Offering Referrals to Clients: A Cautionary Tale

By Richard Johnson.

Those of us in the legal profession have been happy to guide clients toward other service providers as and when appropriate when an aspect of the client’s needs falls outside the scope of our practice.

In a world of ever-increasing specialization, the need for referrals to those with particular areas expertise will only become greater. However, the recent Supreme Court of Canada decision in Salomon v. Matte-Thompson is a strong reminder to lawyers to exercise caution and due diligence when providing referrals and making recommendations.

Background

In 2003, Mr. Salomon (a lawyer) introduced two of his clients (Ms. Matte-Thompson and one of her operating companies) to his financial advisor (Mr. Papadopoulos), who also happened to be Mr. Salomon’s personal friend. Mr. Salomon recommended that his clients consult the financial advisor; they did and, over the subsequent four years, they invested more than $7.5 million with the financial advisor’s firm. Mr. Papadopoulos’ firm.

Over the investment period, Mr. Salomon repeatedly endorsed Mr. Papadopoulos and encouraged the clients to invest with the investment firm (Triglobal).

Ultimately, Mr. Papadopoulos and his associate disappeared with the savings of around 100 investors, including money invested by Ms. Matte-Thompson and her company.

Ms. Matte-Thompson, personally and on behalf of her company, then sued Mr. Salomon and his firm for professional negligence.

Lower Court Rulings

The Québec trial court judge who heard the claim against Mr. Salmon dismissed it. Ms. Matte-Thompson and her company appealed that decision, and the Québec Court of Appeal overturned the trial decision and ordered Mr. Salomon and his law firm to compensate the clients for their losses.

Supreme Court of Canada Ruling

Mr. Salomon and the firm appealed to the Supreme Court of Canada, which dismissed the appeal – i.e. upheld the appeal court’s decision.

In an 8 to 1 decision in favour of Ms. Matte-Thompson and her company, the country’s highest court made some important statements regarding lawyers’ duties to their clients, particularly in the context of providing referrals. Here are the highlights:

• A referral is not a guarantee of the services referred, but it is also not a shield behind which a referring lawyer can evade liability for his or her wrongs.

• A lawyer’s duties to clients include a duty to inform, a duty to explain and a duty to advise.

• Lawyers also have a duty of loyalty and must avoid conflicts of interest which place personal interests in conflict with the interest of their clients.

• When advising clients, lawyers must always act in the client’s best interests and meet the standard of a competent, prudent and diligent lawyer in the same circumstances. These principles apply when making referrals to clients and the duties are assessed based on reasonable knowledge of the professionals or advisors to whom clients are referred.

• Lawyers who refer clients to professionals or advisors must be convinced that the professionals or advisors are sufficiently competent to fulfill the mandates for which the clients are referred.

• The circumstances will dictate how these duties are examined and involve assessing (1) the object of the mandate for which the clients are referred, (2) the particular client’s characteristics, and (3) the expertise that the lawyer claims in regard to the field in question.

• In this case, Mr. Salomon went beyond a mere referral. He made recommendations without performing due diligence and offered repeated reassurances to his clients about the security of their investments. He had personal and financial relationships with Mr. Papadopoulos. These relationships placed Mr. Salomon in a conflict of interest which resulted in him neglecting his clients’ interests.

• Mr. Salomon breached his duties to his clients, and those breaches caused them to suffer financial loss. The fact that Mr. Papadopoulos committed fraud did not break the chain of causation. In other words “but for” Mr. Salomon’s breaches, the clients would not have suffered their losses. As such, Mr. Salomon and his firm were liable for the clients’ losses.

Takeaway

The key takeway for lawyers in their referring activities can be summarized simply as follows: Put your clients’ interests first!


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