Amendments to the Rules of Professional Conduct — Transactions with Clients
The following is from the Law Society of Upper Canada’s June 2016 e-Bulletin Resources for Lawyers.
The Rules of Professional Conduct (the “Rules”) with respect to Doing Business with a Client (now called Transactions with Clients) were amended on May 26, 2016.
The term “transaction with a client” is now defined in rule 3.4-27 as follows:
a transaction to which a lawyer and a client of the lawyer are parties, whether or not other persons are also parties, including lending or borrowing money, buying or selling property or services having other than nominal value, giving or acquiring ownership, security or other pecuniary interest in a company or other entity, recommending an investment, or entering into a common business venture.
Borrowing from Clients
A lawyer is prohibited from borrowing from a client, unless the lawyer is borrowing from a regulated lender or from a related person (r. 3.4-28.1). New definitions for the terms “regulated lender” and “related person” are set out in rule 3.4-27.
Lawyers are also prohibited from circumventing the Rules by doing indirectly what they cannot do directly (r. 3.4-28.2). Transactions between a client and (a) a related person to the lawyer, (b) a trust or estate for which a lawyer is a beneficiary, or (c) a trust or estate for which the lawyer acts as both trustee and lawyer will ordinarily be treated as if the lawyer is a party to the transaction. However, the commentary to rule 3.4-28.2 explains that some transactions will fall outside the scope of this rule.
Requirements for Transactions with Clients
A lawyer must not enter into a transaction with a client unless the transaction is fair and reasonable to the client (r. 3.4-28). In a transaction with a client that is permitted under rules 3.4-28 to 3.4-36, rule 3.4-29 describes the requirements that apply. The essential requirements are:
- disclosure of the nature of any conflicting interest and how and why it might develop later;
- independent legal advice or independent legal representation; and
Whether independent legal advice or independent legal representation is required will vary based on the nature of the transaction:
- If a lawyer lends money to a client who is not a related person, the lawyer must require that the client receives independent legal representation (r. 3.4-29(b)(i)).
- If a lawyer lends money to a client who is a related person, the lawyer must require that the client receive independent legal advice (r. 3.4-29(b)(ii)).
- If a lawyer borrows money from a client who is a “regulated lender”, the lawyer need not recommend independent legal advice or independent legal representation (r. 3.4-29(b)(iii)).
- The circumstance in which a corporation, syndicate, or partnership borrows money from a client of the lawyer and either the lawyer or the lawyer’s spouse have a direct or indirect substantial interest in the transaction is addressed in rule 3.4-33.1. In that situation, the lawyer must require that the client receives independent legal representation (r. 3.4-29(iv)).
- In all other cases not described in rule 3.4-29(b)(i) through (iv), the lawyer must recommend that the client receive independent legal advice. If the circumstances reasonably require, the lawyer must recommend or require that the client receives independent legal representation.
Fiduciary Relationship and No Conflict of Interest
As the relationship between a lawyer and client is a fiduciary one, a lawyer has a duty to act in good faith (commentary to r. 3.4-29). A lawyer should be able to demonstrate that the transaction with the client is fair and reasonable to the client.
Even if the requirements for transactions with clients set out above are satisfied, the lawyer cannot act in a transaction with a client where there is a substantial risk that the lawyer’s loyalty to or representation of the client would be materially and adversely affected by the lawyer’s own interest, unless the client consents and the lawyer reasonably believes that he or she is able to act for the client without having a material adverse effect on loyalty or on the representation (commentary  of r. 3.4-29; see also rr. 1.1-1 and 3.4-1).
The commentary following rule 3.4-29 provides additional guidance about when a person is considered to be lending money to a lawyer, the documentation of a client’s decision to decline independent legal advice or independent legal representation, and the possibility that a client is vulnerable and declines independent legal advice or independent legal representation.
The Rules in this area are complex. For more information on the amendments and a lawyer’s obligations in transactions with clients, please consult the Rules and the resources below.