Jason Bryk 

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Be careful when referring your clients to other advisors!

July 2019

It is unlikely that any lawyer - or indeed any other professional person, or for that matter, any "layperson" - would knowingly/intentionally refer someone to another person for advice when the referring person knew or suspected that the referee was incompetent and/or untrustworthy.  But what if you don't know anything - or very much - about a possible referee, except for the fact that he or she holds himself/herself out as a person with a particular skill set and/or particular knowledge, qualifications and experience?  To what extent should you - morally and legally - be obliged to make inquiries (or conduct "due diligence") concerning the proposed referee's actual knowledge, experience, qualification(s) or reputation?

For most people and in most situations, it is unlikely that these questions will arise.  Or if they do, it is unlikely that the person being referred to a referee will suffer loss, or if he/she does suffer loss, that he/she will seek legal redress against the person making the reference.  But if the person contemplating a reference is a lawyer and the person to be referred to a contemplated referee is a client of that lawyer, then, the lawyer may have a significant obligation to take at least some care in making the reference.

Consider the case of a lawyer who commences to practice in a place different from where he/she previously practiced, say a small city of about 20,000 people.  In fairly short order, the lawyer would probably become familiar with at least the names and occupations of other professionals in the city, including other lawyers, financial planners, accountants, lenders and builders.  But for at least some time, the lawyer would not likely be familiar with the reputations and the skill sets - or lack thereof - of such other professionals.  Where a client of that lawyer requests the lawyer to "recommend" the services of another professional, just how far does the lawyer have to go in order to attempt to comprehend a proposed referee's ability, and the likelihood (or otherwise) that the proposed referee will provide a reasonable level of competence and is trustworthy?  Should the lawyer expend copious time and effort trying to "drill down" on the likelihood - or the non-likelihood - of the proposed referee's ability to properly service the client's needs?

These questions were considered - in the context of a lawyer's legal responsibilities - in the recent Supreme Court of Canada case Salomon v. Matte-Thompson, 2019 SCC 14, judgement issued February 28, 2019, hereinafter, the "Salomon Case".

The "facts" in the Salomon Case were that in 2003, a lawyer recommended and introduced his client to a financial adviser - who happened to be a personal friend of the lawyer - and recommended that the client consult with that adviser.  Over the next four years, the client invested in excess of $7,500,000.00 with that adviser's investment firm, and, over the course of that period, the lawyer repeatedly endorsed and recommended the adviser as a financial adviser and encouraged his client to make and retain certain investments with the investment firm.  In 2007, the adviser disappeared with the savings of approximately 100 investors, including those of those of the lawyer's client.  The client commenced an action against the lawyer and the lawyer's law firm for damages.

The Court held that the lawyer was liable to the client.  The Court emphasized that the lawyer had done substantially more than just referring his client to the adviser.  Over the period of four years, the lawyer had made repeated positive recommendations of the adviser's capabilities to his client, including urging the client to invest (through the adviser and his investment firm) in "risky" investments.  The client had specifically, at the outset, advised the lawyer that the client's needs were to place her funds in investments which would tend to protect her capital.  When the investments started to deteriorate in value, the lawyer - who had placed some of his own monies in those investments - did not suggest to the client that she reduce her holdings with the adviser and his investment firm.  Indeed, just the opposite occurred - the lawyer gave repeated assurances to his client that the investments were, and continued to be, safe and good investments.  Although the judgement doesn't unequivocally hold that the lawyer had received remuneration from the adviser for referring clients - including Mrs. Matte-Thompson - to the adviser, the facts presented to the Court strongly suggested that that was in fact the case.  Taken as a whole, the Court determined that the lawyer owed a duty to provide proper advice to the client as well as a duty of loyalty to the client.  The lawyer had not conducted any "due diligence" whatsoever pertaining to the adviser and his investment firm.  The Court held that had the lawyer done so and advised his client, his client would have almost certainly not made any investments with the adviser and his investment firm.

The Court emphasized that when a lawyer makes a reference of a client to another person for advice and guidance, the lawyer does not thereby guarantee to the client that the referred to adviser will achieve a particular result or objective or that the adviser will turn out to be wholly trustworthy and competent.  However, in the Salomon Case, the lawyer's conduct - which led to his client's losses - was far more than a mere reference.  The lawyer's course of conduct over the entire time period had to be taken into account.

What then does the Salomon Case suggest to practicing lawyers?  Consider the following:

(i)            if you know absolutely nothing about a contemplated referee, either don't make the reference - and explain to your client that that is the reason you are not making any reference - or:

(a)          conduct at least some "due diligence" with respect to the contemplated referee (for example, if the contemplated referee is a financial planner, inquire as to his/her credentials and whether or not he/she is registered or recorded with an organization whose members are regulated, either voluntarily or by government mandate, as to their conduct, competency, etc.); or

(b)          make the reference but get a written acknowledgement from your client that you have no knowledge and have not conducted any due diligence with respect to the contemplated referee, suggesting that the client seek the recommendations of one or more other persons in the community who might have more knowledge of the contemplated referee's reputation;

(ii)           if you either know or have certain information which would lead you to suspect that the contemplated referee is incompetent and/or untrustworthy, either decline to make the reference or before making it, or where you have "suspicious", conduct - and document that you have conducted - some "due diligence". Where your due diligence removes your "suspicions", make the reference, if you feel comfortable in doing so.

Readers will appreciate that there is a marked difference between the hypothetical fact scenario suggested at the beginning of this paper and the facts of the Salomon Case.  The Salomon Case deals with of a rather "extreme" situation.  Clearly, the lawyer there had a conflict of interest and a conflict of duty arising from his dual relationships with his client and with the financial adviser. There was a pattern of ignoring the ramifications of those conflicts over a long period of time.  While this writer's first reaction upon reading the Salomon Case was to fear that the Court had extended the duties and responsibilities of lawyers making referrals, the writer is now convinced that this is not so.  As stated at the outset, most lawyers will not intentionally refer a client to someone who they know - or suspect - to be incompetent and/or untrustworthy.  And where a lawyer contemplating a reference for a client has any suspicions concerning same, she or he will most likely either "diplomatically" not make the reference or not make it until sufficient "due diligence" has been conducted by the lawyer so as to assure herself/himself that making the reference to the particular client in the particular circumstances is reasonable.


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