Legal Ethics

Time Travel on the HMCS Document

I attended my first closing of a commercial transaction when I was an articling student.  It was a rather large share transaction. The closing started around 2 pm and I imagine that the lawyers thought that they would be done by late afternoon.

It was not to be.

The Vendor was selling a business empire that he had built up over many years, for a significant sum of money.   Early at the closing meeting, the Purchaser approached the Vendor asking if the Vendor would like to see his cheque.  As the Vendor looked at the cheque, one of his lawyers literally grabbed the cheque out of his hands, consulted the latest draft of some document or other and proclaimed in a loud voice that the number was wrong.

And then the fight started.

Even after 40 years of practicing corporate and commercial law, I still do not understand how two sophisticated law firms managed to get to a closing with the Purchaser having already cut and certified a cheque, and then have a significant disagreement over the purchase price. However, I was just the articling student and at the time no one involved me in the discussions about that, so it remains one of life’s little mysteries as far as I am concerned.

In any event, from my perspective nothing much happened for the next 10 hours of the closing (other than, I suppose, the accrual of many billable hours on all sides).  However, something must have happened soon after that, because somewhere around 1am the dispute had been resolved and we were ready to start signing documents. And there were many, many documents to be signed.

At that early moment in the morning is when I learned the importance of being practical when practicing law.

The lead lawyer for the Purchaser, whose name was Mort, stood up at the end of the table, surrounded by a boardroom full of clients, lawyers and articling students.   He gazed at the massive stacks of paper and minute books.  Then, he looked at his watch and said: “Gentlemen (there were in fact only men in the room), it is exactly 11 pm and we are now ready to start to sign documents.”

One of the purchaser’s lawyers, not having agreed with anything that Mort had said during the previous twelve hours, immediately interjected: “It is 1 am, not 11 pm.”

Mort sighed and said: “On my watch it is 11 pm.  We have about 3 hours of document signing ahead of us. Perhaps my watch is incorrect and it is, as you say, actually 1 am.  If you are correct, rather than having everyone start signing documents immediately, we will have to spend the next 2 hours changing the dates on all of the documents.  Can you check your watch again and see which one of us is correct about the time?”

The purchaser’s lawyer suddenly found himself agreeing with Mort for the first time since the closing started.  He agreed that it was 11 pm and the signing of documents commenced.

And so, early in my career, I learned the importance of being practical.

Of course, while seeking to be practical, one can sometimes inadvertently (or advertently) cross the line and do something expedient, or even cross a further line and do something which is unethical, actionable, or illegal.  A good place to start down that path is with backdating documents.

In a perfect world, no document would ever be backdated.  In the real world, we look to the purpose for which a document is backdated.  For example, when a company is incorporated, the organizational documents are often dated the same date as the company was incorporated, although they are rarely signed on that date.   It is done that way for convenience with no intent to deceive anyone.  Really, no big deal except to the purists.

Contrast that benign stepping over the line with an accountant who in my early years of practice asked me to prepare and backdate a document stating that a corporation which had lost money in its first year of operations was actually carrying on the business in trust for its shareholders who could use the losses on their tax returns.  Now we are talking tax fraud.  (Just in case it is not yet clear that this accountant was not of the highest ethical persuasion, let me fill you in on the rest of the conversation.  I asked him whether the tax department might audit the transaction and demand proof as to when the document was signed, and he replied that if they did audit, they would likely ask for an affidavit.  Being young and naïve, I asked him what he would do then, and he said that he would swear the false affidavit.)  I declined to be involved. 

Here is another example of stepping over the line.  Back when I started practicing law, the Lord’s Day Act was in force in Ontario.  (It was ruled unconstitutional by the Supreme Court of Canada in 1985.)  The Act prohibited doing many things on Sunday, including signing contracts.  Of course, real estate agents who wanted to strike when the iron was hot on a Sunday would date the purchase agreement on Saturday or Monday.  All of that worked very well until someone wanted out of the deal and would then produce evidence in court that the agreement was actually signed on Sunday and was therefore unenforceable.

The most amusing instance of a lawyer causing a problem by backdating a document that I ever saw was in a file that I inherited.  The previous lawyer was asked by an accountant to do the impossible and backdate Articles of Amendment.   Wanting to oblige, the lawyer included a statement in the Articles of Amendment purporting to make them effective at an earlier date.   If only it was so simple.

We counsel young lawyers to never backdate a document, the idea being that it prevents them from taking even the first step on a journey which can lead to trouble.  Unfortunately, it just is not practical to be that perfect.  Good lawyers figure out where the line is by asking themselves a few questions, such as “Why are we thinking about doing this?”  “Is there a practical way to avoid doing this?” “Whose rights are going to be affected?”  “Would the tax department care if they knew?”  “Is it 2 am and do I want to get home before it is light outside?”

Inspired by Billy.

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