Canada: Duty Of Loyalty

Last Updated: February 12 2015
Article by Jonathan Speigel

The larger a law firm gets, the more important conflict searches become. The benefit of these searches became apparent to a law firm in Stewart v. Hosack 2014 ONSC 5693 (S.C.J.).

Players

For many years, the plaintiff, her family, and her business had been clients of a law firm in Simcoe, Ontario. The firm previously represented the plaintiff and her business on 5 matters: the sale of a home, the purchase of a building, a Small Claims Court action, a flood damage claim, and a medical malpractice lawsuit. The firm was currently acting for the plaintiff's husband, and perhaps her also, on two real estate deals.

A former employee of the plaintiff's business was criminally charged with uttering a death threat to the plaintiff. Another lawyer (the "criminal lawyer") in the law firm, who was a friend of the employee's boyfriend, accepted the employee's retainer to defend her in the criminal proceedings. The criminal lawyer knew that the plaintiff was the alleged victim of the death threat and that she and her family had been clients of the firm. Regardless, he did not "run a conflict check, make inquiries from other lawyers in the firm, review (the plaintiff's) files, obtain consent from (the plaintiff), or set up an ethical wall."

As an aside, why the judge would comment adversely on the criminal lawyer's failure to review the plaintiff's prior files is beyond our comprehension. If those files contained confidential information, the criminal lawyer would not want to know it.

Aha

Something must have clicked within the law firm. Shortly after it accepted the employee's retainer, the real estate lawyer in the firm withdrew from the real estate transaction on the pretext that the plaintiff had not paid a previous account. In reality, the law firm fired the plaintiff so that the firm could continue to represent the employee. The plaintiff claimed that she did not know about an outstanding account and, cognisant of the law firm's involvement in the criminal charges, became suspicious of the real reasons for the termination of her retainer.

Story

The criminal lawyer, who was a part owner of the tavern in which the death threat was allegedly made, had, at all times, a video of the incident taken from the tavern's security system. He provided that video to the Crown about 6 months later. The Crown then laid a 2nd charge against the employee for criminal harassment.

However, it seems that the video told the story differently than the plaintiff or the Crown originally thought. Ultimately, based on the video, the Crown withdrew all charges against the employee. However, it did so while other lawyers were representing the employee. Prior to the withdrawal, the Crown insisted that the criminal lawyer withdraw as counsel because of an alleged conflict of interest. Rather than subject the employee to the legal fees to be incurred to oppose the Crown's threatened motion, the criminal lawyer resigned from the file.

Angry

Why do we refer to the plaintiff as the plaintiff? Because the plaintiff sued the law firm. The plaintiff claimed that the law firm misconducted itself, breached its duty of loyalty to her, and used, or could have used, confidential information. She claimed both compensatory and punitive damages. The law firm moved to dismiss the action by way of summary judgment.

In an understatement, the judge stated "I would have thought that it would be preferable, safer and easier to decline the (employee's) retainer." However, that, by itself, does not mean that there was a conflict.

The plaintiff's first problem was that she had not shown that the law firm had used, in defending the employee, any confidential information that she had provided in her prior files. The video had nothing to do with the plaintiff's prior relationship with the law firm; it was obtained solely pursuant to the law firm's retainer from the employee.

Although the judge ruled that the plaintiff was the law firm's client at the time the firm accepted the employee's retainer, there was still no conflict of interest. A conflict was not generated merely because the law firm knew the plaintiff and her family; confidential information had to arise out of the relationship and be used. The plaintiff could not suggest any way that confidential information was used or misused. Further, the plaintiff was not an adverse party in the criminal proceedings; the Crown was the adverse party and she was merely a witness.

However, the judge found that the law firm breached its duty of loyalty to the plaintiff and noted that the law firm had treated the plaintiff badly. He stated that the law firm ought not to have summarily and unexpectedly terminated its retainer with the plaintiff as a means to circumvent conflict of interest rules. He found that the law firm breached its duty of candour in failing to disclose its intention to represent the employee and allow the plaintiff to make her own decision about continuing her retainers with the firm or going elsewhere.

Damages

The plaintiff claimed that she suffered psychological damages arising out of the law firm's "high-handed arrogant disregard" for her, including emotional distress and damage to reputation. However, aside from own self-serving statements in her affidavit, the plaintiff failed to lead any evidence with respect to those damages. No medical reports. Nothing. The judge refused to award compensatory damages without real evidence in support of them.

The judge also noted that even if there were a conflict, the law firm's actions were not "high-handed, malicious, arbitrary or highly reprehensible" so as to require an award of punitive damages.

Finally, the judge determined that he was not able to compensate the plaintiff for the breach of fiduciary duty by way of a restitution of profits arising out of that breach. There were no profits. The judge noted that the breach of fiduciary duty "was not based on personal profit but on an error in judgment."

The judge did note that the plaintiff's complaint to the Law Society, which was held in abeyance pending the result of the action, was still outstanding and stated "I leave it to the Law Society to fashion an appropriate deterrent remedy if they think that to be fit."

Moral

In our opening, we talked about the advisability of performing a conflict of interest search. In regards to the facts of this case, that opening was, perhaps, misleading. In this case, the law firm did not need the search; it already knew about the problem. Instead of dealing with the problem up front with the plaintiff, it engaged in poorly-executed damage control. As a consequence, it ultimately did not act for the employee, lost the plaintiff and her family as clients, and was dragged into a legal action.

Further, we suspect that, in the thriving metropolis of Simcoe, many residents were told what had happened and might not have had the best view of the law firm's actions. We surmised that the law firm's decision might have embroiled it in a public relations nightmare. However, when reviewing the website of the Simcoe Informer, we noted many hits relating to the law firm, many hits relating to the plaintiff, who it seems runs a very good business, and no hits regarding the action.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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