case3464920 Canada Inc. v. Strother, 2005 BCCA 384 (CanLII):

SUPREME COURT OF CANADA

CITATION:Strotherv.3464920 Canada Inc., [2007] 2 S.C.R. 177, 2007 SCC 24

DATE:20070601

DOCKET:30838

BETWEEN:

Davis & Company, a partnership

Appellant

and

3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation)

Respondent

AND BETWEEN:

Robert C. Strother

Appellant

and

3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation)

Respondent

AND BETWEEN:

Robert C. Strother, Strother Family Trust (Trust No. 1) and

University Hill Holdings Inc. (formerly known as

589918 British Columbia Ltd.) (Company No. 1)

Appellants

and

3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation)

Respondent

AND BETWEEN:

3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation)

Appellant

and

Robert C. Strother, Davis & Company, a partnership, J. Paul Darc,

Pacific Cascadia Capital Corporation, Sentinel Hill Entertainment

Corporation, Sentinel Hill Productions Corporation, Sentinel Hill

Productions II Corporation, Sentinel Hill Productions (1999) Corporation,

Sentinel Hill Management Corporation, Sentinel Hill 19991 Master Limited

Partnership, Sentinel Hill 19992 Master Limited Partnership, Sentinel Hill 19993

Master Limited Partnership, Sentinel Hill 19994 Master Limited Partnership,

Sentinel Hill 19995 Master Limited Partnership, Sentinel Hill 19996 Master

Limited Partnership, J. Paul Darc and Leslie Marie Darc, Trustees of the

Darc Family Trust, and the said Darc Family Trust, Sentinel Hill 1998 Master

Limited Partnership, Sentinel Hill 19982 Master Limited Partnership,

Sentinel Hill Productions No. 5 Limited Partnership, Sentinel Hill Productions

No. 7 Limited Partnership, Sentinel Hill 1999 Master Limited Partnership,

Sentinel Hill Ventures Corporation, Sentinel Hill Alliance Atlantis Equicap

Millenium Limited Partnership, Sentinel Hill Productions III Corporation,

Sentinel Hill Alliance Atlantis Equicap Limited Partnership, Sentinel Hill GP

Corporation, Company No. 1, Company No. 2, Company No. 3, Company No. 4,

Company No. 5, Company No. 6, Company No. 7, Company No. 8, Company No. 9, Company No. 10, Partnership No. 1, Partnership No. 2, Partnership No. 3,

Partnership No. 4, Partnership No. 5, Partnership No. 6, Partnership No. 7,

Partnership No. 8, Partnership No. 9, Partnership No. 10,

Trust No. 1, Trust No. 2, Trust No. 3, Trust No. 4, Trust No. 5, Trust No. 6,

Trust No. 7, Trust No. 8, Trust No. 9 and Trust No. 10

Respondents

and

Canadian Bar Association

Intervener

CORAM:McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and RothsteinJJ.

REASONS FOR JUDGMENT:

(paras. 1 to 116)

REASONS DISSENTING IN PART:

(paras. 117 to 165)

Binnie J. (Deschamps, Fish, Charron and Rothstein JJ. concurring)

McLachlin C.J. (Bastarache, LeBel and Abella JJ. concurring)

______________________________

Strotherv.3464920 Canada Inc., [2007] 2 S.C.R. 177, 2007 SCC 24

Davis & Company, a partnershipAppellant

v.

3464920Canada Inc. (formerly known as

Monarch Entertainment Corporation)Respondent

- and -

RobertC.StrotherAppellant

v.

3464920Canada Inc. (formerly known as

Monarch Entertainment Corporation)Respondent

- and -

RobertC.Strother, Strother Family Trust (Trust No.1) and

University Hill Holdings Inc. (formerly known as

589918British Columbia Ltd.) (Company No.1)Appellants

v.

3464920Canada Inc. (formerly known as

Monarch Entertainment Corporation)Respondent

- and -

3464920Canada Inc. (formerly known as

Monarch Entertainment Corporation)Appellant

v.

RobertC.Strother, Davis & Company, a partnership, J.PaulDarc,

Pacific Cascadia Capital Corporation, Sentinel Hill Entertainment

Corporation, Sentinel Hill Productions Corporation, Sentinel Hill

ProductionsII Corporation, Sentinel Hill Productions (1999) Corporation,

Sentinel Hill Management Corporation, Sentinel Hill19991

Master Limited Partnership, Sentinel Hill 19992 Master

Limited Partnership, Sentinel Hill19993 Master Limited

Partnership, Sentinel Hill19994 Master Limited Partnership,

Sentinel Hill19995 Master Limited Partnership,

Sentinel Hill19996 Master Limited Partnership,

J.PaulDarc and LeslieMarieDarc,

Trustees of the Darc Family Trust, and the said Darc Family Trust,

Sentinel Hill1998 Master Limited Partnership,

Sentinel Hill19982 Master Limited Partnership,

Sentinel Hill Productions No.5 Limited Partnership,

Sentinel Hill Productions No.7 Limited Partnership,

Sentinel Hill1999 Master Limited Partnership,

Sentinel Hill Ventures Corporation, Sentinel Hill Alliance

Atlantis Equicap Millenium Limited Partnership,

Sentinel Hill ProductionsIII Corporation,

Sentinel Hill Alliance Atlantis Equicap Limited Partnership,

Sentinel Hill GP Corporation, Company No.1, Company No.2,

Company No.3, Company No.4, Company No.5, Company No.6,

Company No.7, Company No.8, Company No.9, Company No.10,

Partnership No.1, Partnership No.2, Partnership No.3,

Partnership No.4, Partnership No.5, Partnership No.6,

Partnership No.7, Partnership No.8, Partnership No.9,

Partnership No.10,Trust No.1, Trust No.2, Trust No.3,

Trust No.4, Trust No.5, Trust No.6, Trust No.7, Trust No.8,

Trust No.9 and Trust No.10Respondents

and

Canadian Bar AssociationIntervener

Indexed as:Strotherv.3464920 Canada Inc.

Neutral citation:2007SCC24.

File No.:30838.

2006:October11; 2007:June1.

Present:McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and RothsteinJJ.

on appeal from the court of appeal for british columbia

Law of professions Barristers and solicitors Duty of loyalty Conflict of interest Client suing lawyer and law firm for breach of fiduciary duty and breach of confidence after lawyer took a financial interest in a second client in same line of business Trial judge dismissing claim but Court of Appeal ordering lawyer to disgorge to first client all benefits and profits received or receivable from second client's companies and ordering law firm to disgorge profits earned in form of legal fees from second client Whether lawyer breached fiduciary duty owed to first client by accepting personal financial interest in second client Whether lawyer wrongly used confidential information belonging to first client.

