Court headnote

Strother v. 3464920 Canada Inc.
Collection
Supreme Court Judgments
Date
2007-06-01
Neutral citation
2007 SCC 24
Report
[2007] 2 SCR 177
Case number
30838
Judges
McLachlin, Beverley; Bastarache, Michel; Binnie, William Ian Corneil; LeBel, Louis; Deschamps, Marie; Fish, Morris J.; Abella, Rosalie Silberman; Charron, Louise; Rothstein, Marshall
On appeal from
British Columbia
Subjects
Commercial law
Courts
Professional law
Notes
SCC Case Information: 30838
Decision Content
SUPREME COURT OF CANADA
Citation: Strother v. 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 1999‑1 Master Limited
Partnership, Sentinel Hill 1999‑2 Master Limited Partnership, Sentinel Hill 1999‑3
Master Limited Partnership, Sentinel Hill 1999‑4 Master Limited Partnership,
Sentinel Hill 1999‑5 Master Limited Partnership, Sentinel Hill 1999‑6 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 1998‑2 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 Rothstein JJ.
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)
______________________________
Strother v. 3464920 Canada Inc., [2007] 2 S.C.R. 177, 2007 SCC 24
Davis & Company, a partnership Appellant
v.
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Respondent
- and -
Robert C. Strother Appellant
v.
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Respondent
- and -
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
v.
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Respondent
- and -
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Appellant
v.
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 1999‑1
Master Limited Partnership, Sentinel Hill 1999‑2 Master
Limited Partnership, Sentinel Hill 1999‑3 Master Limited
Partnership, Sentinel Hill 1999‑4 Master Limited Partnership,
Sentinel Hill 1999‑5 Master Limited Partnership,
Sentinel Hill 1999‑6 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 1998‑2 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
Indexed as: Strother v. 3464920 Canada Inc.
Neutral citation: 2007 SCC 24.
File No.: 30838.
2006: October 11; 2007: June 1.
Present: McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein JJ.
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” in s. 12 of Partnership Act include 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 tax‑shelter schemes (with limited exceptions). The written retainer terminated at the end of 1997, but Monarch continued thereafter as a client of the firm. In November 1996, the federal Minister of Finance announced his intention to amend the Income Tax Act to 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 tax‑shelter 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 tax‑assisted 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 55 percent of the first $2 million 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 October 1998. 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 August 1998, 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 50 percent 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 March 31, 1999, S resigned from the law firm and in April joined D as a 50 percent 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 January 1, 1998 and return to Monarch all fees paid by it from that date. S and the law firm appealed, and Monarch cross‑appealed the dismissal of its claims against D and Sentinel.
Held (McLachlin C.J. and Bastarache, LeBel and Abella JJ. dissenting in part on the appeals): The appeals should be allowed in part and the cross‑appeal dismissed.
Per Binnie, Deschamps, Fish, Charron and Rothstein JJ.: When a lawyer is retained by a client, the scope of the retainer is governed by contract. The solicitor‑client 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. [34‑35]
The subject matter of the 1998 retainer was “tax‑assisted 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 tax‑efficient basis, the 1998 retainer 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 1997 retainer had come to an end but the solicitor‑client relationship based on a continuing (if more limited) retainer in relation to tax-assisted film production services carried on into 1998 and 1999. [40] [43] [45‑46]
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 1998 retainer. Moreover, there was no excuse for S not to advise Monarch of the successful tax ruling when it was made public in October 1998. 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. [46‑48]
