorge to the original client. The appellant has suggested it is about $32-million. The court has also asked to hear further arguments on the law firm's vicarious liability in the case. "The decision really applies to any professional person -- but in particular lawyers and accountants, who owe the [fiduciary] duty to the client," said Vern Krishna, a University of Ottawa law professor and a fellow of the Certified General Accountants of Canada. "Had Strother been an accountant instead of a lawyer, I think he would have been in the same trouble," said Mr. Krishna, who was classmates with both Strother and Madam Justice Newbury in the Masters of Law program at Harvard University in the 1970s. "It's a sobering judgment," said Bryan Baynham, a senior litigation partner with the Vancouver law firm of Harper Grey Easton, who has written extensively on conflicts issues and represents many lawyers in professional negligence cases. "Lawyers understand that you can't act contrary to your client's benefit. It's the ramifications and the amount of money involved that is shocking in this case," Mr. Baynham said. "I'm sure this is a topic of discussion for most, if not all, the large law firms in Vancouver ... and I suspect in a lot of the larger law firms across the country." As a tax partner with Davis & Co., Strother advised Monarch Entertainment Corp. that changes in tax rules introduced in November, 1997, rendered the company's film production tax shelter business no longer viable. Acting on Strother's advice, Monarch shut down this aspect of its business. Strother and Davis & Co. continued to do other legal work for Monarch through 1998, although their initial exclusivity/fee arrangement with Strother expired at the end of 1997. In early 1998, meanwhile, Strother was approached by Paul Darc, a former Monarch employee, who said he had a new idea and asked him to persist in developing a new tax shelter/tax credit structure for the industry. Without advising his original client, Strother agreed to produce a new tax ruling request in exchange for a share in profits and 50% of equity and voting rights in the new enterprise, which ultimately produced Sentinel Hill Entertainment Corp. and various other related businesses and trusts. Strother did not tell his law firm about the arrangement and he did not tell Monarch that his legal opinion about the viability of the tax shelters had changed. Monarch sued Strother and Davis & Co. for breach of fiduciary duty and Mr. Darc for breach of confidentiality, alleging that his tax shelter structure idea was Monarch's. The Court of Appeal dismissed Monarch's claim against Mr. Darc, concluding that his tax structure plan had been his own original idea. This ruling -- although shocking in its financial magnitude -- doesn't really advance Canadian law as it relates to a lawyer's duty of loyalty to a client, says Vern Krishna. Rather, it nicely encompasses essential caselaw into a neat well-reasoned package. "It's a superb teaching case for law schools. It has all the meat in it," he said, noting that the Strother decision cites authorities ranging from historical caselaw all the way up to the Supreme Court of Canada's seminal 2002 Neil judgment The Neil judgment established that a lawyer cannot act for a client if its representation would prove adverse to the interests of another client, even if no confidential information is involved and the two matters are unrelated. In a series of more recent cases, courts have determined that the duty of loyalty continues to some extent even after a client becomes a former client. "There's a relationship between lawyers and clients as between a fiduciary and a beneficiary. The fiduciary -- the lawyer -- has to put the interests of the client ahead of their own," says Hutchinson. "They are not allowed to act in a way that would benefit themselves over and above that of the client. And this duty continues to some extent even after the person ceases to be a client." While Strother profited more than most lawyers would from acting in conflict, in other cases, "lawyers might have to give over all of their fees in some circumstances," said Mr. Hutchinson, who rues the lack of training that Canadian law students receive in ethical issues. While Mr. Hutchinson acknowledged a national law firm can inadvertently run into conflict-of-interest problems if a lawyer in the Vancouver office unknowingly agrees to represent a client whose interests are contrary to those of a client of a lawyer in the Toronto office, he says well-organized law firms have nothing to fear from the Strother judgment. "This is really saying: 'You'd better get organized. You'd better be upfront with your clients, you can't play clients off against each other, and -- if you [act unethically and you] get found out -- there's really going to be trouble.' " |