Commercial law Partnerships Vicarious liability Client suing lawyer and law firm for breach of fiduciary duty and breach of confidence after lawyer took a financial interest in a second client in same line of business Whether law firm liable for lawyer's breach of fiduciary duty Whether words "wrongful act or omission" ins.12ofPartnership Actinclude equitable wrong Whether wrongful act was "in the ordinary course of the business" of law firm Partnership Act, R.S.B.C. 1996, c. 348, s.12.

Equity Remedies Breach of fiduciary duty Disgorgement of profit Client suing lawyer and law firm for breach of fiduciary duty and breach of confidence after lawyer took a financial interest in a second client in same line of business Trial judge dismissing claim but Court of Appeal ordering lawyer to disgorge to first client all benefits and profits received or receivable from second client's companies and ordering law firm to disgorge profits earned in form of legal fees from second client Whether remedy ordered appropriate Whether period during which profits must be accounted for appropriate Whether lawyer's profit should be apportioned.

In the 1990s, Monarch devised and marketed tax shelter investments whereby Canadian taxpayers, through ownership of units in a limited partnership, provided film production services to American studios making films in Canada.In 1996 and 1997, Monarch engaged S and the appellant law firm pursuant to written retainer agreements.The retainer expressly prohibited the firm from acting for clients other than Monarch in relation to the taxshelter schemes (with limited exceptions).The written retainer terminated at the end of 1997, but Monarch continued thereafter as a client of the firm.In November1996, the federal Minister of Finance announced his intention to amend theIncome Tax Actto defeat the tax shelters.This was done by the introduction of Matchable Expenditures Rules. Subsequently, S advised Monarch that he did not have a "fix" to avoid the effect of the Rules.By the end of October 1997, Monarch's taxshelter business was winding down.Several employees were laid off, including D.

In late 1997 or early 1998, D approached S to discuss the potential of revised taxassisted film production services opportunities.S drafted a proposal that was submitted to Revenue Canada in March of 1998.S and D had agreed in January 1998 that S would receive 55percent of the first $2million of profit of the new company Sentinel should the tax ruling be granted and 50 percent thereafter.S did not tell Monarch about the possibility of a revival in the film production services business at any time.A favourable tax ruling was issued by Revenue Canada to Sentinel in October1998.S did not advise Monarch of the existence of this ruling. A further ruling addressing studio concerns was issued in December.Throughout 1998 and into 1999, the law firm continued to do some work for Monarch on outstanding matters relating to film production services transactions as well as unrelated general corporate work.In August1998, S wrote a memorandum to the management committee of the firm about a possible conflict of interest with respect to acting simultaneously for Monarch and D/Sentinel.The memo referred, inaccurately, to S only having an option to acquire up to 50percent of the common shares of Sentinel.The firm's managing partner told S that he would not be permitted to own any interest in Sentinel.

Effective March31, 1999, S resigned from the law firm and in April joined D as a 50percent shareholder in Sentinel.After learning of Sentinel's tax ruling,Monarch sued S and the firm for breach of fiduciary duty and breach of confidence.The trial judge dismissed the claim.The Court of Appeal substantially allowed the appeal and ordered S to account for and disgorge to Monarch all benefits and profits received or receivable from Sentinel.It also ordered that the law firm disgorge the profits it earned in the form of legal fees from acting for Sentinel in breach of its duty to Monarch from January1, 1998 and return to Monarch all fees paid by it from that date.S and the law firm appealed, and Monarch crossappealed the dismissal of its claims against D and Sentinel.

Held(McLachlinC.J. and Bastarache, LeBel and AbellaJJ. dissenting in part on the appeals):The appeals should be allowed in part and the crossappeal dismissed.

PerBinnie, Deschamps, Fish, Charron and Rothstein JJ.:When a lawyer is retained by a client, the scope of the retainer is governed by contract.The solicitorclient relationship thus created is, however, overlaid with certain fiduciary responsibilities, which are imposed as a matter of law.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.Fiduciary responsibilities include the duty of loyalty, of which an element is the avoidance of conflicts of interest.[3435]

The subject matter of the 1998retainer was "taxassisted business opportunities".Subject to confidentiality considerations for other clients, if S knew there was still a way to continue to syndicate U.S.studio film production expenses to Canadian investors on a taxefficient basis, the 1998retainer entitled Monarch to be told that S's previous negative advice was now subject to reconsideration.While generally a lawyer does not have a duty to alter a past opinion in light of a subsequent change of circumstances, there are exceptions to the general rule.Here Monarch's written 1997retainer had come to an end but the solicitorclient relationship based on a continuing (if more limited) retainer in relation to tax-assisted film production services carried on into1998 and 1999.[40] [43] [4546]

The issue here was not so much a duty to alter a past opinion, as it was part of S's duty to provide candid advice on all matters relevant to the continuing 1998retainer.Moreover, there was no excuse for S not to advise Monarch of the successful tax ruling when it was made public in October1998.As it turned out, Monarch did not find out about it until February or March 1999.Accordingly, the firm (and S) failed to provide candid and proper legal advice in breach of the 1998 retainer.However, Monarch cannot succeed in a claim for damages for breach of the contract of retainer because it did not establish any damages flowing from the alleged contractual breach.The issue therefore moves to fiduciary duties.[4648]

The firm and S were free to take on D and Sentinel as new clients once the "exclusivity" arrangement with Monarch expired at the end of 1997.The retainer by Sentinel was not directly adverse to any immediate interest of Monarch.Issues of confidentiality are routinely dealt with successfully in law firms.S could have managed the relationship with the two clients as other specialist practitioners do, by being candid with their legal advice while protecting from disclosure the confidential details of the other client's business.S accepted Sentinel as a new client and the firm was given no reason to think that he and his colleagues could not provide proper legal advice to both clients.Commercial conflicts between clients that do not impair a lawyer's ability to properly represent the legal interests of both clients will not generally present a conflict problem.Whether or not a real risk of impairment exists will be a question of fact.The risk did not exist here if the necessary evenhanded representation had not been skewed by S's personal undisclosed financial interest.[52] [55] [65]

In each case where no issue of potential abuse of confidential information arises, the court should evaluate whether there is a serious risk that the lawyer's ability to properly represent the complaining client may be adversely affected, and if so, what steps short of disqualification (if any) can be taken to provide an adequate remedy to avoid this result.[59]

S was not free to take a personal financial interest in the D/Sentinel venture.The difficulty is not that Sentinel and Monarch were potential competitors.The difficulty is that S aligned his personal financial interest with the former's success.By acquiring a substantial and direct financial interest in one client (Sentinel) seeking to enter a very restricted market related to film production services in which another client (Monarch) previously had a major presence, S put his personal financial interest into conflict with his duty to Monarch.The conflict compromised S's duty to "zealously" represent Monarch's interest.Taking a direct and significant interest in the potential profits of Monarch's commercial competitor created a substantial risk that his representation of Monarch would be materially and adversely affected by consideration of his own interests.In time, the risk became a fact.[6667] [69]

