Laflamme v. Prudential-Bache Commodities Canada Ltd., [2000] 1 S.C.R. 638

Placements Armand Laflamme Inc. Appellant

v.

Jules Roy and Prudential-Bache Commodities Canada Ltd. Respondents

Indexed as: Laflamme v. Prudential-Bache Commodities Canada Ltd.

Neutral citation: 2000 SCC 26.

File No.: 26659.

1999: November 2; 2000: May 3.

Present: L’Heureux‑Dubé, Gonthier, McLachlin, Iacobucci, Bastarache, Binnie and Arbour JJ.

on appeal from the court of appeal for quebec

Civil responsibility -- Securities dealers -- Portfolio manager -- Failure to comply with mandate -- Mismanagement of portfolio of securities -- Point in time when manager’s liability ends -- Obligation of client to mitigate damages -- Quantum of damages.

Mandate -- Portfolio manager -- Scope of mandate and point in time when it ends -- Obligation of client to mitigate damages.

L sold his business and, for tax reasons, transferred the proceeds to the appellant company, 98 percent of the shares of which he owned. He entrusted the management of the money to the respondent R, a securities broker. L and his family had no experience in investments. In April 1988, R left his brokerage firm and joined the respondent Prudential-Bache and arranged the transfer of the appellant’s portfolio to his new employer. In June, L learned from his auditor that R was managing the portfolio on margin without his knowledge and that a number of the investments were speculative, when the primary purpose of the investments was supposed to have been to provide L, who was nearly 60 years old, with a retirement fund. In July and November, L’s daughter advised R by letter to limit stock market investments, to make safe investments and to stop engaging in margin transactions. On May 3, 1989, R and the L family met to discuss the management of the portfolio. On May 5, contrary to the suggestions attributed to R, the appellant wrote to him advising him to sell certain shares in batches and postponed a decision relating to other shares for a month. However, it did not subsequently provide any instructions concerning those shares. In the fall of 1989, the price of the shares held by the appellant fell and, in March 1990, it closed its account and sustained major losses. L and the appellant then commenced an action for damages against the respondents, claiming that those losses had been sustained as a result of their faults. The trial judge found that the respondents were entirely liable and ordered them to pay $12,232.55 to L and $1,466,141.08 to the appellant. The Court of Appeal allowed the respondents’ appeal in part. Unlike the trial judge, who used April 1990 to determine the amount of the appellant’s accumulated losses, the Court of Appeal used June 5, 1989, the end of the one-month period specified in the letter of May 5, since as of that date the appellant had sufficient information to decide to close its account and thus mitigate its damages. The court reduced the total damages awarded to the appellant to $70,723.79.

Held: The appeal should be allowed.

The liability of the respondents was not in issue. R failed to comply with the conduct required of a prudent and diligent manager, in that he failed to construct an organized and diversified portfolio, carried out transactions that were inconsistent with the client’s general instructions, acquired speculative securities and failed to have regard to his client’s investment objectives. For the most part, the legal relationship between a client and a portfolio manager is governed by the rules of mandate. As a mandatary, R also failed to deal fairly and honestly with his client, as he was expected to do, by failing to comply with the L family’s specific instructions concerning the amounts to be invested in the stock market and the immediate cessation of transactions on margin. The only issue which arises is the point in time when the respondents’ liability ceased.

The events of May 1989 did not change the object of the mandate between L and the respondents, and R continued to be subject to an ongoing management obligation. The Court of Appeal erred when it intervened on this ground and substituted its own interpretation of the facts for the trial judge’s interpretation, absent patent error on his part. There was nothing to indicate that the parties considered changing the mandate by terminating discretionary management. The trial judge rejected the interpretation of the letters sent by the L family as indicating that they were gradually taking control of the management of their portfolio, and on the whole, he believed the appellant’s witnesses. The degree of discretion that a dealer enjoys in managing a portfolio may vary, and there is nothing to prevent the scope of that discretion being limited or the client being involved in the portfolio’s management from time to time. Intervention of that sort by the client is possible without it amounting to a change in the object of the mandate or to a revocation of the mandate. The conduct of R following receipt of the letter of May 5 is not consistent with a change to or revocation of the management mandate since the account statements show that he bought and sold a number of securities without instructions from the appellant. In fact, there was nothing to indicate that R advised the L family regarding the effect of any such change in the object of the mandate on their respective obligations, as he should have done. The only possible conclusion is thus that R continued to manage the portfolio on a discretionary basis despite the letter of May 5. In any event, even if we were to accept that the object of the mandate had been changed from discretionary management to non-discretionary management, this would not mean that the respondents had no liability. Despite any such change in the object of the mandate, R is still responsible for the injury resulting from the faults he committed. Thus, absent any fault on the part of the appellant or a third party, the damages in the instant case were the direct result of the mismanagement of the portfolio by R, and accordingly, even if it were accepted that the letter operated to change or revoke the management mandate, R is still liable, since the faults were committed prior to the letter. The respondents’ liability cannot end merely because the object of the mandate was changed or the appellant opted to take over control of the management of its portfolio.

The trial judge was correct in holding April 1990 to be the end of the assessment period since the L family were not negligent when they failed to intervene earlier in the respondents’ management in the hope of minimizing the losses. The trial judge noted the state of mind and the knowledge of the members of the L family. They held onto securities in reliance on assurances given by R, whom they trusted. The losses caused by the bad advice and grossly negligent management by R cannot be laid at their doorstep. Absent any patent error on the part of the trial judge, the Court of Appeal erred in blaming the appellant for failing to take measures to mitigate the damages. It cannot be concluded from the evidence in the record that the appellant’s behaviour, in failing to liquidate or withdraw its portfolio in the spring of 1989, was not what a reasonably prudent and diligent person would have done in the same circumstances.

