by Safiyya Vankalwala

This is a story of what seemed like a simple independent legal advice (ILA) matter that turned out to be more complicated than it looked.

The claim story

A lender sought ILA about a loan that he wanted to advance to a friend. The friend intended to use the money to purchase additional shares in a corporation, pledging her existing shares as security.

The lawyer reviewed the loan and share pledge agreement, warning the lender of the riskiness of providing the loan but failing to detail his concerns in writing. He also overlooked key due diligence. He failed to obtain a copy of the borrower’s share certificate for the existing shares and endorsement of it to the lender. He also failed to provide critical advice, including pointing out that the loan agreement lacked both a deadline for purchase of the shares and an early repayment clause. After execution of the agreements, the loan amount was transferred to the borrower’s lawyer to be held in trust pending purchase of the intended shares.

On more than one occasion, the borrower’s lawyer requested that part of the loan be encroached upon for purposes other than the purchase of shares. The lender’s lawyer advised the client against this, but the lender consented to the borrower’s requests anyway.

A while later, the borrower had still not purchased the shares, and the lender began to worry that she never would. Because of oversights by the lawyer, the following issues came to light:

  1. Without the share certificate, the lender could not enforce against the security;
  2. Without a stipulated deadline for the purchase of shares for which the funds were loaned, the borrower was not in default; and
  3. With no clause for early repayment, the lender could not demand repayment of the principal loan.

Ultimately, the lender retained another lawyer who concluded that the lender did not hold valid security on the borrower’s existing shares. Amongst other legal actions, the lender commenced an action against his lawyer for negligence.

So, was it really ILA?

It is unclear whether the lawyer provided ILA or traditional legal representation. The legal services provided to the lender were more consistent with the latter. The key points are: It is imperative that lawyers understand the difference between the two and know when ILA is appropriate and when it is not. When providing ILA, a lawyer should avoid acting beyond the scope of the retainer.

Practice tips

1. Clarify the scope of representation:

  • A limited scope retainer must be confirmed in writing;
  • Advise the client about the nature, extent, and scope of the services that you can provide; and
  • Ensure clients understand what ILA entails and the limits of your role.

 
2. Conduct thorough due diligence:

  • Verify the accuracy of all legal documents;
  • Request and review key materials, including share certificates, corporate appraisals, financial statements, and any agreements relevant to the transaction; and
  • Conduct PPSA and other relevant searches to confirm ownership and identify prior security interests.

 
3. Comment on missing critical clauses: Advise on key clauses in agreements, such as deadlines for performance (e.g., share purchase) and provisions for early repayment.

4. Document advice:

  • Keep detailed notes in your file;
  • Provide written documentation of advice, especially regarding risks or client decisions against your recommendations; and
  • Provide written certificate of ILA.

 
5. Review requirements and use available resources:

 

The Law Society of Ontario (LSO) defines ILA as a limited scope retainer in which a licensee provides objective and unbiased legal advice to clients about the nature and consequences of a specific decision to be made but does not otherwise represent the client with respect to their matter or transaction.

Clients sometimes choose this form of limited representation in family and real estate law as a more affordable alternative to traditional full legal representation. However, challenges arise when the lawyers fail to adhere to the best practices in providing ILA.

Conclusion

This case highlights the importance of thorough due diligence and clear, documented communication. It also emphasizes the critical need for lawyers to clearly define the scope of their retainers and the specific transactions or matters for which ILA is being provided, and to act within that defined scope. Lawyers must use their judgment to determine whether limited scope representation, such as ILA, is appropriate in the circumstances or whether full legal representation is necessary.

Avital Dorfman, Articling Student, LAWPRO
Safiyya Vankalwala, Communications Counsel, LAWPRO