The firm, for its part, did not breach its fiduciary duty to Monarch.The firm's partners were innocent of S's breach.The firm cannot be held to have breached a fiduciary duty on the basis of facts of which its partners were ignorant.[98]

Equitable remedies are always subject to the discretion of the court. In these circumstances, disgorgement is imposed on faithless fiduciaries to serve a prophylactic purpose.Denying S profit generated by the financial interest that constituted his conflict teaches 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.However, the Court of Appeal imposed an excessive award of compensation against S and his appeals should therefore be allowed in part.The prophylactic purpose would be served if S is required to account to Monarch for all monies received during or attributable to his period with the firm between January1, 1998 and March31, 1999.At that point, both Monarch and S had severed their links with the firm, and the conflict was spent.[1] [74] [77] [95]

The law firm's appeal should be allowed in part.While the firm committed no breach of fiduciary duty to Monarch, it is liable for S's breaches of fiduciary duty, of which its partners are innocent, only because of the terms of s.12 of the B.C.Partnership Act.The words "wrongful act or omission" ins.12are broad enough to embrace an equitable wrong, and S's wrongful act was so connected with the firm's ordinary business that it led to a breach of Monarch's retainer of the firm.The firm is accordingly liable under the Act with S to account for S's profits for the period from January1, 1998 to March31, 1999.[1] [100] [106] [113114]

A return of the fees charged to Monarch by the law firm in 1998 and 1999 for general corporate services and "cleanup" work on prior transactions should not be ordered.However, to the extent S personally made a profit under the firm allocation process attributable to hours docketed to Monarch's account, or to fees paid to the firm by Monarch, such profit (earned at a time when S was in a position of conflict, and derelict in his duty to Monarch) should form part of S's accounting to Monarch.The legal fees paid by Sentinel to the firm cannot be said to be in consequence of breaches of fiduciary duties owed by the firm to Monarch since there was no conflict known to the firm that prevented it from acting for both Sentinel and Monarch.These fees therefore do not have to be disgorged.[80] [83]

While some of the clauses in the Sentinel documents were almost identical to those in Monarch's production services agreement, it is not enough to show that a particular transaction document has its "genesis" in a prior transaction document. Monarch failed to establish a breach of confidence and its claim in that regard was properly dismissed.[110111]

Monarch's crossappeal against D should be dismissed for the reasons given by the Court of Appeal.[112]

PerMcLachlinC.J. and Bastarache, LeBel and AbellaJJ. (dissenting in part on the appeals):A conflict of interest arises when a lawyer puts himself or herself in a position of having irreconcilable duties or interests.The starting point in determining whether a conflict arose in a particular case is the contract of retainer between the lawyer and the complaining party.The nature and scope of a lawyer's retainer is purely a factual question on which the trial judge's findings should not ordinarily be upset on appeal save for error arising from misapprehension of the evidence. This is especially true where, as here, the alleged breach is an ethical one.The question then is whether these duties conflicted with the lawyer's duties to a second client, or with his or her personal interests.If so, the lawyer's duty of loyalty is violated, and breach of fiduciary duty is established.The duty of loyalty is not a duty in the air, but is attached to the obligations the lawyer has undertaken pursuant to the retainer.[132] [134135] [142]

Here, the trial judge was correct to begin by asking what the contract obliged S to do for Monarch.Whatever S undertook to do, he was bound to do it with complete loyalty in accordance with his fiduciary obligation.The trial judge did not misapprehend the evidence and therefore there is no basis to overturn his findings.Given the limited nature of the retainer in 1998, there was no conflict between what S agreed to do for Monarch and what he was doing for D and himself with Sentinel.Neither S's obligation to D and Sentinel, nor his taking of a personal interest in Sentinel's profits, directly conflicted with his duties to Monarch.The Monarch retainer permitted S to take on new clients or interests.Only if Monarch had specifically asked S for advice on new film taxshelter opportunities and S had agreed to give that advice could S have been under any duty to provide Monarch with such advice, placing him in a conflict of interest with Sentinel.On the trial judge's findings, this never happened.[143] [145]

The Court of Appeal erred in holding that S's duty to Monarch extended beyond the terms of the 1998 retainer agreement, grounding an ongoing duty to advise Monarch of any developments in the film production taxshelter business.The trial judge made clear findings of fact as to the limited scope of the retainer between the firm and Monarch, and on this basis concluded that no conflict arose when S took on a second client in the same line of business.The trial judge's findings stand unimpeached, and on the applicable law he correctly concluded that S did not breach his contractual or fiduciary duty to Monarch.[119] [131] [150]

Monarch's crossappeal should be dismissed for the reasons given by the Court of Appeal and endorsed by the majority.[164]

Cases Cited

By BinnieJ.

Applied:R. v. Neil, [2002] 3S.C.R.631,2002SCC70;referred to:MacDonald Estate v. Martin,1990 CanLII 32 (SCC), [1990] 3S.C.R.1235;De Beers Canada Inc. v. Shore Gold Inc.(2006), 278 Sask. R. 171,2006 SKQB 101;Dobbin v. Acrohelipro Global Services Inc.(2005), 246Nfld. & P.E.I.R.177,2005NLCA22;Canadian Aero Service Ltd. v. O'Malley,1973 CanLII 23 (SCC), [1974] S.C.R.592;Hilton v. Barker Booth and Eastwood, [2005] 1AllE.R.651;Ct v. Rancourt, [2004] 3S.C.R.248,2004SCC58;Ramrakha v. Zinner(1994),1994 ABCA 341 (CanLII), 157A.R.279;Stewart v. CanadianBroadcasting Corp.(1997),1997 CanLII 12318 (ON SC), 150D.L.R. (4th)24;Credit Suisse First Boston Canada Inc., Re(2004), 2B.L.R. (4th)109;Chiefs of Ontario v. Ontario(2003),2003 CanLII 32351 (ON SC), 63O.R. (3d)335;Bolkiah v. KPMG, [1999] 2A.C.222;Kelly v. Cooper, [1993] A.C.205;Williams v. Reed, 29F.Cas.1386 (1824);Martin v. Goldfarb(1998),1998 CanLII 4150 (ON CA), 41O.R. (3d)161;Waxman v. Waxman(2004),2004 CanLII 39040 (ON CA), 186O.A.C.201;Uniform Custom Countertops Inc. v. Royal Designer Tops Inc., [2004] O.J. No.3090 (QL);deGuzman v. delaCruz, [2004] B.C.J. No.72 (QL),2004BCSC36;Celanese Canada Inc. v. Murray Demolition Corp., [2006] 2S.C.R.189,2006SCC36;R. v. Speid(1983),1983 CanLII 1704 (ON CA), 43O.R. (2d)596;Coutu v. Jorgensen(2004),2004 BCCA 400 (CanLII), 202B.C.A.C.67;Nocton v. Lord Ashburton, [1914] A.C.932;R. v. Shamray(2005),191Man. R. (2d)55, 2005MBQB1;R. v. Henry(1990),1990 CanLII 3201 (QC CA), 61C.C.C. (3d)455;Wewaykum Indian Band v. Canada, [2002] 4S.C.R.245,2002SCC79;Hodgkinson v. Simms,1994 CanLII 70 (SCC), [1994] 3S.C.R.377;Canson Enterprises Ltd. v. Boughton & Co.,1991 CanLII 52 (SCC), [1991] 3S.C.R.534;Chan v. Zacharia(1984), 154C.L.R.178;Warman International Ltd. v. Dwyer(1995), 128A.L.R.201;MacMillan Bloedel Ltd. v. Binstead(1983), 22B.L.R.255;McDonic Estate v. Hetherington (Litigation Guardian of)(1997),1997 CanLII 1019 (ON CA), 31O.R. (3d)577;Dubai Aluminium Co. v. Salaam, [2003] 2A.C.366;Bazley v. Curry,1999 CanLII 692 (SCC), [1999] 2S.C.R.534;Jacobi v. Griffiths,1999 CanLII 693 (SCC), [1999] 2S.C.R.570;E.D.G. v. Hammer, [2003] 2S.C.R.459,2003SCC52;K.L.B. v. British Columbia, [2003] 2S.C.R.403,2003SCC51;Blackwater v. Plint, [2005] 3S.C.R.3,2005SCC58;E.B. v. Order of the Oblates of Mary Immaculate in the Province of British Columbia, [2005] 3S.C.R.45,2005SCC60.

