Triple 3 Holdings Inc. et al. v. Jan et al. [Indexed as: Triple 3 Holdings Inc. v. Jan]
82 O.R. (3d) 430
Court of Appeal for Ontario,
O'Connor A.C.J.O., Doherty and Goudge JJ.A.
September 7, 2006
Civil procedure -- Costs -- Costs against solicitor personally -- Solicitor employed as in-house corporate counsel and representing his employer and two related companies in unsuccessful litigation -- Trial judge awarding costs against solicitor personally on basis that he shared financial interest with his clients and therefore had placed himself in conflict with his duty to his clients and to court -- Solicitor's appeal allowed -- Finding of shared financial interest not supported by facts -- Existence of shared financial interest not placing solicitor in conflict of interest with his clients in any event so long as clients were aware of that interest -- Solicitor not breaching his duty under Rules of Professional Conduct to treat court with candour, fairness, courtesy and respect by conducting litigation while having economic relationship with clients.
Professions -- Barristers and solicitors -- Conflict of interest -- Solicitor employed as in-house corporate counsel and representing his employer and two related companies in unsuccessful litigation -- Trial judge awarding costs against solicitor personally on basis that he shared financial interest with his clients and therefore had placed himself in conflict with his duty to his clients and to court -- Solicitor's appeal allowed -- Finding of shared financial interest not supported by facts -- Existence of shared financial interest not placing solicitor in conflict of interest with his clients in any event so long as clients were aware of that interest -- Solicitor not breaching his duty under Rules of Professional Conduct to treat court with candour, fairness, courtesy and respect by conducting litigation while having economic relationship with clients.
The appellant was employed as in-house corporate counsel by Company A. Two related companies, Company B and Company C, terminated the respondents' franchise agreement and sublease, respectively, and then sued the respondents [page431] for breach of those agreements. The respondents counterclaimed against all three Companies, claiming fraudulent termination of the agreements. The appellant acted for the Companies. The trial judge dismissed the claim and allowed the counterclaim. While he found that the actions taken against the respondents by the Companies were abusive, high-handed and fraudulent, he did not suggest that the appellant was in any way a participant in those actions. However, he awarded costs against the appellant personally, noting that the appellant was not only counsel but also a vice-president and finding, on the basis of an employment agreement, that he shared a common financial interest with the Companies and so placed himself in conflict with his duty to the court and to his clients. The appellant appealed.
Held, the appeal should be allowed.
The trial judge could not have relied on rule 57.07(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 in making the order of costs against the appellant personally, as the trial judge did not find that the appellant was responsible for any wasted costs or for costs otherwise incurred without reasonable cause in the litigation. Moreover, the trial judge did not suggest that the appellant was in any way a participant in the actions of his clients which were found to be fraudulent. The only other possible jurisdictional basis for the costs order was the court's general power to determine by whom costs shall be paid under s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43.
The trial judge should not have relied on the employment agreement, under which the appellant stood to profit from the sale of a store or a transfer of an existing franchise, as by its own terms the agreement was effective only if the appellant were included under a standard directors' and operators' liability insurance policy. That step not having been taken, the agreement was not effective. Even if the agreement had been effective, Company B, not Company A, was the respondents' franchisor and the appellant had no contractual agreement with Company B. Further, even if the Companies could be treated as one for the purposes of the appellant's contractual entitlement, the respondents' franchise was not for a Company A corporate store, nor was this a sale by them to a new franchisee. The appellant therefore had no contractual right from which he stood to gain as a result of his clients' actions against the respondents. Finally, even if the appellant did have such a contractual right, he would not thereby put himself in a position of conflict with his duty to his clients or his duty to the court. Having a common financial interest does not place a lawyer in conflict with his or her duty to provide his or her client with objective professional advice, provided the client was aware of the lawyer's interest. As the common interest in this case derived from the employment agreement and would therefore be disclosed to his clients, it could not be said that the appellant was in breach of his professional duty of candour to his clients. Moreover, the duty to treat the court with candour, fairness, courtesy and respect imposed by the Rules of Professional Conduct focuses on the lawyer's conduct of the litigation, rather than on the economic relationship between lawyer and client. It could not be said that simply by conducting this litigation while having this economic relationship with his clients, the appellant was in breach of that rule. The reasons that underpinned the costs order were fatally flawed.