The appellant is entitled to compensatory damages because of the wrongful conduct of the respondents. The total amount of the damages is made up of the losses incurred by the appellant and the profits of which it was deprived. Those damages must be assessed for the period from April 1988, the date on which the portfolio was transferred, to April 1990. The findings of the trial judge cannot be restored in their entirety. The trial judge erred when he added the commissions and interest to the quantum of damages assessed by the expert, since those amounts had already been included by the expert in his calculation of damages. The respondents are jointly and severally ordered to pay the appellant the amount of $924,374, plus interest at the legal rate from the date of service and the additional indemnity.

Cases Cited

Distinguished: Bazinet v. Wood Gundy Inc., [1997] R.R.A. 273; referred to: Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377; Rothschild v. Duffield, 1950 CanLII 38 (SCC), [1950] S.C.R. 495; Beatty v. Inns, [1953] Que. Q.B. 349; Mines v. Calumet Investments Ltd., [1959] C.S. 455; Proulx v. Société de placements & Co., [1976] C.A. 121.

Statutes and Regulations Cited

Civil Code of Lower Canada, arts. 1024, 1073, 1074, 1701, 1709, 1710, 1735, 1756.

Civil Code of Québec, S.Q. 1991, c. 64, arts. 1434, 1479, 1611, 2130, 2139, 2176, 2182.

Regulation respecting securities, (1983) 115 G.O. II, 1269, s. 232 [am. (1996) 128 G.O. II, 560, s. 25], 234.1 [ad. (1988) 120 G.O. II, 2396, s. 19], 235 [repl. (1985) 117 G.O. II, 2297, s. 59].

Securities Act, R.S.Q., c. V-1.1, ss. 5 [am. 1984, c. 41, s. 2], 161.

Authors Cited

Baudouin, Jean-Louis, et Patrice Deslauriers. La responsabilité civile, 5^e éd. Cowansville: Yvon Blais, 1998.

Beaudoin, Lise I. Le contrat de gestion de portefeuille de valeurs mobilières: nature juridique, rôle des règles de l’administration du bien d’autrui et obligations des parties. Cowansville: Yvon Blais, 1994.

Fabien, Claude. “Les règles du mandat”. Extraits du Répertoire de droit -- Mandat -- Doctrine -- Document 1. Montréal: Chambre des notaires du Québec, 1986.

L’Heureux, Nicole. “La révocation d’un agent et le statut d’intermédiaire de commerce” (1977), 18 C. de D. 397.

Lemoyne, Raymond D., et Georges R. Thibaudeau. “La responsabilité du courtier en valeurs mobilières au Québec” (1991), 51 R. du B. 503.

Pétel, Philippe. Les obligations du mandataire. Paris: Litec, 1988.

Québec. Commission des valeurs mobilières. Instructions générales québécoises Q-9, s. 57.

Savatier, René. “Les contrats de conseil professionnel en droit privé”, D. 1972.chron.137.

APPEAL from a judgment of the Quebec Court of Appeal, 1998 CanLII 12694 (QC CA), [1998] R.J.Q. 765, [1998] Q.J. No. 828 (QL), allowing in part the respondents’ appeal from a judgment of the Superior Court, [1996] R.J.Q. 2694, [1996] Q.J. No. 1400 (QL). Appeal allowed.

Serge Létourneau and Odette Jobin-Laberge, for the appellant.

Edward E. Aronoff and Sophie Crevier, for the respondents.

English version of the judgment of the Court delivered by

[1] Gonthier J. — The issue in this case relates to the extent of the liability of a securities dealer acting as a portfolio manager. More specifically, the case relates to the point in time when that liability ceases.

1. Facts

[2] In June 1987, when he was about 60 years of age, Armand Laflamme and his brother sold the door and window business they owned. Armand Laflamme’s share of the proceeds was $2,200,000, which he transferred to the appellant company, Placements Armand Laflamme Inc., 98 percent of the shares of which he owned. He was supposed to have received $5,000,000, representing one half of the selling price of $10,000,000, but as a result of financial difficulties experienced by the company the balance of the selling price could not be paid. The appellant is a company established for tax purposes to receive the proceeds of the sale of Armand Laflamme’s shares.

[3] In April 1987, Armand Laflamme accompanied by his son Benoît, met with the respondent, Jules Roy, who was at that time a securities dealer with the firm of Burns Fry, to discuss investments. The purpose of these investments was primarily to provide him with a retirement fund. Armand Laflamme had only a grade four education, and his son Benoît had no experience in portfolio management. The son, who had not completed Secondary V, handled personnel in the family’s plant. On May 19, 1987, the respondent Roy opened an account for the appellant company and obtained Armand Laflamme’s signature on a number of complex forms. Mr. Laflamme signed the forms in blank, and Roy filled them out himself later.

[4] Between May 1987 and April 1988, Roy made various investments totalling approximately $2,000,000 which resulted in a loss of approximately $200,000. In April 1988, Roy left Burns Fry and joined the respondent Prudential‑Bache Commodities Canada Ltd. (“Prudential‑Bache”). He arranged the transfer of the appellant’s portfolio to his new employer and sent the forms relating to the opening of the new account to Armand Laflamme, who signed them in blank. A few weeks later, on June 8, 1988, the Laflamme family were stunned to learn from their auditor, Alain Martineau, who had just completed an examination of the financial statements of the appellant company, that Roy was managing the portfolio on margin without their knowledge and that a number of the investments were speculative. However, the primary purpose of the investments was supposed to have been to provide Armand Laflamme with a retirement fund.

[5] On July 15, 1988, Suzanne Laflamme, Armand’s daughter, wrote to Roy advising him to limit stock market investments to $500,000 — [translation] “not all in high risk” — and to invest the rest of the money in safe investments. She stated that [translation] “[n]aturally, we will no longer use the line of credit”. Over the next few months, the position of the portfolio deteriorated, while interest on the line of credit, and Roy’s commissions, increased. On November 10, 1988, another letter was sent to Roy setting the amount to be invested in the stock market at $750,000 and stating that the investments were to be diversified and to include approximately $200,000 in risk investments. This letter repeated the intention to stop using the line of credit and asked that the shares be sold when it was possible to do so without a loss, in order to reinvest the proceeds in safe investments.

