Fiduciary Obligations in the Supreme Court of Canada: a Retrospective

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Fiduciary Obligations in the Supreme Court of Canada: A Retrospective

Anthony Duggan

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Citation Anthony Duggan, "Fiduciary Obligations in the Supreme Court of (published version) Canada: A Retrospective" (2011) 50 Canadian Business Law Journal 85.

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FIDUCIARY OBLIGATIONS IN THE SUPREME COURT OF CANADA: A RETROSPECTIVE

Anthony Duggan*

I. Introduction The purpose of this collection of papers is to reflect on developments in the law over the past forty years, this being the life span to date of the Annual Workshop on Commercial and Consumer Law. I plan to limit my focus to the past 20 years and also to confine the discussion to a selection of Supreme Court of Canada cases. My reasons are partly related to limitations of space, but more importantly to the fact that, during the period 1989-2009, the Supreme Court substantially reshaped the law of fiduciary obligations and, in doing so, it has moved Canadian law away from both its historical origins and the law as it is applied in other parts of the Commonwealth.1 I will address three related issues: (1) what is the nature of the fiduciary relationship? (2) what is the relationship between contract and fiduciary law? (3) what are the remedial goals of fiduciary law? The first question arises in the context of so-called ―fact-based fiduciary relationships‖, in other words, cases where the plaintiff alleges breach of fiduciary obligation even though the parties‘ relationship does not fit into any of the established fiduciary categories (for example, trustee-beneficiary, director- company, solicitor-client). Cases of this kind inevitably force the court to go looking for the defining characteristics of a fiduciary relationship in order to determine whether the present case is a match. In LAC Minerals Ltd v. International Corona Resources Ltd,2 for example, the Supreme Court went through this intellectual exercise in response to the question whether fiduciary obligations apply between parties to an arm‘s length commercial relationship. In Hodgkinson v. Simms,3 the question arose again, this time

* Honourable Frank H. Iacobucci Chair, Faculty of Law, University of Toronto. Thanks to Dennis Kao for indispensable research assistance and to John McCamus, Stephen Waddams and James Edelman for helpful comments. 1 See Albert Oosterhoff, Robert Chambers, Mitchell McInnes and Lionel Smith, Oosterhoff on Trusts: Text, Commentary and Materials, 7th ed. (Toronto: Carswell, 2009), pp. 827-844 (―Oosterhoff‖). 2 [1989] 2 S.C.R. 574. 3 [1994] 3 S.C.R. 377.

1 with regard to the relationship between a financial advisor and his client. In McInerney v. McDonald,4 the question was whether, as a matter of fiduciary law, a doctor is required to give her patients access to medical records. In Norberg v. Wynrib,5 the question was whether it is a breach of fiduciary obligation for a doctor to supply a patient with prescription drugs in return for sexual favours, while in M(K) v. M(H),6 the issue was whether incest is actionable as a breach of fiduciary obligation between parent and child. Most recently, in Galambos v. Perez,7 the court had to decide whether a struggling law firm was in breach of fiduciary obligation for accepting loans from its bookkeeper to help it out of financial difficulty. This line of cases has been criticised for having extended the law, ―not predictably or incrementally but in quantum leaps so that judges, lawyers and citizens alike are often unable to know whether a given situation is governed by the usual laws of contract, negligence or other torts, or by fiduciary obligations whose limits are difficult to discern‖.8 Others have expressed the same concern by invoking the image of ―Prometheus Unbound‖,9 and ―the unruly horse of public policy‖.10 In Part II, below, I argue, with reference to comparable Australian decisions, that the court‘s attempt in these cases to articulate an over-arching theory of fiduciary relationships was a mistake, that the type of inductive logic the court employed runs counter to the common law tradition of argument by analogy and that adherence to more conventional techniques would have avoided much of the criticism the cases have attracted. The second question mentioned above, concerning the relationship between contract and fiduciary law, typically arises in cases where the parties are in a contractual relationship and the court has to decide whether fiduciary obligations may be superimposed on the contract. There are two competing views on the relationship between contract and fiduciary law. The first, the ―contractarian position‖, is that fiduciary obligations are consensual and so they must take second place to the parties‘ own

4 [1992] 2 S.C.R. 138. 5 [1992] 2 S.C.R. 226. 6 [1992] 3 S.C.R. 6. 7 [2009] 3 S.C.R. 247. 8 A (C) v. C (JW) (1998), 166 D.L.R. (4th) 475, at p. 496 per McEarchern C.J.B.C., quoted in Oosterhoff, supra footnote 1, at p. 835n. 9 John D. McCamus, ―Prometheus Unbound: Fiduciary Obligation in the Supreme Court of Canada‖ (1997), 28 C.B.L.J. 107. 10 Oosterhoff, supra footnote 1, at p. 835.

