3464920 Canada Inc. v. Strother

2005 BCCA 35 3464920 Canada Inc. v. Strother

COURT OF APPEAL FOR BRITISH COLUMBIA Citation: 3464920 Canada Inc. v. Strother, 2005 BCCA 35 Date: 20050121 Docket: CA030145 Between: 3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation) Appellant (Plaintiff) 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, Trust No. 10 Respondents (Defendants) Before: The Honourable Madam Justice Newbury The Honourable Mr. Justice Hall The Honourable Mr. Justice Oppal R. Basham, Q.C., R.D. Holmes and L.J. Muir Counsel for the Appellant G.K. Macintosh, Q.C., J.K. McEwan, Q.C. and L.A. Warren Counsel for the Respondents Robert C. Strother, J. Paul Darc and for the companies known as the "Pre-1999 Sentinel Entities" (Pacific Cascadia Capital Corp., Sentinel Hill Entertainment Corp., Sentinel Hill Productions Corp., Sentinel Hill Productions II Corp., Sentinel Hill Management Corp., J. Paul Darc and Leslie 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, and Trust No.

1) I.G. Nathanson, Q.C., A.A. Thompson and E.A. Poyner Counsel for the Respondent Davis & Company W.S. Berardino, Q.C., D.C. Harris, Q.C. and A.N. MacKay Counsel for the Respondents known as the "New Sentinel Hill Entities" (Sentinel Hill Productions (1999) Corp., Sentinel Hill Master Limited Partnerships, Sentinel Hill Productions Limited Partnerships, Sentinel Hill Alliance Atlantis Equicap Millenium Limited Partnership, Sentinel Hill Productions III Corp., Sentinel Hill Alliance Atlantis Equicap Ltd. Partnership, and Sentinel Hill GP Corp.) Place and Dates of Hearing: Vancouver, British Columbia November 15-18, 2004 Place and Date of Judgment: Vancouver, British Columbia January 21, 2005 Written Reasons by: The Honourable Madam Justice Newbury Concurring in by: The Honourable Mr. Justice Hall The Honourable Mr. Justice Oppal Reasons for Judgment of the Honourable Madam Justice Newbury:

INTRODUCTION [1] At the outset of its factum, the plaintiff/appellant ("Monarch") submits that the first question raised by this appeal is whether a lawyer is entitled to advise his client that the client cannot continue in its business due to changes in applicable tax laws and then, using an exception of which he did not advise his client, secretly start up and pursue the same business while still acting for the client. [2] The respective defendants, respondents in this court, do not purport to answer that question directly. Instead, they say it ignores or distorts findings of fact made by the trial judge below. Specifically, they submit that the lawyer's retainer to provide advice to Monarch concerning tax-assisted production services financing ("TAPSF") syndications had ended before he began to act for the "new client"; that the lawyer was under no continuing duty to disclose a new initiative he and a former employee of Monarch developed in order to revive such syndications; that the lawyer and the former employee did not pursue "the same business" as Monarch had; and that in any event, once the new initiative became public, Monarch lacked the drive and skills to re-enter the highly competitive TAPSF market. For these reasons and others, they say this court must not interfere with the trial judge's dismissal of Monarch's claim against the lawyer and the ex-employee for an

accounting of the profits -- said to exceed $60 million -- made by them during the three-year period ending in September 2001, when the TAPSF business was shut down by the federal government, this time permanently. [3] Thus stated, the appeal may be likened to two ships passing in the night. In this court at least, Monarch focuses on the duty of loyalty owed by lawyers to their clients, while the defendants, like the trial judge, focus on the duties of lawyers not to disclose the confidential information of clients to others -- even to other clients who would be vitally interested in receiving it. As will be seen below, I am of the view that the former duty, the duty of loyalty, was breached by the lawyer in this case, and that even accepting the facts found by the court below, the dismissal of Monarch's claims against him cannot stand. The lawyer was indeed in a position of conflict in two senses -- a conflict of duty between two clients, and a conflict of interest between himself and Monarch, his client through 1998. [4] Both conflicts arose no later than January 30, 1998 when the lawyer prepared and entered into a written contract on his own account with the former employee of Monarch. In it, he agreed that his law firm would form certain new corporations and limited partnerships and provide the services necessary to seek an advance tax ruling for the "new idea" the two

developed for TAPSF syndications. (Although the lawyer deposed prior to trial that no draft of the ruling request was attached as a schedule to the agreement, he testified at trial that it was.) If the ruling could not be obtained, there would be no charge for the firm's fees. If the ruling was obtained, the firm would be retained to prepare the necessary offering memorandum and the lawyer would endeavour to obtain its approval of a fee arrangement based solely on subscription sales and with no minimum fee. Under clause 6 of the agreement, the lawyer was to receive 55 per cent of the first $2,000,000 of profits from "the transaction" and thereafter, 50 per cent. The lawyer's "profit participation", also referred to in clause 6 as his "equity participation", was to take the form either of common shares of the corporate entities that would receive the syndication profits, or of royalties or 'other charges'. Voting interests in the entities were to be equally divided between the lawyer and the former employee of Monarch. [5] Contrary to the defendants' submissions, the agreement was not conditional on the law firm's approval. Indeed, the lawyer did not disclose the existence of the agreement to his firm until August 1998 (and then not with complete accuracy, as the trial judge noted). The lawyer did not disclose it to Monarch at any time. [6] From the time he entered into this

agreement, the lawyer could not meet the duty of loyalty of every lawyer to his client. In Ramrakha v. Zinner (1994) 157 A.R. 279 (Alta. C.A.), Harradence J.A. described the duty as follows: A solicitor is in a fiduciary relationship to his client and must avoid situations where he has, or potentially may, develop a conflict of interests: . . . . The logic behind this is cogent in that a solicitor must be able to provide his client with complete and undivided loyalty, dedication, full disclosure, and good faith, all of which may be jeopardized if more than one interest is represented. [para. 73; emphasis added.] (I emphasize the phrase "where he has, or potentially may develop" to make the point that even if the agreement, properly construed, had given the lawyer an option to acquire an interest, as opposed to an immediate entitlement, the conflict would arise immediately.) [7] The foregoing passage from Ramrakha v. Zinner was quoted with approval by the Supreme Court of Canada recently in R. v. Neil [2002] 3 S.C.R.

631. Binnie J. for the Court also made the point that confidential information may or may not play a role in the broad principle that a lawyer must avoid conflicts of interest. (See para. 17.) The duty of loyalty was said to encompass a duty of commitment to the client's cause -- i.e., to ensure that a divided loyalty does not cause the lawyer to "'soft pedal' his or her defence of a client out of concern for another client" -- and a duty of candour with the client on "matters relevant to the retainer". (para. 19.) In my opinion, these duties are as applicable to solicitors who provide commercial or tax advice in connection with their clients' business affairs as they are to barristers who represent their clients in courts of law. [8] Monarch's claims against its former employee, the various trust and corporate vehicles through which the two men made their profits, and the lawyer's firm -- a large and reputable firm in Vancouver -- raise other questions which I will address presently. THE CLAIMS AGAINST MR. STROTHER The "Retainer" in 1997 [9] The trial judge's Reasons, written after a trial of some nine weeks, are reported at (2002) 26 B.L.R. (3d) 235, 2002 BCSC 1179, and are 95 pages long. Because of this, and because of the complexity of the facts, I will not attempt to recount them here, but will proceed on the basis that the reader has read the trial judgment. I will use

the same terminology used by the trial judge, with one exception -- the word "retainer". Although "retainer" is often used to refer to the general relationship between solicitor and client, the trial judge used it to refer to a written contract between and Monarch and the law firm ("Davis") dated October 8, 1996. This contract replaced an earlier one and was to remain in effect until the end of 1997. It provided that Mr. Strother would continue as the billing partner and "overall firm contact" for Monarch. This client had become the firm's second most lucrative client since it first began using Davis's services in 1993. [10] The agreement contemplated a sliding scale of fees for TAPSF work, calculated as percentages of Monarch's sales of limited partnership units, subject to a minimum fee of $200,000 for the year. (Monarch argued at trial that the agreement did not comply with the rules of the Law Society regarding contingent fee agreements, but the trial judge found it unnecessary to decide that point: see para. 169.) These rates were higher than those specified in the preceding agreement, a fact for which Monarch and Mr. Strother had different explanations: see paras. 163-65 of the Reasons. For purposes of this case, however, the most notable feature of the contract was an "exclusivity" clause under which Davis agreed that it would not act for any other person in connection

with the public offering of investments in "'production services' syndicated tax shelters." [11] In late 1996, the Minister of Finance announced new "Matchable Expenditure Rules" under the Income Tax Act aimed specifically at ending TAPSF syndications in Canada. The Minister granted two extensions of time in response to lobbying by the industry, but the rules finally came into effect on November 1, 1997. Like other legal advisers to TAPSF promoters in Canada, Mr. Strother advised Monarch at that time that he had no "technical fix" and that the "tax shelter business was over." (Paras. 17 and 19.) Accordingly, Monarch and its competitors essentially closed down their TAPSF business after October 31. By the time the exclusivity/fee agreement between Monarch and Davis expired at the end of 1997, the trial judge found that: . . . Monarch was completely out of the tax shelter business because the government had shut it down. Monarch and its two competitors ceased promoting tax shelters. No production services business of that kind was being done by anyone. The Deal Team meetings which Mr. Strother was required to attend for the purpose of participating in Monarch's strategic planning tapered off and he certainly had no obligation under the agreement to attend after it ended. There was no ongoing provision for Davis to be remunerated for advice which was not specifically sought. By

the end of 1997, virtually the whole basis of the firm's retainer was gone. The retainer was not renewed, and, in the circumstances, could not be, at least on the basis of providing legal services for the tax shelter business based on fees that were dependent on the volume of transactions. After the agreement ended, no continuing contractual requirement existed for Davis to act exclusively for Monarch. If Monarch had for some reason wished to retain Davis, particularly on an exclusive basis for some legal services, an appropriate form of retainer would have to have been negotiated, and it is not at all clear on what basis that could have been done. [paras. 106-107; emphasis added.] [12] It is common ground that in late 1997, Monarch's principals, Messrs. Knutson and Cheikes, sought Mr. Strother's advice regarding 'what could be done', but he suggested they defer that discussion to the new year. By December 31, he had had the conversation with Mr. Nitikman in which s. 18.1(15)(b) was mentioned, and he had prepared a memorandum for a private investor-client in which he described proceeding under that section as "inefficient" from a tax perspective. Also by the end of 1997, Mr. Strother had spoken to Mr. Holtz at CCRA and learned that a tax ruling was not out of the question for a production services transaction -- as long as it complied with the new rules. (If one believes a

later memorandum written by Mr. Strother to his firm's management committee, he had also met several times with Mr. Darc to discuss a new TAPSF venture.) The Retainer in 1998 [13] But although the term of the exclusivity/fee agreement had expired, the solicitor-client relationship between Monarch and Davis did continue, 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 Mr. 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. There was continuing "clean-up" work to be done on the existing TAPSF syndications, and Monarch sought and obtained Mr. Strother's advice on several occasions regarding tax planning, general corporate and partnership matters, a corporate amalgamation, and a possible acquisition. Thus when the trial judge stated at para. 106 that the "retainer" was not renewed in 1998, he must be taken to be referring to the written agreement of October 8, 1996 and not to the solicitor-client relationship between Davis and Monarch. [14] In 1998, Mr. Strother met with Mr. Knutson and/or Mr. Cheikes on January 15, 21, 27 and May 19, June 26, July 24, August 4 and (by chance) in mid-September. They testified that they

