LEGAL AND ETHICS: THE LETTER AND SPIRIT OF THE LAW PROTECTING YOUR INVESTIGATION FROM TARGET REPRISAL

Transcription

1 LEGAL AND ETHICS: THE LETTER AND SPIRIT OF THE LAW PROTECTING YOUR INVESTIGATION FROM TARGET REPRISAL Fraud examiners are no longer immune from being sued by the targets of their investigation. Learn the new best practices that you must adopt to proactively thwart these novel methods of attack so you can keep the court s focus where it belongs on the fraudster. During the course of this session, you will receive a checklist of Black Ops to inoculate yourself from the emerging claims being made against public- and private-sector fraud examiners in the 21 st century. DAVID B. DEBENHAM, CFE, CMA Partner McMillan LLP Ottawa, Ontario David Debenham has been a practicing commercial litigation trial lawyer for the past 23 years. He is a partner in the McMillan law firm s Ottawa office. David s fraud practice eventually inspired him to become a Certified Fraud Examiner, and acquire his diploma in investigative and forensic accounting from the Rotman Business School s Graduate Program at the University of Toronto, where he was valedictorian of his class. He has published a text directed at fraud investigators and expert witnesses, The Law of Fraud and the Forensic Investigator, along with the leading articles in the United States and Canada on the subject of detecting and reporting fraud in a law firm. He has spoken at ACFE chapter meetings in Ottawa, Toronto, and Saskatoon, as well as the ACFE national convention. Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without the prior consent of the author. 2012

2 times have changed. There are many professions today which nobody would have considered professions in times past The profession of the chartered accountant has grown up in comparatively recent times, and other trades or vocations may in future years acquire the status of professions. 1 Introduction You may have been asked to investigate professional misconduct. However, have you ever asked yourself what it means to be a professional? We sometimes say that someone did a very professional job, suggesting a high standard of work. We also say that someone acted very professionally, meaning a high standard of ethical behavior. What does it mean, in law, when a court finds that someone has professional obligations? Since fraud examiners are now considered professionals, what legal obligations does the law impose on you and your practice as a result? Those who practice the Black Arts, as professionals who represent the suspect, will be sure to illustrate your potential level of exposure to malpractice and other claims unless you learn to protect yourself. In this paper you will learn about the erosion of expert witness immunity, the new tort of negligent investigation, and other cuttingedge methods of attacking anti-fraud professionals personally as part of a vigorous campaign to discredit your investigation and disqualify you from testifying. You will learn the new best practices that you must adopt to proactively thwart these novel methods of attack so you can keep the court s focus where it belongs on the fraudster. What Does Being a Professional Mean? The idea of a professional originates with the medieval concepts of nobility, a custom and status. Society was 1 Carr v. I.R.C., [1994] 2 All ER 163 at

3 organized organically such that everyone from king to serf had reciprocal public (or social) rights and obligations. The nobility has an obligation to fight in times of way and public interest. The professional status of the surgeon imposed an obligation to undertake a cure according to his calling literally the ability of society to call upon the professional to ply their professional skills. In modern practice, lawyers and doctors are said to apply taxi cab ethics in that they practice for the benefit of whoever seeks their services, however distasteful, for so long as they pay their fee. The underlying primary premise is a professional obligation to provide a public service, even on a pro bono, or reduced-fee, basis if the public good demands it regardless of one s personal opinions about the clientele. Professionals have clients, craftsmen have customers. The second premise is that not only does being a professional involve skill and training; it involves skill and training in an art or mystery, such that the practice of the traditional professions of law, medicine, and clergy were beyond the purview of normal contracts and public regulation. As one court noted: The classical formulation of the claim in this sort of case is damages for negligence and breach of professional duty tends to be a mesmeric phrase. It concentrates attention on the implied obligation to devote to the client s basis that reasonable care and skill to be expected from a normally competent and careful practitioner If I employ a carpenter to supply and put up a good quality oak shelf for me, the acceptance by him of that employment involves the assumption of a number of contractual duties. He must supply wood of an adequate quality, and it must be oak. He must fix the

4 shelf. And he must carry out the fashioning and fixing with the reasonable care and skill which I am entitled to expect of a skilled craftsmen. If he fixes the brackets but fails to supply the shelf, or if he supplies and fixes a shelf of unseasoned pine, my complaint against him is not that he has failed to exercise reasonable care in carrying out the work, but that he has failed to supply what was contracted for. 2 While the professional has a higher public calling than a craftsman, the professional also belongs to a guild, in that she applies a technique in the performance of her calling that is monitored and regulated by the guild for quality assurance. A professional is something less than a craftsman in that she promises only to apply skills that are of the profession, but not a tangible result the outcome of a lawsuit, a prayer, or surgery is too uncertain, and depends on too many exogenous factors, to promise more. The mysterious aspect of a profession, replete with ceremonies, gowns, hierarchies, and rituals is that there is no tangible link between the practice of the art and the outcome outsiders are left to ponder how much of the hocus pocus (literally hoc est corpus here is the body as part of the mass) is affecting the result at all. That determination has to be left to members of the guild itself as a means of quality control to ensure an individual is trained in, and practicing, the art properly or she is (literally) defrocked. How Does the Law Define a Profession? 1. There is the requirement of form of technical and social training. 2 Midland Bank Trust Co. Ltd. v. Hett Stubbs & Kemp, [1979] Ch. 384 at