[6] On May 3, 1989, the Laflamme family and Roy met at Le Bouvier restaurant to discuss the management of the portfolio, and more specifically the Campeau and Quaker State shares held in the portfolio. On May 5, 1989, contrary to the suggestions attributed to Roy that these shares not be sold, the appellant decided to sell the Quaker State shares in batches and to postpone a decision relating to the Campeau shares for a month. However, the appellant did not subsequently provide any instructions concerning those shares.

[7] In the fall of 1989, the price of the shares held by the appellant fell, with the result that the value of the portfolio dropped significantly. On March 2, 1990, the appellant closed its account with the respondent Prudential-Bache, and sustained major losses at that time.

[8] The appellant and Armand Laflamme then commenced an action for damages against the respondents, claiming that these losses had been sustained as a result of their faults.

2. Decisions

Superior Court of Quebec, [1996] R.J.Q. 2694

[9] Lebrun J. of the Superior Court found that the respondents Roy and Prudential‑Bache were entirely liable.

[10] At the beginning of his analysis, Lebrun J. made a finding concerning the credibility of the witnesses and unhesitatingly accepted the testimony of the witnesses for the plaintiff, the appellant in this Court. In his opinion, Armand Laflamme and his two children [translation] “had been led into an adventure in which gross negligence if not deception were key factors” (p. 2701). On this point, he wrote (at p. 2701):

[translation] The explanations given by the Laflamme children concerning their relations with the defendant Roy are credible and lead to only one conclusion — that they were all persons unfamiliar with the stock market and their conversations with the defendant Roy were information sessions, and that they could never have given informed consent or approved the many risky and irresponsible transactions carried out by the defendant Roy without regard for his regulatory and legal obligations.

In defence, reliance was placed on several letters the Laflamme family sent to the defendant, in an attempt to prove that they were knowledgeable individuals who were giving the defendant orders. This interpretation is not persuasive. It is clear from the letters to Roy, the dealer, that his clients were mystified by the “play” of the stock market, that they had only a minimal understanding of the transactions carried out on their behalf by the defendant, that it was their accountant and auditor who made them aware, when preparing the financial statements, of the mess that the defendant was making of things.

[11] Lebrun J. placed considerable weight on the testimony of the appellant’s experts, Stephen A. Jarislowski and Jean‑Claude Dorval. He even noted that the opinion of these two experts was so persuasive that the respondents’ expert agreed with them concerning three of the five faults attributed to Roy that they identified. These three faults were the absence of an investment policy, the speculative nature of the portfolio, and the lack of diversification.

[12] Relying, inter alia, on the obligations that rest on the dealer pursuant to the rules of the Montréal stock exchange, Lebrun J. found that the respondent Roy had failed to fulfill his basic obligation to know his client by [translation] “totally [ignoring] the plaintiff’s objective, which was to establish a retirement fund for himself after a lifetime of hard work” (p. 2701). On the question of the scope of Roy’s obligation to provide advice, he stated that the obligation was particularly broad in view of Mr. Laflamme’s lack of knowledge concerning investments.

[13] He accordingly found that the respondents were entirely liable and listed the [translation] “quite unmistakable and clearly proved” faults of the dealer, Roy, which he characterized as gross faults (at p. 2703):

1. Failure to be properly knowledgeable about his client’s situation;

2. Failure to act in accordance with the client’s objectives;

3. Failure to adequately inform the client concerning the nature, return on and risks of the investments;

4. Failure to comply with the client’s specific instructions;

5. Failure to deal with his client in good faith and in accordance with good practice;

6. Extremely large numbers of transactions for the purpose of increasing commissions;

7. Failure by the defendant company to exercise proper supervision;

8. Clear conflict of interest with [Roy’s] alleged supervisor, [Claudio] Vecchio, who received a 50 percent share of the defendant’s commissions.

[14] On the question of quantum, Lebrun J. adopted the report prepared by the expert, Dorval, stating that the method used to establish the plaintiffs’ losses was in accordance with the provisions of arts. 1073 and 1074 C.C.L.C. and the principle established in Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377. He therefore found the respondents jointly and severally liable to pay to Armand Laflamme $12,232.55, and to the appellant company $1,466,141.08. The latter amount consists of the quantum of $1,078,420 established by Dorval, to which Lebrun J. added Roy’s commissions of $111,812.15 and interest on the margin account totalling $275,908.93, [translation] “these amounts being recoverable in view of the evidence that they were acquired illegally and in breach of rules which are matters of public order” (p. 2704).

Court of Appeal of Quebec, 1998 CanLII 12694 (QC CA), [1998] R.J.Q. 765

[15] On March 16, 1998, the Court of Appeal allowed the respondents’ appeal in part and reduced the total damages awarded to the appellant company to $70,723.79.

[16] On the issue of the respondents’ liability, Letarte J.A., writing for the Court of Appeal, expressed the view that the trial judge had instructed himself properly as regards the nature of the faults committed by Roy. However, in the opinion of Letarte J.A., the Laflamme family had gradually become capable of managing their portfolio, and he felt that this should be identified as the point where the causal connection between the faults committed by the respondents and the damage suffered by the appellant company was broken. He identified the following errors as justifying intervention by the Court of Appeal (at p. 771):

[translation]

a) the calculation by the trial judge took into account the Burns-Fry period, which the parties had agreed to exclude;

b) that calculation ignored the change in the discretionary nature of the portfolio’s management during the period under consideration;

c) by establishing the total loss as of the date on which the portfolio was closed in April 1990 he failed to take into account the respondent’s obligation to mitigate the damages by closing the account earlier;

d) the findings in the Dorval report relating to the accumulated losses already included the commissions and interest on the margin account;

e) the amount of the losses did not take into account lost profits.