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 even‑handed 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. [66‑67] [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 January 1, 1998 and March 31, 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” in s. 12 are 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 January 1, 1998 to March 31, 1999. [1] [100] [106] [113‑114]
A return of the fees charged to Monarch by the law firm in 1998 and 1999 for general corporate services and “clean‑up” 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. [110‑111]
Monarch’s cross‑appeal against D should be dismissed for the reasons given by the Court of Appeal. [112]
Per McLachlin C.J. and Bastarache, LeBel and Abella JJ. (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] [134‑135] [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 tax‑shelter 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 on‑going duty to advise Monarch of any developments in the film production tax‑shelter 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 cross‑appeal should be dismissed for the reasons given by the Court of Appeal and endorsed by the majority. [164]
Cases Cited
By Binnie J.
Applied: R. v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70; referred to: MacDonald Estate v. Martin, [1990] 3 S.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), 246 Nfld. & P.E.I.R. 177, 2005 NLCA 22; Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592; Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651; Côté v. Rancourt, [2004] 3 S.C.R. 248, 2004 SCC 58; Ramrakha v. Zinner (1994), 157 A.R. 279; Stewart v. Canadian Broadcasting Corp. (1997), 150 D.L.R. (4th) 24; Credit Suisse First Boston Canada Inc., Re (2004), 2 B.L.R. (4th) 109; Chiefs of Ontario v. Ontario (2003), 63 O.R. (3d) 335; Bolkiah v. KPMG, [1999] 2 A.C. 222; Kelly v. Cooper, [1993] A.C. 205; Williams v. Reed, 29 F. Cas. 1386 (1824); Martin v. Goldfarb (1998), 41 O.R. (3d) 161; Waxman v. Waxman (2004), 186 O.A.C. 201; Uniform Custom Countertops Inc. v. Royal Designer Tops Inc., [2004] O.J. No. 3090 (QL); de Guzman v. de la Cruz, [2004] B.C.J. No. 72 (QL), 2004 BCSC 36; Celanese Canada Inc. v. Murray Demolition Corp., [2006] 2 S.C.R. 189, 2006 SCC 36; R. v. Speid (1983), 43 O.R. (2d) 596; Coutu v. Jorgensen (2004), 202 B.C.A.C. 67; Nocton v. Lord Ashburton, [1914] A.C. 932; R. v. Shamray (2005), 191 Man. R. (2d) 55, 2005 MBQB 1; R. v. Henry (1990), 61 C.C.C. (3d) 455; Wewaykum Indian Band v. Canada, [2002] 4 S.C.R. 245, 2002 SCC 79; Hodgkinson v. Simms, [1994] 3 S.C.R. 377; Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534; Chan v. Zacharia (1984), 154 C.L.R. 178; Warman International Ltd. v. Dwyer (1995), 128 A.L.R. 201; MacMillan Bloedel Ltd. v. Binstead (1983), 22 B.L.R. 255; McDonic Estate v. Hetherington (Litigation Guardian of) (1997), 31 O.R. (3d) 577; Dubai Aluminium Co. v. Salaam, [2003] 2 A.C. 366; Bazley v. Curry, [1999] 2 S.C.R. 534; Jacobi v. Griffiths, [1999] 2 S.C.R. 570; E.D.G. v. Hammer, [2003] 2 S.C.R. 459, 2003 SCC 52; K.L.B. v. British Columbia, [2003] 2 S.C.R. 403, 2003 SCC 51; Blackwater v. Plint, [2005] 3 S.C.R. 3, 2005 SCC 58; E.B. v. Order of the Oblates of Mary Immaculate in the Province of British Columbia, [2005] 3 S.C.R. 45, 2005 SCC 60.
By McLachlin C.J. (dissenting in part on the appeals)
Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651; R. v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70; Hodgkinson v. Simms, [1994] 3 S.C.R. 377; Smith v. McInnis, [1978] 2 S.C.R. 1357; Hospital Products Ltd. v. United States Surgical Corp. (1984), 156 C.L.R. 41; Kelly v. Cooper, [1993] A.C. 205; Housen v. Nikolaisen, [2002] 2 S.C.R. 235, 2002 SCC 33; Bristol and West Building Society v. Mothew, [1996] 4 All E.R. 698; Armitage v. Nurse, [1997] 2 All E.R. 705; Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534; Bazley v. Curry, [1999] 2 S.C.R. 534.
Statutes and Regulations Cited
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 18.1(15) (b).
Partnership Act, R.S.B.C. 1996, c. 348, ss. 11, 12, 14.
Authors Cited
American Law Institute. Restatement (Third) of Law Governing Lawyers, vol. 2, § 121. St. Paul, Minn.: American Law Institute Publishers, 2000.
Banks, R. C. I’anson. Lindley & Banks on Partnership, 18th ed. London: Sweet & Maxwell, 2002.
Burgess, Robert, and Geoffrey Morse. Partnership Law and Practice. London: Sweet & Maxwell, 1980.
Devlin, Richard F., and Victoria Rees. “Beyond Conflicts of Interest to the Duty of Loyalty: from Martin v. Gray to R. v. Neil” (2005), 84 Can. Bar Rev. 433.
Estey, Wilfred M. Legal Opinions in Commercial Transactions, 2nd ed. Toronto: Butterworths, 1997.
Getzler, Joshua. “Am I My Beneficiary’s Keeper? Fusion and Loss‑Based Fiduciary Remedies”, in Simone Degeling and James Edelman, eds., Equity in Commercial Law. Sydney: Lawbook Co., 2005, 239.