APPEAL from the award of costs by Paisley J. of the Superior Court of Justice, dated March 15, 2005, against a solicitor personally.
Cases referred to McIntyre Estate v. Ontario (Attorney General) (2002), 2002 45046 (ON CA), 61 O.R. (3d) 257, [2002] O.J. No. 3417, 218 D.L.R. (4th) 193, 23 C.P.C. (5th) 59 (C.A.); Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, [1993] S.C.J. No. 112, 84 B.C.L.R. (2d) 1, 108 D.L.R. (4th) 193, 160 N.R. 1, [1993] 8 W.W.R. 513, 18 C.R.R. (2d) 41, 49 R.F.L. (3d) 117 [page432] Statutes referred to Courts of Justice Act, R.S.O. 1990, c. C.43, s. 131 Rules and regulations referred to Law Society of Upper Canada, Rules of Professional Conduct Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 57.07(1)
William E. Pepall, for appellant (John W. Chidley-Hill). Gregory M. Sidlofsky, for respondents.
The judgment of the court was delivered by
1GOUDGE J.A.: -- The appellant is a barrister and solicitor who was called to the bar in 1982. At trial, the respondents obtained a significant award of damages against the appellant's clients. The trial judge subsequently awarded costs of the litigation to the respondents on a substantial indemnity basis. He also ordered that the appellant be jointly and severally liable with his clients for those costs because he found that the appellant's relationship with his clients placed him in conflict of interest with them and with his duty to the court.
2The issue in this appeal is whether the costs order against the appellant can be sustained. For the reasons that follow, I conclude that it cannot. I would therefore allow the appeal.
Facts
3The underlying litigation concerned two agreements: a franchise agreement between the respondents as franchisee, and 3 Pizzas 3 Wings Ltd. ("3P3") as franchisor; and a sublease between the respondents as tenant, and Triple 3 Holdings Inc. ("Triple 3") as sublessor.
4On September 29, 2001, 3P3 and Triple 3 terminated the respondents' franchise agreement and sublease and then sued the respondents for breach of both agreements. The respondents counterclaimed against them and a third related company, 3 for 1 Pizza & Wings (Canada) Inc. ("3 for 1"), and the two principals of all three companies, claiming fraudulent termination of both agreements.
5After an eight-day trial, the trial judge dismissed the claim and allowed the counterclaim. He found that the actions taken against the respondents by the defendants to the counterclaim were abusive, high-handed and fraudulent. He pierced [page433] the corporate veil, found all five defendants to the counterclaim liable, and awarded the respondents $244,457 in damages and an additional $350,000 in punitive damages. The appeal from this judgment was dismissed for failure to post security for costs.
6Nine months later, after receiving written and oral submissions, the trial judge made his costs award. He found that the conduct of the defendants to the counterclaim justified costs on a substantial indemnity basis. He found the sum claimed by the respondents to be fair and reasonable and fixed the amount of costs at $140,000, including approximately $22,500 for the costs of the costs motion.
7The respondents also sought costs personally against the appellant. They based their claim primarily on rule 57.07(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which reads:
57.07(1) Where a solicitor for a party has caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence or other default, the court may make an order,
(a) disallowing costs between the solicitor and client or directing the solicitor to repay to the client money paid on account of costs;
(b) directing the solicitor to reimburse the client for any costs that the client has been ordered to pay to any other party; and
(c) requiring the solicitor personally to pay the costs of any party.
8On the costs motion, the trial judge did not call on counsel for the appellant to respond to the argument that the appellant was responsible for the obstructionist tactics of his clients at discovery. Nor is there any suggestion in his reasons that the appellant was otherwise responsible for any wasted costs or for costs otherwise incurred without reasonable cause in the litigation. Moreover, the trial judge does not suggest that the appellant was in any way a participant in the actions of his clients which were found to be fraudulent.