2 preferences as expressed or implied in the contract. The opposing view, the ―anti- contractarian position‖, is that fiduciary obligations are imposed and a court may use them to over-ride the parties‘ contract for public interest reasons or to enforce some form of higher morality. In 3469420 Canada Inc. v. Strother,11 the court divided on this question with the majority, led by Binnie J., supporting the anti-contractarian position and the minority, led by McLachlin C.J.C, supporting the contractarian position. Earlier cases reflect a similar division of views.12 In Part III, below, I argue that the anti- contractarian position is unsustainable as a matter of policy and that the court‘s continuing ambivalence over the question is a source of confusion additional to the concerns surrounding its handling of the first question (the nature of the fiduciary relationship). In Pettkus v. Becker,13 the court re-wrote the law of constructive trusts, holding that the object of the remedy is to prevent unjust enrichment and that the plaintiff must prove: (1) detriment to herself; (2) the defendant‘s corresponding enrichment; and (3) the absence of a juristic reason to support the defendant‘s enrichment. The court‘s insistence on correspondence between the plaintiff‘s detriment and the defendant‘s enrichment implies that the remedy is grounded in corrective justice and a predictable question that arose in the wake of the decision was whether corrective justice was now the only basis of the remedy. If this was the case, then how was Pettkus v. Becker to be reconciled with the long line of authority, dating back to Keech v. Sandford,14 in support of constructive trust relief to deter breach of fiduciary obligations? The court appeared to resolve this question in Soulos v. Korkontzilas,15 where McLachlin J. (as she then was), writing for the majority, held that the prevention of unjust enrichment is not the only basis for constructive trust relief and that the deterrence of fiduciary wrongdoing is also a legitimate objective. However, the case was subject to a strong dissent by Sopinka and Iacobucci JJ., while McLachlin C.J.C.‘s minority judgment in Strother suggests that she might be having second thoughts about key aspects of her judgment in Soulos. In Part IV below, I examine these case law developments, arguing that the court‘s failure to resolve

11 [2007] 2 S.C.R. 177. 12 See, e.g., Schmidt v. Air Products of Canada [1994] 2 S.C.R. 611. 13 [1980] 2 S.C.R. 834. 14 (1726), Sel. Cas. Ch. 61, 25 E.R. 223 (Ch). 15 [1997] 2 S.C.R. 217.

3 the tension between corrective justice and deterrence objectives adds yet another layer of uncertainty to the law of fiduciary obligations in Canada which, again, is not found in other Commonwealth jurisdictions.

II. The nature of the fiduciary relationship In Frame v. Smith, Wilson J. formulated a ―rough and ready guide‖ to the identification of fiduciary relationships in novel factual settings, as follows:

Relationships in which a fiduciary obligation has been imposed seem to possess three general characteristics:

(1) The fiduciary has scope for the exercise of some discretion or power.

(2) The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary‘s legal or practical interests.

(3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.16

In the LAC Minerals case (which involved two mining companies in preliminary negotiations for a joint venture), the majority, led by Sopinka J., endorsed this formulation. The judgment went on to say that the third factor, vulnerability, was the most important consideration and it read vulnerability as a function of the dependency that characterizes relationships of influence (parent and child, priest and penitent, and so on). On the other hand, the minority, led by La Forest J. adopted a reasonable expectations test: ―the issue should be whether, having regard to all the facts and circumstances, one party stands in relation to another such that it could reasonably be expected that that other would act or refrain from acting in a way contrary to the interests of that other‖.17 Relevant considerations include ascendancy, influence, vulnerability, trust, confidence and dependence.18 The judgment goes on to suggest that vulnerability is not a critical factor, that vulnerability means no more than susceptibility to harm and that, in turn, susceptibility to harm may result from an inequality of bargaining power. On this

16 (1987), 42 D.L.R. (4th) 81, at pp. 98-99. 17 LAC Minerals, supra footnote 2, at para. 171. 18 Ibid., at para. 148.

4 score, the majority stressed that both parties were ―experienced mining promoters who have ready access to geologists, engineers and lawyers‖.19 On the other hand, the minority pointed to the fact that ―Corona was a junior mining company which needed to raise funds in order to finance the development of its property‖, whereas ―LAC was a senior mining company that had the ability to provide those funds‖.20 This is no more than assertion and counter-assertion and such debates are effectively unwinnable. The same sort of intellectual tussle was played out again in Hodgkinson v. Simms (concerning a financial advisor and his client), except that this time La Forest J.‘s vision prevailed. As Lionel Smith has pointed out, his judgment is characterized by at least three shifts in position, making it all but unfathomable.21 La Forest J‘s starting position is that for a fact-based fiduciary relationship, there must be evidence ―of a mutual understanding that one party has relinquished his own self-interest and agreed to act solely on behalf of the other party‖.22 This statement emphasizes the importance of the prospective fiduciary‘s consent to assume the responsibilities in question, a factor missing from the Frame v. Smith formulation and glossed over in the LAC Minerals case.23 But later in his judgment, La Forest J. switches to the reasonable expectations test he had articulated in the LAC Minerals case (ignoring the LAC Minerals majority‘s preference for the Frame v. Smith approach)24 and later still he restates the test again, this time in terms of trust and dependency, via vulnerability: (1) vulnerability is a function of susceptibility to harm; (2) in turn, susceptibility to harm is a function of trust and reliance (because a client who trusts his financial advisor will be off-guard); and (3) partial trust and reliance is sufficient to make the client susceptible and, hence, vulnerable.25 The minority, led by Sopinka and McLachlin JJ., took the opposite tack, holding that: (1) on the authority of

19 Ibid., at para. 51 per Sopinka J. 20 Ibid., at para. 175 per La Forest J. 21 Lionel Smith, ―Case Comment: Fiduciary Relationships – Arising in Commercial Contexts – Investment Advisors: Hodgkinson v. Simms‖ (1995), 74 Can. Bar Rev. 714, at pp. 716-719. 22 Hodgkinson, supra footnote 3, at para. 33. 23 In the context of institutional fiduciary relationships (trustee-beneficiary, director-company, solicitor- client, etc), the consent requirement means that the prospective fiduciary must ―willingly occupy the office which, as a matter of law, attracts the fiduciary obligations‖: Smith, supra footnote 21, at p. 717n. In the fact-based fiduciary context, this translates to the proposition that the prospective fiduciary must willingly assume the task which attracts the fiduciary obligations. In both contexts, the prospective fiduciary‘s consent, or undertaking, may be express or implied: Ibid., at p. 722. 24 Ibid., at p. 718. 25 Ibid., at pp. 718-719.