By McLachlinC.J.(dissenting in part on the appeals)

Hilton v. Barker Booth and Eastwood, [2005] 1All E.R.651;R. v. Neil, [2002] 3S.C.R.631,2002SCC70;Hodgkinson v. Simms,1994 CanLII 70 (SCC), [1994] 3S.C.R.377;Smith v. McInnis,1978 CanLII 217 (SCC), [1978] 2S.C.R.1357;Hospital Products Ltd. v. United States Surgical Corp.(1984), 156C.L.R.41;Kelly v. Cooper, [1993] A.C.205;Housen v. Nikolaisen, [2002] 2S.C.R.235,2002SCC33;Bristol and West Building Society v. Mothew, [1996] 4All E.R.698;Armitage v. Nurse, [1997] 2All E.R.705;Canson Enterprises Ltd. v. Boughton & Co.,1991 CanLII 52 (SCC), [1991] 3S.C.R.534;Bazley v. Curry,1999 CanLII 692 (SCC), [1999] 2S.C.R.534.

Statutes and Regulations Cited

Income Tax Act, R.S.C.1985, c.1 (5thSupp.),s.18.1(15)(b).

Partnership Act, R.S.B.C. 1996, c.348, ss.11,12,14.

Authors Cited

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Burgess, Robert, and Geoffrey Morse.Partnership Law and Practice.London: Sweet & Maxwell, 1980.

Devlin, RichardF., and VictoriaRees."Beyond Conflicts of Interest to the Duty of Loyalty:fromMartin v. GraytoR. v. Neil" (2005), 84Can. Bar Rev.433.

Estey, WilfredM.Legal Opinions in Commercial Transactions, 2nded. Toronto: Butterworths, 1997.

Getzler, Joshua."Am I My Beneficiary's Keeper?Fusion and LossBased Fiduciary Remedies", in Simone Degeling and James Edelman, eds.,Equity in Commercial Law. Sydney: Lawbook Co., 2005, 239.

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Hayton, David. "Unique Rules for the Unique Institution, the Trust", in SimoneDegeling and JamesEdelman, eds.,Equity in Commercial Law. Sydney: Lawbook Co., 2005, 279.

Law Society of British Columbia.Professional Conduct Handbook, The Law Society of British Columbia, 1993.

Maddaugh, PeterD., and JohnD.McCamus.The Law of Restitution.Aurora, Ont.:Canada Law Book, 2006 (loose-leaf updated August 2006).

Millett, Peter. "Proprietary Restitution", in SimoneDegeling and JamesEdelman, eds.,Equity in Commercial Law. Sydney: Lawbook Co., 2005, 309.

Proulx, Michel, and David Layton.Ethics and Canadian Criminal Law. Toronto:Irwin Law, 2001.

Waters, DonovanW.M."The Development of Fiduciary Obligations", in R.Johnson et al., eds.,GrardV.La Forest at the Supreme Court of Canada, 19851997.Winnipeg: Canadian Legal Historic Project, Faculty of Law, University of Manitoba, 2000, 81.

Worthington, Sarah.Equity.Oxford: University Press, 2003.

APPEALS and CROSSAPPEAL from judgments of the British Columbia Court of Appeal (Newbury, Hall and OppalJJ.A.) (2005), 38B.C.L.R. (4th)159, 208B.C.A.C.39, 344 W.A.C. 39,1B.L.R. (4th)302, 28C.C.L.T. (3d)159, [2005] 3C.T.C.168, 2005D.T.C.5059, [2005] 5W.W.R.108, [2005] B.C.J. No.80 (QL), 2005BCCA35, and (Newbury, Hall and Levine JJ.A.) (2005), 44B.C.L.R. (4th)275, 215B.C.A.C. 9, 355 W.A.C. 9, 8B.L.R. (4th)4, 256D.L.R. (4th)319, 47C.C.E.L. (3d)159, [2005] 11W.W.R.399, [2005] 5C.T.C.107, [2005] B.C.J. No.1655 (QL),2005 BCCA385, setting aside in part a decision of LowryJ. (2002), 26B.L.R. (3d)235, [2003] 1C.T.C.88, 2002D.T.C.7327, [2002] B.C.J.No.1982 (QL),2002BCSC1179.Appeals allowed in part, McLachlinC.J. and Bastarache, LeBel and AbellaJJ. dissenting in part.Crossappeal dismissed.

IrwinG.Nathanson,Q.C.,ArdellaA.ThompsonandGeoffreyGomery, for the appellant/respondent Davis & Company, a partnership.

RoseMaryLiuBasham,Q.C.,RobertD.HolmesandLeslieJ.Muir, for the respondent/appellant 3464920Canada Inc. (formerly known as Monarch Entertainment Corporation).