5 2. The socialization emphasizes that the skills are to be practiced for socially responsible uses for the public welfare and, therefore, has an ethical component. 3. There is a guild, union, society, or overseeing body that validates the competency, training, and practice, including the ethical component that ensures professionalism. 4. The professional promises the practice of ethical skills not a desired outcome. The link between the practice of the art and the desired outcome is nebulous or mysterious. 5. The combination of requiring a lot of training, performing an important role in society, and practicing a mysterious art supports the guild s efforts to create and maintain high barriers to entry and avoid judicial and public supervision as independent bodies. The quid pro quo is that the guild zealously safeguards the ethical and technical standards of the profession via internal education and disciplinary reviews. 3 What Are the Implications of Being a Professional? A professional has duties to: 1. The public to behave in the public interest, which in practice means an obligation to the court or tribunal; 2. Those who entrust themselves to her (a fiduciary duty); 3. Those imposed by contract who retained her; 4. Clients and near clients to use due care in the practice of her act; 5. Her fellow professionals not to besmirch their reputation and public confidence in the profession as a whole. 3 Parsons, Talcott, Professions Int l Encyclopaedia of Social Sciences 536 (1968)

6 A Fiduciary Duty A fiduciary duty is a duty to act in the best interest of another to the exclusion of one s own best interests. When one person voluntarily accepts a retainer that places another fate in their hands, that person has an obligation not to take advantage of this position of trust. As one court noted: A fiduciary is someone who has undertaken to act for, or on behalf of, another in a particular matter in circumstances which give rise to a position of trust and confidence. The distinguishing obligation of a fiduciary is a duty of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several factors. A fiduciary must act in good faith; he must not make a [undisclosed] profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or for the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of the fiduciary obligations. 4 Whether a person is a fiduciary, and the precise scope of the fiduciary obligation, depends on the facts of each particular circumstance. Generally speaking, however, there are five (5) rules: 1. The no-conflict rule A fiduciary must not place himself in a position in which his interest conflicts with his client s. 2. The no profit rule A fiduciary must not profit beyond the agreed-upon fee for the service, whether the profit is at the beneficiary s expense or not. 4 Bristol & West Building Society v. Mothen, [1998] Ch. 1 at

7 3. The undivided loyalty rule A fiduciary owes a duty or undivided loyalty to the beneficiary, such that the fiduciary must not place himself in a position where his acts or omissions benefit another client at the expense of the beneficiary without the beneficiary s full knowledge and informed consent. 4. The duty of confidentiality A fiduciary must only use information obtained in confidence from the beneficiary for the benefit of the beneficiary and not for his own benefit or the benefit of a third party. 5. The full disclosure rule A fiduciary has an obligation to make full, fair, and timely disclosure of all information that may be possibly relevant to the beneficiary. 5 It is often said that fiduciary duties are proscriptive, not prescriptive, meaning that they tell a fiduciary what he cannot to, but not what he can or ought to do. These avenues are best addressed through the retainer agreement, which will determine the extent and nature of the fiduciary obligations in the facts of any particular case. While the existence of a contract does not preclude fiduciary obligations and, indeed, the retainer may be the source of the fiduciary s obligations, contracts can elaborate, modify, and mold the nature of the fiduciary s obligations to the particular circumstance. 6 A fiduciary duty may be owed to non-clients who are in a similar position of vulnerability and reliance as the client is such that they are near clients 7 such as the corporation 5 Jacks v. Davis, [1980] 6 WWR 11 at 16 (BC SDC) aff d [1983] 1 WWR 327 (BC CA). 6 Henderson v. Merrett Syndicates Ltd., [1995] 2 AC Tracy v. Atkins (1977), 83 DLR (3d) 46 (BC SC) aff d 105 DLR (3d) 632 (BC CA); Palmeri v. Littleton, [1979] 4 WWR 577 (BC SC); Blown v. Johnstone, [1988] 2 WWR 178 (CA); Clarence Construction Ltd. v. Lavallee (1980), 111 DLR (3d) 582 (BC SC) aff d (1982) 132 DLR (3d) 153 (BC CA); Cavallin v. King (1980), 51 BCCR 149 (SC)