5 LAC Minerals, the Frame v. Smith formulation governs and vulnerability is the critical factor; (2) for a fiduciary relationship, there must be total reliance and dependence; and (3) although the client in this case accepted the advisor‘s advice, he did not do so unreflectively and so he was at best partially reliant on the advisor. Ultimately, therefore, the difference between the majority and the minority revolved around a question of degree on the trust and reliance front and, by definition, questions of degree cannot be definitively answered. Like the LAC Minerals case before it, Hodgkinson v. Simms leaves the status of the Frame v. Smith formulation uncertain and in any event, both the Frame v. Smith formulation and its main competitor, the reasonable expectations test, are indeterminate. The Frame v. Smith formulation is ―potentially either expansive or restrictive. It is capable of producing any desired conclusion merely through the instrumental interpretation of the open-ended notions of power and vulnerability.‖26 The reasonable expectations test is no better: ―[it] confers an uncontrolled discretion that courts may employ to find fiduciary responsibility wherever they please‖.27 The reasoning in M(K) v. M(H) is no more satisfactory. The analysis starts with La Forest J.‘s bare assertion that ―[i]t is intuitively apparent that the relationship between parent and child is fiduciary in nature, and that the sexual assault of one‘s child is a grievous breach of the obligations arising from that relationship‖.28 The judgment goes on to quote the Frame v. Smith test before saying that ―[e]ven a cursory examination of these indicia establishes that a parent must owe fiduciary obligations to his or her child. Parents exercise great power over their children‘s lives, and make daily decisions that affect their welfare. In this regard, the child is without doubt at the mercy of his parents‖.29 This statement seems to make vulnerability the sole relevant indication of fiduciary relationships and it is hard to reconcile with La Forest J.‘s position in both LAC Minerals and Hodgkinson v. Simms, where he was at pains to stress that vulnerability is not decisive. As mentioned above, one problem with vulnerability as a stand-alone test of fiduciary relationships is its indeterminacy: reasonable minds might differ on what makes

26 Robert Flannigan, ―The Boundaries of Fiduciary Accountability‖ (2004), 83 Can. Bar Rev. 35 at p. 70. 27 Ibid., at p. 74. For a fuller analysis of Hodgkinson v. Simms, see McCamus, supra footnote 9; and Smith, supra footnote 21. Both writers struggle valiantly to make sense of the judgments, working their way through what Smith refers to as ―the bewildering variety of theoretical bases for the imposition of fiduciary duties‖ in the majority judgment: Ibid. at p. 721. See also Flannigan, supra footnote 26, Part V. 28 M(K), supra footnote 6, at para. 72 per La Forest J. 29 Ibid., at para. 74.

6 one person vulnerable to another. Over-inclusiveness is another problem. For example, on La Forest J.‘s reasoning in M(K) v. M(H), does an employer owe fiduciary obligations to his employees? Does a debtor owe fiduciary obligations to her guarantor? Do motorists owe fiduciary obligations to pedestrians?30 If the answer to any or all these questions is, ―no‖, where does the distinction lie? In McInerney v. MacDonald, La Forest J. held that a doctor is under a fiduciary obligation to give her patients access to medical records, but this time his reasoning is grounded, not in appeals to the patient‘s vulnerability, but, rather, to the trust and confidence between doctor and patient and the patient‘s reasonable expectation of access. It is true that, as he says in Hodgkinson v. Simms, vulnerability and trust and confidence are two sides of the same coin, but the failure to draw this connection in McInerney v. MacDonald is at least a potential source of confusion. As for his appeal to the patient‘s reasonable expectations, this is simply question-begging. The most recent case, Galambos v. Perez,31 reveals the court‘s sensitivity to these concerns. Writing on behalf of a bench, which for once was unanimous, Cromwell J. attempted to restate the law in more coherent terms. The decision discards both the vulnerability and the reasonable expectations approaches in favour of a new two-part test requiring: (1) an express or implied undertaking by the fiduciary to act in the other party‘s best interests; and (2) discretionary power in the fiduciary to affect the other party‘s legal or practical interests. The first part of the new test is a positive development because it settles the point that a person cannot be made a fiduciary against his will.32 But the second part of the test seems simply to substitute one indeterminate indication for another. If the Galambos v. Perez test had been in place at the time of the LAC Minerals case, for example, it is easy enough to envisage the court splitting along precisely the same lines. Breen v. Williams,33 a decision of the High Court of Australia, like McInerney v. MacDonald, was about patients‘ right of access to their medical records, but it reached the opposite conclusion. For present purposes, though, the different case outcomes are less interesting than the different judicial techniques on display. The Canadian approach,

30 The last two examples are taken from Smith, supra footnote 21, at pp. 717-718. 31 Supra, footnote 7. 32 See supra footnote 23. 33 (1996), 186 C.L.R. 71.