inquired what business opportunities might be available to Monarch in the wake of the new tax rules and that they relied on him to advise if there was any "way around" the rules that would permit them to resume TAPSF syndications. Mr. Knutson said Mr. Strother was "very emphatic" that "there is nothing that you can do". Mr. Knutson took this to mean that Mr. Strother "had no prospect that he could proffer . . . for us to do any kind of business whatsoever." Mr. Strother himself acknowledged in discovery that he was "aware of the interest of Monarch that any possibilities of staying in business be presented to it." [15] It is unclear whether the trial judge accepted the testimony of Messrs. Knutson and Cheikes concerning their meetings with Mr. Strother in 1998. He stated at para. 99 of his Reasons that the testimony of Messrs. Knutson and Cheikes fell "far short of supporting what [was] pleaded". He continued: Indeed, to my mind, the difference in what is pleaded and what is said illustrates the frailty in this aspect of Monarch's case. What was said at the meetings in 1997 and 1998 was obviously said in the context of the government's termination of tax shelters and of Monarch having stopped doing that business in the same way as had both Grosvenor Park and Alliance. In other words, 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. What they wanted to know was whether Monarch could do anything else apart from tax-sheltered financing. Mr. Strother says that, in general terms, the focus of the meetings he had with Mr. Knutson in January was to consider what Monarch might do, and Mr. Knutson says that it was not until the end of January that he was able to get Mr. Strother to sit down and focus on talking about new business opportunities. The subject of tax-shelter financing never arose. The only real advice Mr. Strother appears to have given was with respect to the loss-co idea. He was not asked to advise on tax-shelters and he did not do so. [paras. 99-100; emphasis added.] [16] In this court, the defendants rely heavily on this reasoning to support their position that Mr. Strother owed no duty to Monarch in connection with his and Mr. Darc's "new idea" or "new structure". (The contribution made by each individual to the new tax shelter/tax credit structure incorporated in the ruling request is not material for present purposes.) The defendants assert that the question of the nature and scope of a lawyer's retainer is a purely factual question on which a court of appeal should not

interfere "save for error arising from misapprehension of the evidence": per Chief Justice Dickson in Smith v. McInnis [1978] 2 S.C.R. 1357, at 1360-61. (See also, of course, Housen v. Nikolaisen [2002] 2 S.C.R. 235, at paras. 26-36, regarding the broad principles of appellate review.) Further, Mr. Nathanson on behalf of Davis submitted that no "implied retainer" encompassing a duty on the part of Mr. Strother to inform Monarch of the new idea or the possibility of a favourable ruling could have arisen in 1998 as a result of Monarch's asking the lawyer what could be done. This could not ground a fiduciary duty, Mr. Nathanson argued, because Monarch's TAPSF business and the "retainer" were "over". [17] One must not, however, equate the scope of a lawyer's contractual duty to advise his client -- usually a matter of fact like that at issue in Smith v. McInnis -- with his fiduciary duties, including the duty not to place himself in a position of conflict and the duty to disclose any personal interest he may have that might affect his loyalty and dedication to the client's cause. The latter duties are implied by law and are unlikely to be validly excluded or diminished by contract. (See, e.g., s. 65(3) of the Legal Profession Act, S.B.C. 1998, c. 9 and the various Guidelines in the Law Society's Professional Conduct Handbook, breach of which may lead to disciplinary proceedings.)

Certainly when Monarch asked 'what was to be done', it was entitled to an honest and complete answer, whether or not Mr. Strother had a file open for continuing TAPSF work. The fact that the client did not ask about s. 18.1(15)(b) specifically, or seek repeated confirmations that Mr. Strother had not yet become aware of the possibility of a "technical fix", is surely not conclusive of his duty to respond candidly. The very reason Monarch had abandoned its TAPSF business, had discontinued the meetings of its "deal team", and was looking around for other alternatives, was that Mr. Strother had told them there was 'nothing to be done' (in the way of TAPSF syndications) under the new rules. In my opinion, it does not lie in his mouth to say now, as Mr. Macintosh contends, that Messrs. Knutson and Cheikes "were not consulting Mr. Strother on tax shelters and they had no expectation of receiving any advice in that regard." They were not legally knowledgeable, and whether they "expected" to be told that there was a possible solution to their predicament, they were entitled to candid and complete advice from a lawyer who was not in a position of conflict. [18] Ms. Basham submitted that Mr. Strother's duty was to inform Monarch of any information that would be "likely to operate upon the [client's] judgement", meaning the "new idea" concerning the use of s. 18.1(15)(b) and the

possibility (which became more probable as 1998 wore on) of a favourable tax ruling. She cited Ocean City Realty Ltd. v. A & M Holdings Ltd. (1987) 36 D.L.R. (4th) 94 (B.C.C.A.), which concerned the duty of disclosure owed by a real estate agent to her principal. Wallace J.A. for the Court stated: The test is an objective one to be determined by what a reasonable man in the position of the agent would consider, in the circumstances, would be likely to influence the conduct of his principal. I would emphasize that the agent cannot arbitrarily decide what would likely influence the conduct of his principal and thus avoid the consequences of non-disclosure. If the information pertains to the transaction with respect to which the agent is engaged, any concern or doubt that the agent may have can be readily resolved by disclosure of all the facts to his principal. In the instant case the very withholding from the principal of the information concerning the payments to the purchaser of a portion of the commission could be evidence from which one might properly infer that the agent was aware that such circumstances would be a matter of concern to the principal. [at 99] In Ms. Basham's argument, a solicitor is similarly duty-bound to provide such advice as the client is likely to be interested in, and any doubt as to the scope of that obligation should be resolved in favour of

disclosure. In this case, of course, there is little doubt that Monarch would have been very interested in knowing what Mr. Strother knew, and indeed he testified as much. [19] In response, Mr. Nathanson submitted that a lawyer is expected to exercise judgement in providing advice to his or her client and need not raise a hopeless idea (see R. & L. Contracting Ltd. v. A and B (1981) 28 B.C.L.R. 342, at 351 (B.C.C.A.)) or offer advice outside the general scope of his or her retainer (see Clark Boyce v. Mouat [1993] 4 All E.R. 268, at 275 (J.C.P.C.)). Counsel referred us to Credit Lyonnais S.A. v. Russell Jones & Walker [2003] Lloyd's Rep. PN 7 (Ch.D.), a negligence case that turned on the terms of a law firm's retainer in connection with a lease which a client was planning to terminate in accordance with a specific clause in the lease. The client engaged the firm to attempt to obtain an extension of the time within which the clause could be invoked. Later the client decided to terminate immediately, but the solicitor did not draw to the client's attention the importance of paying the termination fee by the date specified in the lease. That date went by, and the lessor refused to treat the lease as at an end. The client sued the law firm for breaching its duty of care in failing to warn it about the termination requirements. The firm contended that its retainer had been

restricted to serving the notice of termination and had not included advising as to termination and the "time-sensitive nature" of the fee provision in the lease. [20] Mr. Nathanson noted in particular the comment of Laddie J. at para. 28 of Credit Lyonnais that "the solicitor has only to expend time and effort in what he has been engaged to do and for which the client has agreed to pay. He is under no general obligation to expend time and effort on issues outside the retainer." However, the Court in Credit Lyonnais also went on to observe: . . . if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing "extra" for which he is not to be paid. He is simply reporting back to the client on issues of concern that he learns as a result of, and in the course of, carrying out his express instructions. In relation to this, I was struck by the analogy drawn by Mr. Seitler. If a dentist is asked to treat a patient's tooth and, on looking in the latter's mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if, in the course of carrying out instructions in his area of competence, a lawyer notices, or ought to notice, a problem or risk for

the client of which it is reasonable to assume that the client may not be aware, the lawyer must warn him. I do not need to consider what would be the consequences if the lawyer does more than asked for, for example reads documents that he was not asked to read, and discovers a risk to the client. [para. 28; emphasis added.] The Court held that since the solicitor had been asked to read the lease in question, it had been necessary for him to consider the termination conditions, and that these "should have alerted him to the risk facing [his client] under the latter clause, and they should have been warned. The failure to do so is a . . . breach of duty to the client." (Para. 36.) [21] I acknowledge that we are not concerned with "risks" in this case. I also appreciate that as stated in Clark Boyce at 275, it would pose an "intolerable burden" on solicitors if they were expected to offer advice on any matter that might affect their clients' interests, regardless of how remote the connection to the subject-matter of the retainer. However, authorities concerning the scope of a lawyer's duty of care for purposes of the law of negligence, or concerning the scope of a lawyer's contractual obligation to provide advice, are of limited relevance where a conflict of interest is concerned. Such a conflict must always be disclosed and the solicitor must withdraw from the position of

conflict unless his client gives an informed consent. It is hardly necessary to state that this context is not governed by the law of the marketplace or of contract or negligence alone, but by the principles of "trust, confidence, and independence": per La Forest J. in Hodgkinson v. Simms [1994] 3 S.C.R. 377, at 415. [22] Thus I respectfully disagree with the trial judge's statement at para. 45 of his Reasons that Mr. Strother's fiduciary duty "did not serve to broaden his contractual duty in the sense of requiring him to give advice or provide information beyond what his firm's retainer required". The trial judge here relied on Clark Boyce, in which both negligence and breach of fiduciary duty were alleged by a client who had been warned by her solicitor "in no uncertain terms" that she should obtain independent advice. The solicitor's firm was acting both on her behalf and on behalf of her son, who was borrowing funds to be secured by a mortgage in her favour. The Judicial Committee rejected the mother's argument that the lawyer had been obliged to refuse to act for her after he had satisfied himself that she "was fully aware of what she was doing" and after she had rejected independent advice. The Committee then went on to consider the question of fiduciary duty: That a solicitor owes a fiduciary duty to a client is not in doubt. The classic case where the duty arises is

where a solicitor acts for a client in a matter in which he has a personal interest. In such case there is an obligation on the solicitor to disclose his interest and, if he fails so to do, the transaction, however favourable it may be to the client, may be set aside at his instance . . . . Another case of breach is where a solicitor acts for both parties to a transaction without disclosing this to one of them or where having disclosed it he fails, unbeknown to one party, to disclose to that party, material facts relative to the other party of which he is aware. A fiduciary duty concerns disclosure of material facts in a situation where the fiduciary has either a personal interest in the matter to which the facts are material or acts for another party who has such an interest. It cannot be prayed in aid to enlarge the scope of contractual duties. Thus, there being no contractual duty on Mr. Boyce [the solicitor] to advise [the client] on the wisdom of entering into the transaction, she cannot claim that he nevertheless owed her a fiduciary duty to give that advice. Furthermore, any duty of disclosure can only extend to the solicitor's knowledge of facts and not to his lack of knowledge thereof. [at 275; emphasis added.] [23] I do not read this passage as suggesting that a fiduciary duty cannot impose an obligation on a solicitor to disclose material facts relating to his

position of conflict, particularly where he has a personal interest. Indeed, I read Clark Boyce as confirming such a duty. On the facts of that case, the duty was met. Similarly, the statement of Oliver J. in Midland Bank Trust Co. Ltd. v. Hett, Stubbs & Kemp [1978] 3 All E.R. 571 (Ch.D.), also a tort case relied on by the trial judge, to the effect that "[t]here is no such thing as a general retainer" does not in any way negative the duty of a solicitor, like any other fiduciary, to advise his client of the existence of a conflict of interest when one arises. [24] This duty may continue even after the solicitor's retainer has terminated. In Allison v. Clayhills (1908) 97 L.T. 709, [1904-7] All E.R. Rep. 500 (Ch.D.), for example, Parker J. held that a solicitor's fiduciary duty will last as long as his "ascendancy" over the client can operate, and thus may require full and proper disclosure of his interest in any transaction between himself and his client "long after the relationship of solicitor and client in its stricter sense had ceased to exist." (At 502.) This principle was approved by the Privy Council in McMaster v. Byrne [1952] 1 All E.R. 1362, a case on appeal from Canada, and was applied in Korz v. St. Pierre (1987) 43 D.L.R. (4th) 528, at 637-38 (Ont. C.A.). In the case at bar, it was implicit in Mr. Strother's continuing to act for Monarch that it was subject to the