8 and its President, a spouse of the client, or other person who is in such close proximity to the nominal client that the fiduciary would foresee that this third party and the client relying and trusting them such that it would be unfairly technical to suggest that it was only the person who signed the retainer form who was owed the fiduciary duty, and as we shall see, a duty to act professionally toward them. A Professional s Duty of Care In Nocton v. Lord Ashburton, 8 a lawyer recommended to a prospective client that he discharge part of his first mortgage in order to accommodate a second mortgage. Unknown to the prospective client, the lawyer had an interest in the second mortgage. Because there was no cause of action in negligence in 1914, the plaintiff had to sue for fraud, for which there is no limitation period. The court found that although there had been no actual dishonesty, there was what we now call constructive fraud, being a breach of a fiduciary duty of candor, full disclosure, and avoidance of a conflict of interest that afforded the plaintiff a remedy. The court thought such a fiduciary duty did not depend on a contract being found between the parties, as there was a relationship that was the equivalent of contract (but for a lack of consideration for a retainer) whereby the lawyer had assumed a professional responsibility to the client that could not be evaded by allegations that no binding contract existed between the parties. In Candler v. Crane, Christmas & Co 9 the plaintiff tried to apply this principle to auditors. Mr. Candler was interested in investing 2000 in a business, if he could see the company s accounts. Mr. Ogilvie, the company s director, instructed Crane, Christmas & Co, a firm of auditors, to 8 [1914] A.C. 932 (H.L.). 9 Candler v. Crane Christmas & Co., [1951] 1 All ER 426 (CA)

9 prepare the company s accounts and balance sheet. The draft accounts were shown to Mr. Candler in the presence of Crane, Christmas & Co s clerk. Mr. Candler relied on their accuracy and subscribed for 2,000 worth of shares in the company. But the company was actually in a very bad state. Ogilvie used the investment on himself and then went bankrupt. Mr. Candler lost all the money he invested. He brought an action against the accountants, Crane, Christmas & Co. for negligently misrepresenting the state of the company. As there was no contractual relationship between the parties, the action was brought under the principle in Nocton v. Ashburton. The majority of the Court of Appeal ruled against the plaintiff, confirming that the general rule that there was no liability for negligent misstatements in the absence of any contractual or fiduciary relationship between the parties. The duties owed by the auditor were contractual only, and therefore the case was dismissed. The famous jurist dissented. In his opinion they were professional accountants who knew the plaintiff was relying on him, and therefore they had a duty to use reasonable care in accordance with the dictates of their profession. In answering what persons are under such a duty to be careful, Lord Denning referred to persons whose profession it is to examine books and to make reports on which other people other than their clients rely in the ordinary course of business Herein lies the difference between these professional men and other persons who have been held to be under no duty to use care in their statements Those persons do not bring, and are not expected to bring, any professional knowledge or skill into the preparation of their statements: they can only be made responsible by the law affecting persons generally, such as contract, estoppel, innocent misrepresentation or fraud. But it is very different with persons who engage in a calling, which requires

10 special knowledge and skill. From very early times it has been held that they owe a duty of care to those who are closely and directly affected by their work, apart altogether from any contract or undertaking in that behalf. Thus Fitzherbert, in his new Natura Brevium (1534) 94D, says that: If a smith prick my horse with a nail, I shall have my action on the case against him, without any warranty by the smith to do it well; and he supports it with an excellent reason: for it is the duty of every artificer to exercise his art rightly and truly as he ought. This reasoning has been treated as applicable because their situation and employment necessarily imply a competent degree of knowledge in making such entries The same reasoning has been applied to medical men who make reports on the sanity of others: It is, I think, also applicable to professional accountants. In 1951 the majority of the English Court of Appeal thought auditors as mere craftsmen retained to perform a service under contract with their client. By 1976 the Canadian Supreme Court thought that auditors had risen to the status of a profession, with duties to the public as part of their professional calling. When distinguishing their position from that of the English court taken a quarter century earlier, our court said: The increasing growth and changing role of corporations in modern society has been attended by a new perception of the societal role of the profession of accounting. The day when the accountant served only the owner-manager of a company and was answerable to him alone has passed. The complexities of modern industry combined with the effects of specialization, the

11 impact of taxation, urbanization, the separation of ownership from management, the rise of professional corporate managers, and a host of other factors, have led to marked changes in the role and responsibilities of the accountant, and in the reliance, which the public must place upon his work. The financial statements of the corporations upon which he reports can affect the economic interests of the general public as well as of shareholders and potential shareholders. With the added prestige and value of his services has come, as the leaders of the profession have recognized, a concomitant and commensurately increased responsibility to the public. It seems unrealistic to be oblivious to these developments. 10 The general principle is clear, whether it be a doctor helping an injured person at the side of a road, a lawyer giving some pro bono advice to the indigent, or an accountant doing a favor for a friend, professionals have a duty to use reasonable care in the practice of their calling, which may have originated in the private fiduciary relationship with clients but which now applies to members of the public that now trust them to practice their professional skills up to a professional standards. Where a person holds themselves out as being a professional, and that a member of the public is relying on their status as a professional, a relationship is established that requires the professional to use reasonable care in accordance with the standards of the profession, and if the professional fails, the person reasonably relying on their professionalism may sue for damages, whether they have a contract with the professional or not. 11 In commenting on why insurance 10 Haig v. Bamford et al., [1977] 1 S.C.R. 466, at Henderson and others v Merrett Syndicates Ltd and others [1994] 3 All ER 506 (HL)