7 as described above, involves a form of ―top-down reasoning‖, whereas the Australian approach, as evidenced in Breen v. Williams, is to reason from the bottom up. ―In top- down reasoning, the judge or other legal analyst invents or adopts a theory about an area of law … and uses it to organize, criticize, accept or reject, explain or explain away, distinguish or amplify the existing decisions to make them conform to the new theory and generate an outcome in each new case as it arises that will be consistent with the theory‖.34 ―In bottom-up reasoning, which encompasses such familiar lawyers‘ techniques as ‗plain meaning‘ and ‗reasoning by analogy‘, one starts with the words of a statute or other enactment, or with a case or mass of cases, and moves from there — but doesn‘t move far‖.35 There were four separate judgments in Breen v. Williams, but they were all in agreement both on the outcome of the case and the approach to deciding it. The first step was to determine the function of fiduciary law, as revealed by the decided cases, and the second step was to ask whether that function was engaged by the present facts. Fiduciary duties arise from two sources, (1) agency, and (2) relationships of influence.36 Agency refers to the familiar case, exemplified by Keech v. Sandford, 37 where management and control of an asset or enterprise are separated from ownership, creating a misalignment between the interests of the owner and the intermediary and giving the intermediary an incentive to cheat the owner.38 Relationships of influence include cases such as parent and child or priest and penitent where one party uses a position of power or advantage to extract some gift or contractual benefit from the other. In this context, fiduciary law functions as a proxy for the common law doctrine of capacity and the underlying concern is to police transactions where the quality of the weaker party‘s consent may have been affected.39 On the facts of Breen v. Williams itself, there were no agency issues and no

34 Richard A. Posner, ―Legal Reasoning From the Top Down and From the Bottom Up: The Question of Unenumerated Constitutional Rights‖ (1992), 59 U. Chicago L. Rev. 433. 35 Ibid. 36 Breen, supra footnote 33, at para. 14 per Brennan C.J. 37 Keech, supra footnote 14. 38 See Breen, supra footnote 33, at para. 27 per Gaudron and McHugh JJ, quoting Bray v. Ford, [1896] A.C. 44 at 113 (H.L.). 39 The Canadian case law uses the expression ―power-dependency relationship‖ to capture this idea: see Galambos v. Perez, supra footnote 7 at para.[72]. Furthermore, Canadian law extends the concept beyond economic loss to protection against physical harm or abuse: see, e.g., Norberg v. Wynrib, supra footnote 5; M(K) v. M(H), supra footnote 6.

8 undue influence concerns and so fiduciary law did not apply. In summary, under the bottom-up approach Breen v. Williams exemplifies, the inquiry is a functional one and this avoids the need for abstract inquiry into the defining characteristics of a fiduciary relationship. On the other hand, under the top-down approach the Canadian cases employ, the inquiry is a conceptual one and this leaves the applications of fiduciary law at large.40 As the opposing outcomes in McInerney v. MacDonald and Breen v. Williams clearly show, these differences in judicial technique matter. We can test this point further by thinking about Hodgkinson v. Simms from a bottom-up perspective. The defendant there was an accountant who specialized in tax planning work. The plaintiff, a stockbroker, approached the defendant for investment advice. The defendant advised the plaintiff to invest in some building development projects. Unknown to the plaintiff, the defendant was on commission with the developers and he received a ―bonus billing‖ each time one of his clients made an investment. Subsequently, the real estate market crashed and the plaintiff lost a substantial part of his investment. He sued the defendant for recovery of his losses pleading breach of fiduciary obligation, among other things. The argument was that the parties were in a fiduciary relationship, the defendant was in breach of fiduciary obligation for accepting commissions from the developers and the breach caused the plaintiff‘s loss in the sense that if the plaintiff had known about the commissions he would not have made the investments. The Supreme Court found in the plaintiff‘s favour by a 4:3 majority. One objection to the plaintiff‘s claim is that it presupposes the defendant‘s wrongdoing lay in his failure to disclose the commissions. However, non-disclosure is not itself a breach of fiduciary obligation: ―‗informed consent‘ is an answer to circumstances which otherwise indicate disloyalty, not a mainspring of equitable liability.‖41 In other words, the defendant‘s real wrongdoing was his acceptance of the commissions in the first place, not his failure to disclose them, but there was no plausible way the plaintiff could have connected his investment losses to this aspect of the

40 For a critique of Breen v. Williams and a partial defence of the Canadian cases, see Flannigan, supra footnote 26, Part VI. 41 Breen, supra footnote 33, at para. 33 per Gummow J. Cf. Canson Enterprises Ltd v. Boughton & Co., [1991] 3 S.C.R. 534.

9 defendant‘s conduct. In any event, as the minority was at pains to stress, the proximate cause of the plaintiff‘s loss was the downturn in the real estate market, not the defendant‘s non-disclosure. The effect of the majority‘s decision was to give the plaintiff a form of insurance against investment losses he had not bargained for. Going forward, the decision may have a chilling effect on the provision of investment advice because it exposes advisors to potentially unlimited liability for investment losses that are beyond their control. Of course, one possible precaution would be for advisors to stop accepting commissions. However, this may result in a substantial loss of revenue which they would have to compensate for by raising fees charged to clients and it is not clear that there would be a net welfare improvement. An alternative precaution would be for the advisor to disclose the commissions to prospective clients, but this is not a fail-safe solution because there is still the risk of a court ruling that the disclosure was inadequate. There is also the risk under the top-down approach that the court, having found the parties to be in a fiduciary relationship, may identify other types of breach not previously anticipated.42 Applying the bottom-up approach to a case like Hodgkinson v. Simms, the court‘s first inquiry would be to look for indications of an agency problem or an undue influence problem. In the absence of any allegation of undue influence, there is only an agency problem. The agency problem is that the defendant was under an obligation to give the plaintiff independent investment advice, but this conflicted with his self-interest in accepting commissions from the developers. The outcome is likely to be a finding that the defendant was in breach of fiduciary obligation and an order requiring him to pay over his gains to the plaintiff. By contrast, in Hodgkinson v. Simms itself, the majority, applying a top-down approach, found that there was a fiduciary relationship and that the defendant was liable for the plaintiff‘s investment losses while the minority, also taking a top-down approach, held there was no fiduciary relationship at all. In combination, the Hodgkinson v. Simms judgments appear to suggest that the fiduciary question is an all or nothing one, whereas, in other parts of the Commonwealth it is clear that a party may be

