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Liability of brokerage firms for the fault of their representatives: The Court of Appeal reaffirms the applicable principles

 In Non classifié(e)

Authors: Sebastien C. Caron, Sébastien Girard and Réginal Labonté.

In a recent decision rendered in the context of a class action (Lloyd’s Underwriters v. Brown, 2021 QCCA 633), the Quebec Court of Appeal illustrates the importance for brokerage firms to put in place and ensure the proper functioning of control and monitoring mechanisms for their representatives.

In particular, the Court of Appeal revisits the teachings of Asselin v. Desjardins Cabinet de services financiers inc., 2017 QCCA 1673 [Asselin][1] with respect to the legal relationship between firms, their clients and their representatives, the legal consequences of the exercise of the representatives’ duties and solidary liability under article 1525 of the Civil Code of Québec (“C.C.Q.“).

Context

Marc Jémus was a mutual fund representative at iForum Financial Services Inc. which had an exclusive service agreement with B2B Trust. With the help of accomplices, including François Roy, Jémus set up a fraudulent scheme in which clients’ investments in B2B investment products were diverted to companies controlled and directed by Jémus and his accomplices. The amounts invested were thus diverted to the personal use of the accomplices.

iForum carried professional liability insurance with Lloyd’s Underwriters (“Lloyd’s“). The trial judge determined that the principal coverage balance of the policy is $1,170,250.40. At trial, Jémus and his accomplice Roy were ordered jointly and severally to repay over $15 million. For its part, Lloyd’s was ordered, jointly and severally, to pay the amount corresponding to the insurance coverage limit, for a total of over $1.1 million.

Decision

In essence, the Court of Appeal dismissed the appeal and upheld the trial judgment.

The Court of Appeal recalls that a brokerage firm may incur liability through the wrongful act of its representative as an employee or agent of the firm. Since a firm cannot act without a representative and vice versa, a contractual relationship is created between the firm and the client when the representative acts in the exercise of his duties. The client does not have to be aware of the existence or involvement of the firm.

The Court of Appeal concluded that, under article 2160 C.C.Q. firms are liable to their clients for the acts of their representatives and must ensure that they act honestly, competently and in accordance with the Act respecting the distribution of financial products and services (RLRQ, c. D-9.2) and its regulations.

The Court of Appeal found that a contractual relationship was created between iForum and the class members because of Jémus’ conduct. Jémus committed fraudulent acts in the performance of his duties as a mutual fund representative of iForum, including advising clients and investing their RRSPs with B2B, thereby creating this contractual relationship since the acts performed were those of a representative attached to a brokerage firm. iForum was therefore liable to the plaintiffs.

iForum also incurred liability by failing to monitor and control the activities of Jémus and to ensure that the services offered to class members were adequate. According to the Court of Appeal, the criminal nature of the acts committed by Jémus with respect to clients does not negate the fact that Jémus committed them in the course of his duties as a mutual fund representative at iForum.

The Court of Appeal concludes that the trial judge did not err in establishing, according to article 1525 C.C.Q., joint and several liability between iForum and B2B.

The Court of Appeal rejected Lloyd’s’ argument that iForum and B2B could not be held jointly and severally liable, on the basis that their respective obligations were separate. According to the Court of Appeal, both iForum and B2B in this case had “a duty of care, diligence and control to protect individuals who enter into a contractual relationship with it” under the Act respecting the distribution of financial products and services and the Trust and Loan Companies Act (S.C. 1991, c. 45, s. 162(1)) respectively. The two corporations were also bound by the standards for the administration of the property of others through their management of the invested RRSPs. Accordingly, the joint and several approach defeats the limitation argument raised by Lloyd’s, as the action against B2B also interrupted the limitation period against iForum.

Take away

Considering their statutory and common law obligations towards their clients, brokerage firms have every interest in setting up robust control and monitoring mechanisms. This way, they can prevent, in advance, claims against them regarding a wrongful or fraudulent act on the part of a representative in the performance of his duties.

With its experience in representing and advising companies in the financial services field, LCM Attorneys is a partner of choice in the legal and business support of your brokerage firm.

[1] Confirmed by the Supreme Court in Desjardins Cabinet de services financiers inc. v. Asselin, 2020 SCC 30.