In its recent judgment in Galambos v. Perez, the Supreme Court of Canada has clarified the law relating to ad hoc fiduciary duties.
The facts of the case are unique. Perez was the office manager of Galambos’ law firm and controlled the firm’s non-trust bank accounts. In order to avoid the firm overdrawing its line of credit, Perez made personal loans to the firm, totalling $200,000. She made these loans without being asked, and often without informing Galambos. He told her to reimburse herself with interest, but she did so only partially. Perez was a client of the firm, in that the firm prepared her wills and mortgages for free. When the firm went bankrupt, Perez was unsecured, and was left uncompensated. She sued for negligence, breach of contract and breach of fiduciary duty.
The trial judge dismissed the claims but the Court of Appeal allowed the appeal, finding that, while the loans were unrelated to the firm’s retainer and so did not engage the firm’s solicitor-client fiduciary duties, Galambos and his firm owed Perez ad hoc fiduciary duties arising out of the parties’ “power-dependency” relationship, such as existed in Norberg v. Wynrib, [1992] 2 S.C.R. 226. The Court of Appeal held that such relationships can give rise to ad hoc fiduciary duties despite the absence of “mutual understanding” that the fiduciary was taking on that role.
The Supreme Court of Canada allowed the appeal. Cromwell J., writing for a unanimous Court, found the Court of Appeal’s conclusion that the parties were in a “power-dependency” relationship to be directly at odds with the findings of fact made by the trial judge and to amount to an error of law.
The Court also clarified the legal test for ad hoc fiduciary duties. While the Court found that it did not have to determine if “mutual understanding” of the fiduciary relationship (a requirement that had previously been stated in Hodgkinson v. Simms, [1994] 3 S.C.R. 377) is necessary in every case, it did clearly state that “what is required in all cases is an undertaking by the fiduciary, express or implied, to act in accordance with the duty of loyalty reposed on him or her” (emphasis added). The Court also held that “[i]t is fundamental to the existence of any fiduciary obligation that the fiduciary has a discretionary power to affect the other party’s legal or practical interests” (emphasis added). While the Court cautioned that the presence of such discretionary power does not necessarily mean an ad hoc fiduciary duty exists, it held that “its absence, however, negates the existence of such a duty.” The Court concluded that the trial judge’s finding that Perez never relinquished her decision-making power to Galambos was therefore fatal to her ad hoc fiduciary duty claim.
The Court’s judgment is significant in that it identifies two fundamental prerequisites for all ad hoc fiduciary duties (and probably per se fiduciary duties as well): an undertaking by the fiduciary and a transfer of discretionary power by the beneficiary. The absence of either of these will negate the existence of the duty.
Tim Dickson is an associate at Farris, Vaughan, Wills & Murphy LLP and was counsel, with George Macintosh, Q.C., for the appellants at the Supreme Court of Canada in Galambos v. Perez.