GeorgeK.Macintosh,Q.C.,J.KennethMcEwan,Q.C., andRobinM.Elliot,Q.C., for the appellant/respondent RobertC.Strother, the appellants Strother Family Trust (Trust No.1) and University Hill Holdings Inc. (formerly known as 589918British Columbia Ltd.) (Company No.1), and the respondents Partnership No.1, Partnership No.2, Partnership No.3, Partnership No.4, Partnership No.5, Partnership No.6, Partnership No.7, Partnership No.8, Partnership No.9, Partnership No.10, Trust No.1, Trust No.2, Trust No.3, Trust No.4, Trust No.5, Trust No.6, Trust No.7, Trust No.8, Trust No.9 and Trust No.10.

Kenneth N.Affleck,Q.C.,Lisa A. WarrenandMichael J. Sobkin, for the respondents J. Paul Darc, Pacific Cascadia Capital Corporation, Sentinel Hill Entertainment Corporation, Sentinel Hill Productions Corporation, Sentinel Hill Productions II Corporation, Sentinel Hill Management Corporation, J. Paul Darc and Leslie Marie Darc, Trustees of the Darc Family Trust, and the said Darc Family Trust, Company No.1, Company No.2, Company No.3, Company No.4, Company No.5, Company No.6, Company No.7, Company No.8, Company No.9 and Company No.10.

David C. Harris,Q.C., andAndrea N. MacKay, for the respondents Sentinel Hill Productions (1999) Corporation, Sentinel Hill 19991 Master Limited Partnership, Sentinel Hill 19992 Master Limited Partnership, Sentinel Hill 19993 Master Limited Partnership, Sentinel Hill 19994 Master Limited Partnership, Sentinel Hill 19995 Master Limited Partnership, Sentinel Hill 19996 Master Limited Partnership, Sentinel Hill 1998 Master Limited Partnership, Sentinel Hill 19982 Master Limited Partnership, Sentinel Hill Productions No.5 Limited Partnership, Sentinel Hill Productions No.7 Limited Partnership, Sentinel Hill 1999 Master Limited Partnership, Sentinel Hill Ventures Corporation, Sentinel Hill Alliance Atlantis Equicap Millenium Limited Partnership, Sentinel Hill Productions III Corporation, Sentinel Hill Alliance Atlantis Equicap Limited Partnership and Sentinel Hill GP Corporation.

Terrence J.O'SullivanandM. Paul Michell, for the intervener the Canadian Bar Association.

The judgment of Binnie, Deschamps, Fish, Charron and Rothstein JJ. was delivered by

1BINNIE J. A fundamental duty of a lawyer is to act in the best interest of his or her client to the exclusion of all other adverse interests, except those duly disclosed by the lawyer and willingly accepted by the client.The appellant Robert Strother, a successful tax partner with the appellant Davis & Company ("Davis") in Vancouver, was found by the Court of Appeal of British Columbia to have put his own financial interest in one client (Sentinel) ahead of his duty to another client (Monarch) in breach of his fiduciary duty.Fiduciary duties provide the framework (enforced by the courts and by the Law Society of British Columbia) within which a particular contractual mandate is to be carried out.The issue here is whether (as the trial judge held) those responsibilities were sufficiently limited by the scope of the retainer so as to afford Monarch no relief; or whether, on the contrary, the fiduciary duty is broader than the trial judge thought (as held by the Court of Appeal) and was breached either by Strother or Davis or both and, if so, what the appropriate remedy is.For the reasons which follow, I conclude that the trial judge did not correctly construe the scope of Monarch's 1998 retainer of Davis and Strother, and thus did not pursue the analysis of fiduciary duty far enough.In my view, the Court of Appeal correctly analysed the retainer and found a breach of fiduciary duty by Strother.I would allow the appeal by the Davis firm (which was an innocent party in Strother's misconduct) against any direct liability for breach of fiduciary duty, but give effect to Monarch's statutory claim against Davis for vicarious liability under thePartnership Act, R.S.B.C. 1996, c. 348.I also conclude that the Court of Appeal imposed an excessive award of compensationagainst Strother.I would therefore allow both appeals in part for the reasons which follow.Monarch's cross-appeal should be dismissed.

I.Facts

2Monarch Entertainment Corporation ("Monarch" (now 3464920 Canada Inc.)) began promoting taxassisted production services funding ("TAPSF") investments in 1993.It was owned by Stephen Cheikes and Nova Bancorp Capital Management Ltd.The principal of Nova is Harry Knutson.Knutson and Cheikes were introduced to one another by Davis.Paul Darc, a chartered accountant, became Monarch's chief operating officer in 1995, but was demoted the following year to the position of chief financial officer.

A.The Tax Scheme

3From 1993 to 1997, Monarch devised and marketed tax shelter investments whereby Canadian taxpayers, through ownership of units in a limited partnership, provided film production services to American studios making films in Canada.In outline, the tax shelter worked like this.Limited partnerships were established.The investors would notionally produce a film for a studio in return for a fee, paid over time, that was contingent on the success of the film.The contingency of the payment introduced a substantial element of risk, and the right to receive such speculative income at some future date was considered by Revenue Canada not to be a capital asset.Therefore, expenditures for the film production were treated as deductible from other income in the year the expenditures were incurred.The scheme yielded a loss to the partnership in the early years because of the mismatch between the front-end expenses in the year the film was made and the delayed and uncertain return.The loss was deducted by investors from their unrelated income thereby sheltering this income from immediate taxation.If the film was a success, the tax collector's cut would at least be deferred.

4The American studios shared in the tax deferral benefit of the Canadian investors by an advantageous sale of their expenses of making the film to the Canadian investors.Monarch derived a profit equal to the difference between what the investors actually paid and what the studio received, less its own expenses.

B.Monarch Retains Davis & Company

5Robert Strother was one of the biggest billers at Davis and in the mid-1990s Monarch was by far his biggest client (representing about half his billings).The TAPSF shelter was considered almost too good to be true; thus potential investors, fearing a government clampdown, required the assurance of a favourable advance tax ruling from Revenue Canada.The structuring of such shelters and negotiation of such rulings were key elements of Strother's expertise.

6The fees paid to Davis were mostly determined on an agreed-upon percentage of the volume of production transactions closed each year.The trial judge found that Strother was instrumental in Monarch's success ((2002), 26 B.L.R. (3d) 235,2002 BCSC 1179, at para.11).In 1996 and 1997, the firm's engagement was expressed in written retainer agreements.Effective October 1996, the retainer expressly prohibitedDavis from acting for clients other than Monarch in relation to TAPSF schemes (with limited exceptions).The written retainer terminated at the end of 1997, but Monarch continued thereafter as a firm client. Between 1993 and 1997 Monarch closed transactions of almost $460 million, realized more than $13 million in profits and paid Davis more than $5 million in legal fees.