42 For example, a court might hold the defendant liable for failing to act in the plaintiff‘s best interests as evidenced by the plaintiff‘s investment loss. Cf. K.L.B. v. British Columbia, [2003] 2 S.C.R. 403, where an argument along these lines was made — and rejected — in the context of the government‘s responsibility to supervise foster home placements. On the court‘s propensity to invent new types of fiduciary obligation, see McCamus, supra footnote 9, at p. 113.

10 a fiduciary for some purposes, but not others.43 In policy terms, a key difference between the top-down approach and the bottom-up approach is that the bottom-up approach does not force the advisor into the role of the client‘s insurer. It is true that the advisor may have to disgorge the commissions, but this liability is for a predictable and limited amount and, furthermore, the advisor‘s exposure to it is largely within his control.

III. Contract and fiduciary law Galambos v. Perez settled the point that a person cannot be made a fiduciary against her will. However, the decision expressly left open the question whether a mutual understanding is necessary.44 This question bears directly on the relationship between contract and fiduciary law because if fiduciary relationships do require a mutual understanding, they are conceptually indistinguishable from contracts. The implication is that the courts should not impose on the defendant fiduciary obligations that are inconsistent with the terms of any contract between the parties or, if there is no express contract, with the terms of the understanding which gave rise to the relationship. This is the so-called ―contractarian‖ approach to fiduciary law.45 The anti-contractarian position holds that the parties‘ own wishes are not decisive and that, in an appropriate case, fiduciary law may override express or implied contractual terms in favour of other interests. The contractarian position is grounded in considerations of both economic efficiency and party autonomy because it treats the parties‘ own preferences as paramount and it respects their right to decide for themselves on the shape and content of their relationship. On the other hand, the anti-contractarian approach is grounded in the idea either that there is a moral dimension to fiduciary relationships which contract law

43 See, e.g, Breen, supra footnote 33, at para. 14 per Brennan C.J. Cf Galambos v. Perez, supra footnote 7, para.[36], where the court, contrary to the impression Hodgkinson v. Simms creates, did acknowledge that ―not every legal claim arising out of a per se fiduciary relationship … will give rise to a claim for breach of fiduciary duty‖. 44 Supra footnote 7 at para. [66]. 45 See e.g., Frank H. Easterbrook and Daniel R. Fischel, ―Contract and Fiduciary Duty‖ (1993) 36 JL and Econ. 425; John H. Langbein, ―The Contractarian Basis of the Law of Trusts‖ (1995) 105 Yale LJ 625; Anthony Duggan, ―Contracts, Fiduciaries and the Primacy of the Deal‖ in Elise Bant and Matthew Harding, eds., Exploring Private Law: Essays for Michael Bryan (Cambridge, U.K.: Cambridge UP, 2010, forthcoming).

11 does not capture or that fiduciary law has a public interest component which may trump the interests of the parties themselves. Paul Finn is one of the leading exponents of the higher morality thesis.46 He argues that whereas contract law allows both parties to promote their own respective interests, fiduciary law requires the principal to subordinate her own interests to the interests of the beneficiary. This distinction could not be more fundamental because it suggests that the underlying objective of contract law is essentially an economic one, namely to promote self-interest, while fiduciary law‘s goal is a non-economic one, namely to promote altruism. The public interest thesis typically takes the form of statements such as that fiduciary law is important for the preservation of institutions - for example, the trust or the professional adviser-client relationship or the administration of justice - and that the parties‘ own interests must necessarily play second fiddle to these larger concerns.47 The Supreme Court case law remains ambivalent on this front. The question arose most recently in the Strother case, which involved a lawyer‘s fiduciary obligations to his client. The client had engaged Strother to provide advice about film production tax shelter investments. There was a change in the tax laws aimed at defeating this kind of tax shelter and Strother advised the client there was no way round the new rules. Some time later, Strother discovered a loop-hole but, instead of telling the client, he exploited it himself. The client sued Strother and his firm alleging breach of fiduciary duties and claiming an account of profits. The Supreme Court split 5-4 in the plaintiff‘s favour. The main point of disagreement was the scope of the defendant‘s retainer. Binnie J. for the majority, held that the retainer obliged the defendant to keep the plaintiff informed of new developments, while McLachlin C.J.C. for the minority held the opposite. Given that, as McLachlin C.J.C. was at pains to stress, this is a question of fact, there is not much to be gained from debating the merits of the competing views. However, in the course of getting to their respective conclusions, the two judgments make some

46 ―The Fiduciary Principle‖ in T.G. Youdan (ed.), Equity, Fiduciaries and Trusts (Carswell, Toronto, 1989), 1; ―Contract and the Fiduciary Principle‖ (1989) 12 University of New South Wales Law Journal 76. The higher morality thesis is traceable to Cardozo J.‘s famous statement in Meinhard v. Salmon that ―a trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior‖: 164 NE 545 at 546 (NY, 1928). 47 See Duggan, supra footnote 45.