[17] Concerning the conduct of the Laflamme family with respect to the management of their portfolio, Letarte J.A. was of the opinion that Lebrun J. had erred by failing to have regard to the change in the relationship between the parties, and in particular the fact that the Laflamme family account changed from “discretionary” to “non‑discretionary”. On this point, he said (at p. 772):

[translation] Between the transfer and the letter directing that the account be closed, on March 2, 1990, a number of facts could have prompted the Laflamme family to respond earlier. By the spring of 1989 they had sufficient information on the stock market transactions and were aware of the status of their portfolio, and their confidence in Roy was beginning to be seriously eroded.

For one thing, the accountant, Martineau, had warned them of the danger of investing in speculative securities using an ever-growing line of credit.

These hesitations, and even questions, went on for several months before the Laflamme family decided to give their instructions to the appellants, in short, to take control of their stock market transactions themselves.

At what point in time were the Laflamme family capable of realizing that it was desirable for them to sever all ties with the appellants and call them to account? On the evidence, this point at least had to come during the period following the meeting at Le Bouvier restaurant in May 1989. As regards the period prior to this, I must rely on the findings of the trial judge regarding the circumstances that affected their capacity to make an informed decision in this respect. [Emphasis in original.]

[18] According to Letarte J.A., the meeting at Le Bouvier restaurant prompted the first serious response from the appellant to Roy’s management. During this meeting, Roy apparently strongly recommended that certain securities be kept. Despite those recommendations, Suzanne Laflamme wrote to Roy, on behalf of the appellant, on May 5, advising him that the appellant wished to sell the Quaker State securities in batches and that it would review its position concerning the Campeau securities within a month. [translation] “The unavoidable conclusion is therefore that as of that point in time the Laflamme family had decided to take control and make their account a non‑discretionary account” (p. 773). Thus, unlike Lebrun J., who found that the situation had crystallized in April 1990, Letarte J.A. felt that for the purpose of determining the total accumulated losses, the correct date to use was rather June 5, 1989 (at p. 774):

[translation] With respect, I am of the opinion that the Laflamme family’s loss of confidence in Roy developed gradually over a period beginning with the meeting on May 3, 1989, and continuing to the end of the period for thinking matters over referred to in the letter of May 5, 1989 and that at the end of that period, the respondent was sufficiently well informed to decide to close the account and stop the haemorrhage. I must therefore find that the final date, in terms of calculating the respondent’s accumulated loss, was June 5, 1989.

[19] In calculating the quantum, Letarte J.A., relying on Dorval’s revised report, found that the accumulated losses between April 29, 1988, the date on which the account was transferred to Prudential‑Bache, and June 5, 1989, totalled $143,963. From that amount he deducted two withdrawals of $30,000 and $90,000 made by the appellant on June 10 and 16, 1998, for a net accumulated loss of $23,963. That figure includes the interest received by the respondents and commissions paid. Letarte J.A. determined the lost profit to be $46,760.79, representing an annual return of 4 percent on an average investment of $1,061,423.50 from April 29, 1988 to June 5, 1989, a period of 402 days.

[20] The Court of Appeal accordingly varied the trial decision and fixed the total award at $70,723.79, representing the lost value of the portfolio ($23,963) and the lost profit ($46,760.79).

3. Analysis

[21] The appeal does not involve the principles of the liability of a securities dealer. The findings of the trial judge concerning the liability of the dealer, Roy, and of Prudential‑Bache were not appealed and were affirmed by the Court of Appeal.

[22] The issue is rather the scope of the mandate and the time over which that mandate extended, and the associated duty to mitigate damages.

A. Law

[23] A securities dealer may perform a variety of functions. First, in his most common role, the dealer is an intermediary. He buys and sells securities on behalf of his client, in accordance with the client’s instructions. The dealer is in no way involved in the management of his client’s portfolio and has no discretion regarding its content and the transactions to be carried out. In this situation, the client’s account is sometimes referred to as “non‑discretionary”.

[24] Second, a dealer may also be responsible for managing the portfolio. In addition to his function as a dealer, he is also a portfolio manager with responsibility for making decisions with respect to the management and make up of the portfolio (R. D. Lemoyne and G. R. Thibaudeau, “La responsabilité du courtier en valeurs mobilières au Québec” (1991), 51 R. du B. 503, at p. 523; L. I. Beaudoin, Le contrat de gestion de portefeuille de valeurs mobilières (1994), at pp. 10-11). This kind of account is referred to as a “discretionary” account. While in the case at bar Roy was both dealer and manager, these functions may sometimes be performed by different persons (Securities Act, R.S.Q., c. V‑1.1, s. 5).

[25] The functions of a manager and the powers granted to the manager may be quite extensive. Beaudoin, supra, describes them as follows at pp. 25‑26:

[translation] Authorized management of a portfolio results from delegation by the client of his decision‑making authority. This task covers the intellectual, tactical and strategic activities performed in respect of a portfolio. The manager acts in accordance with the investment objectives set with the client. His decisions are essentially guided by the concept of maximizing return on the portfolio, having regard to the risks that this involves. The manager determines the portfolio’s make up and the investments to make. On behalf of the client, he forwards orders to a securities dealer to buy or sell securities. He advises the depositary regarding future transactions relating to the client’s portfolio and instructs it concerning settlements and security transfers. The dealer and the depositary, neither of which is a party to the portfolio management contract, act in accordance with the manager’s instructions. The manager has no contractual relationship with the depositary, but does establish a contractual relationship with the dealer by giving him orders to buy or sell securities on behalf of the manager’s client.

[26] Thus, the manager makes most of the decisions relating to the portfolio and the make up of the portfolio. The scope of his management authority and the exercise of his discretion will, however, depend on any restrictions that are imposed by law or agreement. In particular, the agreement may expressly circumscribe the manager’s authority and discretion, for instance by giving the client the option of confirming certain transactions. Such limitations may also be implicit in the client’s investment objectives or circumstances.