Goode, Roy. “Proprietary Restitutionary Claims”, in W. R. Cornish et al., eds., Restitution: Past, Present and Future. Oxford: Hart Publishing, 1998, 63.
Hayton, David. “Unique Rules for the Unique Institution, the Trust”, in Simone Degeling and James Edelman, 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, Peter D., and John D. McCamus. The Law of Restitution. Aurora, Ont.: Canada Law Book, 2006 (loose-leaf updated August 2006).
Millett, Peter. “Proprietary Restitution”, in Simone Degeling and James Edelman, 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, Donovan W. M. “The Development of Fiduciary Obligations”, in R. Johnson et al., eds., Gérard V. La Forest at the Supreme Court of Canada, 1985‑1997. Winnipeg: Canadian Legal Historic Project, Faculty of Law, University of Manitoba, 2000, 81.
Worthington, Sarah. Equity. Oxford: University Press, 2003.
APPEALS and CROSS‑APPEAL from judgments of the British Columbia Court of Appeal (Newbury, Hall and Oppal JJ.A.) (2005), 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, [2005] 3 C.T.C. 168, 2005 D.T.C. 5059, [2005] 5 W.W.R. 108, [2005] B.C.J. No. 80 (QL), 2005 BCCA 35, and (Newbury, Hall and Levine JJ.A.) (2005), 44 B.C.L.R. (4th) 275, 215 B.C.A.C. 9, 355 W.A.C. 9, 8 B.L.R. (4th) 4, 256 D.L.R. (4th) 319, 47 C.C.E.L. (3d) 159, [2005] 11 W.W.R. 399, [2005] 5 C.T.C. 107, [2005] B.C.J. No. 1655 (QL), 2005 BCCA 385, setting aside in part a decision of Lowry J. (2002), 26 B.L.R. (3d) 235, [2003] 1 C.T.C. 88, 2002 D.T.C. 7327, [2002] B.C.J. No. 1982 (QL), 2002 BCSC 1179. Appeals allowed in part, McLachlin C.J. and Bastarache, LeBel and Abella JJ. dissenting in part. Cross‑appeal dismissed.
Irwin G. Nathanson, Q.C., Ardella A. Thompson and Geoffrey Gomery, for the appellant/respondent Davis & Company, a partnership.
Rose‑Mary Liu Basham, Q.C., Robert D. Holmes and Leslie J. Muir, for the respondent/appellant 3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation).
George K. Macintosh, Q.C., J. Kenneth McEwan, Q.C., and Robin M. Elliot, Q.C., for the appellant/respondent Robert C. Strother, the appellants Strother Family Trust (Trust No. 1) and University Hill Holdings Inc. (formerly known as 589918 British 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. Warren and Michael 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., and Andrea N. MacKay, for the respondents Sentinel Hill Productions (1999) Corporation, Sentinel Hill 1999‑1 Master Limited Partnership, Sentinel Hill 1999‑2 Master Limited Partnership, Sentinel Hill 1999‑3 Master Limited Partnership, Sentinel Hill 1999‑4 Master Limited Partnership, Sentinel Hill 1999‑5 Master Limited Partnership, Sentinel Hill 1999‑6 Master Limited Partnership, Sentinel Hill 1998 Master Limited Partnership, Sentinel Hill 1998‑2 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’Sullivan and M. Paul Michell, for the intervener the Canadian Bar Association.
The judgment of Binnie, Deschamps, Fish, Charron and Rothstein JJ. was delivered by
1 Binnie 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 the Partnership Act, R.S.B.C. 1996, c. 348. I also conclude that the Court of Appeal imposed an excessive award of compensation against Strother. I would therefore allow both appeals in part for the reasons which follow. Monarch’s cross-appeal should be dismissed.
I. Facts
2 Monarch Entertainment Corporation (“Monarch” (now 3464920 Canada Inc.)) began promoting tax‑assisted 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
3 From 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.
4 The 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
5 Robert 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.
6 The 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 prohibited Davis 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
7 In 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
8 In November 1996, the federal Minister of Finance announced his intention to amend the Income 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
9 By 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”
10 At 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 “Lade idea”) 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).
11 Strother 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
12 In 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 the ITA ). 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.
13 Darc 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
14 A 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