"ascendancy" of his advice. [25] In my view, the trial judge also erred in law in concluding at paras. 100-112 of his Reasons that because Davis's exclusivity/fee agreement with Monarch had expired and Monarch had been forced to discontinue its TAPSF business, Mr. Strother ceased to be under any obligation to advise it of the possibility that TAPSF syndications could be revived or that it should seek advice elsewhere. I need not decide whether the "idea" was in fact confidential information belonging to Mr. Darc (as the trial judge suggested at para. 122) or "information of a competitive nature" (para. 117), or was simply information that became part of Mr. Strother's professional knowledge (see Spector v. Ageda [1971] 3 All E.R. 417, at 430 (Ch.D.)). If it was confidential information of Mr. Darc's, I agree that Mr. Strother could not disclose it to Monarch. But having undertaken to work towards a tax ruling that would contradict the continuing advice he had given and was continuing to give Monarch -- either by his silence or by telling its principals there was 'nothing to be done' -- Mr. Strother had placed himself in a position of conflict of duty and of interest. The following passage from the judgment of Lord Cozens-Hardy M.R. in Moody v. Cox and Hatt [1917] 2 Ch. 71, aptly describes his situation: A man may have a duty on one side and an interest on another. A solicitor

who puts himself in that position takes upon himself a grievous responsibility. A solicitor may have a duty on one side and a duty on the other, namely, a duty to his client as solicitor on the one side and a duty to his beneficiaries on the other; but if he chooses to put himself in that position it does not lie in his mouth to say to the client "I have not discharged that which the law says is my duty towards you, my client, because I owe a duty to the beneficiaries on the other side." The answer is that if a solicitor involves himself in that dilemma it is his own fault. He ought before putting himself in that position to inform the client of his conflicting duties, and either obtain from that client an agreement that he should not perform his full duties of disclosure or say -- which would be much better -- "I cannot accept this business." I think it would be the worst thing to say that a solicitor can escape from the obligations, imposed upon him as solicitor, of disclosure if he can prove that it is not a case of duty on one side and of interest on the other, but a case of duty on both sides and therefore impossible to perform. [at 81; emphasis added.] In this case, Mr. Strother should have told Mr. Darc that he 'could not accept this business'. His failure to do so meant that he could not be candid with his existing client, Monarch, regarding a subject on which he had

given clear and unequivocal advice. He would have to "hold back" on what he would normally advise Monarch, in order to protect the confidentiality of his other client, Mr. Darc (and the Sentinel Hill companies.) Once he had accepted Mr. Darc's retainer (and become entitled to a share of profits) he then was required in my view to cease acting for both clients and as I have already said, to alert Monarch to the possibility that his previous advice was incorrect. Although it is not necessary to decide the point for purposes of this appeal, I would also suggest that he was precluded from going into business with Mr. Darc, even if he had first left his law practice -- that, to quote the well-known words of the Lord Chancellor in Keech v. Sandford [1726] Sel. Cas. Ch. 61, 25 E.R. 223, he was the "only person of all mankind" who could not take up the opportunity -- at least without the fully informed consent of Monarch. [26] The trial judge recognized, of course, that in a situation of conflict, a lawyer must withdraw. At paras. 118‑19 of his Reasons, he stated: As I understand Monarch's position, it says that Mr. Strother was obliged to disclose to it information which he would not have possessed except for his acceptance of a retainer he should not have accepted. In my view, the position is untenable. Had Mr. Strother not been in a position to act for Sentinel Hill, because Davis

had acted or was continuing to act for Monarch, his duty would not have required him to disclose confidential information to Monarch but rather to refuse or discontinue the Sentinel Hill retainer. If Mr. Strother had not been in a position to be consulted by Mr. Darc and to accept from him instructions to seek an advance tax ruling for Sentinel Hill, he would have been obliged to tell Mr. Darc that he would have to seek alternative legal representation and, depending upon what Mr. Darc had told Mr. Strother of his intentions, he might also have had to refer Monarch elsewhere. What he could not do was disclose to Monarch what he knew of Mr. Darc's intentions. The obligation of a solicitor faced with a divided duty, or conflicting interest, is to withdraw. It is not to disclose to one client what he holds in confidence for another. I do not read Moody as authority for any contrary proposition. [Emphasis added.] The trial judge fell into error, however, in assuming that Mr. Strother was "in a position to act for Sentinel Hill" in seeking the tax ruling at the same time as he continued to advise Monarch. The lawyer had told his longstanding client one thing, and as 1998 progressed, it was becoming more and more apparent that that "one thing" might not be correct. He was working towards a ruling that would provide a "technical fix". The fact that the "long shot" became less of a

long shot only gradually does not in my opinion provide a defence or diminish his duty. As McEachern, then C.J.S.C., said in Henfrey & Co. Ltd. v. A Law Firm (1983) 149 D.L.R. (3d) 736 (B.C.S.C.): While these conflicts arise infrequently, and usually under circumstances where there is time for leisurely consideration, the law is the same whether the conflict develops gradually or arises suddenly. Further, a normal solicitor-and-client relationship may be visited with a conflict as a result of developments which are not always foreseeable until they arise. When that occurs the solicitor must react quickly, and he must be right or suffer the consequences. This is as it should be because the principles governing lawyers' conduct are so well-known, and they are so unmistakably clear, that there should be no difficulty in deciding what must be done. [at 745] [27] Even more fundamentally, as soon as Mr. Strother and Mr. Darc entered their agreement in January 1998, Mr. 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. This interest provides the answer to the question posed by the trial judge at para. 84 of

his Reasons: It is more difficult to see, without benefit of hindsight, why Mr. Strother could have thought there was any advantage he might derive by concealing an exception from his largest client. For some years that client had occupied half of his practice and generated substantial remuneration for his firm. Having said this, however, I note that it is not necessary to prove bad faith or a fraudulent or personal motive underlying a fiduciary's breach of duty before liability will be imposed. As Lord Herschell acknowledged in Bray v. Ford [1896] A.C. 44, at 52 (H.L.), the "positive rule" against a fiduciary's profiting from his or her position may be "departed from in many cases, without any breach of morality . . . and without any consciousness of wrong-doing". The breach of duty alone is sufficient to entitle the beneficiary to a remedy. (See also K.P. McGuinness, The Law and Practice of Canadian Business Corporations (1999), at 745-46.) [28] Instead of disclosing his interest and referring Monarch to another firm, Mr. Strother took pains to ensure that no one at Davis let slip to Monarch the fact that the firm was acting for Sentinel Hill in connection with a new TAPSF tax ruling. When he was about to meet with Mr. Knutson on May 19, 1998, he was obviously conscious of Monarch's continuing reliance on his advice in this regard and wondered aloud to another partner about

"what we could tell" Monarch if Mr. Knutson asked specifically whether there was a way around the new Rules at that meeting. Framed this way, his concern could only elicit the obvious response that one client's confidential information could not be disclosed to another client. The following day, he was no doubt relieved to advise his partner that the issue had not arisen. He continued to hold back information he knew Monarch would be vitally interested in, and allowed Messrs. Knutson and Cheikes to go on thinking there was 'nothing to be done'. [29] The trial judge was of the view -- which I do not doubt as a general proposition -- that solicitors may routinely act, and must be free to act, for clients who are competitors. (Para. 115.) But in my respectful opinion, that proposition is not determinative in this case. Not only were Monarch and Sentinel Hill "commercial competitors"; Monarch was relying for advice from a lawyer who was entitled to 50 per cent of the profits and equity shares of Sentinel Hill. Unbeknownst to Monarch, Mr. Strother himself was "the competition". He had both a direct personal interest, and an indirect professional interest, in seeing that Monarch remained in the dark and that Sentinel Hill was first to market with the new structure. Even assuming the confidentiality of the "new idea", this was a breach of the duty of loyalty he and his firm owed

Monarch. To paraphrase the elements of that duty as described in Neil, his duty to avoid conflicting interests, his duty of commitment to the client's cause, and his duty of candour with the client on matters relevant to the retainer were all compromised. The "bright line" was crossed. The Events of Late 1998 [30] As mentioned earlier, Mr. Strother did not inform Davis of his agreement with Mr. Darc at the time it was signed in January 1998. However, by August 4, the "Davis & Company rumour mill" and the prompting of the firm's managing partner led him to prepare a memorandum to the management committee. He began the memorandum by stressing that at the time of writing, Sentinel Hill's prospects remained "highly speculative and uncertain." He had not previously raised the issue of his involvement with Sentinel Hill because he "felt there was no point in provoking a controversial discussion unless and until the venture had some potential for economic gain." He stated that "[d]uring the late fall of 1997, Paul Darc and I met several times to discuss the possibility of forming a company to carry out [TAPSF]." (My emphasis.) (As the trial judge noted at para. 77 of his Reasons, in discovery Mr. Strother denied any contact with Mr. Darc for that purpose in 1997 and said only that they had "met a couple of times".) Mr. Strother went on to describe Mr. Darc's efforts in interesting

various studios in the United States in a "proposal", and continued: In the meantime, the new venture incurred some modest start-up costs and was expected to incur additional costs . . . if the venture was successful in obtaining contracts from the studios. Mr. Darc and I agreed to share these costs and to participate equally in the profits. We decided to call the venture "Sentinel Hill Entertainment" and, accordingly, we incorporated a company. At the time of incorporation, we decided that Mr. Darc would be sole shareholder and director and that I would have an option to acquire up to 50% of the common shares. Any funds which I put into the venture prior to the exercise of my option would be treated as advances. [Emphasis added.] Again, Mr. Strother was inaccurate in stating that he had reached his agreement with Mr. Darc at the time of the incorporation of Sentinel Hill Entertainment Corporation. It was incorporated in early March, and their agreement had been entered into on January 30. Further, the agreement entitled him to 55 per cent of profits as soon as they materialized, not to the exercise of an "option" as the memorandum suggested. It went on to state that when Messrs. Strother and Darc had decided to seek a ruling, Sentinel Hill had entered into a retainer agreement with Davis -- also a puzzling assertion, since the ruling request had been filed in March and no

retainer agreement, at least one in writing, was signed until October. Mr. Strother advised that approximately $46,000 of fees and $5,000 worth of disbursements had been incurred and that preliminary indications on the ruling request were "hopeful, though the attainment of a ruling on favourable terms is highly uncertain at this time." [31] Under the heading "Conflict of Interest Issues", Mr. Strother wrote that he had spoken with an official of the Law Society, who had drawn his attention to chapter 7 of the Professional Conduct Handbook. According to Mr. Strother: [He] acknowledged that the word "matter" [in Principle 1] was ambiguous but suggested that it meant a litigation proceeding and probably included a commercial transaction. With respect to the current circumstances (my having prepared a ruling request and had conversations with Revenue Canada), he advised that I am potentially technically off-side with Principle 1 but that the only party who could complain would be Mr. Darc. He suggested that I should advise Mr. Darc of the rule and let him know that he has right to complain to the Law Society at any time. I did so and Mr. Darc asked that I continue with the ruling request because he felt that my involvement was critical to the success of the ruling request process. No mention was made of Mr. Strother's continuing to act for Monarch. [32] Mr. Strother also noted that