[27] For the most part, the legal relationship between the client and the securities dealer is governed by the rules of mandate. This legal characterization of the relationship is apparent when the dealer buys or sells in accordance with the client’s instructions (art. 1735 C.C.L.C.; Rothschild v. Duffield, 1950 CanLII 38 (SCC), [1950] S.C.R. 495; Beatty v. Inns, [1953] Que. Q.B. 349). What is the situation for a portfolio manager? Despite the fact that the new Civil Code of Québec, S.Q. 1991, c. 64, may suggest a new characterization of this relationship (art. 2130 C.C.Q.; Beaudoin, supra, at pp. 45‑52), the rules of the Civil Code of Lower Canada concerning mandate, which apply to the facts of this case, are also binding on a portfolio manager, whether or not the manager is acting as a dealer. The mandate “commits a lawful business to the management of” the manager (art. 1701 C.C.L.C.; N. L’Heureux, “La révocation d’un agent et le statut d’intermédiaire de commerce” (1977), 18 C. de D. 397, at p. 438). He is acting as the mandatary of the client, the mandator. The object of the mandate is not simply the carrying out of a transaction, but rather the management of the client’s portfolio, using a greater or lesser degree of discretion. The dealer’s obligation then becomes [translation] “an ongoing obligation as a manager, and no longer a simple mandate to buy or sell which is renewed for each transaction” (Lemoyne and Thibaudeau, supra, at p. 523).

[28] As in the case of any mandate, the mandate between a manager and his client is imbued with the concept of trust, since the client places his trust in the manager — the mandatary — to manage his affairs. The very definition of mandate in art. 1701 C.C.L.C. conveys this concept. As one author has written, the word “confie” (“commits”, in the English version) implies a degree of trust, on the part of the person granting the mandate, in the person receiving it. This element of trust explains, for instance, the mandator’s authority to revoke the mandate at any time (art. 1756 C.C.L.C.; art. 2176 C.C.Q.). This spirit of trust is reflected in the weight of the obligations that rest on the manager, which will be heavier where the mandator is vulnerable, lacks specialized knowledge, is dependent on the mandatary, and where the mandate is important. The corresponding requirements of fair dealing, good faith and diligence on the part of the manager in relation to his client will thus be more stringent.

[29] The content of the obligations that rest on the manager will vary with the object of the mandate and the circumstances. One of the most fundamental of these obligations is that the manager exercise reasonable skill and all the care of a prudent administrator (art. 1710 C.C.L.C.). The conduct expected is not that of the best of managers, nor the worst. Rather, it is the conduct of a reasonably prudent and diligent manager performing similar functions in an analogous situation. Thus the portfolio manager’s conduct must [translation] “be analysed having regard to his role as a specialist in this kind of transaction, and to the practices of each profession” (L’Heureux, supra, at p. 425). The Regulation respecting securities, (1983) 115 G.O. II, 1269, further defines this obligation by requiring that in his relations with his client the manager use “the care that one might expect of an informed professional placed in the same circumstances” (s. 235). He must also deal in good faith, honestly and fairly with his clients (s. 234.1).

[30] The mandate also imposes an obligation for the manager to inform his client and, in certain circumstances, a duty to advise him. The obligation to inform, now codified in art. 2139 C.C.Q., requires that the manager, as mandatary, inform the mandator of the facts and of the progress of his management. Professor Claude Fabien summarizes the object of this obligation as follows (“Les règles du mandat”, in Chambre des notaires du Québec, Extraits du Répertoire de droit — Mandat — Doctrine — Document 1 (1986), No. 127):

[translation] The purpose of this obligation is to avoid the mandator doing things that are inconsistent, or to enable him to change his instructions or react to the circumstances. This obligation also implies that the mandatary will remain in contact with the mandator to allow communication in both directions. The mandatary’s obligation to inquire from the mandator in the event of doubt concerning his instructions or authority could also be included. [References omitted.]

[31] A professional mandatary also has a duty to provide advice (J.‑L. Baudouin and P. Deslauriers, La responsabilité civile (5th ed. 1998), No. 1570). This duty results from the very nature of the portfolio management contract (art. 1024 C.C.L.C.; art. 1434 C.C.Q.). As noted by L’Heureux, supra, at p. 419, the dealer’s duty to advise is [translation] “in fact what often induces a client to retain his services”. And according to Philippe Pétel (Les obligations du mandataire (1988), at pp. 151-52):

[translation] Plainly, a mandator using the services of a professional as an intermediary in his relations with third parties expects a great deal from that intermediary. It is not merely a matter of performing a legal act in his absence, since such an outcome could in most cases be achieved by means of modern telecommunications. The mandator also wishes to have his interests better taken care of than they would have been had he acted directly. This is the reason for the existence of certain professional mandataries such as insurance brokers or freight forwarding agents. [Emphasis in original; references omitted.]

[32] For the same reasons, a securities portfolio manager is also subject to this duty.

[33] The duty to provide advice requires that the manager make his knowledge and expertise available to the client, and that he use them better to serve the client’s interests in light of the client’s objectives. However, the duty to provide advice is not the same as the obligation to inform, the substance of the latter being more objectively quantifiable. As Pétel says, supra, at pp. 155-56, [translation] “advice is not just any kind of information. It is directed information, designed to guide its recipient toward a decision consistent with his interests”. This duty relates not only to the risks associated with certain initiatives, but also to the very nature of the matters agreed to between mandatary and mandator, especially where the mandator is a lay person. Thus, the duty to advise extends to everything involved in the mandate to manage the portfolio, including the consequences for the client of any change in the object of the mandate. The manager being subject to an ongoing obligation to manage, this duty continues as long as the object of the mandate given by the client to the manager remains unchanged and could even survive the termination of the mandate (art. 1709 C.C.L.C.; art. 2182 C.C.Q.).