Court headnote

Strother v. 3464920 Canada Inc. Collection Supreme Court Judgments Date 2007-06-01 Neutral citation 2007 SCC 24 Report [2007] 2 SCR 177 Case number 30838 Judges McLachlin, Beverley; Bastarache, Michel; Binnie, William Ian Corneil; LeBel, Louis; Deschamps, Marie; Fish, Morris J.; Abella, Rosalie Silberman; Charron, Louise; Rothstein, Marshall On appeal from British Columbia Subjects Commercial law Courts Professional law Notes SCC Case Information: 30838 Decision Content SUPREME COURT OF CANADA Citation: Strother v. 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 1999‑1 Master Limited Partnership, Sentinel Hill 1999‑2 Master Limited Partnership, Sentinel Hill 1999‑3 Master Limited Partnership, Sentinel Hill 1999‑4 Master Limited Partnership, Sentinel Hill 1999‑5 Master Limited Partnership, Sentinel Hill 1999‑6 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 1998‑2 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 Rothstein JJ. 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) ______________________________ Strother v. 3464920 Canada Inc., [2007] 2 S.C.R. 177, 2007 SCC 24 Davis & Company, a partnership Appellant v. 3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation) Respondent - and - Robert C. Strother Appellant v. 3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation) Respondent - and - 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 v. 3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation) Respondent - and - 3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation) Appellant v. 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 1999‑1 Master Limited Partnership, Sentinel Hill 1999‑2 Master Limited Partnership, Sentinel Hill 1999‑3 Master Limited Partnership, Sentinel Hill 1999‑4 Master Limited Partnership, Sentinel Hill 1999‑5 Master Limited Partnership, Sentinel Hill 1999‑6 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 1998‑2 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 Indexed as: Strother v. 3464920 Canada Inc. Neutral citation: 2007 SCC 24. File No.: 30838. 2006: October 11; 2007: June 1. Present: McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein JJ. 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” in s. 12 of Partnership Act include 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 tax‑shelter schemes (with limited exceptions). The written retainer terminated at the end of 1997, but Monarch continued thereafter as a client of the firm. In November 1996, the federal Minister of Finance announced his intention to amend the Income Tax Act to 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 tax‑shelter 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 tax‑assisted 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 55 percent of the first $2 million 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 October 1998. 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 August 1998, 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 50 percent 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 March 31, 1999, S resigned from the law firm and in April joined D as a 50 percent 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 January 1, 1998 and return to Monarch all fees paid by it from that date. S and the law firm appealed, and Monarch cross‑appealed the dismissal of its claims against D and Sentinel. Held (McLachlin C.J. and Bastarache, LeBel and Abella JJ. dissenting in part on the appeals): The appeals should be allowed in part and the cross‑appeal dismissed. Per Binnie, Deschamps, Fish, Charron and Rothstein JJ.: When a lawyer is retained by a client, the scope of the retainer is