A Matter of Conflict

The following Casebook feature examines precedent-setting cases that detail the legal fallout from conflict of interest situations. What these cases make clear is that a lawyer who prefers the interests of one client over another's may find himself liable for indemnifying the client who "lost out" for all of the losses which that client suffered simply because the lawyer has put him/herself into a conflict of interest position.

The case:
Martin v. Goldfarb [1997] O.J. 1918 (Ont.Ct.Gen.Div.) is a spectacular illustration of the dangers of preferring the interests of one client over another's.

Nigel Axton, a disbarred lawyer who had been incarcerated for fraud, was the defendant lawyers' client. The plaintiff Martin was also their client. Axton asked that the lawyers not tell Martin about his background. The lawyers obliged. Unfortunately, Axton began to fleece Martin. When Martin could not recover his losses from Axton, he turned on the lawyers.

The judgment:
Lederman, J. held them liable for $9 million dollars. While the Court of Appeal has ordered on new trial on damages, that Court confirmed Lederman, J.'s finding that the lawyers had indeed breached their fiduciary duty the plaintiff by withholding material information from him.

The case:
A more mundane illustration of the dangers of "acting for both sides" is the judgment of Anderson, J. of the Nova Scotia Supreme Court in Barrett v. Reynolds (1998) 17 R.P.R. (3d) 32 (N.S.S.C.).

A lawyer acted for both vendors and purchasers in an agreement to purchase a home. A bank had agreed to provide financing to the purchasers provided they first sold their own home. The lawyer failed to tell the vendors that the bank had imposed this condition. The vendors took out bridge financing and began constructing another home. The purchasers were unable to sell their own house, and the transaction did not close.

The judgment:
The lawyer was held to have breached his fiduciary duty to the vendors by failing to disclose this material fact to them. The lawyer was held to be jointly and severally liable for all damages flowing from the failure of the transaction to close.

The lesson:
In situations where the lawyer has, according to the courts, acted in breach of his or her fiduciary, the consequences for the lawyer are often significant.

Davey v. Woolley, Hames, Dale & Dingwall (1982) 35 O.R. (2d) 599 (Ont.C.A.) is old news, but the following passage from the judgment of Wilson, J.A. is worth remembering:

"…. In any event, the lawyer unquestionably assumes a dual role at his own risk, the onus being on him in any lawsuit that ensures to establish that the client has had "the best professional assistance which, if he had been engaged in a transaction with a third party, he could possibly have afforded'….Even on the simple real estate deal the consequences of conflict can manifest themselves in a failure to make the requisition that alleged should have been made and would have been made if the lawyer had been motivated solely by a concern for the plaintiff." (at p. 602)

Financial implications: Another consequence of conflict is that damages may be assessed on a more generous scale than is the case where there has been a negligent breach of contract.

In Canson Enterprises v. Boughton & Co. (1992) 85 D.L.R. (4th 129 (S.C.C.) the Court stressed that equity should award compensation on the same basis as would be awarded for the tort of deceit. This would include damages which were unforeseeable at the time of the breach. Unforeseeable damages are not recoverable in breach of contract and tort actions.

Where the plaintiff has demonstrated that a lawyer has breached his or her fiduciary duty to him, and that this breach of duty has caused damage to the plaintiff, the onus then shifts to the lawyer to attempt to prove that the plaintiff would have suffered damages even if the breach had not occurred. The onus is a difficult one to meet. (Hodgkinson v. Simms, (1994) 17 D.L.R. (4th) 161 (S.C.C.))

This is not to say that a lawyer who acts on both sides of a transaction is automatically liable for any losses the client(s) suffer. Rather, once a client sustains a loss, he or she, with the help of new counsel, may attempt to uncover some "material fact" which was "withheld" by the lawyer. If the client succeeds to discovering such an undisclosed material fact, he or she will then allege that the transaction would not have proceeded had proper disclosure been made. The lawyer must then demonstrate that the loss would have been suffered in any event. This burden is extremely difficult to discharge, and the lawyer may discover that he or she is indeed the "guarantor" of the transaction.