[34] The scope and nature of this duty will vary with the circumstances. Specifically, we note the importance of the client’s personality. As René Savatier has commented, [translation] “any mandate given by a lay person to a person with special knowledge gives rise to a duty to provide advice” (“Les contrats de conseil professionnel en droit privé”, D. 1972.chron.137, at p. 140). The substantive content of the duty to provide advice will vary inversely with the client’s knowledge of investments (Mines v. Calumet Investments Ltd., [1959] C.S. 455; Proulx v. Société de placements & Co., [1976] C.A. 121). A dealer who is a manager is also required to be well informed as to his client (Securities Act, s. 161; Regulation respecting securities, s. 232; Commission des valeurs mobilières du Québec, Instructions générales québécoises Q‑9, s. 57).

B. Application to the Facts

[35] As noted earlier, the actual liability of the respondents is not in issue. The Superior Court and the Court of Appeal agree that they have incurred liability through their actions. The respondents have not appealed those findings to this Court.

[36] I agree with the findings of the trial judge in that regard. The faults committed by the respondent Roy are apparent from the record. He failed to comply with the conduct required of a prudent and diligent manager, in that he failed to construct an organized and diversified portfolio, carried out transactions that were inconsistent with the client’s general instructions, acquired speculative securities and failed to have regard to his client’s investment objectives. As a mandatary, the respondent Roy also failed to deal fairly and honestly with his client, as he was expected to do. There could be no clearer illustration of that breach than his failure to comply with the Laflamme family’s instructions concerning the amounts to be invested in the stock market and the immediate cessation of transactions on margin.

[37] The issue which arises is the point in time when the respondents’ liability ceased. That point in time may be decisive, in view of the nature of the damages in this case, which resulted not from losses caused by an easily singled out act, such as an unauthorized transaction or the failure to act on the client’s instructions to buy or sell a particular security, but rather from the on-going mismanagement of a portfolio whose value fluctuates continuously with the prices of the securities of which it is made up. The point at which the causal connection was broken may then have a major impact on the value of the portfolio, and consequently on the quantum of damages.

[38] One of the grounds on which the Court of Appeal intervened was that the respondents’ liability should have ended on June 5, 1989. According to Letarte J.A., the trial judge’s calculation of the damages ignored the change in the discretionary nature of the management of the portfolio. He also held that by basing the determination of the amount of the loss on the date on which the account was closed, in April 1990, Lebrun J. erred by failing to take into account the appellant’s duty to mitigate its damages.

(i) Change in Object of the Mandate

[39] The Superior Court held that the period for assessing damages ended in April 1990, when the activity in the account ceased after the appellant closed it in March. The Court of Appeal regarded this as an error, and was instead of the opinion that the date should be June 5, 1989, the end of the one‑month period the appellant allowed itself in its letter of May 5, 1989, for making a decision concerning the Campeau shares held in the portfolio.

[40] The intervention by the Court of Appeal was based on its own assessment of the evidence. Letarte J.A. was of the opinion that at the end of the period specified in the letter of May 5, the Laflamme family had acquired sufficient knowledge of stock market transactions and the status of their portfolio. Their confidence in Roy had also been seriously undermined. In the view of the Court of Appeal, the Laflamme family, by that letter, took [translation] “control of their stock market transactions themselves” (p. 772 (emphasis in original)). At that point in time, the account changed from “discretionary” to “non‑discretionary”. This means that as of that date, the dealer was no longer responsible for managing the portfolio, his role now being limited to that of a mere instrumental agent responsible for carrying out the client’s instructions. Decisions concerning the management and make-up of the portfolio would now be left to the appellant.

[41] With respect, the intervention by the Court of Appeal on this issue seems unwarranted. No patent error by the trial judge that would justify reassessment of the evidence was identified. The principle that an appellate court must exercise deference with respect to a trial judge’s findings of fact has been clearly established by this Court. La Forest J. reiterated that principle in Hodgkinson v. Simms, 1994 CanLII 70 (SCC), supra, at pp. 425-26:

It is axiomatic that a reviewing court must exercise considerable deference with respect to a trial judge’s findings of fact, all the more so when those findings are based on credibility; see Fletcher v. Manitoba Public Insurance Co., supra, at pp. 204‑5; Laurentide Motels Ltd. v. Beauport (City), 1989 CanLII 81 (SCC), [1989] 1 S.C.R. 705, at pp. 794, 799; Lensen v. Lensen, 1987 CanLII 4 (SCC), [1987] 2 S.C.R. 672, at p. 683; White v. The King, 1947 CanLII 1 (SCC), [1947] S.C.R. 268, at p. 272. In my view, the reasons supporting this principle apply with particular force to situations where a trial judge is asked to characterize a relationship for the purposes of determining the nature and extent of civil liability. . . . I stress that the principle of non‑intervention stated in this line of cases is not merely cautionary; it is a rule of law. Failing a manifest error, an appellate court simply has no jurisdiction to interfere with the findings and conclusions of fact of a trial judge; see Lapointe v. Hôpital Le Gardeur, 1992 CanLII 119 (SCC), [1992] 1 S.C.R. 351, at pp. 358‑59.

[42] Despite the fact that the Court of Appeal indicated that it agreed with the trial judge’s findings, it erred by nevertheless drawing its own conclusions concerning the intentions of the Laflamme family, the interpretation of the letter of May 5, and the object of the mandate.

[43] The trial judge clearly rejected the interpretation of the letters sent by the Laflamme family as indicating that they were gradually taking control of the management of their portfolio. In his view, those letters showed that the Laflamme family [translation] “were mystified by the ‘play’ of the stock market, that they had only a minimal understanding of the transactions carried out on their behalf by the defendant, that it was their accountant and auditor who made them aware, when preparing the financial statements, of the mess that the defendant was making of things” (p. 2701). More specifically, concerning the letter of July 15, 1988, Lebrun J. pointed out that, in the three experts’ opinions, that letter [translation] “contained numerous contradictions, and demonstrated an obvious lack of knowledge on the part of the person who signed it, as well as unequivocal proof of the need for safe investments of members of the Laflamme family concerned” (pp. 2697-98).

