Providing Investment Advice Proves Costly For Lawyer - A Cautionary Tale

Sometimes, as part of a retainer, a lawyer may provide advice that, in addition to being legal advice, includes financial, practical or personal advice. This is not entirely surprising as most problems or situations cannot be categorized as solely legal or solely personal. Rather, the advice required has implications for both areas. Good legal counsel try to take this into account and separate the advice they are giving the client. This strategy, however, does not always occur.

Recently, I came across a case which illustrates the risks of providing more than legal advice to a client. The case in question involved a former client suing its lawyer for giving it bad investment advice. It seems after doing some work for this particular client, the lawyer heard about a business that was looking for an angel investor. The lawyer thought he could match-make by introducing the current and former client. He sent an email to the former client advising that he had knew of a potential investment. The email continues:

Let us review where we are.

We talked about the potential in investing in a window and door manufacturing company situated in Barrie.

At the time we spoke, I expressed my intuition after interviewing my friend (an investor in the Company and responsible for Sales) which was as follows:

1) Small company that has economic potential.

2) Cash crunch due to long Accounts Receivable cycle (from time order in materials until order is filled and paid).

3) Lack of executive management on the business vision side.

4) Lack of expertise in financial affairs management.

5) Good inside technical people.

6) Opportunity to be white knight investor (come in and save company in return for healthy interest in company).

A match was made and the lawyer was retained to close the transaction. Unfortunately, the match did not workout and the investment failed. The former client sued alleging inter alia that the lawyer failed to obtain security for the investment, that there was an active conflict of interest in that the lawyer was acting for the company seeking the investment, the lawyer failed to perform due diligence and failed to provide a legal opinion about why personal guarantees were needed.

The lawyer informed his professional insurer who denied coverage on the basis that legal services are insured including investment advice related to performing legal services. However, since the initial contact was about an investment rather than legal services, this transaction was excluded. The court agreed and the lawyer was denied insurance coverage.

The Lesson for Investors and Clients: Although many lawyers have a wealth of experience, they're professional qualifications* limit them to providing legal advice. When you move into areas of financial, investment or practical advice, you would be prudent to question the qualifications and seek a second opinion. After all, in the case of investment advice, it is your money that is at risk.

*Some lawyers may have additional educational or training backgrounds qualifying them to provide additional advice such as investment advice.

The Lessons for Lawyers: Always be cognizant of the type of advice being given and, where appropriate alert clients to potential conflicts of interest and the need for second opinions or independent legal opinions.

Juroviesky v. Lawyers Professional Indemnity Company, 2014 ONSC 43 (CanLII) https://www.canlii.org/en/on/onsc/doc/2014/2014onsc43/2014onsc43.pdf

The content and the opinions expressed here is informational purposes only and does not constitute legal or professional advice. Nor does reading or commenting on it create a lawyer/client relationship with the author. I encourage you to contact me directly at adrianlawoffice@gmail.com if you have specific legal questions or concerns.

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