A recent decision from the Supreme Court of Canada significantly clarifies the law of “ad hoc” fiduciary relationships — Galambos v. Perez, 2009 SCC 48. The decision has potentially wide-ranging commercial implications, since an ad hoc fiduciary relationship is one that may arise on the particular facts of a case. It thus stands in contrast to a “per se” fiduciary relationship, which can arise only in certain limited contexts (e.g., those involving solicitor-client, doctorpatient, or trustee-beneficiary relationships).
The plaintiff in Galambos was a part-time bookkeeper and office manager of a law firm founded by the defendant lawyer. She was also a client of the law firm, which performed a handful of unpaid legal tasks for her during her employment (i.e., the preparation and execution of a will, and two mortgage transactions). However, there was no ongoing solicitor-client relationship between the parties beyond these limited retainers.
When the law firm encountered financial difficulties, the plaintiff made several financial contributions to it, often without notice to the defendant. The defendant promised to pay her back, and continued to inform her that the firm’s financial prospects would improve.
However, the firm was ultimately placed into receivership, and the defendant lawyer became a bankrupt. The plaintiff found herself an unsecured creditor of the defendant in the amount of approximately $200,000.
With leave of the bankruptcy court, the plaintiff sued the defendant, hoping to pursue his professional liability insurer if the lawsuit was successful. Her claims were framed in breach of fiduciary duty, negligence, and breach of contract. The plaintiff argued that the defendant had violated his duties to her in several ways, including by not recommending that she obtain independent legal advice about the financial contributions, by continuing to represent that the firm’s prospects would improve, and by placing himself in a conflict of interest.
At trial in the British Columbia Supreme Court, all of the plaintiff’s claims were rejected. However, the British Columbia Court of Appeal allowed the plaintiff’s action with respect to one aspect of her breach of fiduciary duty claim. It found that the defendant had breached the duties flowing from an ad hoc fiduciary relationship, which existed separate and apart from the per se fiduciary relationship attributable to the parties’ limited solicitorclient retainers.
The ad hoc fiduciary relationship was said to arise because the parties had been in a position of power-dependency, and the plaintiff possessed a unilateral reasonable expectation that the defendant would act in her best interests.
On further appeal, the Supreme Court of Canada overturned this ruling, and restored the trial judgment. Cromwell J., writing for a unanimous nine-member panel, found that the Court of Appeal’s reasons had unduly extended the scope of fiduciary obligations.
As an initial matter, Cromwell J. agreed with both courts in rejecting the plaintiff’s claims for negligence, breach of contract, and breach of a per se fiduciary relationship, insofar as they were based upon the limited solicitorclient relationship between the parties. This was because the specific legal services that the defendant had performed for the plaintiff were completely unrelated to her financial contributions to the law firm.
However, Cromwell J. held that the Court of Appeal had committed two legal errors in its analysis of the ad hoc fiduciary relationship claim:
- It erred in finding that a power-dependency relationship, coupled with a unilateral reasonable expectation by the plaintiff that the defendant would act in her best interests, was sufficient to give rise to ad hoc fiduciary duties. Instead, Cromwell J. held that it is essential to all ad hoc fiduciary relationships, including those involving elements of power-dependency, that the fiduciary itself undertake to exercise a discretionary power in the vulnerable party’s best interests (although this undertaking may be express or implicit).
- It erred in concluding that an ad hoc fiduciary relationship could arise where, as found by the trial judge in this case, the defendant had no discretionary power to unilaterally affect the plaintiff’s legal or practical interests. While the presence of such a discretionary power is not sufficient to give rise to an ad hoc fiduciary duty, Cromwell J. held that its absence will negate it.
McCarthy Tétrault Notes
Prior to Galambos, the law was unclear as to the test for an ad hoc fiduciary relationship. Among other things, it was not certain whether the plaintiff had to establish a mutual understanding on the part of both itself and the defendant that the defendant would act in the plaintiff’s best interests, or whether establishing a reasonable expectation to this effect by the plaintiff alone would suffice.
The decision in Galambos charts a middle course between these two extremes, and in so doing clarifies the test for ad hoc fiduciary relationships. It establishes that two elements are necessary in order for such a relationship to arise: (1) the existence of a discretionary power on the part of the fiduciary to affect the vulnerable party’s legal or practical interests that the fiduciary can exercise unilaterally; and (2) an express or implied undertaking by the fiduciary itself that it will exercise this discretionary power in the vulnerable party’s best interests.