[44] Nor, would I add, with respect, do the facts support the Court of Appeal’s interpretation of the letter of May 5. The Court placed great weight on the events of May 1989, to conclude that this was a turning point in relations between the parties. However, the testimony of the parties concerning the meeting on May 3, 1989, at Le Bouvier restaurant were contradictory, as the Court of Appeal noted (at p. 773):

[translation] Roy’s description of the meeting on May 3 was flatly contradicted by the Laflamme family, whom the trial judge believed “without the slightest hesitation”. Roy claims to have strongly suggested that the Campeau shares be sold, despite the objections of the Laflamme family. They maintain exactly the opposite: Roy painted a glowing picture of huge profits for them, and added that he was keeping the same shares in his father’s portfolio, and that he was even considering buying them himself: “. . . you won’t lose anything . . .”.

[45] While he did not make a specific finding concerning the events of May 1989, Lebrun J. did make a general finding concerning the credibility of the witnesses. On the whole, he believed the Laflamme family.

[46] There is nothing to indicate that the parties stopped to consider changing the mandate by terminating discretionary management. In that case, Roy would have been obliged to inform the Laflamme family, who were not knowledgeable investors, of the effects of this change on the management of the account, to ensure that an informed decision was made. This stems from his obligation to act in good faith. He would then also have been required to advise them concerning the implications of that decision and, at the very least, tell them clearly that they alone would now be responsible for all aspects of management of the portfolio. In fact, the Laflamme family remained under the impression that Roy was still handling their affairs.

[47] Thus, in the circumstances, the letter of May 5 was not an express or implied revocation of the management mandate given to the respondents nor a change in its object or their obligations. As we have seen, the degree of discretion that a dealer enjoys in managing a portfolio may vary. There is nothing to prevent the scope of that discretion being limited or the client being involved in the portfolio’s management from time to time. Intervention of that sort by the client is possible without it amounting to a change in the object of the mandate or to a revocation of the mandate. In view of the length of the relationship between the parties, the Laflamme family’s lack of knowledge concerning securities markets and investment management, and the size of the portfolio and role of the mandatary, much more would have been required in the instant case in order for there to have been an implied change to or revocation of the management mandate.

[48] I would also add that the conduct of the respondent Roy following receipt of the letter of May 5 is not consistent with such an interpretation of the letter’s effect. Not only was there no communication between the parties subsequent to that letter, but quite a number of transactions were in fact carried out by Roy relating to the appellant’s portfolio. The respondents claim that only 18 administrative transactions were carried out, such as cashing matured government bonds and performing obligations incurred by way of options. However, the account statements in the record show that, while he did so less frequently, the respondent Roy bought and sold a number of securities without instructions from the appellant. During the hearing in this Court, the respondents in fact had some difficulty explaining these transactions. The only possible conclusion is thus that Roy continued to manage the portfolio on a discretionary basis despite the letter of May 5.

[49] In any event, even if we were to accept that in late spring 1989 the object of the mandate had been changed from discretionary to non‑discretionary management, this would not mean that the respondents had no liability. Despite any such change in the object of the mandate, Roy, the dealer, is still responsible for the injury resulting from the faults he committed. Thus, absent any fault on the part of the appellant or a third party, the damages in the instant case were the direct result of the mismanagement of the portfolio by the respondent Roy, and accordingly, even if we were to accept that the letter operated to change or revoke the management mandate, Roy is still liable, since the faults were committed prior to the letter. The respondents’ liability cannot end merely because the object of the mandate was changed or the appellant opted to take over control of the management of its portfolio.

[50] Accordingly, the discussions of May 1989 did not change the object of the mandate between the Laflamme family and the respondents, and Roy, the dealer, continued to be subject to an ongoing management obligation. The Court of Appeal erred when it intervened on this ground and substituted its own interpretation of the facts for the trial judge’s interpretation, absent patent error on his part.

(ii) Mitigation of Damages

[51] The Court of Appeal and the respondents also state that the Laflamme family ought to have acted earlier to mitigate the damages resulting from mismanagement of the portfolio. The Laflamme family did nothing after the letter of May 5, 1989. Should they have taken action? Did they have an obligation to terminate the mandate and change the investments?

[52] Civil law imposes an obligation on a creditor to mitigate damages. This obligation, which is now codified in art. 1479 C.C.Q., requires that a creditor avoid aggravating the risk [translation] “by taking the measures that would have been taken, in the same circumstances, by a reasonably prudent and diligent person” (Baudouin and Deslauriers, supra, No. 1256). The specific circumstances of each situation must therefore be considered in assessing what conduct is expected of a creditor.

[53] In the case of injury resulting from mismanagement of a securities portfolio, a flexible approach must be taken in determining what constitutes a reasonable period of time for the client to act and mitigate the damages. In particular, regard must be had to the client’s level of experience and knowledge of investments, and to the complexity of the situation.

[54] I would add that the sense of trust that is characteristic of a contract of mandate also has a significant impact on the state of mind of a client who is the victim of a fault committed by a manager. In this case, that trust lay in the belief acquired in the professional merit of the manager, as a result of which a client, especially one who is not knowledgeable, may be unable or at least reluctant to believe that the manager is incompetent. Both that trust and the confusion resulting from a loss of trust will make it particularly difficult for the victim to take charge of the situation. Awareness of the extent of the injury dawns more slowly. This situation, which the manager himself has created by representing himself as a professional worthy of trust, must be taken into account before blaming the victim for any want of diligence in mitigating damages, especially since the measures to be taken were not obvious and responsibility for taking or advising those measures rested primarily on the respondents, as knowledgeable dealers and managers. A number of options were available: transfer the portfolio to another manager, sell the securities held, or hold onto them in the hope that they would go up in value. Obviously, it is easy to identify the right course of action in hindsight. At the time however the decision was one that called for an assessment of highly complex risks, and that involved risks of its own. The Laflamme family held onto the securities. Should they be faulted for that? In the circumstances, we must conclude that they are not to blame.

