Ethics Matter, But Don’t Be Naive About It

In my first year of practice, a client asked me to advise him concerning his plan to build a sign for his restaurant.  The sign was to sit at sidewalk level and would be 6 feet high and 20 feet long with flashing neon lights.  It did not take long for me to determine that the sign would contravene the city’s by-laws and to tell him not to do it.

The client was furious with me.  He angrily explained to me that it was not my job to give him business advice.  In his mind, my role as the lawyer was simply to tell him what the law said and what the penalties were for breaking the law.  It was his job to make the determination whether it was a good business decision to break the law.  

That was my introduction to business ethics and how the practice of law fits in.

I wish that I could say that the client was wrong, but I eventually learned that although he might have been an immoral jerk and a bit of a bully, what he said was not far off from the truth.

The rules of professional conduct for lawyers provide that “a lawyer shall not…knowingly assist in or encourage any dishonesty, fraud, crime or illegal conduct” or “advise a client…on how to violate the law and avoid punishment.”  However, telling the client what they are prohibited from doing and what the punishment is so that they can decide whether or not to do it would appear to be on the right side of the ethical line.

As proud as I was for doing my absolute best to stay on the right side of the ethical line throughout my career, deep down I knew that I could not be an effective lawyer if I was afraid to approach the line from time to time.

Before I learned that lesson, however, an experienced businessperson told me (also somewhat angrily): “I don’t hire lawyers to tell me not to do what I want to do.  I hire lawyers to tell me how to do it.” 

I eventually figured out that one key to success as a business lawyer is to be someone who finds a way to get things done.  Businesspeople are not overly fond of lawyers who simply point out the obstacles without developing a road map to avoid them (legally) and still get close to the desired destination.  Sometimes the only route to that destination runs close to the ethical line.

Which brings me to the story about the time that I was hired to help a client who operated a franchised store.  (This was back before the protections offered by franchise legislation in Ontario.)  The client came to me with a letter that he had just received from the franchisor’s lawyers, which covered the following points:

1. He had signed a franchise agreement, sublease, general security agreement and personal guarantee;
2. He was in arrears in paying for his royalties, rent and supply of inventory; and
3. The franchisor was:
   1. terminating the franchise agreement and sublease;
   2. appointing a receiver and manager to take over the store; and
   3. suing him under his guarantee.

The client knew that all was lost, and he was prepared to walk away from the store.  However, he would have liked to avoid losing his house pursuant to a claim under the personal guarantee. The franchisor was unwilling to negotiate.

Unfortunately for both the client and me, the client figured that he only had enough money to pay me to write one letter to try to head off this disaster.

There was a small possibility that we could establish that misrepresentations made when the franchise agreement was signed made it unenforceable.  Other than that, we had no legal grounds to rely upon to argue that the agreements were invalid or that the franchisor did not have the right to do what it was doing.  Even if there had been some more solid legal grounds to rely upon, the client could not afford to hire a lawyer to litigate.  The only thing that the client could offer me to use as leverage was the client’s belief that the franchisor did not trust him and would be concerned about the huge inventory of easily transportable goods in the store.

I wrote my “Hail Mary” letter.  It went something like this:

1. Our client is not bound by the franchise agreement because of misrepresentations made when it was signed;
2. Our client will not surrender possession of the store until you obtain a court order requiring it to do so;
3. If you do apply for a court order it will be vigorously defended. (Note that lawyers always say that they will “vigorously” defend claims.  I do not actually know why that is important); and
4. Our client is hiring security on a 24-hour a day basis to prevent you from taking possession of the store except by court order.

We sent the letter. The client hired a security firm and slept in the store.  At 2 am someone came along to check things out and saw that the security was in place. The next day the franchisor, possibly worried that while it fought court proceedings the inventory would disappear, settled on our terms.  The client turned over the store and the franchisor released the client from the personal guarantee.

I believed that our client was honourable.  However, I also knew that the franchisor did not trust our client and I decided to let the franchisor come to its own conclusion about the risks inherent in having our client in possession of the store during litigation proceedings.

The rules of professional conduct require lawyers to “carry on the practice of law… honourably and with integrity.”  Also, there is a legal doctrine of “inducing a breach of contract” which can expose a person to liability for encouraging someone else not to comply with his or her agreements.  Our client had agreed that if he could not pay his debts, he would allow a receiver and manager to be appointed by the franchisor without the necessity of court proceedings, but I concluded that there were some grounds, albeit not very solid, to argue about that.  Based upon my advice, the client decided to demand a court order before cooperating with the appointment of the receiver.

Was I on the right side of the ethical line? 

I think so.  We ran a bit of a bluff. Our grounds for claiming misrepresentation on the signing of the franchise agreement were somewhat weak and our client could not afford to hire a lawyer to defend the claims, vigorously or otherwise.  He would have had to represent himself in court, likely against a team of experienced franchise lawyers, acting for a sophisticated franchisor. We did not threaten that the client would steal the inventory. We just left the franchisor to worry about it.

One thing that I do know for a fact is that if this conduct was over the line, lawyers are crossing the line every single day.  Most of the profession would call it ‘good lawyering.’

The bottom line is this: no one wants a lawyer who is a goodie-goodie.  At the same time, lawyers put themselves at personal risk when they do not comply with the ethical standards of their profession. The simple fact is that from time-to-time businesspeople pressure lawyers to cross the line.  Resistance is not futile, but sometimes it is not easy either.

All of this reminds me of what I was taught in Criminal Law at law school.  The professor said that our duty as lawyers was to vigorously (there is that word again) defend our clients using all of our intelligence, skill, and expertise, and to leave no stone unturned in our efforts to keep our clients out of jail. But he warned us, if at the end of the day someone has to go to jail, make sure that it is your client, and not you.

Postscript

My franchisee client had a cash float in his possession of a few thousand dollars.  The receiver would likely never have figured that out.  After the settlement was completed, our client turned the funds over to the receiver.  The franchisor’s fears (which we played upon) that the client was dishonest and would steal the inventory were never well-founded.

Post-Postscript

The common law has evolved in the years since the franchise scenario above played out.  Lawyers seeking to stay on the right side of the ethical line today have to consider the evolving case-law on the existence of an obligation to act in good faith in the performance and enforcement of contractual obligations.  Had that obligation been established at the time, determining where the ethical line was might have been even more complicated.