12 observations about the interaction between contract and fiduciary law and these are noteworthy. According to the majority, while the scope of a lawyer‘s retainer is governed by contract, ―the solicitor-client relationship thus created is … overlaid with certain fiduciary responsibilities, which are imposed as a matter of law‖.48 Furthermore, ―fiduciary duties provide a framework within which the lawyer performs the work and may include obligations that go beyond what the parties expressly bargained for. The foundation of this branch of the law is the need to protect the integrity of the administration of justice.‖49 These statements could be read as suggesting that fiduciary obligations may be imposed on parties regardless of what their contract says and, therefore, against their wishes. In any event, this is how the minority read them.50 The minority judgment strongly endorses the opposite position, namely that the terms of the contract shape the fiduciary relationship and not vice versa: ―the fiduciary duty between lawyer and client is rooted in the contract between them. It enhances the contract by imposing a duty of loyalty with respect to the obligations undertaken, but it does not change the contract’s terms. Rather, it must be molded [sic] to those terms.‖51 These words echo Mason J.‘s statement in Hospital Products v. United States Surgical Corporation, which McLachlin C.J.C. goes on to quote:

the fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract, so that it is consistent with, and conforms, to them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.52

In Strother, both the majority and minority judgments spoke of the public interest in maintaining the integrity of the justice system. According to Binnie J., this consideration may justify imposing obligations beyond what the parties bargained for,53

48 Strother, supra footnote 11, at para. 34 (emphasis added). 49 Ibid. (emphasis added). 50 Ibid., at para. 147 per McLachlin C.J.C. 51 Ibid., at para. 141 (emphasis added). 52 (1984), 156 C.L.R. 41, at p. 97 (H.C.A.). Mason J.‘s statement was endorsed by the Privy Council in Kelly v. Cooper, [1993] A.C. 205, at p. 215 per Lord Browne-Wilkinson and by the House of Lords in Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651, at para. 30 per Lord Walker of Gestingthorpe. 53 Strother, supra footnote 11, at para. 34.

13 while, according to McLachlin C.J.C., an excessively robust conflicts rule would compromise the integrity of the justice system by threatening the security of retainers and limiting clients‘ access to legal services, particularly in specialized practice areas and small communities.54 However, there is a more basic consideration which both judgments appear to overlook. Unless the contract is paramount, the courts would be using fiduciary law to rewrite the parties‘ bargain and it is hard to see how this could be justified. Take the facts of Strother itself and assume for the sake of argument that the minority‘s reading of the retainer is the correct one. This means that, as a matter of contract, Strother was under no obligation to provide new information about film production tax shelters unless the client specifically asked for it. Now suppose the court were to say that nevertheless, as a matter of fiduciary law, Strother was under a continuing obligation to volunteer such information. The upshot would be to foist on the client services it neither wanted nor bargained for. The client itself would get a windfall because presumably the fees it paid Strother did not reflect this additional obligation. In future similar cases, though, the lawyer would presumably demand a premium for his services and the client‘s only choice would be to pay the extra or do without the lawyer‘s services altogether. The client would not have the option of stipulating in the retainer for a lower level of service because, ex hypothesi, the terms of the retainer are not determinative. The majority judgment in Strother appears to suggest that overriding the contract may be needed ―to protect the integrity of the administration of justice‖, but the administration of justice is hardly served by forcing unwanted legal services on members of the public.55 The Strother case exposes a division within the court on both the relationship between contract and fiduciary duty and the wider question of whether fiduciary duties are consensual or imposed. Moreover, McLachlin C.J.C. herself has not consistently maintained the line she took in her Strother minority judgment. In Norberg v. Wynrib, she concluded that a doctor was in breach of fiduciary obligation for supplying a patient with prescription drugs in return for sexual favours. The plaintiff sued in tort and contract and also for breach of fiduciary duty. The majority found the defendant liable in tort but

54 Ibid., at paras. 136-138. 55 For a contrary view of the case, see Remus Valsan and Lionel Smith, ―The Loyalty of Lawyers: A Comment on 3464920 Canada Inc. v. Strother‖ (2008), 87 Can. Bar Rev. 247.

14 McLachlin J. (as she then was), writing for the minority,56 concluded that the doctrines of tort and contract do not ―capture the essential nature of the wrong done to the plaintiff‖ and that ―[o]nly the principles applicable to fiduciary relationships and their breach encompass it in its totality‖.57 She went on to say that:

[t]he foundation and ambit of the fiduciary obligation are conceptually distinct from the foundation and ambit of contract and tort. Sometimes the doctrines may overlap in their application, but that does not destroy their conceptual and functional uniqueness. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self-interest … The essence of a fiduciary relationship, by contrast, is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other.58

This statement is at odds with her judgment in the Strother case because if fiduciary obligations are subject to the terms of the parties‘ contract, it must follow that they are consensual, but if fiduciary obligations are consensual, they are not ―conceptually distinct from the foundation and ambit of contract‖. Lionel Smith has suggested that ―there is a sense in which a fiduciary obligation is the most serious and demanding type of obligation the law imposes. This can lead to a perception that if a given relationship is not fiduciary, then the law is not taking it as seriously as it might‖.59 Smith‘s insight helps to explain McLachlin J.‘s position in Norberg v. Wynrib: for her, holding the defendant liable in contract or tort simply did not capture the gravity of his misconduct. In other words, fiduciary law has a moral dimension that is lacking in tort and contract: contract and tort facilitate self-interest, whereas fiduciary law promotes selflessness. But the dichotomy is a false one because, while it is true that fiduciary law requires the obligor to put the obligee‘s interests before her own, so, too, does contract law. Contract is the standard mechanism for aligning parties‘ competing interests and it works in basically the same way as fiduciary law, not by appealing to the obligor‘s better nature but, rather, by imposing penalties for default.60

56 McLachlin and L‘Heureux-Dube JJ. 57 Norberg, supra footnote 5, at para. 60. 58 Ibid. at para. 65. 59 Smith, supra footnote 21, at p. 730. 60 See Easterbrook and Fischel, supra footnote 45.