C.Emergence of Stiff Competition

7In 1996-1997, two other promoters entered the TAPSF business and substantially reduced Monarch's share of the market:Grosvenor Park Securities Ltd. ("Grosvenor Park") and Alliance Equicap Corporation ("Alliance").Monarch's market share fell from almost 100 percent of the potential market in 1995 to 20 percent in 1996-1997.

D.The Minister of Finance Decides to Close the Door

8In November 1996, the federal Minister of Finance announced his intention to amend theIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("ITA"), to defeat the TAPSF tax shelters.This was done by the introduction of Matchable Expenditures Rules ("MER").Subsequently, Strother advised Monarch that he did not have a "fix" to avoid the effect of the MER.As a transitional measure, the government extended relief from the MER until the end of October 1997, but no further.

E.Monarch Looks for Other Opportunities

9By the end of October 1997, Monarch's TAPSF business had been wound down.Several employees were laid off, including Paul Darc.Grosvenor Park and Alliance also stopped promoting tax shelters and went out of the TAPSF business.In late 1997, Monarch sought Strother's advice about what could be done to salvage what was left of their business, but he suggested that they defer that discussion until the new year.The trial judge held:"I find that Mr. Strother concealed nothing from Monarch in 1997 in order to take a benefit for himself" (para. 91).

F.Strother Learns of a Possible "Fix"

10At the end of October or beginning of November 1997, Joel Nitikman, a tax lawyer with Fraser Milner Casgrain in Vancouver, contacted Strother and told him that he thought there might be a way around the MER and that 20th Century Fox was interested in exploring the possibility of having a film financed using a somewhat different structure (the "Ladeidea") by the Stern Group of companies (who were also clients of Strother's) (trial judgment, at para. 66).In the course of subsequent discussions in November 1997,Nitikman discussed with Strother s. 18.1(15)(b) which provided that MER would not apply where more than 80.1 percent of the right to receive income was realized before the end of the year in which the expenditure was made.This meant that the maximum "loss" available for a tax deduction would be 19.9 percent of production expenses (compared to 50 percent previously).

11Strother was unable to get a favourable advance ruling from Revenue Canada for the "Lade" scheme for Stern, but by the end of 1997, in connection with this initiative, Strother obtained confirmation from Revenue Canada that a favourable tax ruling was not out of the question for a film production services transaction, as long as it complied with the new rules, including s. 18.1(15)(b).

G.Darc/Sentinel Becomes a Client

12In the fall of 1997 or early 1998, Strother was approached by Paul Darc, a former executive of Monarch, to discuss potential opportunities.Darc was working on a possible tax credit business (as opposed to a tax shelter business). Strother discussed with Darc the s. 18.1(15)(b) exception.Darc devised the idea of marrying a tax shelter and a tax credit business, subordinating the shelter to the credits (to ensure that the business would not run afoul of the general anti-avoidance rule of theITA).Under Darc's plan, the studio fee would not be contingent on the success of the film but rather was fixed at 80.1 percent.

13Darc was able to put together enough of a scheme to convince Strother to draft a nine-page proposal that was submitted to Revenue Canada in March of 1998.Although the trial judge found as a fact that Strother honestly felt throughout 1997 and even after learning of Darc's proposal that the TAPSF shelter was dead for good, Strother was obviously persuaded that Darc's scheme was worth a try, and far from holding that opinion as a disinterested lawyer, he agreed to volunteer his services without charge to attempt to obtain the ruling, in exchange for a personal benefit.Strother later told his partners that he had an "option" to acquire up to 50 percent of the common shares of a new company called Sentinel Hill Entertainment Corporation ("Sentinel" or "Sentinel Hill"), a shelf company owned by Darc, but in fact, on the evidence, he and Darc had agreed in January 1998 that Strother would receive 55 percent of the first $2 million of profit should the tax ruling be granted and 50 percent thereafter.Out-of-pocket expenses for the ruling request were to be shared equally.Strother did not tell Monarch about the possibility of a revival in the film production services business at any time.

H.Sentinel Obtains Advance Tax Ruling

14A favourable tax ruling was issued by Revenue Canada to Sentinel on October 6, 1998 based on the s. 18.1(15)(b) exception to the MER.A further ruling addressing studio concerns was issued in December 1998.Sentinel closed $260 million in studio production transactions by year-end of 1998.Subsequently, Grosvenor Park and Alliance obtained their own rulings and were back in the film production services business by September 1999.

I.Monarch Was a Continuing Client of Davis/Strother

15In 1998, Strother met with Monarch executives on January 15, 21, 27 and May 19, June 26, July 24, August 4 and (by chance) in mid-September.They testified that they asked Strother what business opportunities might be available to Monarch in the wake of the new tax rules.They said they relied on him to advise if there was a "way around" the MER that would allow them to resume their TAPSF business.Cheikes testified in cross-examination as follows:

Q.And I suggest, sir, that in fact that you did not Monarch did not approach Strother and Davis to request Strother and Davis to develop a means to amend the structure.Isn't that correct, sir?

A.It's not correct.As I've said to you what happened is Monarch had a general agreement and understanding in their being represented by Davis & Company thatthat was a principal function of the law firm for us, is when there is a change of tax law to find a way around it.When the tax law was changed and we were told in 1996, November of '96, that there was no absolutely no way around it, we followed Strother's advice to lobby the government, try to get an exception, and try again to get grandfathering.But we were told, and we relied absolutely on his legal advice that there was absolutely no way to get around the rules.The general instruction though of our employment stayed in effect all the time.If there is a way, Strother, if you know it now, if you know it in the future, that's your job for us.Find a way to get around any changes of the law.It was first implicit, possibly not explicit at that point, but it was clearly the central part of the retention of Davis & Company and Rob Strother for our business.[Emphasis added.]

(Monarch's R.R., vol. 1, at p. 84)

In his evidence-in-chief, Strother testified:

A.And I think we had a general discussion, that I had very little recollection of, which I've, I guess come to be refreshed through the course of this litigation, and I think it was a, where-are-we-going-now meeting with Mr. Knutsonwhere we talked about some of the things that I said earlier that we sort of put on holdwhile he was getting closed and, and worrying about those issues.[Emphasis added.]

(Strother's A.R., at p. 94)

In his factum, Strother emphasizes the trial judge's conclusion that

Mr. Knutson and Mr. Cheikes were not consulting Mr. Strother for advice on the rules that had put an end to their tax shelter business or to explore whether there was any possibility of that business in some way being continued.They had no reason to do so and had no expectation of receiving any advice in that regard. [Emphasis deleted; para. 24.]

16Throughout 1998 and into 1999, Davis continued to do some work for Monarch on outstanding matters relating to film production services transactions that had closed by the end of October 1997 as well as unrelated general corporate work.Through 1998 and into January 1999, Davis invoiced Monarch more than $98,000 in legal fees.