9The trial judge did call on the appellant to respond to the allegation that he was personally liable for the costs of the proceedings due to a fundamental conflict of interest between himself, his clients and his duty to the court. The trial judge's conclusion on this issue is set out at paras. 11 and 13 of his reasons as follows:
Mr. Chidley-Hill acted as counsel and vice president for the defendants, who acted in common, at the time that the abusive transactions complained of in this proceeding occurred, and as counsel at trial. He shared a common financial interest at that time with the defendants. He could not have been acting in an independent position when he stood to gain from his clients' wrongdoing as it occurred, and while he was obliged to advise them as to their legal responsibilities. He had placed himself in conflict with his duty to [page434] the Court and to his clients, as he was unable to advise the clients as to their exposure to liability in this case, and the advantage of settling it, without admitting his own. Rule 57.07(1) provides, "where a solicitor for a party has caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence or other default, the court may make an order, (c) requiring the solicitor personally to pay the costs of any party". . . . . .
It was submitted on behalf of Mr. Chidley-Hill that he believed that his clients had an arguable case, and that it was not his role to judge their cause. This would have been a complete defence had Mr. Chidley-Hill maintained the position of independent counsel. It is not a valid defence for a lawyer who has a financial interest in his clients' wrongdoing, was closely allied with his client as an executive officer while the wrongful acts were committed, who had the responsibility to give appropriate legal advice to the client at the time that the wrongful acts occurred and who represented the client as counsel at trial, where those wrongful acts were in issue.
10In the result, the trial judge found the appellant jointly and severally liable with his clients for the costs of the proceedings, which he had fixed at $140,000.
11The facts before the trial judge concerning the appellant's relationship with his clients were straightforward. The appellant signed an employment agreement with 3 for 1 on July 13, 2001. By its terms, the agreement was to be effective upon his inclusion under a standard directors' and officers' liability insurance policy.
12The appellant was to be employed in his professional capacity, with the title "Vice President and General Counsel", in relation to 3 for 1 and its business. He was to perform the duties of corporate counsel, including representing 3 for 1 and its related companies in litigation.
13The appellant was to be paid an annual salary of $160,000. As well, he was entitled to one per cent of the money received by 3 for 1 from the purchase and sale of its corporate stores, and 10 per cent of all transfer fees received by 3 for 1 when an existing franchisee sold its franchise to a new franchisee. When the franchisor 3P3 terminated the respondents' franchise and then sold it, the appellant received no payment from 3 for 1 under either of these provisions.
14While the respondents were aware early in the litigation that the appellant held himself out as Vice President of 3 for 1, they did not know the precise terms of his employment with 3 for 1 set out above until the costs motion. Moreover, although he acted as their counsel in litigation, the appellant had no office or employment with 3P3 or Triple 3. [page435]
Analysis
15One possible basis for the order under appeal can quickly be disposed of. The trial judge appears to have relied in part on rule 57.07(1), although there is no finding that the appellant caused costs to be incurred without reasonable cause or wasted by undue delay, negligence or other default. Indeed, the trial judge did not focus at all on the way the appellant conducted the litigation. Rather, he relied on the nature of the appellant's relationship with his clients. Given the absence of a finding of wasted or unreasonable costs, rule 57.07(1) cannot be used to support this costs order. The respondents candidly conceded as much in this court.
16The only other possible jurisdictional basis for the trial judge's costs order is the court's general power to determine by whom costs shall be paid under s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43.
17Acting under that section, the trial judge focused on the appellant's relationship with his clients. The trial judge found that the appellant shared a common financial interest with them, namely that he stood to gain from their actions, which the trial judge found to be unlawful.
18In my view, the finding of a common financial interest is palpably wrong. While the trial judge does not explain how this common interest could arise, the only possible source is the pair of provisions in the appellant's employment agreement entitling him to one per cent of the money received by 3 for 1 from the purchase and sale of its corporate stores, and 10 per cent of all transfer fees received by 3 for 1 where an existing franchisee sells its franchise to a new franchisee.