15 IV. The remedial goals of fiduciary law61 The constructive trust is one of the primary remedies for breach of fiduciary obligation. There is clear authority, dating back to Keech v. Sandford, for the proposition that the purpose of the remedy is to deter fiduciary misappropriation. However, in Pettkus v. Becker, the Supreme Court reformulated the doctrine of constructive trusts in corrective justice terms.62 On the other hand, the case was unclear as to whether corrective justice was now the only goal, or whether deterrence remained a valid objective. The point matters because if corrective justice is the goal, there must be proof that the plaintiff has suffered a loss and, furthermore, that the defendant has made a gain corresponding with the plaintiff‘s loss. On the other hand, if deterrence is the goal, it is sufficient if the defendant has made a gain, even if it is not at the plaintiff‘s expense. In many cases, the issue will be obscured by the presence — real or manufactured63 — of a corresponding loss to the plaintiff because in these circumstances the remedy can be justified on either ground. However, the issue comes to the fore in cases where the defendant makes a gain but the plaintiff suffers no loss. Soulos v. Korkontzilas was such a case. In Soulos, the plaintiff employed the defendant real estate agent to purchase a property on his behalf. The defendant purchased the property for himself instead and concealed his action by telling the plaintiff that the vendor had changed his mind about selling the property. The plaintiff sued the defendant for breach of fiduciary duty, claiming a constructive trust over the property. Specifically, the plaintiff asked for the property to be transferred to him for the price the defendant had paid, subject to certain adjustments. The market price of the property had fallen since the date of the defendant‘s purchase, but both parties claimed to want the property because it held special significance for them as members of the Greek community. The defendant argued that

61 For a fuller account, see Anthony Duggan, ―Gains-Based Remedies and the Place of Deterrence in the Law of Fiduciary Obligations‖ in Andrew Robertson and Tang Hang Wu, The Goals of Private Law (Hart Publishing, Oxford, 2009) 365. 62 I.e., the constructive trust to prevent unjust enrichment. In this context, ―unjust enrichment‖ refers to unjust enrichment by subtraction (where the defendant makes a gain at the plaintiff‘s expense). In other jurisdictions, the expression ―unjust enrichment‖ is used to mean not only unjust enrichment by subtraction, but also unjust enrichment by wrongs (where the defendant makes a gain by wrongdoing, but not at the plaintiff‘s expense). See, e.g., Peter Birks, An Introduction to the Law of Restitution (Oxford: Clarendon Press, 1989), p. 6. 63 See, e.g., LAC Minerals, supra footnote 2, discussed in Duggan, supra footnote 61, at pp. 368-370.

16 there must be unjust enrichment before the court can award a constructive trust and, in the present case, there was no gain to the defendant because the market value of the property had fallen. Likewise, the plaintiff was not deprived. On the contrary, the defendant‘s actions saved him from a bad bargain. In the Supreme Court McLachlin J., writing for the majority, rejected the defendant‘s argument on two grounds. First, she said, the constructive trust remedy is not limited to the reversal of unjust enrichment. It is also available to deter breach of fiduciary obligation and other wrongful conduct. In any event, the plaintiff had established unjust enrichment, given his desire to own the property for non-monetary reasons.64 The conditions for constructive trust relief in wrongful conduct cases are that: (1) the defendant was under an equitable obligation; (2) the assets in the defendant‘s hands resulted from deemed or actual agency gains of the defendant; (3) the plaintiff has a legitimate reason for seeking a proprietary remedy; and (4) there are no other factors that would make it unjust to award a constructive trust. Sopinka and Iacobucci JJ. dissented, holding that: (1) the constructive trust remedy depends on proof of unjust enrichment; (2) the trial judge had rejected the plaintiff‘s contention that the property held special value for him and there was no basis for disturbing this finding; and (3) there was no unjust enrichment because the plaintiff had suffered no loss. However, ten years later, in the Strother case, McLachlin C.J.C. delivered a minority judgment which is philosophically at odds with the position she took in Soulos. In Strother, the plaintiff claimed an account of profits, not constructive trust relief but these are both gains-based remedies and so the cases are comparable in this respect. Moreover, in Strother, as in Soulos, the plaintiff suffered no loss. This was because, by the time of the defendant‘s alleged wrongful conduct, the plaintiff had already wound down its film production tax shelter business and was not in a position to revive it. Consequently, it could not have taken advantage of the new developments even if the plaintiff had disclosed the information to it.