an exclusion to the Law Society's liability insurance policy disentitles a lawyer to coverage where he and related persons have "control . . . or ownership" greater than 10 per cent of "any organization". In light of these facts, he continued, there were three alternatives open to him -- to terminate the retainer arrangement between Sentinel Hill and Davis and refer Sentinel Hill to other lawyers, to reduce his share of entitlement to 10 per cent or less, or to resign from Davis. [33] Mr. Strother wrote that he preferred not to pursue the third alternative, "an economic opportunity which is, at this time, highly speculative, risky and potentially worthless." While the first alternative was, he said, most favourable to himself, he favoured the second in the interests of sharing the potential benefits with his partners. He advised that he had arranged with Mr. Darc for Sentinel Hill to pay Davis a fee equal to 1.75 per cent of the first $10 million of subscription proceeds received from the issue of partnership units, 2.75 per cent of the next $10 million, 3.75 per cent of the third $10 million and one per cent thereafter. This fee, he noted, was more than two and a half times the size of the fee previously paid by Monarch. He stated his willingness to limit his shares of Sentinel Hill to 10 per cent and to relinquish the other 40 per cent as the "price of continuing the client

relationship and preserving the opportunity for significant fee income to the firm." [34] Mr. Strother testified at trial that the firm's managing partner responded to his memorandum "unilaterally" -- i.e., without consulting the committee -- to the effect that Mr. Strother would not be permitted to own any interest in Sentinel Hill. Mr. Strother said he advised Mr. Darc of this decision and that it was his "clear intention" to stay as a partner at Davis. [35] Once the ruling was obtained and Sentinel Hill began to succeed on a large scale, however, Mr. Strother was apparently persuaded to join Mr. Darc at Sentinel Hill after all. Although he did not leave Davis officially until March 31, 1999, Mr. Darc made substantial funds available to him beginning in late February through his company, Pacific Cascadia. These originally took the form of loans ($450,000 on February 24 and $335,000 on March 10, 1999). After Mr. Strother officially left Davis, he received 50 per cent of the common shares of Sentinel Hill Entertainment Corporation for a nominal amount and an additional $900,000 by way of loans from Mr. Darc's company. The total amount of the loans made to him in 1998 -- some $1,685,000 -- was ultimately set off against management fees that became payable to him for that year. [36] It appears that Monarch did not become aware of the Sentinel Hill ruling until early 1999. In the

meantime, Mr. Strother and his firm continued to act for and bill Monarch for various services. Notably, Mr. Strother met on November 27 and December 8, 1998 with Monarch personnel regarding tax matters and "tax planning for Monarch 1993 and 1994 structures" (we were not told what this reference meant) and sent out bills to Monarch as late as January 19, 1999 for these and other services. The firm's retainer (used in its broader sense) was not terminated until Monarch learned of the Sentinel Hill ruling and the role Mr. Strother had played in obtaining it. Post-Ruling Events and the Sentinel Hill Companies [37] The advance tax ruling based on the "new structure" developed by Messrs. Darc and Strother was issued by CCRA on October 6, 1998. The ruling was in the name of Sentinel Hill Entertainment Corporation, a company of which Mr. Darc (through his holding company) then owed all the common shares -- subject, of course, to his agreement of January 30, 1998 with Mr. Strother. On behalf of Sentinel Hill, Mr. Darc immediately signed the contingency fee agreement with Davis that Mr. Strother had prepared some months earlier. [38] In the marketplace, word had begun to spread in the summer of 1998 that, to quote from the testimony of Mr. Bacal, Alliance Atlantis's tax lawyer, "Mr. Strother was working on some kind of deal relating to production services". Alliance heard about the

ruling two days after it was issued, and within seven weeks, had prepared its own ruling application. It received a ruling in February 1999 and began marketing its syndications the next day. [39] In late 1998, Mr. Sherman at Grosvenor Park in the U.K. "caught a snippet" of a new production services deal that was combined with the new tax credit program and had CCRA's blessing. He had already decided to leave Grosvenor Park, and quickly set up a meeting with Mr. Darc and Mr. Strother for February 16, 1999. He negotiated a consulting contract between his company and Sentinel Hill Entertainment Corporation, and a sales contract with it, Sentinel Hill Sales Corporation and Sentinel Hill Productions (1999) Corporation under which he became the exclusive marketer of the evolving "structure" marketed by those companies. [40] The Sentinel Hill companies enjoyed great success with their syndications in 1999 but became even more profitable when Mr. Sherman initiated changes, not apparent from the "outside", that made their financing structure more competitive and efficient. The changes were such that Mr. Harris, counsel for the New Sentinel Hill Entities, referred to the TAPSF structure used by Sentinel Hill from early 1999 on as the "Sherman Structure." Whether this is an exaggeration or not, the trial judge found that Sentinel Hill "may not have survived" without Mr. Sherman's

"structural innovations." (Para. 185.) At the same time, Mr. Sherman himself acknowledged that he made the changes "while still operating within the framework of the advance tax ruling that had been obtained by Sentinel Hill Entertainment Corporation." [41] In March 1999, Monarch wrote to Messrs. Strother and Darc threatening legal action. Its correspondence was disclosed to Mr. Sherman and his partner Mr. Gordon at the time they were negotiating their consulting and sales arrangements with Sentinel Hill. As part of his due diligence, Mr. Sherman obtained legal advice. Evidently, Monarch's threats did not concern him unduly, and in December 1999, Messrs. Strother, Darc, Gordon and Sherman signed a memorandum of understanding in which they agreed to form a new company, Sentinel Hill Ventures Corporation, to market tax shelter products in the year 2000. Through their respective corporate vehicles, each of the men became a 25 per cent owner. [42] Only two months later, Mr. Sherman was active in bringing about the merger of the new company with Alliance Atlantis Equicap. The new company was called "Sentinel Hill Alliance Atlantis Equicap", or "SHAAELP", and was able to use the well-known "Alliance Atlantis" logo in its marketing. Each of Messrs. Strother, Darc, Gordon and Sherman received a 17.5 per cent in the new entity, and Atlantis Alliance Equicap received 30 per cent. The

merged corporation continued to market TAPSF syndications successfully until such tax shelters were closed down by new tax legislation which came into effect in the fall of 2001. [43] According to an expert report prepared for Monarch's counsel, the "Sentinel Hill Group" raised approximately $40 million in 1998 by way of TAPSF syndications, and $600 million in 1999. In return, the Group received management fees from the limited partnerships, units of which were sold to public investors. After the SHAAELP merger, a further $1.6 billion was raised in the year 2000 and at least another $500 million was raised in the first half of 2001, resulting in a total of approximately $2.7 billion raised by the Sentinel Hill Group since the inception of their business. The expert's final report estimated the entitlement of Messrs. Strother and Darc to financial benefits from Sentinel Hill up to the end of the year 2001 to be as follows: 1998 As previously estimated $4,132,131 1999 As previously estimated $20,886,761 Deferred management fees $1,931,267 $22,818,028 2000 As previously estimated $21,690,510 2001 As previously estimated $15,400,000 Revision for actual results $448,244 $15,848,244 Total $64,488,913 Since each of Messrs. Darc and Strother held 50 per cent of the shares, the expert opined that a reasonable allocation to each individual would be $32,344,456. What Monarch Would Have

Done [44] At paras. 180-87 of his Reasons, the trial judge addressed Monarch's submission that had it been informed of how the s. 18.1(15)(b) exception might be used, it would have "done whatever was possible to stay in the tax shelter business." He framed the question as whether it would be "reasonable to conclude that, while Monarch never did re-enter the [TAPSF] business after it learned of the Sentinel Hill advance tax ruling, it would, nonetheless, have sought to do so in the circumstances that prevailed throughout 1998 if Mr. Knutson and Mr. Cheikes had known about the exception to the Matchable Expenditures Rules on which the ruling was sought and obtained". (Para. 180.) He noted that although it was possible for promoters to make "very substantial profits" in the TAPSF business in the three-year interval ending September 30, 2001, Monarch did not in fact re-enter the business after it became aware of Sentinel Hill's tax ruling. In the trial judge's words, while Grosvenor Park and Alliance, Monarch's traditional competitors, "moved very quickly indeed", Monarch "held back" and seemed unable to make the required adjustments. (Para. 182.) Mr. Knutson, for example, demanded a commitment from studios of $267 million (U.S.) per year in NCLEs before he would proceed -- a condition that was simply unrealistic. Monarch's efforts made to "reverse engineer" the Sentinel Hill

financing structure also proved unsuccessful. [45] The trial judge rejected Monarch's submission that it would have invested substantial funds and efforts to seek an advance tax ruling if it had known the true facts, even though the company had "dismantled [its] business and discharged almost all of the key employees". (Para. 183.) The trial judge reasoned: Monarch says it would have had an all-important competitive advantage in 1998 which it did not have in 1999, and that would have made all the difference. But Monarch could never have assumed it would be the first to get an advance tax ruling and re-enter the business, nor could it have expected in any event to be free of severe competition from Grosvenor Park and Alliance. Indeed, Monarch had seen its competitors drastically reduce its share of the market. As indicated, Monarch's share declined from 100% to less than 20% in the space of one year in 1996 and was eroded even further in 1997. . . . There is little in the circumstances which prevailed prior to the Sentinel Hill advance tax ruling to support what Mr. Cheikes and Mr. Knutson say they would have done, particularly when considered in light of what they actually did do in the three years after the ruling was issued. It certainly appears to me that it would not, on the evidence, be reasonable to accept as fact the opinions they express now. The balance of

probabilities is against them. In my view, it seems clear that, by the fall of 1997, Monarch had no tax shelter business to be taken, and in 1998, there was no business opportunity for tax-assisted production services financing that it would have taken. [paras. 185-87; emphasis added.] [46] These findings were relied on at least by the New Sentinel Hill Entities in support of their argument that a causal connection must be shown by a plaintiff seeking an equitable remedy (such as an accounting of profits) for breach of fiduciary duty. They noted Warman International Ltd. v. Dwyer (1995) 128 A.L.R. 201, where the High Court of Australia stated: In determining the proper basis for an account of profits, it is of first importance in this, as in other cases, to ascertain precisely what it was that was acquired in consequence of the fiduciary's breach of duty. And, in some situations, it may also be relevant to ascertain what was lost by the plaintiff. [at 214; emphasis added.] Similarly, in Canson Enterprises Ltd. v. Boughton & Co. [1991] 3 S.C.R. 534, a case concerned with equitable compensation, La Forest J. for the majority noted that "[i]n the case of a mere breach of duty, the concern of equity is to ascertain the loss resulting from the breach of the particular duty. Where the wrongdoer has received some benefit, that benefit can be disgorged. . . ." (At 578; my emphasis.)