J.Strother Makes Incomplete Disclosure to Davisof His Side-Deal With Darc

17On August 4, 1998, Strother wrote a memorandum to the management committee of Davis about a possible conflict of interest with respect to acting simultaneously for Monarch and Sentinel/Darc.He said that Sentinel's prospects were highly speculative and uncertain.He stated that duringthe late fall of 1997he met with Darc several times to discuss the possibility of forming a company to carry out film production services transactions (although in examination for discovery, Strother claimed that the meetings did not occur until 1998).The memo referred, inaccurately, to Strother only having"an optionto acquire up to50%of the common shares" of Sentinel Hill (emphasis added).Strother also described a conversation with an official of the Law Society of British Columbia that resulted in Strother acknowledging that because of his financial interest in Sentinelhe was "potentially in technical breach" of Chapter 7 of the Law Society'sProfessional Conduct Handbookwhich provides:

1.Except as otherwise permitted by theHandbook, a lawyer shall not perform any legal services for a client in a matter in which:

(a)the lawyer has a direct or indirect financial interest, or

(b)anyone, including a relative, partner, employer, employee, business associate or friend of the lawyer, has a direct or indirect financial interest which would reasonably be expected to affect the lawyer's professional judgement.

2.A lawyer shall not perform any legal services for a client with whom or in which the lawyer or anyone, including a relative, partner, employer, employee, business associate or friend of the lawyer, has a financial or membership interest which would reasonably be expected to affect the lawyer's professional judgment.

The managing partner of Davis, Douglas Buchanan, told Strother that he would not be permitted to own any interest in Sentinel.Strother did not provide Buchanan with a copy of the January 30th Agreement.

K.Strother Quits Davis

18Effective March 31, 1999,Strother resigned from Davis and in April joined Darc as a 50 percent shareholder in Sentinel.They hired Bradley Sherman as a consultant and sales coordinator.(Until 1997, Sherman had been the driving force behind Grosvenor Park.)Sherman and his associate, Kenneth Gordon, acquired equity positions in a new vehicle, Sentinel Hill Ventures Corporation, owned equally but indirectly by Strother, Darc, Sherman and Gordon.As a result of further affiliation, the promoters formed Sentinel Hill Alliance Atlantis Equicap Limited Partnership ("SHAAELP") that became the primary entity promoting the Sentinel Hill-Alliance business throughout 2000 and 2001.

19By the time Parliament finally ended the late-blooming film production services transactions through further amendments to theITAin September 2001, Sentinel and related enterprises had closed transactions exceeding $4 billion with profits approaching $130 million.Darc and Strother had together realized total profits in excess of $64 million.Davis acted for the SHAAELP throughout and received fees exceeding $9 million.

L.Monarch Severs Relations With Davis

20Monarch learned of Sentinel's tax ruling through word of mouth some four months after the ruling was granted.Neither Strother nor anyone else at Davis had mentioned it.Monarch, feeling betrayed, promptly severed its relationship with Davis and threatened legal action against Strother and Darc.Monarch never reentered the film production services although it took preliminary steps in that regard with the assistance of another law firm.These efforts were discontinued in mid-2001 when Monarch learned that the government was planning further amendments to theITAto end such shelters for good, which Parliament did as of the end of 2001.

II.Issues

21On these facts, the following issues emerge:

1.Did Strother and/or Davis breach a fiduciary duty owed to Monarch by accepting Darc/Sentinel as a new client?

2.Did Strother breach a fiduciary duty to Monarch by accepting a personal financial interest in Sentinel, and if so, is Davis also liable for that breach?

3.Did Strother wrongly use for his own and/or Sentinel's benefit confidential information belonging to Monarch?

4.If one or more of the above issues are resolved in favour of Monarch, what remedies lie against Strother and/or Davis and the various entities who profited by the default, if any, from 1998 to the present?

III.Judicial History

A.British Columbia Supreme Court(2002), 26 B.L.R. (3d) 235,2002 BCSC 1179

22Lowry J. dismissed Monarch's claim.While the relationship between Monarch and Strother was fiduciary in nature, Strother's duty to advise was governed by the terms of the retainer, express or implied.He was only obliged to act in Monarch's best interests in relation to the advice he was retained to give.

23Lowry J. noted that the scope of the Davis retainer under the 1996-97 agreement was sufficiently broad to require Strother to stay apprised, and keep Monarch apprised, of all legal developments which he recognized would affect Monarch's ability to continue to promote TAPSF investments.He found that Strother's advice to Monarch, that he had no technical fix and that, even if he could devise one, he did not consider that any advance tax ruling could be obtained, was the view he in fact held throughout 1997.Strother's pessimistic view was consistent with that held by Monarch's competitors and their tax advisers.Lowry J. concluded that in 1997 Strother gave Monarch all of the advice concerning the MER and their impact on its business that was required within the scope of the Davis 1997 retainer.He also concluded, however, that in "the latter part of 1997", when "those at Monarch looked to Mr. Strother for ideas on what, if anything, they could do . . . Strother suggested some alternative tax-assisted business opportunities that could be explored.A decision was taken to defer consideration" until 1998 (para. 96).

24The Davis retainer in 1998 was decidedly different from what it had been in 1997.There was no continuing contractual requirement for Davis to act exclusively for Monarch.Lowry J. held that after 1997, Strother was not obliged to provide any advice to Monarch that was not specifically sought and that he agreed to give.Strother was not, on any account, required to disclose information of a competitive nature pertaining to the basis of the Sentinel Hill advance tax ruling request.Strother was free to be consulted by Darc in January 1998, and Davis was free to act for Sentinel thereafter.

25Lowry J. observed that solicitors do not generally carry an ongoing obligation to alter advice given under a concluded retainer because of a subsequent change of circumstances provided the advice, when given, was correct.Lowry J. concluded that, in 1998, there was no advice Strother was required to give Monarch about how the s. 18.1(15)(b) exception might be used in a film production services scheme.Moreover, neither Darc nor Strother breached any confidences owed to Monarch.Monarch had not established that its financing structure was held in confidence.With respect to transaction documentation, Lowry J. held that solicitors are entitled to use documentation they have prepared in the course of an earlier retainer providing that by their doing so information is not disclosed which remains confidential to the client for whom the documentation was initially prepared.Lowry J. did not consider that Monarch had made out a case for a return of the fees paid to Davis.

B.British Columbia Court of Appeal (Newbury, Hall and Oppal JJ.A.)(2005), 38B.C.L.R. (4th) 159,2005 BCCA 35("BCCA #1")

26The appeal was allowed in part.

27The court concluded that the duty of loyalty was breached by Strother in this case, and that even accepting the facts found by the trial judge, the dismissal of Monarch's claims against him could not stand.Strother was in a position of conflict in two senses a conflict of duty between two current clients, Monarch and Sentinel, and a conflict of interest between Strother himself and Monarch, his client through 1998.