64 Soulos, supra footnote 15, at pp. 242-243.

17 The orthodox teaching is that an account of profits may be awarded for reasons of corrective justice or deterrence and, where deterrence is the objective, the plaintiff‘s loss is neither here nor there.65 The majority judgment in Strother reflects this orthodoxy:

[w]here, as here, disgorgement is imposed to serve a prophylactic purpose, the relevant consideration is the breach of a fiduciary duty and the defendant‘s gain (not the plaintiff‘s loss). Denying Strother profit generated by the financial interest that constituted his conflict teaches faithless fiduciaries that conflicts of interest do not pay. The prophylactic purpose thereby advances the policy of equity, even at the expense of a windfall to the wronged beneficiary.66

On the other hand, the minority, led by McLachlin C.J.C., went out of its way to question the legitimacy of using the account of profits remedy for solely deterrence purposes. McLachlin C.J.C. referred to a debate taking place ―throughout the Commonwealth‖ about the appropriate remedies for breach of fiduciary duties and that, ―underlying this debate is the tension between the need to deter fiduciaries from abusing their trust on the one hand, and the goal of achieving a remedy that is fair to all those affected, on the other‖.67 In other words, is deterrence a legitimate goal for gains-based remedies in the absence of loss to the plaintiff? This is the same as the question the court had earlier addressed in Soulos, where the majority answered it in the affirmative. McLachlin C.J.C.‘s reservations in Strother about the deterrence function of the account of profits remedy contrast sharply with her appeal in Soulos to deterrence considerations as a justification for the constructive trust. On the other hand, they are perfectly consistent with the minority position espoused by Sopinka and Iacobucci JJ. in Soulos. What are we to make of this apparent volte face? It is true that the remarks were only obiter, but they deserve to be taken seriously because they were made by the Chief Justice, because they were subscribed to by three other members of the court and because they raise fundamental questions about the functions and limits of the civil justice system.

65 Chan v Zacharia (1984), 154 C.L.R. 178, at p. 198 per Deane J. (H.C.A.), quoted in Strother, supra footnote 11, at para. 75 per Binnie J. 66 Strother, ibid. (emphasis in original). 67 Strother, supra footnote 11, at para. 156. She also suggested that ―[w]here extra deterrence is required, it [may] be better achieved by remedies such as exemplary damages, which, unlike account, can be tailored to the particular situation‖: ibid. For discussion, see Anthony Duggan, ―Solicitors‘ Conflicts of Interest and the Wider Fiduciary Question‖ (2007), 45 C.B.L.J. 16 at pp. 27-28, 30-33.

18 On the other hand, McLachlin C.J.C. did not mention Soulos in her Strother judgment and it is quite possible the inconsistency did not occur to her. For the time being, though, the two opposing viewpoints remain on the table, waiting to be made a meal of by enterprising counsel.

V. Conclusion Supreme Court jurisprudence on fiduciary law over the past twenty years is characterized by a high level of indeterminacy. In the matter of fact-based fiduciary relationships, until Galambos v. Perez, there were at least two competing approaches in play — the Frame v. Smith formulation and the reasonable expectations test — both of which were unpredictable in their applications and neither of which squarely addressed a central concern, namely the defendant‘s consent to the assumption of fiduciary responsibility. Galambos v. Perez resolves the consent issue, but unpredictability remains a problem. Furthermore, while the case confirms the need for an undertaking on the defendant‘s part, it leaves open the further question of whether a mutual understanding is required. This question bears directly on the relationship between contract and fiduciary law because, if fiduciary relationships are based on mutual understanding, they are conceptually indistinguishable from contracts. The Strother case remains the court‘s latest word on this topic, but it is inconclusive.68 Another fundamental matter apparently still unresolved is the goal of fiduciary remedies. The cases reveal a clear division of opinion on the proper basis of gains-based remedies and on the legitimacy of using private law for deterrence purposes.69 Other writers are more sanguine about the current state of the case law. For example, John McCamus and Lionel Smith both argue that the differences between the majorities and minorities in the LAC Minerals case and Hodgkinson v. Simms are not so great, that in most of the fact-based fiduciary cases, the court found for the plaintiff on other grounds anyway and that this answers the charge that the court has been using

68 Space limitations preclude a full discussion of the policy issues here, but for a defence of the contractarian position on fiduciary relationships, see Duggan, supra footnote 45. 69 For a survey of the competing policy arguments, see Duggan, supra footnote 61, and for a defence of the deterrence objective, with reference to punitive damages in particular, see Anthony Duggan, ―Exemplary Damages in Equity: A Law and Economics Perspective‖ (2006), 26 Oxford J. Legal Stud. 303.

19 fiduciary doctrine to ride rough-shod over other areas of law such as contract and tort.70 However, as Robert Flannigan points out, while it might be true that the court‘s decisions have been relatively conservative, ―the difficulty is that the court has done this conventional work with unconventional conceptual tools‖ and the ongoing concern is that ―the criteria it has introduced will be misinterpreted‖.71 In other words, what matters is not so much the case outcomes themselves, as the techniques the court relied on to get there. John McCamus also suggests that, on a less expansive reading, the cases do not stray all that far from the orthodox position maintained in other parts of the Commonwealth. But, as he goes on to acknowledge, ―the cumulative effect appears to be one of introducing a degree of instability into the analysis of fiduciary issues [and one] can certainly make the case for a prometheus unbound thesis‖.72 In other words, the cases are open to differing interpretations, and that is precisely the point. McCamus rightly points out that the Supreme Court ―bears the burdensome responsibility of reshaping and adjusting private law doctrine in order to render it more just and consistent and to render it more suitable to changing social and economic conditions‖. 73 But this burden must be discharged ―predictably and incrementally‖, not in ―quantum leaps‖, so that parties can be reasonably certain in advance about the legal consequences of their actions and can plan accordingly.74 There is ―a very real danger that, released from its historical origins, the fiduciary principle is becoming an unruly horse of public policy, pressed into service whenever existing doctrines are perceived to be inapplicable or inadequate‖.75

70 McCamus, supra footnote 9; Smith, supra footnote 21. 71 Flannigan, supra footnote 26, at p. 69. 72 McCamus, supra footnote 9, at p. 140. 73 Ibid. at p. 131. 74 See text at footnote 8, supra.. 75 Oosterhoff, supra footnote 1, at p. 835.