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The duty of care for advisors

Non-clients can be a factor in class action negligence claims

By Sandra Barton

August 30 2013 issue

Adam Hicks /
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As a general rule, professional advisors do not owe a duty of care to non-clients. Cases which have found otherwise have been the exception, not the rule. However, there has been a recent spate of class actions in which disgruntled investors have brought claims against lawyers and other professionals, even though they never retained or received advice from the professional advisor. Furthermore, many of these actions, framed as claims in negligence and/or negligent misrepresentation have been certified as class actions.

The most recent of these cases is the Court of Appeal’s decision in Lipson v. Cassels, Brock and Blackwell [2013] O.J. No. 1195, in which the plaintiffs were participants in a tax benefit program. As part of the program, they donated cash and resort timeshare weeks to a trust, and later to a registered third party. Donors were to receive a tax credit for the donation, and expected to realize a net return of about 35 per cent. Between 2000 and 2003, the defendant law firm (Cassels) provided six tax opinions to the promoters of the program.

The representative plaintiff was not Cassels’ client, had never spoken with anybody at Cassels and had never read any of the Cassels tax opinions. Nevertheless, the court found there could be a duty of care owed to investors. Of particular importance to the court was the fact that all of the opinions were addressed to potential donors as well as to promoters, and that the tax opinion was included as part of the promoter’s marketing materials.

This case should sound alarm bells for most professional advisors. Traditionally, there have been limited exceptions to the rule that a lawyer’s duty is to the client alone, such as in the disappointed beneficiary cases in which lawyers have been held liable for negligent preparation of a will, or in transactions cases wherein the solicitor agreed but failed to perform a service on the opposing party’s behalf.

The Lipson case and others like it demonstrate the courts’ willingness to expand the class of people to whom advisors owe a duty of care, perhaps moving the existence of a duty to a non-client from being the “exception” to becoming part of the norm. If so, courts have provided very little guidance as to what would justify expanding the duty, and what policy reasons will justify negating what some courts have called a “prima facie duty of care.” 

What we do know is that in negligence claims, a duty may be imposed: where the solicitor is aware of the identity of the party, and the nature of the party’s interest; if the auditor had specific knowledge of the particular plaintiff or class of plaintiffs who would rely on the audited statements; depending on the nature of the legal service being undertaken. For instance, a lawyer who negligently drafts a prospectus may be liable to investors.

In negligent misrepresentation claims, duties of care have been imposed: where the opinions, statements or profile of the advisor form part of the promotional materials; wherein a solicitor is specifically authorized to speak to investors about an investment; even in the face of a disclaimer intended to prevent third parties from relying on the advice, if the advice was integral to the transaction.

While these cases can provide some guidance, cases such as Lipson evince an emerging trend which should raise concerns about the potential for indeterminate liability. Historically, it was difficult to certify a class-action claim for negligent misrepresentation because proof of actual reliance could not be proven as a common issue. However, courts are now certifying actions on the basis that a general, rather than a specific reliance, may be sufficient to make out such a claim. The rationale for such holdings has been that even without direct reliance  in entering, for example, a tax-saving scheme — plaintiffs relied on legal advisors as the “architects of the scheme” to ensure that their pledges would qualify as valid charitable donations. The effect is to potentially lower the threshold for establishing a negligent misrepresentation claim. In other cases, class-action plaintiffs’ have gotten around the challenges posed by misrepresentation claims by framing their claims in negligence. For example in Lipson, the representative plaintiff claimed that absent a negligent opinion, the tax-savings program would not have been marketed at all. Whether framed as negligence simpliciter or negligent misrepresentation, the essence of these claims seems to be that had the advisor performed her duty to her client, the plaintiff wouldn’t have suffered any losses. In which case, shouldn’t the cause of action against the solicitor belong to the client, and the client alone?

The fallout from these cases remains to be seen. But the immediate consequence of cases such as Lipson will likely be more class proceedings by third parties with tenuous connections to professional advisors — an expensive endeavour for defendants, and a development that professional liability insurers are likely monitoring with great concern.

Sandra Barton is a partner at Heenan Blaikie LLP who practices in commercial and civil litigation and class-action defence. This article was written with contributions from Michael Byers.

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