Fiduciary duty

By Mindy Paskell-Mede
Illustration: Mike Constable

Two recent cases Shed light on what factual elements must exist in order to hold a defendant to a fiduciary standard of care

Two recent decisions of the Ontario courts have scrutinized certain relationships with the view to determining whether the law will view them as fiduciary in nature. This is an important threshold question in many lawsuits, giving rise to the possibility that the defendant will be judged differently and by different standards if there is a finding that he or she owed such a duty.

Although neither case dealt directly with accountants (one involved an investment adviser and the other directors of an insolvent company), they shed light on the underlying question as to what factual elements must exist in order to hold a defendant to a fiduciary standard of care.

To put the problem into context, it is interesting to consider those relationships that are traditionally and by definition fiduciary. The best example is that of a trustee, who stands in a fiduciary relationship with the beneficiary of the trust. The trustee is the legal owner of the property that is impressed with the trust, but all benefits of the property belong to the beneficiary. (The situation in Quebec is slightly different, since ownership concepts are different in civil law, but the overall concept is sufficiently similar for purposes of this discussion.) The trustee is given power to deal with the trust property without seeking instructions, or even necessarily informing the beneficiary of what he or she is doing. Trustees must always act in the best interests of beneficiaries, not in their own interests. In order to discharge this overriding obligation, trustees must hold themselves free of conflicts of interest. The law therefore provides a balance: the degree of power that trustees have over the interests of beneficiaries dictates the level of the standard against which their performance will be measured.

One of the first extensions of the law of fiduciary duty beyond the situations where a trust deed is established identifying a trustee and his or her powers and the beneficiaries and their entitlement was in British company law. Directors were found to owe a fiduciary duty, and this has been encoded in statute law in the rule that directors must act in good faith and in the best interests of the company. This extension of the law of fiduciary duty makes sense: companies cannot act on their own and their shareholders may be too numerous and too unskilled to permit them to govern their own affairs. Again, the power to act resides with the directors and those they delegate (day-to-day management), although someone else will make a profit or suffer the loss that results from those actions.

The law of fiduciary duty has grown significantly from these beginnings. One question frequently put before the courts is whether a professional owes a fiduciary duty to his or her clients. Some have argued because there are certain attributes of professionalism that are the same as certain duties of fiduciaries, a fiduciary relationship must exist. For example, professionals are obliged to put the interests of their clients before their own and to hold themselves free of conflicts of interest. However, it would be a logical fallacy to conclude because two relationships have similar attributes in some respects, they must be the same in all respects. Unlike the situation of a trustee or a company director, the answer is not found in the mere fact that the professional has the status of a professional in the relationship. The answer depends on the specific facts and nature of the engagement.

The Ontario Court of Appeal in Hunt v. TD Securities Inc. et al. (August 26, 2003) conducted a thorough review of the law of fiduciary duty to determine whether an investment adviser who had allegedly traded his clients' shares in BCE Inc. without their authorization had merely breached a contractual obligation (in which case, issues of ratification and mitigation of damages would be relevant) or whether the adviser also owed them a fiduciary duty, which had been breached.

The plaintiff investors were a couple in their 70s. During his working life, the husband had held many positions with his employer, including general sales manager for all Canadian divisions and senior vice-president, and had served as a member of its board of directors. He had also been in charge of the family's financial investments throughout the marriage. When the Hunts became clients of the defendant, a nondiscretionary account was established, under the terms of which the investment adviser could not trade in securities without the Hunts' authorization. The dispute arose with respect to the sale of certain BCE shares. The trial judge found, as a fact, that the Hunts' authorization had not been obtained prior to that transaction. The court also found that the investment adviser had not profited from this transaction, other than for his commission.

The trial judge was of the opinion that the investment adviser stood in a fiduciary relationship with the Hunts, such that this unauthorized transaction constituted a breach of a fiduciary duty as well as a breach of contract. However, the Court of Appeal held that this was a "palpable error" because, in fact, the investment adviser did not have the discretion or power to unilaterally affect the Hunts' interests. Simply because the adviser had the factual ability to conduct an unauthorized sale did not mean the relationship itself was a fiduciary one in nature. He was not authorized to act unilaterally and with the exception of this transaction had not done so.

The Court of Appeal held that in order for there to be a fiduciary duty, the alleged fiduciary must have the power or discretion to act unilaterally so as to affect the beneficiary's interests and that the beneficiary must be in a vulnerable position. Factors that can be taken into account would include vulnerability, trust, reliance, discretion and (if applicable) a professional's code of conduct. The Court of Appeal pointed out, however, that this list of factors is not a recipe, nor necessarily exhaustive. They simply assist the court in weighing the facts.

In this case, the Court of Appeal determined there was no evidence the Hunts were vulnerable. Hunt had a strong background, was intelligent and made his choices freely. He may have followed advice occasionally but not always and he did not display dependency or vulnerability. Simply because the contract was breached and the investment adviser acted without authority could not turn the relationship from a contractual one into a fiduciary one. In order for a fiduciary relationship to exist, one party must have agreed to relinquish its self-interest and to act solely on behalf of the other. The fact that the Hunts trusted their adviser was not dispositive. This was distinguished from the situation in another case — Zivanadinovich v. Mehta (1999) OJ No. 338 (CA) — in which an accountant was found to be in a fiduciary relationship to a close friend because of the length of time over which he provided the friend with financial advice. In that case, the court found absolute trust had been developed over time, which overshadowed the formal words of the engagement. Here, the Hunts had retained decision-making power.

On this analysis, it would be inconsistent for an accountant who is conducting an assurance engagement to be found to owe a fiduciary duty. It is clear that an auditor or reviewer has no unilateral power or discretion to act on the company's or shareholders' behalf. He cannot change the financial statements presented by management. He can merely give advice and make recommendations as to what those changes should be. He can point out to the company the consequences of not following his suggestions. If his advice is not followed, however, the most he can do is refuse to sign a clean opinion. The mere fact that management retains the right to argue with the auditor and prevail over the presentation of the financial statements (and ultimately to fire the auditor) indicates quite clearly that the relationship is not a fiduciary one. Unlike the directors, who do have a fiduciary duty, the auditor cannot win the fight by replacing management. In fact, if the auditor had the power or discretion to act unilaterally in the drafting and presentation of financial statements, he would not have the independence required of him to stand as auditor in the first place. The two roles, that of auditor and that of fiduciary, are mutually exclusive.

This brings us to the second recent Ontario Court judgment (a trial-level decision), rendered on November 12, 2003 in Millgate Financial Corp. Ltd. v. BCED Holdings Ltd. et al. The court was asked to consider whether the directors of the company, who clearly owed a fiduciary obligation to the company, also owed a fiduciary duty to the company's creditors, particularly as the company approached insolvency. In other words, can the creditors sue the directors for breach of fiduciary duty? The court said no. It agreed that while in difficult times the directors often have an obligation to consider the interests of the creditors because to do otherwise is to act against the interests of the corporation, this does not by itself confer a right of action on the creditors that would allow them to enforce that duty. In other words, the duty of the directors is to the company, not to the creditors, although that duty may involve more closely considering the creditors' interests.

These two cases should put to rest claims against auditors by company creditors for breach of fiduciary duty.

Mindy Paskell-Mede, BCL, LLB, is a partner with Nicholl Paskell-Mede in Montreal and is technical editor for Law