McLachlin J. (now C.J.C.) in the minority observed that a fiduciary in a land transaction must be responsible for "losses flowing from the fiduciary breach" but not for all wrongful acts associated with the land thereafter causing loss to the plaintiff, since that would not only deter future breaches but also render such fiduciaries "impotent". (At 557.) [47] I must say I would have been very surprised if the law were anything else, or if Monarch had suggested that it was entitled to recover any profits from Mr. Strother beyond those made in consequence of his breach of duty. But the necessity for a causal connection does not mean that before the beneficiary of a fiduciary duty may recover, he or she must prove that "but for" the breach, he or she would have taken up the opportunity in question and would have made the profits in question -- effectively, to prove a loss. The traditional, and supposedly "inflexible", rule of Equity is that "the court . . . is not entitled . . . to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that." (Parker v. McKenna (1874) L.R. 10 Ch. App. 96, at 124-25.) If further authority is needed for this proposition, reference may

be made to the seminal decision of Keech v. Sandford, supra, where it was no defence for the trustee to show that the cestui que trust could not have renewed the lease itself. Thus the Lord Chancellor stated in connection with the infant's trust in that case: I must consider this as a trust for the infant; for I very well see, if a trustee, on the refusal to renew, might have a lease to himself, few trustees would be renewed to cestui que use; though I do not say there is a fraud in this case, yet, he should rather have let it run out, than to have had the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestui que use. [at 223] Reference may also be made to Regal (Hastings), Ltd. v. Gulliver [1942] 1 All E.R. 378 (H.L.), where it was no defence for the corporate directors to show that their company could not provide the money to take up the shares in question; and Boardman v. Phipps [1966] 3 All E.R. 721 (H.L.), where it was said (e.g., by Lord Hodson, at 748) that whether or not the trust or its beneficiaries could have taken advantage of the information in question was immaterial. More recently, in

Industrial Development Consultants Ltd. v. Cooley [1972] 1 W.L.R. 443 (H.C.), Roskill J. stated: The remarkable position then arises that if one applies the equitable doctrine upon which the plaintiffs rely to oblige the defendant to account, they will receive a benefit which, on Mr. Smettom's evidence at least, it is unlikely they would have got for themselves had the defendant complied with his duty to them. On the other hand, if the defendant is not required to account he will have made a large profit, as a result of having deliberately put himself into a position in which his duty to the plaintiffs who were employing him and his personal interests conflicted. . . . When one looks at the way the cases have gone over the centuries, it is plain that the question whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant. [at 453; emphasis added.] (See also Bray v. Ford, supra, at 48 and 51-52, and Brickenden v. London Loan & Savings Co. [1934] 3 D.L.R. 465, at 468-69 (J.C.P.C.).) [48] In Canada, similar reasoning has been applied on numerous occasions: see especially Canadian Aero Service Ltd. v. O'Malley ("Canaero") [1974] S.C.R. 592, at 608-611, and Abbey Glen Property Corp. v. Stumborg (1975) 65 D.L.R. (3d) 235 (Alta. S.C. (T.D.)), aff'd (1978) 85 D.L.R. (3d) 35 (App. Div.). In his text, supra, Professor McGuinness

summarizes these and other authorities as showing that "the true basis of the fiduciary's liability is not that the fiduciary has seized a corporate opportunity or a maturing business prospect (for if the transaction is not available to the corporation, it cannot be said to have matured, or to be a corporate opportunity), but rather [that] the fiduciary has permitted self-interest to conflict with the duties that are owed to the corporation." (At 750.) After citing Chan v. Zacharia (1984) 154 C.L.R. 178 (H.C.A.), McGuinness continues: Generally, the court will not inquire and is not in a position to ascertain whether the person to whom the fiduciary duty is owed has actually lost or not lost by reason of the breach of duty. Instead, the court will look to see whether an improper profit has been made by the fiduciary, and if so it will require the fiduciary to account for that profit. It follows that like all fiduciaries, a director or officer of a corporation has a duty to account to the corporation for any profit made in breach of the director's or officer's fiduciary duties to the corporation. The liability to account does not depend upon proof of negligence, fraud or bad faith on the part of the director. [at 746; emphasis added.] See also Henfrey & Co., supra, at 745-47, Jacks v. Davis (1982) 141 D.L.R. (3d) 355 (B.C.C.A.), and Professor McCamus's article, Remedies for

Breach of Fiduciary Duty in the 1990 Special Lectures of the Law Society of Upper Canada. He notes (at 60) that relief by way of the disgorgement remedy is not limited to those cases in which "unjust enrichment by subtraction from the plaintiff" has occurred, but that it is also available where "unjust enrichment by doing wrong to the plaintiff" has been shown, citing the well-known analysis of P.B.H. Birks in An Introduction to the Law of Restitution (1985). [49] It follows in my view that the trial judge's conclusion at paras. 186-87 that Monarch would likely not have "taken" a TAPSF opportunity up in 1998 does not preclude the equitable remedies sought against Mr. Strother for breach of his fiduciary duty. At the same time, Monarch may not claim the disgorgement of profits beyond those earned "in consequence of" the lawyer's breach of duty. The Accounting Remedy [50] This brings me to the difficult questions that arise concerning Monarch's prayer that Mr. Strother and the Sentinel Hill Entities (by which term I mean both the Pre-1999 Sentinel Entities and the New Sentinel Hill Entities) account for "all benefits, profits, interests and advantages obtained or derived" by them "as a consequence of the breaches of duties and obligations" owed to Monarch. Monarch's Statement of Claim also seeks "tracing and other consequential equitable Orders", a declaration of constructive

trust over all benefits obtained or derived by the defendants in consequence of the breaches of duty, and other "interim and final equitable orders, including injunctive relief"; but I proceed on the assumption that Monarch has effectively "elected" to receive an accounting rather than equitable compensation or other relief. (See Personal Representatives of Tang Min v. Capacious Investments Ltd. [1996] 1 A.C. 514 (J.C.P.C.) and Warman International, supra, at 217.) It is perhaps unnecessary to observe that an accounting of profits "directs the defendant to give to the plaintiff the monetary value of what he has improperly obtained, whereas equitable compensation directs the defendant to restore the monetary value of the loss which he has caused to the plaintiff": Denis Ong, Breach of Fiduciary Duty: The Alternative Remedies (1999) 11 Bond L. Rev. 336, at 346. Both remedies operate in personam and are discretionary. [51] An accounting is one of the most important remedies that may be called in aid of the beneficiary of a fiduciary duty which has been breached. This was made clear in the seminal case of Nocton v. Lord Ashburton [1914] A.C. 932 (H.L.), which involved a solicitor's breach of duty. Viscount Haldane, L.C. stated: When, as in the case before us, a solicitor has had financial transactions with his client, and has handled his money to the extent of using it to pay off a

mortgage made to himself, or of getting the client to release from his mortgage a property over which the solicitor by such release has obtained further security for a mortgage of his own, a Court of Equity has always assumed jurisdiction to scrutinize his action. It did not matter that the client would have had a remedy in damages for breach of contract. Courts of Equity had jurisdiction to direct accounts to be taken, and in proper cases to order the solicitor to replace property improperly acquired from the client, or to make compensation if he had lost it by acting in breach of a duty which arose out of his confidential relationship with the man who had trusted him. [at 956-57] [52] The accounting remedy has often been used to redress and deter fiduciary wrongdoing in cases of "secret profits" and in cases where the profits are all clearly attributable to a specific asset wrongly acquired by the fiduciary. Where, however, the profits of a business are in question and the efforts and resources of persons other than the wrongdoer have contributed to those profits, care must be taken to ensure that the remedy does not itself become an instrument of injustice. Courts of Equity have sounded notes of caution when they are asked to impose burdens on, or appropriate benefits from, investors or business partners who have little connection with the breach; and this is especially so

where the plaintiff will be enriched by an accounting far beyond the profits he or she would have earned had the breach not occurred: see, e.g., In re Coomber; Coomber v. Coomber [1911] 1 Ch. 723, at 728-29 (C.A.); In re Jarvis (dec'd.) [1958] 1 W.L.R. 815 (Ch.D.). [53] In Canada, the Supreme Court has not had a case of this kind; but in recent years it has moved away from an approach that regards the available remedies and applicable principles as either strictly equitable or strictly common law. It has said, for example, that "a court exercising equitable jurisdiction is not precluded from considering the principles of remoteness, causation and intervening act where necessary to reach a just and fair result." (Per La Forest J. in Hodgkinson v. Simms, at 443.) He continued: Put another way, equity is not so rigid as to be susceptible to being used as a vehicle for punishing defendants with harsh damage awards out of all proportion to their actual behaviour. On the contrary, where the common law has developed a measured and just principle in response to a particular kind of wrong, equity is flexible enough to borrow from the common law. As I noted in Canson, at pp. 587-88, this approach is in accordance with the fusion of law and equity that occurred near the turn of the century under the auspices of the old Judicature Acts; see also M.(K.) v. M.(H.), [[1992] 3 S.C.R. 6], at p.

61. Thus, properly understood Canson stands for the proposition that courts should strive to treat similar wrongs similarly, regardless of the particular cause or causes of action that may have been pleaded. As I stated in Canson, at p. 581: . . . barring different policy considerations underlying one action or the other, I see no reason why the same basic claim, whether framed in terms of a common law action or an equitable remedy, should give rise to different levels of redress. In other words, the courts should look to the harm suffered from the breach of the given duty, and apply the appropriate remedy. [at 444; emphasis added.] The Court in Hodgkinson held that an award of equitable damages was the appropriate remedy where the wrong in question went "to the heart of the duty that lies at the core of the fiduciary principle" and where disgorgement would have subjected the plaintiff to the risks of market fluctuations. (At 452-53.) The former factor is of course operating in the case at bar, while the latter is not. [54] Counsel referred us to Warman International, supra, which bears some similarity to this case. There the High Court of Australia had to deal with the accounting remedy in the context of a claim for breach of fiduciary duties successfully made by the plaintiff Warman against its former manager, Dwyer, and two of his companies. They had formed a joint

distribution venture with the plaintiff's former supplier, and the joint venture successfully competed with Warman between 1986 and 1988. As the headnote states, the trial judge found a clear breach of the fiduciary relationship between the plaintiff and Dwyer, and found that the two companies were equally liable with him because their controlling minds were "fully aware of and joined in" the breach. The trial judge granted a claim for an accounting of profits and attempted to determine the proportion of the defendants' business which had flowed to them by reason of the breach of fiduciary obligation. He also provided for the payment of an additional amount on account of the "present value" of that portion of the goodwill of the defendants' business and made an allowance for the time, energy, skill and capital that the defendants had brought to the business. The Queensland Court of Appeal allowed an appeal on the basis inter alia that "the cases manifested a reluctance to let the wronged party reap a great benefit from the wrong done to it, and that in all cases the fiduciary's liability must be imposed flexibly, bearing in mind all the facts of the case." Accordingly, the Court of Appeal remitted the matter "so as to allow judgment to be given against the defendants for the loss suffered by the plaintiffs consequent upon the breaches of fiduciary duty." (At 207.) [55] The High

Court of Australia allowed the plaintiff's appeal. The Court began its judgment by rejecting the notion that the liability of a fiduciary to account depends on detriment to the plaintiff, citing several of the cases I have already mentioned. (See 208-9.) The Court then wrote the following passage which is reminiscent of our Supreme Court's reasoning in Canson and Hodgkinson: Ordinarily a fiduciary will be ordered to render an account of the profits made within the scope and ambit of his duty. Of course, if the loss suffered by the plaintiff exceeds the profits made by the fiduciary, the plaintiff may elect to have a compensatory remedy against the fiduciary. That election will bind the plaintiff. Although an account of profits, like other equitable remedies, is said to be discretionary, it is granted or withheld according to settled principles. It will be defeated by equitable defences such as estoppel, laches, acquiescence and delay. And, notwithstanding what was decided in Regal (Hastings) Ltd. v. Gulliver and Phipps v. Boardman, it may be that: the liability to account for a personal benefit or gain obtained or received by use or by reason of fiduciary position, opportunity or knowledge will not arise in circumstances where it would be unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is

plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits. The conduct of the plaintiff may be such as to make it inequitable to order an account. Thus a plaintiff may not stand by and permit the defendant to make profits and then claim entitlement to those profits. It is necessary to keep steadily in mind the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts. [at 210; emphasis added.] [56] Having acknowledged that the accounting remedy is "ancient and notoriously difficult in practice", the Court observed that "a principal who so elects is entitled to an account of profits, subject to considerations of the kind already mentioned." Further: The outcome in cases of this kind will depend upon a number of factors. They include the nature of the property, the relevant powers and obligations of the fiduciary and the relationship between the profit made and the powers and obligations of the fiduciary. Thus, according to the rule in Keech v. Sanford, a trustee of a tenancy who obtains for himself the renewal of a lease holds the new lease as a constructive trustee, even though the landlord is unwilling to grant it to the trust. But the rule "depends partly on the nature of leasehold property" and partly on the position which the trustee occupies.