12 brokers were suddenly facing so many third party lawsuits in the 1980s one author noted: this widening of liability is consistent with the view that insurance intermediaries are now viewed as experts or professionals rather than as mere merchants. The wider duties of care are commensurate with this status. It is perhaps ironic that, at the time other, more traditional, professions are agitating to be treated like merchants (doctors want more freedom to contract with patients, lawyers want to advertise). I offer the view that it is not merely coincidence that these groups are now exposed to more lawsuits. The traditional reticence to sue professionals is breaking down and this is part due to the increasing public image of them as business people. So, as insurance agents graduate to professional status they get the worst of both worlds. They cannot shake their public image as merchants but at the same time the courts and legislatures are imposing professional obligations on them. 12 Professional Contracts The expression fiduciary duty refers particularly to those duties of loyalty and fidelity peculiar to fiduciaries, and not to claims of incompetence that may be made against fiduciaries and non-fiduciary experts alike. A fiduciary that loyally does his incompetent best for his beneficiary may be liable for breach of contract or negligence, but not for breach of fiduciary duty. 13 Even if a professional can avoid the label of a fiduciary, many of the same obligations to act in good faith may be implied as part of the terms of the retainer itself. As one text has stated: 12 Brown, The Implications of Professional Status, 1 C.I.L.R. 31, at 52 (1988). 13 Bristol & West Building Society v. Mothen, [1998] Ch. 1 at 18l Extrasure Travel Insurance v. Scattergood Ltd., [2003] 1 BCLC 598 at

13 Duties of good faith are frequently recognised without any suggestion that the responsibility to act in good faith arose because of the presence of a fiduciary relationship or on the basis of fiduciary principles. The duty of good faith is, therefore, not peculiar to fiduciaries and ought, for that reason, be classified in some manner other than as a fiduciary duty. 14 The same may be said of a duty of fidelity and confidentiality, which also may be insinuated into the terms of a retainer without finding that you are a fiduciary. 15 In some instances a duty of good faith may arise ordinarily out of the nature of the relationship, or the circumstances created by the other party. The imposition of a duty of good faith and a fiduciary duty are closely related. They are points on a continuum in which the law acknowledges a limitation on the principle of self-reliance and imposes an obligation to respect the interests of the other. Unconscionability accepts that one party is entitled as of course to act self-interestedly in his actions towards the other. Yet in deference to that other s interests, it then proscribes excessively self-interested or exploitative conduct. Good faith, while permitting a party to act selfinterestedly, nonetheless qualifies this by positively requiring that party, in his decision and action, to have regard to the legitimate interests therein of the other. The fiduciary standard for its part enjoins one party to act in the interests of the other to act selflessly and with undivided loyalty. There is, in other words, a progression from the first to the third: from selfish behavior to selfless behavior. There is at least one important difference between the duty of good faith and a fiduciary duty. If, on the other hand, A owes a duty of good faith to B, A must give consideration 14 Snell, Principles of Equity, paras (2001). 15 See e.g., A.G. v. Blake, [1998] Ch. 439 aff d [2001] 1 AC 268, Ontario Inc. v. Boa-Franc (2003), 40 BLR (3d) 239 (ON HC)

14 to B s interests as well as to its own interests before exercising its power. Thus, if A owes a duty of good faith to B, so long as A deals honestly and reasonably with B, B s interests are not necessarily paramount. As the Ontario Court of Appeal has noted: The difference is that while a fiduciary duty imposes a duty to act selflessly, a contractual duty of good faith requires one to act in the joint interests of both parties to fulfil the purpose or intention of the contract in accordance with professional standards. [Emphasis added]. As the Supreme Court of Canada has noted, many of the norms of loyalty and good faith are often indicated by the various codes of professional responsibility and behavior set out by the relevant self-regulatory body. The raison d'etre of such codes is the protection of parties in situations where they cannot, despite their best efforts, protect themselves, because of the nature of the relationship. These codes exist to impose regulation on an activity that cannot be left entirely open to free market forces. 16 Good faith is sometimes thought of as a short-hand way of describing how courts interpret contractual provisions and, where necessary, imply terms 17 to ensure one party does not unfairly use their discretion to defeat the reasonable or legitimate expectations of the other party to promulgate a general duty of good faith and fair dealing in the performance of contractual obligations. 18 Where it arises in the course of a professional relationship, this duty of good faith, like a fiduciary duty, will be imposed even in the face of a contractual provision that generally 16 Hodgkinson v. Simms, [1994] 117 D.L.R. (4th) 161 at 187 (S.C.C.) 17 Dahl v. Nelson, Donkin & Co. (1881), 6 A.C. 38 at 59; Transamerica Life Canada v. ING Canada (2003), 234 DLR (4 th ) 367 at para. 53 (ON CA). 18 Town of Fort Francis v. Boise Cascape Canada, [1931] 1 SCR 171, Mason v. Freedman, [1958] SCR 483. American Restatement of Contracts, (2d), s. 205 (1979)

