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Paying Practice Debts

This article will focus on the ethical responsibilities of lawyers and law firms for:

  1. Financial commitments incurred on behalf of clients,
  2. Financial commitments incurred in the business of practising law, and
  3. Using personal legal knowledge to take unfair advantage in business dealings.

Chapter 8 of the 1995 Code of Professional Conduct contained practical guidance for lawyers on the ethics of the business aspects of practice. The Statement of Principle introducing the chapter is valid today and warrants repeating here:

Except where a higher standard is imposed by this Code, a lawyer in conducting the business aspects of the practice of law must adhere to the highest business standards of the community.

The new Code of Conduct, introduced November 1, 2011, responded to the growth in interprovincial lawyer mobility and the need for national standards. Although there is no longer a complete chapter devoted to the business of law, the Code opens with a broad recognition of professional integrity:

A lawyer has a duty to carry on the practice of law and discharge all responsibilities to clients, tribunals, the public and other members of the profession honourably and with integrity.

Specific guidance is now found in the Code at Rule 7.1-2:

A lawyer must promptly meet financial obligations in relation to his or her practice, including payment of the deductible under a professional liability insurance policy, when called upon to do so.

The related Commentary speaks generally to these obligations and specifically to the payment of experts and consultants, including what should happen if the file is transferred to another lawyer.

In order to maintain the honour of the Bar, lawyers have a professional duty (quite apart from any legal liability) to meet financial obligations incurred, assumed or undertaken on behalf of clients, unless, before incurring such an obligation, the lawyer clearly indicates in writing that the obligation is not to be a personal one.

When a lawyer retains a consultant, expert or other professional, the lawyer should clarify the terms of the retainer in writing, including specifying the fees, the nature of the services to be provided and the person responsible for payment. If the lawyer is not responsible for the payment of the fees, the lawyer should help in making satisfactory arrangements for payment if it is reasonably possible to do so.

If there is a change of lawyer, the lawyer who originally retained a consultant, expert or other professional should advise him or her about the change and provide the name, address, telephone number, fax number and email address of the new lawyer.

Although the commentary to Rule 7.1-2 focuses on lawyers’ obligations to pay debts incurred on behalf of clients, the obligation does not end there. It extends to the manner in which lawyers honour other financial commitments incurred by their firms.

General

The practice of law, while concerned primarily with the delivery of professional services, has a significant business component. As law firms grow larger and society more complex, the business aspects of practice assume increasing importance in the eyes of many lawyers. At all times, however, the lawyer remains a professional and has an obligation to behave as such.

While the fiduciary standard applied in dealings with clients is not expected of a lawyer in business dealings with third parties, lawyers must adhere to the highest business standards of the community, which are often higher than those imposed by law. As a result, conduct falling short of fraud or misrepresentation may attract ethical sanction, depending on the circumstances. Relevant factors include the sophistication and acumen of the party dealing with the lawyer; the lawyer’s intent and motivation; whether the lawyer’s conduct reflects adversely on the profession; and any unfair advantage obtained by the lawyer.

Apart from the risk of disciplinary proceedings, it is to a lawyer’s personal benefit to maintain high standards in business dealings since they will affect the lawyer’s standing in the community and the extent to which the lawyer is regarded as a trustworthy and honourable advisor.

Guidelines
  1. A lawyer is personally responsible for financial commitments incurred by the lawyer on behalf of clients unless the lawyer has expressly disclaimed responsibility to the relevant party beforehand.

    If a lawyer intends that the client pay for an expert report, then there is a clear obligation to inform the supplier before work begins. It must also, he stressed, be confirmed in writing when ordering the report. Nothing has changed.The efficacies and time restraints of practice often require that lawyers incur financial obligations to others on behalf of clients. Such obligations include charges for medical reports; disbursements payable to government registries; fees charged by expert witnesses; expenses for home studies; court clerks, registrars, court reporters and public officials; and the accounts of agents retained in other jurisdictions. A firm, as well as each firm member, is responsible for an obligation incurred by the firm to a third party unless the third party is advised otherwise in advance.Particularly in dealings with solicitor agents in other jurisdictions, it is common for a lawyer to forward the third party’s statement of account to the client for payment. While this practice is not in itself unethical, it does not divest the lawyer of responsibility for ensuring that the account is paid when due, and seeking reimbursement from the client if necessary.
    Caution is urged in dealing with assignments to third parties of client liabilities. Assignments acknowledged by lawyers to pay third parties are included within this guideline. For example, in a personal injury matter a lawyer might undertake by assignment to pay the client’s treating physiotherapist upon settlement. Problems arise when the client changes lawyers, the lawyer forgets to flag the assignment, or the client instructs non-payment. Each of these scenarios may have different causes and consequences, but a lawyer’s personal responsibility will be at stake.

    In the event of a good faith dispute regarding the proper amount of a fee or other charge, payment may not be required before an appropriate resolution of that issue.

  2. A lawyer having personal responsibility for a financial commitment incurred in the business aspects of practice must ensure that such commitment is fulfilled unless there is reasonable justification for the lawyer’s failure to do so. 

    Trade debts incurred in the practice of law are an example of financial commitments for which a partner or sole practitioner has personal responsibility. Office and equipment rents are examples. These commitments constitute ethical as well as legal obligations of the lawyer. Reasonable justification for failure to meet such an obligation would normally be limited to
    – inability to pay created by insolvency of which the lawyer was not aware at the time the obligation was incurred,
    – the existence of a legitimate and bona fide defence to the obligation.This obligation does not apply to debts for which a lawyer has no personal responsibility, that have been incurred by a management company or similar corporate entity, other than a professional corporation.

  3. A lawyer having a legal obligation to another party must not raise a defence to its enforceability if, at the time it was undertaken, the lawyer was aware and the other party unaware that the defence applied to the transaction.When dealing with third parties, the taking of an unfair advantage equates to conduct that a normal person, acting reasonably, would consider dishonourable. One example of a situation falling within this guideline is the execution by a lawyer of a personal guarantee in the absence of a certificate of notary public. Another is borrowing money pursuant to a loan agreement calling for interest at an unconscionable rate. In neither case can a lawyer subsequently challenge the transaction on the basis of the legal deficiency unless the other party was also aware of it, but desired to proceed nonetheless.
    The onus will be on the lawyer to establish the other party’s awareness. This will normally require that the lawyer point out the potential defence, particularly if the other party is not represented by counsel. This obligation is distinct from the duty owed, between lawyers, to avoid sharp practice. Also, separate considerations apply when a lawyer deals on a client’s behalf with an unrepresented party. (See Code Rule 7.2-11).
Printed from https://www.lawsociety.ab.ca on January 17, 2021 at 7:12:24 PM
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