A similar approach will be adopted in a case in which a fiduciary acquires for himself a specific asset which falls within the scope and ambit of his fiduciary responsibilities, even if the asset is acquired by means of the skill and expertise of the fiduciary and would not otherwise have been available to the person to whom the fiduciary duty is owed. [at 211] [57] The Court drew a distinction between cases in which a specific asset is acquired and those in which a business is acquired and operated. Their reasoning is sufficiently important, I think, to reproduce yet another lengthy passage: In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not

the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff. It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant's breach of fiduciary duty and the profits attributable to those earned by the defendant's efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own. Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case. [at 211-12; footnotes omitted; emphasis added.] [58] Applying the foregoing to the case before them,

the High Court noted that the defendant Dwyer and his companies had all knowingly profited from his breach of fiduciary duty. There was no acceptable basis for depriving the plaintiff of its right to an accounting of profits; if the remedy were refused, the defendants would retain benefits flowing from the breach "over and above the amount which represents equitable compensation for the loss actually sustained by Warman." The Court concluded that were it not for Dwyer's breach of fiduciary duty, Warman's distributorship would probably have continued only for one more year, but that the defendants' acquisition of the services of former Warman employees had resulted in benefits that would endure beyond that period. In all the circumstances, the Court found that two years was the appropriate period over which the companies should be ordered to account. From the profits so determined, an allowance for the expenses, skill, expertise, effort and resources contributed by the defendants was to be deducted. Accounting by Mr. Strother [59] As has been seen, the general approach taken by the High Court in Warman International is consistent with the Supreme Court of Canada's endorsement of "flexibility" and "common sense" in recent decisions involving equitable remedies. The question then is the extent of the accounting or disgorgement appropriate in Mr. Strother's case, given on the one

hand the "underlying prophylactic purpose of fiduciary liability" (P.L. Loughlan, Liability for Assistance in a Breach of Fiduciary Duty, (1989) 9 Oxford J. Legal Stud. 260, at 265), and on the other hand, the principle that the fiduciary's liability should not go beyond what he or she gained in consequence of the breach of duty. On this question, the facts stressed in argument by counsel for the New Sentinel Hill Entities are relevant to Mr. Strother's case. As has been seen, his role in the Sentinel Hill business decreased as Mr. Sherman's contribution of expertise increased, and more latterly, as the Alliance Atlantis merger took effect. There is an argument that these factors weaken the causal link between Mr. Strother's breach of duty and the ongoing profits of the Sentinel Hill business so that an accounting order in respect of all benefits received or receivable by him, no matter when, might be too extreme. [60] Countering that argument, however, is the fact that Mr. Strother's proportionate share of profits from the business also decreased -- from 55 per cent of the first $2 million (under the original agreement with Mr. Darc), to 50 per cent thereafter; and then to 25 per cent (when Messrs. Sherman and Gordon were given shares); and then to 17.5 per cent (when the merger took place). Thus an order requiring Mr. Strother to account for the profits he receives does not

carry the danger of prejudice to innocent persons or of failing to give due weight to the contributions made by the other shareholders to the success of the Sentinel Hill companies. As for the notion of a time-limited order -- for example, that Mr. Strother account for his profits only in respect of the period ending March 31, 1999 when he left Davis, or the period ending December 31, 1999 when Mr. Sherman effectively became a shareholder -- I see no principled basis for a cut-off at any particular time, as there was in Warman International to reflect the dilution of the causal link. Neither Mr. Strother's decision to leave his firm and pursue the Sentinel Hill business directly, nor the advent of the new shareholders cleared the lawyer's feet or affected the impact of his breach of duty on Monarch. In a very real sense, the profits that continued to accrue to him after these events are the fruit of the tree rooted in his double conflict of interest. Further, if Mr. Strother were permitted to retain a portion of his profits from the Sentinel Hill business, it is doubtful the Court would achieve the policy objectives underlying the rule that a fiduciary may not profit from his position. Where the fiduciary is a lawyer, this "prophylactic" principle is of overarching importance, and in my view outweighs any argument based on the fact (found by the trial judge) that Monarch would

not have succeeded in the renewed TAPSF business even if it had had the advantage of knowing what Mr. Strother knew. [61] After much anxious consideration, I have therefore concluded that Mr. Strother must be required to account for and disgorge to Monarch all benefits, profits, interests and advantages he has received or which he may hereafter be entitled to receive, directly or indirectly (i.e., through a corporation, trust, or other vehicle), from or through any of the Sentinel Hill Entities. I do not include Mr. Strother's actual shares in the Sentinel Hill Entities, since such an order would place Monarch "in business" with Sentinel Hill, and the companies are presumably private. However, any redemption, repurchase or purchase proceeds, net of what Mr. Strother actually paid for the shares, are intended to be caught. I would also order that all the Sentinel Hill Entities and any other defendants owned or controlled by Mr. Strother must co-operate fully in the accounting, which I would remit to a judge of the Supreme Court. Further, I am satisfied, partly because of the defendants' easy access to offshore corporations and accounts, that a constructive trust is necessary in this case to ensure that "others like the defendant [Mr. Strother] remain faithful to their duties": see Soulos v. Korkontzilas [1997] 2 S.C.R. 217, at para.

45. I would therefore declare Mr. Strother, the Sentinel Hill Entities and any other defendants owed or controlled by him, constructive trustees in favour of Monarch in respect of the profits, interests and benefits referred to above. If the Supreme Court judge determines that further equitable machinery, such as tracing, is in order, he or she may so direct. MONARCH'S CLAIMS AGAINST MR. DARC [62] I turn next to Monarch's claims against its former employee, Mr. Darc. He was a chartered accountant who entered the employment of a company associated with Monarch in 1991. He became Chief Operating Officer of Monarch itself in 1995 and at some later point, was "demoted" to Chief Financial Officer. In February 1997, Monarch gave him eight months' working notice of termination of his employment because of the necessity to close down its TAPSF business. He worked out his notice period at Monarch until the end of October 1997. [63] When Mr. Darc joined Monarch, he had been asked to sign an agreement containing a restrictive covenant that would have prohibited him from competing against Monarch for a year after leaving its employ. The trial judge found (at para. 133) that Mr. Darc never acceded to the terms of that agreement, although it is unclear whether the Court believed Mr. Knutson's testimony to the effect that Mr. Darc did not raise any objection to the covenant, and that he, Mr.

Knutson, assumed the agreement had been signed. Whatever Mr. Knutson assumed, the agreement was not signed, and Mr. Darc was under no contractual duty to Monarch not to compete with it after the expiration of his notice period. [64] Monarch contends, however, that as a "senior officer" of Monarch, Mr. Darc owed it a "statutory fiduciary duty". This duty arises from s. 122(1)(a) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, under which Monarch was evidently incorporated. Section 122(1)(a) states: 122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation. . . . The Supreme Court of Canada recently suggested that this duty is better described as a "duty of loyalty" than a "fiduciary duty", and that it "comes from the powers delegated to [officers] by the directors": Peoples Department Stores Inc. (Trustee of) v. Wise (2004) 244 D.L.R. (4th) 564, 2004 SCC 68, at paras. 32 and 34. As well, the Court referred to the comment of McLachlin C.J.C., concurred in by the majority in K.L.B. v. British Columbia [2003] 2 S.C.R. 403, 2003 SCC 51, that the obligation imposed on a fiduciary "may vary in its specific substance, depending on the relationship [between the fiduciary and the beneficiary]." (Lac Minerals Ltd. v. International

Corona Resources Ltd. [1989] 2 S.C.R. 574, at 646.) [65] Perhaps in that vein, the trial judge in the case at bar emphasized that Mr. Darc's particular duties had not involved the exercise of corporate powers or discretion, but were almost purely administrative. He found that: From early 1996 until his eight-month notice of termination expired at the end of October 1997, Mr. Darc was, according to Mr. Fodor, primarily responsible for administration, and, according to Mr. Knutson, his duties related to internal accounting and administrative matters. He held the title of Chief Financial Officer and managed a small staff, but he was not a director, he held no equity, and Monarch was a small company where impressive titles were readily available. He had no cheque signing authority. He was not the company's contact with either the studios from which production was obtained or its agents who sold its tax shelters to investors. [para. 127] [66] On appeal, Mr. Macintosh on behalf of Mr. Darc emphasized this passage, submitting that the duties incumbent on any particular officer are not so much a matter of his or her title in the corporation (see also McGuinness, supra, at 713), but vary according to the kinds of powers and duties he or she exercises. Counsel noted the statement of Laskin J. (as he then was) for the Court in Canaero that the "general standards of loyalty, good faith and

avoidance of a conflict of duty and self-interest" to which directors and senior officers must conform, must be "tested" in each case by many factors, including the "factor of position or office held." (At 620.) At the same time, Laskin J. said at 610 that the strict application of fiduciary principles is a "necessary supplement, in the public interest, of statutory regulation and accountability which themselves are, at one and the same time, an acknowledgment of the importance of the corporation in the life of the community and of the need to compel obedience by it and its promoters, directors and managers to norms of exemplary behaviour." Breach of Confidentiality [67] Regardless of whether Mr. Darc was subject to the "strict ethic" of a senior officer or simply the duty of good faith owed by an employee (see 57134 Manitoba Ltd. v. Palmer (1989) 37 B.C.L.R. (2d) 50, at 56 (B.C.C.A.)), there is no question he was restricted at all times from appropriating any confidential information belonging to Monarch, either for his own use or for that of a competitor. This restriction manifests itself in two ways in Monarch's case against Mr. Darc, as I understand it. First, Monarch says that Mr. Darc breached his duty by discussing with Mr. Strother in late 1997 and thereafter his idea for a "new structure" that would provide a way around the Matchable Expenditure Rules; and second, in

using his business contacts to line up TAPSF business for Sentinel Hill once the tax ruling had been issued. [68] In connection with the latter and more general branch of this argument, the trial judge correctly stated the applicable law: While it is clear that employees may make use of any skill or knowledge, acquired in the course of their employment, to their own competitive advantage once their employment has concluded, they may not make use of any confidential information about their former employer's business: Alberts v. Mountjoy (1977), 16 O.R. (2d) 682 (H.C.) at 686-689. By the same token, while it cannot be suggested that a client has some proprietary right to the skill or knowledge developed by its solicitors acting in the course of its retainer, information given by a client to solicitors in confidence must never be disclosed or made use of other than as intended by their client, or compelled by the court: Ott v. Fleishman (1983), 46 B.C.L.R. 321 (S.C.) at 322. An action for a breach of confidence lies where the information possesses the necessary quality of confidence, it was imparted in circumstances giving rise to an obligation of confidence, and the information was misused: Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574 per Sopinka J. at 608 and La Forest J. 635. [paras. 135-36] [69] The requirement that the plaintiff show a

