Galambos v Perez: Fiduciary Duties Re-Examined

Last week, the Supreme Court of Canada (“SCC”) released its decision in Galambos v Perez, [2009] 3 SCR 247, concerning the scope of a fiduciary duty. While TheCourt.ca has already provided a complete overview of the case in last year’s comment on the British Columbia Court of Appeal’s (“BCCA”) decision, a brief recap is helpful. Although the facts of the case are quite unique, it remains highly relevant to understanding how the SCC is developing fiduciary obligations. The case also provides an insight into the underlying rationale behind imposing a fiduciary obligation, providing a glimpse into the direction the Court seems to be taking.

Background

Ms. Perez was hired in May 2001 to work as a bookkeeper in Mr. Galambos’s law firm. She eventually became the office manager, was in charge of overseeing the firm’s income, expenses, and accounting, and had unlimited signing authority on firm bank accounts. When the firm began experiencing cash flow difficulties in January 2002, Ms. Perez – on her own initiative – began to make deposits of her own funds into the firm’s account. By March 2004, the firm owed Ms. Perez approximately $200,000. When the firm then declared bankruptcy and was placed into receivership, Ms. Perez recovered nothing as an unsecured creditor. During the duration of her employment Ms. Perez received gratuitous legal services from the firm, including the preparation of wills and mortgage transactions.

Proceedings

Ms. Perez, having received nothing through her status of creditor, attempted to recover through Mr. Galambos’s professional insurance. She argued the firm breached alleged fiduciary duties when the firm’s failed to provide legal advice with regards to her loans and acted while in a conflict of interest. While other claims in contract and negligence were made as well, they were dismissed both by the trial judge and the BCCA. On the other hand, while the trial judge held that Mr. Galambos did not owe a fiduciary duty to Ms. Perez regarding her loans, the BCCA held that such a duty existed. Both agreed that the solicitor-client relationship that gives rise to a fiduciary relationship was limited to the particular services that the firm provided to Ms. Perez, and did not extent to the loans deposited on her own initiative. However the BCCA found that an ad hoc fiduciary duty existed by virtue of the specific circumstances of the case. The court of appeal held that it was not necessary for there to be a “mutual understanding” in order to give rise to such a duty. Where there existed a “power-dependency” relationship in that one side is vulnerable and the other is in a position to exploit that vulnerability, there is a fiduciary obligation to the vulnerable individual.

The SCC took strong issue with the appellate court’s position on three grounds. First, it held the appellate court exceeded its scope of review in finding that there existed a circumstance of “power-dependency,” contrary to the trial judge’s findings. Second, it found that the BCCA erred in holding a fiduciary relationship may arise in the absence of a mutual understanding that one party is acting only in the interest of the other. For a fiduciary obligation to arise, there must be some actual undertaking by the fiduciary (either implicit or explicit.) Regardless of whether Ms. Perez had a reasonable expectation that Mr. Galambos would act in her best interests, and advise her accordingly, Mr. Galambos never undertook to act as such. Finally, it is fundamental to any fiduciary relationship that the fiduciary has the discretionary power to affect the other’s legal or practical interests. In this case, Ms. Perez neither relinquished her decision-making power with regards to the loan to Mr. Galambos nor was he able to exercise any unilateral discretion over her interests.

Comments

At the crux of the Court’s decision is the holding that a fiduciary relationship is the product of a deemed undertaking, explicit or otherwise. The Court left open the possibility that, in circumstances lacking any such “mutual understanding” an undertaking (and, accordingly, a fiduciary relationship) may be found to exist. In light of the underlying policy rationales, however, it would seem antithetical to the concept of the fiduciary’s undertaking to act in the best interest of the other party to bypass the “mutual understanding” requirement.

In Hodgkinson v Simms, [1994] 3 SCR 377 La Forest J. describes this rationale as follows:

The underlying purpose of fiduciary law may be seen as protecting and reinforcing ‘the integrity of social institutions and enterprises,’ recognizing that ‘not all relationships are characterized by a dynamic of mutual autonomy, and that the marketplace cannot always set the rules.’

Yet, as Cromwell J. points out, fiduciary law focuses on a particular class of relationships and the vulnerabilities that arise from such relationships, rather than the parties relative positions before they entered the relationship. Thus, when a party has not entered into such a relationship, but another party has a particular vulnerability, the circumstances of the situation alone will never give rise to a fiduciary duty.  Nevertheless, despite outlining the basic rationale for a fiduciary duty and the case law requiring there be an undertaking, Cromwell J. remains somewhat vague of why there must be an undertaking.

One possible justification for this is that the law remains chary of imposing a positive legal obligation to act, even if socially desirable. Under tort law, for example, nonfeasance does not impose liability upon an actor. Were a person to pass a drowning child, there would be no legal obligation to help the child however morally repugnant might be. The recognized exception to this reluctance to impose a duty is when a special relationship between the parties can be identified, so an argument can be made that one has assumed responsibility. In Horsley v MacLaren, [1972] SCR 441, the SCC recognized a duty on the respondent in his capacity as host and owner of the boat to do the best he could to effect the rescue of the victim. Thus, to impose an ad hoc fiduciary duty solely upon the circumstances of the situation would create a positive legal responsibility that is at odds with our legal regime.

Conclusion

In what appears to be only his second majority opinion for the Court, Cromwell J. tackles tort law and the developing standards of fiduciary relationships. Given the sound logic underlying the reasons, the Court was undoubtably justified in overturning the BCCA’s decision. In writing for the majority, Cromwell J. succinctly deals with the legal issues while allowing us a glimpse of the underlying policy. Whether that glimpse is sufficient to lead us down the right road of reasoning remains to be seen – perhaps from a future judgment delivered by the indomitable pen of Justice Cromwell.