[55] Liquidating or reorganizing the portfolio would not have been an easy task for the Laflamme family. Playing the stock market requires a thorough knowledge of finance, economics and the dynamics of securities markets. Professionals make their careers, and sometimes even lose them, by their choice of timing of securities transactions. In this case, the Laflamme family were not dealing with one investment, or a few investments, that they should or should not have disposed of. On the contrary, the portfolio, which was Armand Laflamme’s retirement fund, was composed of a number of securities on both the Canadian and American markets. It was made up of shares, warrants, call options, put options, mutual funds, debentures and government bonds — in short, a range of sometimes highly sophisticated financial instruments. We should not forget the complexity of the situation facing the Laflamme family.

[56] In order to prevail on this issue, the respondents had to show that the Laflamme family were negligent when they failed to intervene in the respondents’ management earlier in the hope of minimizing the losses. The trial judge noted the state of mind and the knowledge of the Laflamme family, who held onto securities in reliance on assurances given by the respondent Roy, whom they trusted. The losses caused by the bad advice and grossly negligent management by Roy cannot be laid at their doorstep. It is reasonable to assume that an average investor faced with similar circumstances would have been indecisive and hesitant when faced with the various options: selling the securities and taking the loss, holding onto them and hoping that they would go back up in value, or transferring the account to another manager. Nor was any evidence tendered to suggest that, on the information available to them at the time, any of these options would have been beneficial. For all these reasons, the Laflamme family cannot be faulted for failing to take further measures in the hope of minimizing the losses. Those losses were sustained as a result of mismanagement by the respondents, which, as the trial judge found, continued until the account was closed.

[57] The respondents cited the decision of the Quebec Court of Appeal in Bazinet v. Wood Gundy Inc., [1997] R.R.A. 273. That decision is not applicable here. In that case, the investor had made an investment on the basis of incomplete information provided by the dealer. One year later, concerned about the mediocre performance of his investment, he got the straight facts from another dealer with the same brokerage firm, who told him that it was in fact a highly speculative investment. Nonetheless, he held onto the securities. In the opinion of the Court of Appeal, the investor then had to bear the adverse consequences of holding onto the securities with full knowledge of the risk. The nature or termination of a management mandate or the measures to be taken were not at issue, but rather, a risk assumed with full knowledge of the situation, resulting from holding onto an investment that was not in compliance with the instructions given at the outset.

[58] Absent any patent error on the part of the trial judge, the Court of Appeal erred in blaming the appellant for failing to take measures to mitigate the damages. It cannot be concluded from the evidence in the record that the appellant’s behaviour, in failing to liquidate or withdraw its portfolio in the spring of 1989, was not what a reasonably prudent and diligent person would have done in the same circumstances.

[59] Accordingly, for the foregoing reasons, I believe that the Court of Appeal erred in holding June 5, 1989, to be the end of the damage assessment period. The trial judge committed no error in holding April 1990 to be the end of the assessment period.

C. Quantum of Damages

[60] The appellant is entitled to compensatory damages because of the wrongful conduct of the respondents. The total amount of the damages is made up of the losses incurred by the appellant and the profits of which it was deprived (art. 1073 C.C.L.C.; art. 1611 C.C.Q.). For the foregoing reasons, those damages must be assessed for the period from April 1988, the date on which the portfolio was transferred from Burns Fry to the respondent company, to April 1990.

[61] The Court of Appeal held that there were grounds for intervening with respect to calculation of the quantum. First, Letarte J.A. was of the opinion that the trial judge erred in adopting the Dorval report in its entirety for calculating the quantum. That calculation apparently covered [translation] “the entire life of the portfolio, both with Burns‑Fry” (p. 771) and with the respondent Prudential-Bache, although the parties had agreed to exclude the losses sustained during the Burns Fry period from the quantum of damages. With respect, the Court of Appeal erred. The account was transferred from Burns Fry to Prudential‑Bache in April 1988. The Dorval report clearly states that it [translation] “relates to all activities . . . for the period from May 1988 to April 1990”. Thus, the losses during the Burns Fry period were not included in the Dorval study, and consequently were not considered by Lebrun J.

[62] The appellant agrees that the trial judge erred when he added the commissions and interest to the quantum of damages assessed by Dorval. Those amounts were included by Dorval in his calculation of damages, so they should not have been added. For that reason, we cannot restore the findings of the trial judge in their entirety.

[63] The appellant submitted an analysis of the performance of its portfolio for the relevant period. That analysis shows, inter alia, the total principal amount initially transferred to the respondent company, the monthly return and the total accumulated losses, and takes into account the value of withdrawals from the account. It also shows the weighted rates of return and the market value of the portfolio if a passive investment strategy had been followed. That analysis is based on the Dorval report, which was accepted by Lebrun J., and on which he relied in calculating the damages. Based on that analysis, the appellant is seeking damages in the amount of $924,374, representing the loss it sustained and the profit of which it has been deprived. Absent a counter-analysis or objections to that analysis by the respondents, I accept the amount determined by the appellant.

4. Disposition

[64] For these reasons, I would allow the appeal, set aside the judgment of the Court of Appeal in this case, restore the judgment of the Superior Court in part, find the respondents jointly and severally liable to pay to the appellant the amount of $924,374, plus interest at the legal rate from the date of service and the additional indemnity, with costs in all courts, including expert witness fees.

Appeal allowed with costs.

Solicitors for the appellant: Lavery, de Billy, Québec.

Solicitors for the respondents: Mendelsohn Rosentzveig Shacter, Montréal.