"quality of confidence" associated with the information alleged to have been wrongfully used, is consistent with various English and Canadian authorities outside the employment context, including Coco v. A.N. Clark (Engineers) Ltd. [1969] R.P.C. 41 (Ch.D.). There Megarry J. described the elements required for a case of breach of confidence: First, the information must be of a confidential nature. As Lord Greene said in [Saltman Engineering Co. Ltd. v. Campbell Engineering Co. Ltd. [1963] 3 All E.R. 413 (C.A.), (1948) 65 R.P.C. 203] at page 215, "something which is public property and public knowledge" cannot per se provide any foundation for proceedings for breach of confidence. However confidential the circumstances of communication, there can be no breach of confidence in revealing to others something which is already common knowledge. But this must not be taken too far. Something that has been constructed solely from materials in the public domain may possess the necessary quality of confidentiality: for something new and confidential may have been brought into being by the application of the skill and ingenuity of the human brain. [at 47; emphasis added.] Similarly, in Ridgewood Resources Ltd. v. Henuset (1982) 18 Alta. L.R. (2d) 68 (Alta. C.A.), lve. refused (1982) 36 A.R. 450 n (S.C.C.), Laycraft J.A. (as he then was) stated at 76 that both "secrecy of the information and

the circumstances of confidential disclosure" must co-exist before the recipient of information may be liable for its use to the detriment of the giver of the information. Thus the circumstances of disclosure alone could not produce a "confidential relationship" with respect to the information. (See also ERSS Equity Retirement Savings Systems Corp. v. Canadian Imperial Bank of Commerce (2002) 8 B.C.L.R. (4th) 340 (B.C.S.C.), where Wedge J. commented at para. 150 that as long as the information in question is "available to those members of the public who have a particular interest in the marketing or development of products", it will be considered to be non-confidential.) [70] Applying the principle formulated in Alberts v. Mountjoy (1977) 16 O.R. (2d) 682, 79 D.L.R. (3d) 108 (H.C.J.), the trial judge found that Mr. Darc's contacts with various studios, agents, investors and financial organizations did not have the requisite quality of confidentiality. In his analysis: I cannot see anything confidential about any of the contacts Mr. Darc and Mr. Strother had by virtue of the work they did for Monarch. The studios are few in number and the production services financing was controlled by people whose identity was far from confidential to Monarch. All were well known to the three promoters and their solicitors. Similarly, there was no quality of confidence associated with the

agents who sold the tax shelters to their clients the investors. They did not work exclusively for any broker and certainly not for Monarch. Much the same can be said with respect to financial organizations. Further, Mr. Darc and Mr. Strother took no employees from Monarch. Those which Sentinel Hill did employ were discharged from Monarch or had left of their own accord because Monarch wound down its tax-assisted production services business. [para. 139] I am not persuaded the trial judge erred in reaching these conclusions, which are supported by the evidence before the Court. Thus I see no basis for interfering on this aspect of the claims advanced against Mr. Darc. [71] The second branch of those claims involves the misuse of confidential information in a more particularized fashion and rests on the well-known distinction drawn in Canaero between the appropriation of a "maturing business opportunity" by an employee or former employee and the development of a "fresh initiative" not attributable to his or her previous employment. In the words of Laskin J.: An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to

another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired. [at 607; emphasis added.] [72] Again, the trial judge found that Monarch had failed to prove that the financing structure used by Sentinel Hill "contained elements unique to the Monarch structure which had not been substantially disclosed to studios, agents, or investors, and not otherwise made publicly available, that were in fact held in confidence." He elaborated: The key distinction between the Sentinel Hill financing structure and all structures which preceded it was, of course, the provision for the fixed 80.1% fee originated by Mr. Darc and Mr. Strother to render the Matchable Expenditures Rules inapplicable. When writing to Mr. Knutson after having attempted to modify the Monarch structure only to accommodate the fixed fee, Mr. Beach characterized the resulting differences as "substantial". Others would not characterize the significance of the fixed fee in the same way, but it does seem clear

that, at least in this one fundamental respect, the Monarch and Sentinel Hill structures were certainly materially different. In the absence of any unique elements in the Monarch structure which were truly confidential but nonetheless found in the Sentinel Hill structure, Mr. Darc or Mr. Strother have not been shown to have committed any breach of confidence in using the structure they did. I find that, with the Matchable Expenditures Rules having rendered all previous structures obsolete, Mr. Darc and Mr. Strother employed only the skill and knowledge they were entitled to employ in developing a structure that would render the Rules inapplicable by virtue of the 15(b) exception. [paras. 145-46; emphasis added.] [73] Notwithstanding Ms. Basham's able argument challenging these findings, I am not persuaded the trial judge erred in this regard insofar as Mr. Darc was concerned. Indeed, I believe that subject to the role played by Mr. Strother in obtaining the ruling, the trial judge was correct in stating that Sentinel Hill's use of the exception in s. 18.1(15)(b) to obtain the advance tax ruling and then to undertake TAPSF transactions "cannot in any sense be said to have been pursued other than on Mr. Darc's own, independent initiative. He was not led to the opportunity, which ultimately materialized, by virtue of the administrative position with Monarch from which he was

discharged. He created the opportunity he pursued after he left Monarch. He certainly did not take it with him." (Para. 128.) Participation in Mr. Strother's Breach [74] Finally, Monarch submitted that Mr. Darc was also liable on the basis that he participated in Mr. Strother's breach of loyalty, either knowingly or in circumstances that should have put him on notice of the breach. This issue, of course, was not considered by the trial judge, since he found no breach on Mr. Strother's part. [75] The circumstances in which a "stranger" to a trust will be held responsible by Equity (often by means of a constructive trust) for a breach of trust by another, are clear enough where "knowledge" of a "fraudulent design" is shown, or where the stranger "knowingly" received or dealt with trust property. The locus classicus in this regard is Barnes v. Addy (1874) L.R. 9 Ch. App. 244, which was elaborated upon in the leading modern case, Selangor United Rubber Estates, Ltd. v. Cradock (No.3) [1968] 2 All E.R. 1073 (Ch.D.). [76] Analogizing from cases of express trusts to fiduciary duties, there would appear to be no good reason why a stranger to the fiduciary relationship (here, between solicitor and client) could not also be held liable in Equity where he had the requisite degree of knowledge. But in the more attenuated context where the stranger has not received trust property, courts

are reluctant to make wrongdoers out of persons who simply participate in what may be called the "actus reus" of the fiduciary's breach. In Air Canada v. M & L Travel Ltd. [1993] 3 S.C.R. 787, the Court said at 811 that for liability to arise, the "knowledge requirement . . . is actual knowledge; recklessness or wilful blindness will also suffice." The Court, per Iacobucci, J. for the majority, cited Carl-Zeiss-Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 All E.R. 367 (C.A.) and continued: In the latter case, Sachs L.J. stated that to be held liable the stranger must have had "both actual knowledge of the trust's existence and actual knowledge that what is being done is improperly in breach of that trust -- though, of course, in both cases a person wilfully shutting his eyes to the obvious is in no different position than if he had kept them open." Whether the trust is created by statute or by contract may have an impact on the question of the stranger's knowledge of the trust. . . . If the stranger received a benefit as a result of the breach of trust, this may ground an inference that the stranger knew of the breach. . . . The reason for excluding constructive knowledge (that is, knowledge of circumstances which would indicate the facts to an honest person, or knowledge of facts which would put an honest person on inquiry) was discussed in In re Montagu's Settlement

Trusts, [[1987] Ch. 264], at pp. 271-73, 275-85. Megarry V.-C. held, at p. 285, that constructive notice was insufficient to bind the stranger's conscience so as to give rise to personal liability. While cases involving recklessness or wilful blindness indicate a "want of probity which justifies imposing a constructive trust", Megarry V.-C., at p. 285, held that the carelessness involved in constructive knowledge cases will not normally amount to a want of probity, and will therefore be insufficient to bind the stranger's conscience. [at 811-12; emphasis added.] [77] In Canson Enterprises Ltd. v. Boughton & Co. (1995) 11 B.C.L.R. (3d) 262 (B.C.C.A.), a case decided after the Supreme Court of Canada's decision in the first Canson appeal, Rowles J.A. (at para. 44) interpreted Air Canada to mean that "the applicable standard for imposing liability on a third party in the circumstances at bar would be actual knowledge, recklessness or wilful blindness. Honest negligence on the part of the solicitor, or an objective standard, such as that imposed when imputing constructive knowledge, would be insufficient to 'affect the stranger's conscience ... sufficiently ... to justify the imposition of personal liability' [at 826]." It will be recalled that in Canson, no benefit had been derived by Mr. Wollen or his firm from the fraudulent act, although the lawyer and his firm had been aware

that a secret profit was being made by others. [78] In Citadel General Assurance Co. v. Lloyds Bank Canada [1997] 3 S.C.R. 805, the Supreme Court considered whether constructive knowledge was sufficient to find a stranger to the trust liable on the basis of "knowing receipt". Adopting the reasoning of Millet J. (as he then was) in El Ajou v. Dollar Land Holdings plc [1993] 3 All E.R. 717 (Ch.D.), the Court held that it was not, and again distinguished cases of so-called "knowing assistance" from those of "knowing receipt". La Forest J. stated for the majority: In "knowing assistance" cases, which are concerned with the furtherance of fraud, there is a higher threshold of knowledge required of the stranger to the trust. Constructive knowledge is excluded as the basis for liability in "knowing assistance" cases; see Air Canada v. M & L Travel Ltd., supra, at pp. 811-13. However, in "knowing receipt" cases, which are concerned with the receipt of trust property for one's own benefit, there should be a lower threshold of knowledge required of the stranger to the trust. More is expected of the recipient, who, unlike the accessory, is necessarily enriched at the plaintiff's expense. Because the recipient is held to this higher standard, constructive knowledge (that is, knowledge of facts sufficient to put a reasonable person on notice or inquiry) will suffice as the basis for

restitutionary liability. Iacobucci J. reaches the same conclusion in Gold [v. Rosenberg [1997] 3 S.C.R. 767], where he finds, at para. 46, that a stranger in receipt of trust property "need not have actual knowledge of the equity [in favour of the plaintiff]; notice will suffice". This lower threshold of knowledge is sufficient to establish the "unjust" or "unjustified" nature of the recipient's enrichment, thereby entitling the plaintiff to a restitutionary remedy. . . . In "knowing receipt" cases, relief flows from the breach of a legally recognized duty of inquiry. More specifically, relief will be granted where a stranger to the trust, having received trust property for his or her own benefit and having knowledge of facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of trust property. It is this lack of inquiry that renders the recipient's enrichment unjust. [paras. 48-49; emphasis added.] (See also Waters, Law of Trusts in Canada (2nd ed., 1984), at 409-10; MacMillan Bloedel v. Binstead (1983) 22 B.L.R. 255, at 291-93 (B.C.S.C.); Canada Safeway v. Thompson [1951] 3 D.L.R. 295, at 322 (B.C.S.C.); Paul D. Finn, The Liability of Third Parties for Knowing Receipt or Assistance, in Donovan Waters, ed., Equity, Fiduciaries and Trusts (1993), at 214-17; and Goff and Jones, The Law of Restitution (6th ed., 2002), at

§33-027 to -033.) [79] The case at bar does not involve an express trust or trustees thereof, and except for Canson, no case was cited to us on the question of participation by strangers in other types of breaches by other types of fiduciaries. Nevertheless, Ms. Basham argued that the lower threshold of knowledge should be applied to Mr. Darc -- i.e., that he knew of facts sufficient to put a reasonable person on inquiry of Mr. Strother's breach and should therefore be made a constructive trustee of the benefits he received through the Sentinel Hill syndications. She notes that Mr. Darc was aware that Davis was continuing to act for Monarch in 1998, although he testified that he was not aware "to what extent those services were provided at that time". He also testified that he was not aware of whether Davis had told Monarch that it was in a position of conflict of interest. (Again, we are hampered by the absence of findings of fact on this issue.) [80] Mr. Darc was not asked if he knew in 1997-99 that Mr. Strother's continuing to act for Monarch constituted a conflict of interest. That question, of course, would have involved an opinion on his part on a clearly legal question, and he was not a lawyer. As noted by Professor Finn, supra, the "professional or other relationship the third party has with the fiduciary can . . . affect the appreciation that should reasonably be

attributed to that person, of the character of the matter in which he or she participates. The legal advisor, more so than the layperson, should be expected both to more readily recognize fiduciary wrongdoing when it occurs and to be more sensitive to the likelihood of it when facts exist from which it could be inferred." (At 215.) In Mr. Darc's case, the converse is true. [81] Given these types of considerations and the seriousness of a finding of "knowing assistance" in furtherance of a fraud or of "knowing receipt" of the benefits of a breach of duty, I am not prepared to find, from the evidence I have described, that Mr. Darc knew that Mr. Strother was in breach of his duty as a lawyer; that he was reckless or wilfully blind; or that he should have been put on inquiry analogously to a recipient of funds subject to a trust, when he began to earn profits and fees from Sentinel Hill. In my view, it would have been reasonable for him to think, had he considered it, that the amounts he received were attributable to his own perseverance and skill, in combination with the skill of Mr. Strother, and to his ownership of shares in the enterprise rather than to a breach of duty by Mr. Strother. [82] I would dismiss the appeal insofar as personal liability on the part of Mr. Darc, and indirect liability on the part of his family trusts, is concerned. MONARCH'S CLAIMS AGAINST THE