15 excludes implied obligations. 19 The duty of good faith is sufficiently vague in operation as to give rise to constant academic criticism, because the duty of good faith has become a forensic tool to impose a judicial sense of fairness on the professional at the expense of commencing certainty into the law of contracts. It is important to understand that a breach of contract is not fault-based. A failure to perform is a breach of contract 20 it is only when the contract standard of performance is an obligation to use due care that the claims for breach of contract and in negligence overlap. Thus, an expert s failure to appear in court on the appointed day and time may not be unprofessional (if it were faultless), but it may be a breach of contract. Where the terms of the retainer as to the standard of performance (whether they promise a result or promise performance in accordance with a professional standard), the doubt is resolved in favor of the client. 21 The scope of the professional s obligations will be determined by reference to the scope of services agreed to in the retainer and a client cannot avoid the provisions of that contract by suing in negligence. However, a professional is unlikely to be able to exclude liability for failing to provide services at a level below the professional standard of care set forth, and any such disclaimer clause is likely to be forensically rendered inoperative as being inconsistent with the propose of the contract particularly in light of the fiduciary or good faith obligations of the 19 R. v. Walter Cabott Construction Ltd. (1976), 69 DLR (3d) 542 (FCA). 20 Jackson, Rupert M. and Powell, John L., Jackson & Powell on Professional Negligence, 184 (1982). 21 Bergman v. Williams (1980), 22 BCLR 317 (SC)

16 professional. 22 In other words, the retainer may say I am only doing an assurance audit not a fraud or forensic audit, but it may not say I am doing one of those audits to a standard below the standard allowable by law/set by my professional association (or if I do, you cannot sue me for doing so). 23 Finally, professional employees whose acts or omissions fall well below the standards of their profession so as to be grossly negligent, or who engage in professional misconduct, can be sued by their employer or client for indemnification for any loss the employer, or client, has to pay third parties for the investigator s dereliction of duty. 24 The Role of Standards and Codes of Ethical Conduct Except in exceptional circumstances, the courts consider the standards of the profession, as published by the professional bodies themselves, as definitive of the standard of due care. The key question is: What would the reasonably competent practitioner have done having regard to the standards normally adopted in his profession? 25 Hindsight plays no part in the analysis. Based on the facts then known, or as they have been known with reasonable diligence, a practitioner who complies with the standards is unlikely to be found negligent and an error arising as a 22 Grant, Lawyers Professional Liability, (1989); Jackson, Rupert M. and Powell, John L., Jackson & Powell on Professional Negligence, 1, 93 (1992). 23 Guarantee Co Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423 para.52, 64, confirms that such clauses will likely be considered unconscionable, unfair, unreasonable or otherwise contrary to public policy (as unprofessional). Clauses that seek to limit the amount that can be claimed as a result of negligence, but not breach of fiduciary duty, may have a greater chance of survival. 24 Pinto v. BMO Nesbitt Burns Inc. (2005), 40 C.C.E.L. (3d) 293 (Ont. S.C.J.) and Dominion Manufacturers Ltd. v. O'Gorman (1989), 24 C.C.E.L. 218 (Ont. Dist. Ct.). Douglas v. Klinger (litigation guardian of), D.L.R. (4th) 267, at para. 33, leave to appeal refused. 25 Midland Bank Trust Co. Ltd. v. Hett Stubbs & Kemp, [1979] Ch. 384 at

17 result of departing from a standard is usually treated as negligence. 26 Breach of an ethical rule in a Code of Conduct may result in discipline, but it does not create a cause of action in itself. However, provisions of an ethical code that illuminate the professional s fiduciary duty to a client (e.g. duty of candor and honesty or duty to advise client promptly of an error committed by the professional) may be used by the court to identify a particular fiduciary or contractual duty, or duty of care, or the extent and scope of that obligation, and if the breach of the code results in damage to the client or near client it may result in a claim for breach of contract or fiduciary duty. 27 Are CFEs Professionals? The website of the Association of Certified Fraud Examiners contains the Code of Ethics that requires that All Certified Fraud Examiners must exemplify the highest moral and ethical standards and shall, at all times, demonstrate a commitment to professionalism and diligence in the performance of his or her duties. That includes exhibiting the highest level of integrity in the performance of all professional assignments and will accept only assignments for which there is reasonable expectation that the assignment will be completed with professional competence. That means that a Certified Fraud Examiner, in conducting examinations, will obtain evidence or other documentation to establish a reasonable basis for any opinion rendered. No opinion shall be 26 Jackson, Rupert M. and Powell, John L., Jackson & Powell on Professional Negligence 184 (1982); Lloyd Cheynham & Co. v. Littlejohn, [1986] PCC 389 at Foster v. Barry, [1983] 5 WWR 315 (BS SC).Viennea v. Arsenault 91982), 41 NBR (2d) 82 (CA), Pelky v. Hudson Bay Insurance Co. (1981), 35 OR (2d) 97 (HC). Kern-Hill Co-Op Furniture V. Shuckett (1975), 58 DLR (3d) 157 (Man Ca). Adeshina v. Litwiniuk & Company, 2010 ABQB 80 (CanLII)

