Lawyers’ Professional Obligations in Referring Clients to Independent Advisors

The recent Supreme Court of Canada decision in Salomon v. Matte-Thompson,2019 SCC 14, provides a clear message about a lawyer’s role – and potential liability – when referring a client to an independent financial advisor.

The Background

The case involved a lawyer who had provided legal advice to a client for over 20 years. For her investment decisions, he recommended the services of a particular financial advisor, who also happened to be his personal friend. The client accepted her lawyer’s recommendations: She hired the advisor, heeded his investment advice, and over a four-year period made investments totaling more than $7.5 million.

At times, the client expressed concerns over some of the investment products in her portfolio. The lawyer intervened to reassure her that they were sound. He also repeated his endorsement of the financial advisor, his investment firm, and its in-house products. At several points, he even teamed up with the advisor to help successfully dissuade the client from withdrawing her money.

As it turned out, the financial advisor was running a fraudulent Ponzi scheme. He absconded with the savings of about 100 investors, including the lawyer’s client. She lost millions, and sued the lawyer directly for professional negligence. She claimed he had breached his duty to advise her, and had disregarded his duty of loyalty to her as well.

At trial, the judge dismissed the client’s claim. The Court of Appeal reversed, ordering that the lawyer must reimburse the client for her full losses. The matter was then heard by the Supreme Court of Canada, which was asked to consider whether the Appeal Court had been wrong to interfere with the factual assessments and conclusions that had been made at trial.

In confirming the Appeal Court’s ruling, the Supreme Court had occasion to examine the general conceptual nature of the relationship between a lawyer and his or her client in the context of making referrals to independent advisors.

A Lawyer’s Duties When Making Referrals

First, the Court noted that a lawyer has three main duties to a client: The duty to inform, to explain, and to advise in the strict sense. These duties exist regardless of the specific mandate for which the lawyer is hired, but its exact scope depends on the circumstances. These include the object of the mandate, the particular lawyer’s expertise, and the individual client’s characteristics.

Next, by simply referring a client to an advisor or other professional, a lawyer does not guarantee the services provided by them. On the other hand, a lawyer is also not automatically shielded against liability for the other person’s wrongful acts. Rather, in making any referral a lawyer is required to act competently, prudently, and diligently, and with the client’s best interests in mind. Any recommendation must be based on a reasonable knowledge about the professional or advisor, and on the lawyer’s own conviction that the person is sufficiently competent to fulfill the mandate being contemplated. A referring lawyer who falls short of meeting this threshold runs the risk of being held personally liable to his or her client.

Considering These Facts

Applying those principles to the present case, and looking at the lawyer’s conduct as a whole, it was clear to the Supreme Court of Canada that he did not live up to the standard required of him.

For one thing, the lawyer breached his duty to advise his client, by continually recommending financial products without performing due diligence or asking any questions about them. He professed to be knowledgeable in the area, but never evaluated the investments against his client’s specific needs. Instead, he blindly recommended his friend’s services and investment products, which put his client at financial risk. The Court noted that the client’s ability to trust and rely on the advice received from her own lawyer is central to the lawyer-client relationship.

Secondly, the lawyer also breached the duty of loyalty. He did far more than simply make a referral – he repeatedly endorsed what turned out to be a fraudulent financial advisor with whom he had a close personal relationship. This put the lawyer in a conflict of interest, with divided loyalties.

By failing to fulfill these multiple duties, the lawyer fell short of adhering to the professional standard required of him. Taken together as part of a continuum over a four-year period, the lawyer’s conduct and ongoing reassurances were the true cause of his client’s losses. The fact that the recommended financial advisor turned out to be a fraudster did not break the chain of causation; the client would not have suffered any losses at all, were it not for her trusted lawyer’s faults in the first place.

As the Court put it:

This is not a case about a mere referral. It concerns a referring lawyer who, over the course of several years, recommended and endorsed a financial advisor and financial products, and encouraged his [client] to retain [her] investments with that advisor. Further, in doing this, he failed to perform adequate due diligence, misrepresented investment information, committed breaches of confidentiality and acted despite being in a conflict of interest. In such a context, a lawyer cannot avoid liability by hiding behind the high threshold for establishing liability that applies in a case in which a lawyer has merely referred a client.

In the end, the Supreme Court of Canada confirmed the Appeal Court’s ruling, finding that in these circumstances the lawyer was indeed liable for his client’s full investment losses.

Disclaimer: The content in this article is provided for general information purposes only. It does not constitute legal advice. All rights are reserved.