governed by contract. The solicitor‑client 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. [34‑35] The subject matter of the 1998 retainer was “tax‑assisted 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 tax‑efficient basis, the 1998 retainer 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 1997 retainer had come to an end but the solicitor‑client relationship based on a continuing (if more limited) retainer in relation to tax-assisted film production services carried on into 1998 and 1999. [40] [43] [45‑46] 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 1998 retainer. Moreover, there was no excuse for S not to advise Monarch of the successful tax ruling when it was made public in October 1998. 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. [46‑48] 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 even‑handed 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. [66‑67] [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 January 1, 1998 and March 31, 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” in s. 12 are 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 January 1, 1998 to March 31, 1999. [1] [100] [106] [113‑114] A return of the fees charged to Monarch by the law firm in 1998 and 1999 for general corporate services and “clean‑up” 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. [110‑111] Monarch’s cross‑appeal against D should be dismissed for the reasons given by the Court of Appeal. [112] Per McLachlin C.J. and Bastarache, LeBel and Abella JJ. (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] [134‑135] [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 tax‑shelter 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 on‑going duty to advise Monarch of any developments in the film production tax‑shelter 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 cross‑appeal should be dismissed for the reasons given by the Court of Appeal and endorsed by the majority. [164] Cases Cited By Binnie J. Applied: R. v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70; referred to: MacDonald Estate v. Martin, [1990] 3 S.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), 246 Nfld. & P.E.I.R. 177, 2005 NLCA 22; Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592; Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651; Côté v. Rancourt, [2004] 3 S.C.R. 248, 2004 SCC 58; Ramrakha v. Zinner (1994), 157 A.R. 279; Stewart v. Canadian Broadcasting Corp. (1997), 150 D.L.R. (4th) 24; Credit Suisse First Boston Canada Inc., Re (2004), 2 B.L.R. (4th) 109; Chiefs of Ontario v. Ontario (2003), 63 O.R. (3d) 335; Bolkiah v. KPMG, [1999] 2 A.C. 222; Kelly v. Cooper, [1993] A.C. 205; Williams v. Reed, 29 F. Cas. 1386 (1824); Martin v. Goldfarb (1998), 41 O.R. (3d) 161; Waxman v. Waxman (2004), 186 O.A.C. 201; Uniform Custom Countertops Inc. v. Royal Designer Tops Inc., [2004] O.J. No. 3090 (QL); de Guzman v. de la Cruz, [2004] B.C.J. No. 72 (QL), 2004 BCSC 36; Celanese Canada Inc. v. Murray Demolition Corp., [2006] 2 S.C.R. 189, 2006 SCC 36; R. v. Speid (1983), 43 O.R. (2d) 596; Coutu v. Jorgensen (2004), 202 B.C.A.C. 67; Nocton v. Lord Ashburton, [1914] A.C. 932; R. v. Shamray (2005), 191 Man. R. (2d) 55, 2005 MBQB 1; R. v. Henry (1990), 61 C.C.C. (3d) 455; Wewaykum Indian Band v. Canada, [2002] 4 S.C.R. 245, 2002 SCC 79; Hodgkinson v. Simms, [1994] 3 S.C.R. 377; Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534; Chan v. Zacharia (1984), 154 C.L.R. 178; Warman International Ltd. v. Dwyer (1995), 128 A.L.R. 201; MacMillan Bloedel Ltd. v. Binstead (1983), 22 B.L.R. 255; McDonic Estate v. Hetherington (Litigation Guardian of) (1997), 31 O.R. (3d) 