18 expressed regarding the guilt or innocence of any person or party. A Certified Fraud Examiner shall not reveal any confidential information obtained during a professional engagement without proper authorization but will reveal all material matters discovered during the course of an examination which, if omitted, could cause a distortion of the facts. The CFE standards that are also published on the website confirms that members have a professional responsibility to their clients, to the public interest and each other; a responsibility that requires subordinating self-interest to the interests of those served. These standards express basic principles of ethical behavior to guide members in the fulfilling of their duties and obligations. By following these standards, all Certified Fraud Examiners shall be expected, and all Associate members shall strive to demonstrate their commitment to excellence in service and professional conduct. That means that members shall conduct themselves with integrity, knowing that public trust is founded on integrity. Members shall not sacrifice integrity to serve the client, their employer or the public interest, and Prior to accepting the fraud examination; members shall investigate for potential conflicts of interest. Members shall disclose any potential conflicts of interest to prospective clients who retain them or their employer. Members are also obliged to maintain objectivity in discharging their professional responsibilities within the scope of the engagement. Finally, members shall exercise due professional care in the performance of their services. Due professional care requires diligence, critical analysis and professional skepticism in discharging professional responsibilities. These excerpts, and others, make it clear that the CFE designation stands for professionalism in every sense of

19 that word. However is it legal obligation to others, or only a commitment to the association itself? Suing Investigators for Professional Malpractice It is clear that the tort of negligent investigation exists in Canada. The tort has applied to private investigators. 28 The Supreme Court of Canada considered the tort of negligent investigation in the case of Hill v. Hamilton- Wentworth Regional Police Services Board. 29 In that case, the plaintiff, Mr. Hill, had been investigated by the police, arrested, tried, wrongfully convicted, and ultimately acquitted after spending more than 20 months in jail for a crime he did not commit. Mr. Hill brought a civil action against the police that included a claim in negligence against the police based on the conduct of their investigation. The court determined that the tort of negligent investigation should be recognized. The court concluded that an an investigating police officer and a particular suspect are close and proximate such that a prima facie duty of care should be recognized. In reaching this conclusion, her considerations included: the requirement of reasonable foreseeability was made out in that clearly negligent police investigation of a suspect could cause harm to the suspect; Mr. Hill was a suspect singled out for investigation such that there was a close and direct relationship; Mr. Hill had a critical personal interest in the conduct of the investigation; Mr. Hill s freedom and reputation were at stake; the existing remedies for wrongful prosecution and conviction are incomplete and may leave a 28 Radford v. Stewart 2010 CarswellAlta 1836, at para 162 (Q.B.). 29 [2007] 3 S.C.R See also Beckstead v. Ottawa (City Of), (1997) 37 O.R. (3d) 62 (C.A.); Deheus v. NRPSB {2005] O.J. 1014, at para (SC); Traversy v. Smith [2007] OJ 4505, at 33 (SC); Lloyd v. TPSB [2003] CanLII (Ont SC)

20 victim of negligent police investigation without legal remedies. In addition, there is a strong public interest in negligent police investigations particularly given that their significant contribution to wrongful convictions in Canada; and the recognition of a duty of care would enhance a fair process and was therefore was not something the court should not prohibit on policy grounds. The court made a specific reference to the fact that the Police, like other professionals, exercise professional discretion. No compelling distinction lies between police and other professionals on this score. Discretion, hunch and intuition have their proper place in police investigation. However, to characterize police work as completely unpredictable and unbound by standards of reasonableness is to deny its professional nature. Police exercise their discretion and professional judgment in accordance with professional standards and practices, consistent with the high standards of professionalism that society rightfully demands of police in performing their important and dangerous work. Police are not unlike other professionals in this respect. Many professional practitioners exercise similar levels of discretion. The practices of law and medicine, for example, involve discretion, intuition and occasionally hunch. Professionals in these fields are subject to a duty of care in tort nonetheless, and the courts routinely review their actions in negligence actions without apparent difficulty. Courts are not in the business of second-guessing reasonable exercises of discretion by trained professionals. An appropriate standard of care allows sufficient room to exercise discretion without incurring liability in negligence. Professionals are permitted to exercise discretion. What they are not permitted to do is to exercise their discretion unreasonably. This is in the public interest [2007] 3 S.C.R. 129, at para