SENTINEL HILL ENTITIES [83] The fact that Mr. Darc has not been found to be liable jointly with Mr. Strother gives rise to a difficult question with respect to the liability sought to be imposed on the Sentinel Hill Entities. It is far from clear that as one of two directors and a 50 per cent shareholder, Mr. Strother was "the directing mind" of the Pre-1999 Sentinel Entities -- i.e., their "alter ego" or "primary representative". (See Canadian Dredge & Dock Co. v. The Queen [1985] 1 S.C.R. 662 regarding the "identification" theory in a criminal context.) Thereafter, he was only one of four directors and shareholders. [84] Ms. Basham drew our attention to Baillie v. Charman (1993) 107 D.L.R. (4th) 577 (B.C.C.A.), in which the trial judge had ordered a real estate salesman, Charman, to account for net profits received by a company, "General Mortgage", as a result of a breach of fiduciary duty. Charman owned 50 per cent of the shares of General Mortgage. Since the company was not a party to the litigation, and it had received all the profits from the wrongful resale, Charman argued on appeal that no award for loss of profits should be made; or alternatively, that he should be liable for only half the profit to reflect his half-interest in the company. [85] Toy J.A. for the Court rejected these arguments. He saw the plaintiff's claim to the corporation's net profit as one made

against the company as a constructive trustee. He cited Canaero, where a corporation had been used as the "vehicle" for the wrongdoing of the individual defendants. Toy J.A. continued: In this case, General Mortgage was the "vehicle" which Charman employed to reap a profit that Baillie might otherwise have obtained. Baillie could have added General Mortgage as a party to the action, but I am not persuaded that there is any authority that it was necessary that the company be so joined. Failure to name General Mortgage as a party does not impair or destroy Baillie's cause of action against Charman; it merely reduces the number of defendants jointly responsible for his loss against whom he can recover his $31,919.34 judgment. For the foregoing reason I reject counsel for Charman's argument that Baillie has no claim to the net profits realized by General Mortgage on the resale of the Baillie property. There is a subsidiary argument to the effect that because Charman was only a 50% shareholder in General Mortgage, therefore Charman had to account for only 50% of the profits realized. Based on the evidence adduced in the court below, there is no suggestion that anyone other than Charman participated in these transactions, namely, the sale from Baillie to General Mortgage and resale from General Mortgage to the second purchasers, in order to entitle the other shareholder to share in

the profit derived from such transactions. Charman alone used the company he controlled as his alter ego to effect the purchase and resale. I would not reduce the net profit award of $31,919.34 by 50%. [at 580-81; emphasis added.] I note that in Baillie, no finding was made of "directing mind" and no order was made against the company itself: the fiduciary was simply ordered to account for all net profits received by him or by General Mortgage as a result of the wrongful resale of the property in question. In the case at bar, of course, the Sentinel Hill Entities were all joined as defendants and can be made the subject of constructive trust orders. [86] Even if Mr. Strother had been the "alter ego" of some or all of the Sentinel Hill Entities, however, it would not necessarily follow that they would properly be made the subject of direct orders that they account for their profits in favour of Monarch. As has been seen, Mr. Darc made a contribution to the business of the Sentinel Hill Entities which was as least as important as Mr. Strother's; and after 1999, further investments of capital and expertise were made by Messrs. Sherman and Gordon and by Alliance Atlantis. In my view, it would be carrying a stringent rule to extremes if this court were to impose direct liability on the Sentinel Hill Entities beyond the accounting referred to at para. 61 above. That accounting

should, I believe, be sufficient to express "strict legal censure" of the breach of duty in this case (see Hodgkinson, supra, at 453), while ensuring that others not directly connected with the breach are not unduly affected. MONARCH'S CLAIMS AGAINST DAVIS Vicarious Liability [87] I come next to Monarch's assertion that the Davis law firm is jointly and severally liable with Mr. Strother, a former partner, for his breach of fiduciary duty. I begin by noting that in its Statement of Claim, Monarch made many of the allegations against Mr. Strother against Davis as well, including the allegation at para. 108 that Mr. Strother and his firm had had an obligation to advise Monarch "of the facts of the errors in the 97/98 advice and to recommend that Monarch seek independent legal advice, but, in further breach of their duties and obligations to Monarch, failed or neglected to do so." As well, Monarch pleaded at para. 114 that Mr. Strother was at all relevant times a partner of Davis and knew or ought to have known of his conduct in connection with the "new structure". At paras. 124-125, Monarch sought the return of legal fees it had paid Davis, and at paras. 122 and 126 and in its prayer for relief, it sought various equitable remedies as well as damages, including punitive, exemplary and aggravated damages against all defendants. [88] It is apparent from the transcripts that Davis

defended Monarch's claims on the merits. On appeal, Davis's factum again speaks to the merits. Nevertheless, Mr. Nathanson in his oral submission raised an objection to the effect that Monarch had not pleaded vicarious liability and therefore could not at this late date seek to hold Davis liable for anything more than whatever profits or benefits the firm had received as a result of any breach of duty by Mr. Strother. In other words, the law firm could not, because of an alleged deficiency in Monarch's pleadings, be ordered along with Mr. Strother to account to Monarch for profits wrongfully received by Mr. Strother in the event of a breach of duty on his part. [89] With respect, this argument overlooks the purpose of pleadings -- to state generally the material facts relied upon together with the relief sought -- and wrongly assumes that conclusions of law are required to be stated. No authority was cited for Davis's argument, and as Ms. Basham noted in reply, the Statement of Claim alleges that Mr. Strother was at all relevant times a partner of Davis. The firm cannot claim to be taken by surprise by the assertion of joint and several liability for Mr. Strother's breach. In these circumstances, I would decline to dismiss Monarch's claim of vicarious liability on Davis's part based on this "pleadings" argument. [90] Monarch relies on the joint and several liability of partners

for wrongful acts of their partners. Although Ms. Basham did not refer to it, this principle is of course codified by ss. 12 and 14 of the Partnership Act, R.S.B.C. 1996, c. 348: 12 If, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her partners, loss or injury is caused to any person who is not a partner in the firm or any penalty is incurred, the firm is liable for that loss, injury or penalty to the same extent as the partner so acting or omitting to act. * * * 14 A partner is jointly and severally liable with his or her partners for everything for which the firm, while he or she is a partner in it, becomes liable under either section 12 or 13. (See also R.C. l'Anson Banks, Lindley & Banks on Partnership (18th ed., 2002), at 334-342.) [91] It does not necessarily follow, however, that Davis is liable jointly and severally with, or in the shoes of, Mr. Strother for all the profits for which he must account to Monarch. Several questions arise. Is Monarch in fact asserting liability under the Partnership Act, or seeking only an equitable remedy against Davis? If the former, can it be said Mr. Strother was "acting in the ordinary course of the business of the firm or with the authority of [his] partners" when his breach of duty was committed? Can the firm be liable for profits he earned

after he left the partnership? Can the firm be liable to disgorge profits Mr. Strother received, but which Davis did not? Does an accounting for profits come within the ambit of liability under s. 12? Does the fact that many or all the partners of Davis were not informed of, or aware of Mr. Strother's personal conflict of interest, affect their position? And, if the state of knowledge of the other partners of Davis is relevant, were any of those partners aware that Mr. Strother was breaching his duty to Monarch, or -- perhaps more importantly -- should any or all of them have been put on inquiry? Looked at from a greater distance, do the equitable underpinnings of ss. 12 and 14 mean that the new "flexibility" of equitable remedies applies here as well? Last, do the principles explored in Citadel General, supra, have any effect on the vicarious liability of partners (under the Act or otherwise)? [92] Unfortunately, we did not receive argument on these questions. I have therefore reluctantly come to the conclusion that we must request argument (which would be in writing unless any counsel wishes to make oral submissions) from counsel for Monarch and Davis on the foregoing issues and any other arguments counsel deem to be relevant to the question of the firm's possible liability. (Counsel for the other parties may also make submissions if they wish.) It may be that once we have

received such argument, we will find it necessary to remit this part of the appeal back to the trial court so that any necessary findings of fact may be made; but on the other hand, that may turn out to be unnecessary in law. I would hope that any submissions will be made or filed within the next two months or so. [93] I do bring to counsel's attention the recent decision of the House of Lords in Dubai Aluminium Co. Ltd. v. Salaam [2003] 1 All E.R. 97, which confirmed that in s. 10 of the 1890 Partnership Act (U.K.), the wording of which is almost identical to the wording of our s. 12, the phrase "wrongful act or omission" is not limited to common law torts but may include a lawyer's breach of fiduciary duty. (The disgorgement of profits was not at issue, however.) Their Lordships also concluded that, to quote from the headnote, the "personal innocence of a person vicariously liable for the wrongful act of his . . . partner was not relevant for the purpose of determining contribution proceedings between that person and another wrongdoer, even in cases of dishonesty." Counsel will no doubt make of this case what they will. [94] I will leave for our final Reasons as well the questions pertaining to fees paid by Monarch to Davis between 1993 and 1998, the applicability of the Legal Profession Act, and the allegations regarding the misuse of documents allegedly provided to Davis in confidence.

DISPOSITION [95] In the result, I would allow the appeal to the extent of setting aside the trial judge's dismissal of Monarch's claims against Mr. Strother, and I would order that he account for and disgorge all benefits, profits, interests and advantages he has received or which he may hereafter be entitled to receive, directly or indirectly, from or through any of the Sentinel Hill Entities. (This order would not include his actual shares in the corporate defendants but would include any repurchase, redemption or purchase proceeds, net of the funds actually paid by Mr. Strother for his shares.) I would also order that all the Sentinel Hill Entities and any other defendants owned or controlled by Mr. Strother must co-operate fully in that accounting, which I would remit to a justice of the Supreme Court. I would declare Mr. Strother and the Sentinel Hill Entities constructive trustees in favour of Monarch in respect of all such profits, interests and benefits. [96] Subject to the foregoing, I would dismiss the appeal insofar as it relates to the trial judge's dismissal of the claims against Mr. Darc, the Pre-1999 Sentinel Entities and the New Sentinel Hill Entities. [97] With respect to the appeal of the trial judge's dismissal of Monarch's case against Davis, I would request argument as set out at paras. 91-92 of these Reasons. I would hope that counsel will be able to agree quickly on a date either for oral argument or on dates for the filing of their written submissions, and would ask that they advise the Registry of their proposed schedule. [98] Finally, I would defer the issue of costs until the appeal has been entirely disposed of. "The Honourable Madam Justice Newbury" I Agree: "The Honourable Mr. Justice Hall" I Agree: "The Honourable Mr. Justice Oppal"