577; Dubai Aluminium Co. v. Salaam, [2003] 2 A.C. 366; Bazley v. Curry, [1999] 2 S.C.R. 534; Jacobi v. Griffiths, [1999] 2 S.C.R. 570; E.D.G. v. Hammer, [2003] 2 S.C.R. 459, 2003 SCC 52; K.L.B. v. British Columbia, [2003] 2 S.C.R. 403, 2003 SCC 51; Blackwater v. Plint, [2005] 3 S.C.R. 3, 2005 SCC 58; E.B. v. Order of the Oblates of Mary Immaculate in the Province of British Columbia, [2005] 3 S.C.R. 45, 2005 SCC 60. By McLachlin C.J. (dissenting in part on the appeals) Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651; R. v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70; Hodgkinson v. Simms, [1994] 3 S.C.R. 377; Smith v. McInnis, [1978] 2 S.C.R. 1357; Hospital Products Ltd. v. United States Surgical Corp. (1984), 156 C.L.R. 41; Kelly v. Cooper, [1993] A.C. 205; Housen v. Nikolaisen, [2002] 2 S.C.R. 235, 2002 SCC 33; Bristol and West Building Society v. Mothew, [1996] 4 All E.R. 698; Armitage v. Nurse, [1997] 2 All E.R. 705; Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534; Bazley v. Curry, [1999] 2 S.C.R. 534. Statutes and Regulations Cited Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 18.1(15) (b). Partnership Act, R.S.B.C. 1996, c. 348, ss. 11, 12, 14. Authors Cited American Law Institute. Restatement (Third) of Law Governing Lawyers, vol. 2, § 121. St. Paul, Minn.: American Law Institute Publishers, 2000. Banks, R. C. I’anson. Lindley & Banks on Partnership, 18th ed. London: Sweet & Maxwell, 2002. Burgess, Robert, and Geoffrey Morse. Partnership Law and Practice. London: Sweet & Maxwell, 1980. Devlin, Richard F., and Victoria Rees. “Beyond Conflicts of Interest to the Duty of Loyalty: from Martin v. Gray to R. v. Neil” (2005), 84 Can. Bar Rev. 433. Estey, Wilfred M. Legal Opinions in Commercial Transactions, 2nd ed. Toronto: Butterworths, 1997. Getzler, Joshua. “Am I My Beneficiary’s Keeper? Fusion and Loss‑Based Fiduciary Remedies”, in Simone Degeling and James Edelman, eds., Equity in Commercial Law. Sydney: Lawbook Co., 2005, 239. Goode, Roy. “Proprietary Restitutionary Claims”, in W. R. Cornish et al., eds., Restitution: Past, Present and Future. Oxford: Hart Publishing, 1998, 63. Hayton, David. “Unique Rules for the Unique Institution, the Trust”, in Simone Degeling and James Edelman, 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, Peter D., and John D. McCamus. The Law of Restitution. Aurora, Ont.: Canada Law Book, 2006 (loose-leaf updated August 2006). Millett, Peter. “Proprietary Restitution”, in Simone Degeling and James Edelman, 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, Donovan W. M. “The Development of Fiduciary Obligations”, in R. Johnson et al., eds., Gérard V. La Forest at the Supreme Court of Canada, 1985‑1997. Winnipeg: Canadian Legal Historic Project, Faculty of Law, University of Manitoba, 2000, 81. Worthington, Sarah. Equity. Oxford: University Press, 2003. APPEALS and CROSS‑APPEAL from judgments of the British Columbia Court of Appeal (Newbury, Hall and Oppal JJ.A.) (2005), 38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39, 1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, [2005] 3 C.T.C. 168, 2005 D.T.C. 5059, [2005] 5 W.W.R. 108, [2005] B.C.J. No. 80 (QL), 2005 BCCA 35, and (Newbury, Hall and Levine JJ.A.) (2005), 44 B.C.L.R. (4th) 275, 215 B.C.A.C. 9, 355 W.A.C. 9, 8 B.L.R. (4th) 4, 256 D.L.R. (4th) 319, 47 C.C.E.L. (3d) 159, [2005] 11 W.W.R. 399, [2005] 5 C.T.C. 107, [2005] B.C.J. No. 1655 (QL), 2005 BCCA 385, setting aside in part a decision of Lowry J. (2002), 26 B.L.R. (3d) 235, [2003] 1 C.T.C. 88, 2002 D.T.C. 7327, [2002] B.C.J. No. 1982 (QL), 2002 BCSC 1179. Appeals allowed in part, McLachlin C.J. and Bastarache, LeBel and