21 Since a professional duty may be owed to near clients, it is not surprising that a duty to use reasonable care may arise to not only the suspect, but the suspect s immediate family. In Odhavji Estate v. Woodhouse, 31 the Supreme Court of Canada considered a claim by family members arising from the alleged failure of police officers to cooperate with an SIU [internal police] investigation. Mr. Odhavji was fatally shot by police officers. The SIU investigated the shooting. The estate of Mr. Odhavji and his immediate family members alleged that the defendant officers breached their statutory obligation to cooperate fully with the SIU investigation. They brought an action for misfeasance in public office against the officers and the Chief of Police, and actions for negligence against the Chief, the Metropolitan Toronto Police Services Board and Her Majesty the Queen in Right of Ontario. The allegation against the Chief of Police was that he was negligent because he did not ensure that the police officers cooperated with the SIU investigation. The Supreme Court of Canada considered whether the Chief owed a duty of care to the estate and family members of the deceased. He stated that the determination of whether the harm complained of with respect to the Police Chief s conduct was reasonably foreseeable depended on whether it was reasonably foreseeable that the plaintiffs would suffer psychiatric harm as a consequence of an inadequate investigation by the SIU into the shooting incident. He noted that it would be expected that an inadequate investigation would distress Mr. Odhavji s family, but it was less obvious that this would rise to the level of compensable harm. However, because it was not plain and obvious that the harm was an unforeseeable consequence, the plaintiffs should not be deprived of the opportunity to prove that the complained-of harm was a reasonably 31 [2003] 3 S.C.R

22 foreseeable consequence of an inadequate investigation. The Court then went on to consider whether there was sufficient proximity between the parties such that a duty of care should be imposed on the Chief of Police. He considered the following factors in reaching his conclusion that there was a prima facie duty of care: there was a close causal connection between the Chief s negligent supervision and the injury; members of the public expect a chief of police to be mindful of the injuries that might arise as a consequence of police misconduct; and the expectation was consistent with the statutory obligations that the Police Services Act imposes on the Chief. The Court then considered whether there were any judicial policy considerations that would negate a duty of care. In the end the court rejected the argument that imposing a private law duty on the Chief would compromise the independence of the SIU, and that the public complaints process did not provide an alternative remedy because it did not provide for compensation for the psychological harm that the plaintiffs claimed they had suffered. 32 The professional duty of the police investigator is in evidence in Jane Doe v. Metropolitan Toronto (Municipality) Commissioners of Police. 33 In this case, from December 1985 to August 1986, a series of sexual assaults took place in Toronto. The sexual assaults shared certain characteristics: each took place in the same downtown Toronto neighborhood; all the female victims lived in second or third floor apartments; each apartment contained an exterior balcony; and entry to the women s apartments had been affected via the balconies. After the 32 See also Wellington v. Her Majesty the Queen, [2010] ONSC 2043 (Div l Ct) 33 Jane Doe v. Metropolitan Toronto (Municipality) Commissioners of Police (1998), 160 D.L.R. (4th) 697; Jane Doe v. Metropolitan Toronto (Municipality) Commissioners of Police (1990), 72 D.L.R. (4th) 580;

23 fourth incident, but prior to the sexual assault of Jane Doe, the Metropolitan Toronto Police Force (MTPF) had grounds to believe that a single individual was responsible for the sexual assaults. However, while anticipating that additional assaults were likely to occur, the MTPF deliberately refrained from informing potential victims of the specific risk to them on the grounds that doing so would cause the offender to flee. The trial judge, Macfarlane J. (as she then was), found that the circumstances of the case suggested that the women were being used without their knowledge or consent as bait to attract a predator whose specific identity then was unknown to the police, but whose general and characteristic identity most certainly was. The MTPF s decision not to inform members of the public who had been identified as being at risk was found to be grossly negligent. Importantly, however, the judge was satisfied that a meaningful warning could and should have been given to the women who were at particular risk and that the police that the police failed utterly in their duty to protect these women and the plaintiff in particular from the serial rapist the police knew to be in their midst by failing to warn so that they may have had the opportunity to take steps to protect themselves. Hence, the trial judge in Jane Doe held that where the police are aware of a specific threat to a specific group of individuals in the course of an investigation, the police have a duty to inform those individuals of the specific threat in question so that they may take steps to protect themselves from harm. While the police owe certain duties to the public at large, they may also owe a private law duty of care to certain member of society who might be at particular risk. This is no different that an auditor s liability to a class of near clients who may suffer particular and foreseeable harm as a result of their malpractice Per J.L.P. v. C.R.P., [2008] 89 O.R. (3d) 290 (Master)

24 The standard of care is that of the reasonable investigator acting in the same set of circumstances, whether it is a public investigator like a police officer, or a private investigator. 35 Given the professional nature of a regulatory or private investigator, it follows that private investigators can be sued by their suspects, and potentially their family, in relations to negligent investigations. This was confirmed by the Ontario Court of Appeal in Correia v. Canac Kitchens et al. 36 [Correia] and in the case of those investigating regulatory infractions, in Wilson Fuel Co. Limited v. Canada (Attorney General). 37 In Correia, Joao Correia s employer Canac Kitchens and its parent company Kohler Ltd. suspected that there was theft and drug dealing occurring at the Canac plant. They therefore retained a private investigation firm to conduct an investigation. The firm placed an undercover agent in the firm and he identified several employees engaged in theft and drug dealing. The firm kept the local police force apprised of the investigation, but the police force did little if any independent investigation. On October 24, 2002, the plaintiff, Joao Correia, aged 62, was discharged from his employment with the defendant Canac Kitchens and on the same day was arrested for theft. Both events were the result of mistaken identity arising from the similarity of his name to that of the actual suspect, one Joao Correiro, a man in his 20s and the intended subject of the termination and arrest. Both were employees of Canac Kitchens at the time of the events. Eventually, the mistake was discovered, but by then Mr. Correia claims to have suffered serious injury. Mr. Correia and his family sued his employer, the parent 35 Hill [2007] 3 SCR 129, at para 68; Folland v. Reardon [2005] CanLII. 1403, at (Ont CA) 36 [2008] 91 O.R. (3d) 353 (C.A.) var g Correia v. Kohler Ltd., C.C.E.L. (3d) 209 (Ont SC) 37 [2009] 280 N.S.R. (2d) 298 (SC); See discussion in Radford v. Stewart, [2010] ABQB 586,at para 162 (CanLII)

