Failure to obtain ILA will not always render a client's mortgage for legal fees invalid

Hillsburg Stables Inc. v. Gardiner Roberts LLP, 2012 ONCA 95 deals with a case where counsel obtained a mortgage for fees but did not recommend ILA. Such was an error but did not, on the specific facts, render the mortgage invalid. The Court holds:

     No legal requirement for independent legal advice

[28]       Hillsburgh submits that in the circumstances of this case, there was a legal requirement that Hillsburgh receive independent legal advice in relation to the security transaction pursuant to rule 2.06(2.1) of the Law Society of Upper Canada, Rules of Professional Conduct, which provides as follows:

When a client intends to pay for legal services by transferring to his, her or its lawyer a share, participation or other interest in property or in an enterprise, other than a non-material interest in a publicly traded enterprise, the lawyer shall recommend but need not require that the client receive independent legal advice before accepting a retainer.

[29]       The application judge referred to rule 2.06(2.1) and confirmed that it applied not only to the acceptance of a retainer but also to the circumstances of this case.  I agree. 

[30]       It is conceded by Gardiner Roberts that it did not comply with rule 2.06(2.1).  According to the record, Gardiner Roberts failed to recommend that Elliott and Hillsburgh receive independent legal advice.  As a result, Gardiner Roberts breached rule 2.06(2.1). 

[31]       The rule however only requires that a lawyer recommend that a client seek independent legal advice before providing the lawyer with an interest in property.  It does not require that a client actually receive such advice.  As noted by the application judge, there is no requirement for actual receipt of independent legal advice pursuant to the rule but rather a requirement that such advice be recommended.

[32]       Despite this breach, for the reasons that follow, I have concluded that the security remains nonetheless enforceable as there was no disadvantage resulting from the lack of independent legal advice and the transaction was fair.

(b)     Security transaction was fair despite the lack of independent legal advice

[33]       Hillsburgh submits that once it is established that a lawyer obtained security from his or her client for the payment of accounts, without recommending that the client seek independent legal advice, the lawyer bears the onus of showing that there was no disadvantage to the client. 

[34]       In light of the fiduciary relationship that exists between the lawyer and his or her client, Hillsburgh also maintains that it will be very difficult for the lawyer to show that there was no disadvantage to the client.  As explained by Megarry J. in Spector v. Ageda, [1973] Ch. 30, at p. 47:

[T]he solicitor must be remarkable indeed if he can feel assured of holding the scales evenly between himself and his client.  Even if in fact he can and does, to demonstrate to conviction that he has done so will usually be beyond possibility in a case where anything to his client's detriment has occurred.  Not only must his duty be discharged, but it must manifestly and undoubtedly be seen to have been discharged.

[35]       In Hillsburgh's submission, the application judge either misunderstood the high onus resting on Gardiner Roberts or misapplied it on the facts of this case.  I would not give effect to this ground of appeal.

[36]       As previously discussed, although Gardiner Roberts breached rule 2.06(2.1) by not recommending that Elliott and Hillsburgh receive independent legal advice, it does not automatically follow that the security becomes unenforceable. 

[37]       The application judge identified and considered the correct legal principles applicable to the determination of disadvantage or unfairness in relation to the enforceability of a security transaction.  Specifically, the lawyer must show that "no advantage was taken of the client; that the transaction was fair; that the client was fully informed; and that the client had competent legal advice or was not disadvantaged by its absence": Paul M.  Perell, Conflicts of Interest in the Legal Profession (Markham, Ont.: Butterworths Canada, 1995), at p. 105.

[38]       Applying these legal principles to the record, the application judge found that: (1) Gardiner Roberts did not take advantage of Hillsburgh and Elliott; (2) the security transaction was not unconscionable and there was no duress; (3) Elliott was fully informed in that he was most familiar with security transactions and proposed same; and (4) Elliott and Hillsburgh did not suffer a disadvantage as a result of not having received independent legal advice. 

[39]       These findings are entitled to deference by this court.  In the circumstances of this case, there is a sufficient factual basis for these findings.