Abella JJ. dissenting in part. Cross‑appeal dismissed. Irwin G. Nathanson, Q.C., Ardella A. Thompson and Geoffrey Gomery, for the appellant/respondent Davis & Company, a partnership. Rose‑Mary Liu Basham, Q.C., Robert D. Holmes and Leslie J. Muir, for the respondent/appellant 3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation). George K. Macintosh, Q.C., J. Kenneth McEwan, Q.C., and Robin M. Elliot, Q.C., for the appellant/respondent Robert C. Strother, the appellants Strother Family Trust (Trust No. 1) and University Hill Holdings Inc. (formerly known as 589918 British 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. Warren and Michael 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., and Andrea N. MacKay, for the respondents Sentinel Hill Productions (1999) Corporation, Sentinel Hill 1999‑1 Master Limited Partnership, Sentinel Hill 1999‑2 Master Limited Partnership, Sentinel Hill 1999‑3 Master Limited Partnership, Sentinel Hill 1999‑4 Master Limited Partnership, Sentinel Hill 1999‑5 Master Limited Partnership, Sentinel Hill 1999‑6 Master Limited Partnership, Sentinel Hill 1998 Master Limited Partnership, Sentinel Hill 1998‑2 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’Sullivan and M. Paul Michell, for the intervener the Canadian Bar Association. The judgment of Binnie, Deschamps, Fish, Charron and Rothstein JJ. was delivered by 1 Binnie 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 the Partnership Act, R.S.B.C. 1996, c. 348. I also conclude that the Court of Appeal imposed an excessive award of compensation against Strother. I would therefore allow both appeals in part for the reasons which follow. Monarch’s cross-appeal should be dismissed. I. Facts 2 Monarch Entertainment Corporation (“Monarch” (now 3464920 Canada Inc.)) began promoting tax‑assisted 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 3 From 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. 4 The 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 5 Robert 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. 6 The 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 prohibited Davis 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 7 In 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 8 In November 1996, the federal Minister of Finance announced his intention to amend the Income 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 9 By 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” 10 At 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 “Lade idea”) 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). 11 Strother 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 12 In 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 the ITA ). 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. 13 Darc 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 14 A 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

Strother v. 3464920 Canada Inc.

Court headnote

Full judgment (source text)

Related cases

Administration des aéroports régionaux d’Edmonton c. Thibodeau

Asgaraly c. Canada (Procureur général)

Chad c. Canada (Revenu national)

Banque le Choix du Président c. Canada

Compagnie des chemins de fer nationaux du Canada c. Halton (Municipalité régionale)

2093271 Ontario Inc. c. Canada

Strother v. 3464920 Canada Inc.

Court headnote

Full judgment (source text)

Related cases

Administration des aéroports régionaux d’Edmonton c. Thibodeau

Asgaraly c. Canada (Procureur général)

Chad c. Canada (Revenu national)

Banque le Choix du Président c. Canada

Compagnie des chemins de fer nationaux du Canada c. Halton (Municipalité régionale)

2093271 Ontario Inc. c. Canada