25 company, the private investigation firm, the police force and several individuals. The plaintiffs claim damages under various causes of action. On summary judgment motions brought by all the defendants except the police defendants, the motions judge dismissed several of those causes of action including claims for negligent investigation, malicious prosecution, false arrest, intentional infliction of mental distress, inducing breach of contract and intentional interference with contractual relations. The Ontario Court of Appeal dismissed the claim for negligent investigation against the employer as a matter of law, but allowed it to survive against the private investigation firm. The allegation was that if that firm had paid close attention to the investigation product that Aston Associates Investigations Ltd (Aston) was furnishing to its client and through the client, to the police, it is likely that it would have noticed that the person shown in the video and on the photocopy of the identification badge it had identified as the suspect was not likely to have been the person described as suspect #5 in the final suspect list as a person with a 1940 birth date. There is no evidence that anyone at Aston carried out an analysis of all the material being supplied to the police and no evidence that Aston or Speciale were aware of the error on the suspect list. The Court of Appeal supported the claim against the investigative firm because: 1. Private security firms are not engaged in quasi-judicial work. There is no conflict between a duty of care in negligence and other duties that the private security firm may owe to the public. While the firm may have contractual obligations to the party that has retained it, it is not apparent how those obligations would conflict with a duty of care to the person being investigated. 2. Private investigation firms occupy an increasingly important role in society. Something quite remarkable has been happening to the organization of policing in

26 Canada over the last 30 years. Many functions that were once the exclusive domain of public police forces are now being performed by private agencies. In some instances, this means that private security is doing things that the public police used to do. In other instances, it means that whole new areas of activities services that did not exist or were not widely available can now be purchased. The fact that private investigation firms perform public policing functions but with limited oversight or clear lines of redress to those injured by their activities strongly favors extending tort liability. 3. There is no conflict between loyalty to the client and requiring a private investigator to be careful in its investigation; surely the client would expect nothing less from the investigator. To the extent there may be a potential problem of divided loyalties, it is not sufficiently important to negate the prima facie duty of care, at least outside the insurance context. 38 In the result, the claim for negligent investigation against Aston and its investigators was allowed to proceed to trial because, in the context of a private investigation firm retained by an employer to investigate wrongdoing and a specific employee has been identified as a suspect, there is a duty of care to that suspect. Suing Investigators Personally for Bad Faith The reference in Correia to allowing a claim for negligent investigation to proceed in a context that did not involve in insurance is a reference to the fact that the insurance investigator owes a duty to the insurer and the insured that makes a standard of negligence controversial instead there is an obligation to investigate in good faith, as that 38 See Also Mohammed v. Goodship, [2009] ONCA 320 (CanLII)

27 term is described above. 39 Correia also allowed the claims against the individual investigators for negligent to proceed along with the claim against their private investigation firm. Whether it is the higher standard of bad faith, or the standard of negligence, there is a strong motive to sue the investigator personally in jurisdictions where one only has a right to examine parties to the lawsuit under oath prior to a civil trial. Thus the significance of being allowed to sue for professional malpractice, be it bad faith or for negligence, should not be underestimated. The right to do so was first established in this county in a case I argued successfully in the Ontario Court of Appeal in ADGA v. Valcom 40 in 1999, and which I suggested should be applied in the context of insurance investigators under what I called the ADGA doctrine in an article cited by the New Brunswick Court of Appeal who stated: Ms. Nicholls [the insurance investigator] need not submit to oral examination for discovery. The significance of this by-product of the judgment under appeal is described by David Debenham in Coming Armed With Spiers: Insuring Good Faith Processing of Policy Claims in the Post-Whiten Age (2003) 27:1 Advocates Q. 5, at pp : As a further tactical matter, adding adjusters as parties gives insureds the expanded rights of discovery that our American colleagues already enjoy. It therefore gives insured's counsel an opportunity to pit those who actually committed the bad faith conduct against those who orchestrated it behind the scenes, as the ADGA doctrine holds those who actually 39 Elliott v. Insurance Crime Prevention Bureau,[ 2005] 256 D.L.R. (4th) 674 (NSCA) 40 (1999), 43 O.R. (3d) 101 (C.A.), leave to appeal refused 183 D.L.R. (4 th ) vi