28Newbury J.A. noted that although the term of the exclusivity/fee agreement had expired at the end of 1997, the solicitor-client relationship between Monarch and Davis continued, without the negotiation of a new written agreement.The relationship now took the form more usual between corporate clients and law firms:Monarch consulted as necessary on various matters from time to time and Strother provided advice, or seconded other lawyers to do so according to their expertise, and billed on the basis of the firm's usual hourly rates.

29When Monarch asked "what could be done", it was entitled to an honest and complete answer, whether or not Strother had a file open for another client for continuing TAPSF work.The fact that Monarch did not ask about s.18.1(15)(b) specifically, or seek repeated confirmations that Strother had not yet become aware of the possibility of a "technical fix", was not conclusive of his duty to respond candidly.

30In Newbury J.A.'s view, the trial judge also erred in law in concluding that Strother was under no obligation to advise Monarch of the possibility that TAPSF syndication would be revived or that Monarch should seek advice elsewhere.As soon as Strother and Darc entered into their agreement in January 1998, Strother was in a position of personal conflict whether or not his entitlement to a "profit" or "equity" participation was immediate or contingent on obtaining a ruling.It was in his personal interest to ensure that Monarch remained ignorant of what he knew that a "technical fix" based on s. 18.1(15)(b) was a possibility.

31Newbury J.A. concluded, "[a]fter much anxious consideration", that Strother was "required to account for and disgorge to Monarch all benefits, profits, interests and advantages he ha[d] received or which he [might] hereafter be entitled to receive, directly or indirectly . . . from or through any of the Sentinel Hill Entities" (para. 61).She directed a reference for this purpose.She further declared Strother, the Sentinel Hill entities and other defendants owned or controlled by him to be constructive trustees in favour of Monarch in respect of the profits, interests and benefits in question.No direct liability on the Sentinel Hill entities was warranted beyond the accounting already ordered.

C.Supplementary Decision (Newbury, Hall and Levine JJ.A.)(2005), 44 B.C.L.R. (4th) 275,2005 BCCA 385("BCCA #2")

32As to the vicarious liability of Davis, Newbury J.A. stated that equity would not generally order an accounting or disgorgement by an innocent person who had not received any of the profits resulting from the wrong.In the result, she dismissed Monarch's claim that Davis be required, jointly and severally with Strother, to account for the profits and benefits received or receivable by Strother from Sentinel Hill.However, she held that different considerations applied to Monarch's claim that Davis disgorge the profitsitearned in the form of legal fees as a result of acting for Sentinel Hill in conflict with its duty to its original client, Monarch.Although it did not appear that the partners of the firm were aware of the advice Strother was giving, liability was imposed on the basis of vicarious liability.Accordingly, Newbury J.A. ordered that the law firm account for and disgorge the profits it earned from acting for Sentinel Hill in breach of its duty to Monarch from and after January 1, 1998.

33The Court of Appeal dismissed Monarch's appeal from the trial judge's rejection of its claim that the fees (some $5,600,000) it had paid to Davis between 1993 and 1999 should be returned to it.However, the court ordered that Davis return to Monarch all fees (not including disbursements) paid by Monarch from January 1, 1998 onwards.

IV.Analysis

34When a lawyer is retained by a client, the scope of the retainer is governed by contract.It is for the parties to determine how many, or how few, services the lawyer is to perform, and other contractual terms of the engagement.The solicitor-client relationship thus created is, however, overlaid with certain fiduciary responsibilities, which are imposed as a matter of law.The Davis factum puts it well:

The source of the duty is not the retainer itself, but all the circumstances (including the retainer) creating a relationship of trust and confidence from which flow obligations of loyalty and transparency. [para. 95]

Not every breach of the contract of retainer is a breach of a fiduciary duty.On the other hand, 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:MacDonald Estate v. Martin,1990 CanLII 32 (SCC), [1990] 3 S.C.R. 1235, at pp. 1243 and 1265."[I]t is of high public importance that public confidence in that integrity be maintained":R. v. Neil, [2002] 3 S.C.R. 631,2002 SCC 70, at para.12.

35Fiduciary responsibilities include the duty of loyalty, of which an element isthe avoidance of conflicts of interest, as set out in the jurisprudence and reflected in theRules of Practice of The Law Society of British Columbia.As the late Hon. Michel Proulx and David Layton state, "[t]he leitmotif of conflict of interest is the broader duty of loyalty":Ethics and Canadian Criminal Law(2001), at p. 287.

36In recent years as law firms have grown in size and shrunk in numbers, the courts have increasingly been required to deal with claims by clients arising out of alleged conflicts of interest on the part of their lawyers.Occasionally, a law firm is caught innocently in crossfire between two or more clients.Sometimes the claim of conflict is asserted for purely tactical reasons, an objectionable practice criticized inNeilat paras.14-15, and a factor to be taken into account by a court in determining what relief if any is to be accorded:De Beers Canada Inc. v. Shore Gold Inc.(2006), 278 Sask. R. 171,2006 SKQB 101;Dobbin v. Acrohelipro Global Services Inc.(2005), 246 Nfld. & P.E.I.R. 177,2005 NLCA 22.Sometimes, however, the dilemma is of the lawyer's own making.Here the firm's position was compromised by the personal conflict of a lawyer (Strother) who, contrary to the instructions of Davis's managing partner, contracted for a personal financial interest in one client (Sentinel) whose interest he then preferred over another client (Monarch) who now sues for compensation.In that regard, Monarch relies upon the well-known proposition endorsed by Professors Waters that:

The other (the beneficiary) is entitled to expect that the fiduciary will be concerned solely for the beneficiary's interests, never the fiduciary's own.

(D. W. M. Waters, "The Development of Fiduciary Obligations", in R. Johnson et al., eds.,Grard V. La Forest at the Supreme Court of Canada, 1985-1997(2000), 81, at p. 83)

See, in particular,Canadian Aero Service Ltd. v. O'Malley,1973 CanLII 23 (SCC), [1974] S.C.R. 592.The point was restated in the context of lawyers inNeil, at para.24:"Loyalty includes putting the client's business ahead of the lawyer's business."It was on this basis that Monarch succeeded in the British Columbia Court of Appeal.

37Robert Strother appeals to this Court.In his view, he breached no fiduciary duty to Monarch.His position is that once the "exclusivity" arrangement terminated at the end of 1997, he and Davis were free to take on new clients seeking to exploit what was left of the tax-assisted film production services market.He protests that the judgment of the Court of Appeal leaves the reader with the impression that he was "watching the clock" in order to begin working with Darc and Sentinel the moment the Monarch exclusivity provision expired (Strother factum, at para. 25).I do not think the Court of Appeal subscribed to such a conspiracy theory.Their focus was on the 1998 retainer, which is where the focus should be.A