19There are three reasons why these provisions cannot support the finding of the trial judge. First, 3 for 1 had not included the appellant under a standard directors' and operators' liability insurance policy. By the terms of the appellant's employment agreement that insurance was necessary to make the agreement effective. Second, even if the agreement had been effective, 3P3, not 3 for 1, was the respondent's franchisor. The appellant had no contractual relationship with 3P3. The terms of his employment agreement by which he stood to profit from the sale of a store or a transfer of an existing franchise applied only when 3 for 1 was the franchisor. Third, even if the three related companies could be treated as one for the purposes of the appellant's contractual entitlement the respondents' franchise was not a 3 for 1 corporate store nor was this a sale by them to a new franchisee. The appellant therefore had no contractual right from which he stood to gain as a result of his clients' actions against the respondents. [page436] Vindication of his clients would not trigger a financial benefit for him under his employment contract.
20However, even if the appellant had such a contractual right, I do not think he would thereby put himself in a position of conflict with his duty to his clients or his duty to the court. Thus, even on the assumption of a common financial interest with his clients, the costs order against the appellant cannot stand.
21This issue must be considered against the backdrop of the well-known general admonition that courts must be extremely cautious in awarding costs personally against a lawyer. This reflects the lawyer's duty of confidentiality and the professional obligation to advance the client's case to the best of the lawyer's ability. The lawyer should not be placed in a position where fear of an adverse costs order may conflict with those duties. See Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, [1993] S.C.J. No. 112, at p. 136 S.C.R.
22I turn first to the possibility of the appellant being in conflict with his duty to his client. Assuming that the appellant's contract would entitle him to a payment if his client's actions against the respondents were sustained as lawful in the litigation, his interest in the outcome of the litigation would be coincident with, not in conflict with, that of his clients. While such a payment would not be related to the amount of time he spent on the litigation or the quality of the legal services provided, there is no reason to suspect that an economic incentive like this would tempt a lawyer to conduct the litigation to further his own best interest rather than that of the client. This court said as much in McIntyre Estate v. Ontario (Attorney General) (2002), 2002 45046 (ON CA), 61 O.R. (3d) 257, [2002] O.J. No. 3417 (C.A.), at paras. 52 and 53 in the context of contingency fee agreements. In other words, having a common financial interest would not place the appellant in conflict with his duty to provide his clients with objective professional advice provided the client was aware of the lawyer's interest. In this case, since the common interest derives from the appellant's employment agreement and would therefore be disclosed to his clients, it could not be said that the appellant was in breach of his professional duty of candour to his clients.
23I therefore conclude that even if the appellant shared this common financial interest with his clients he would not be in conflict with his duty to them. This foundation for the order appealed from therefore falls away.
24I reach the same conclusion in respect of the appellant's duty to the court. There is clearly nothing wrong with an employed lawyer representing his or her employer in litigation. The trial judge did not rely on the appellant's employment status to find him in breach of his duty to the court. It was the addition [page437] of the common financial interest the appellant shared with his clients that caused the trial judge to find that the appellant was in breach of his duty to the court.
25I disagree with this conclusion as well. The existence of the economic incentive found by the trial judge is, in my view, no different from that accompanying many contingency fee or class action fee arrangements. In such cases, if counsel succeeds in the litigation, fair and reasonable remuneration need not simply reflect the time spent or the quality of the legal services provided. There is no suggestion today that these contingency fee or class action fee arrangements place the lawyer in a position of conflict with his or her duty to the court, and I do not think that such a suggestion can arise from the common economic interest found by the trial judge here. Something more, such as counsel's unprofessional conduct of the litigation (which did not occur here), would be necessary before counsel could be found in breach of his or her duty to the court.
26Moreover, the duty to treat the court with candour, fairness, courtesy and respect imposed by the Rules of Professional Conduct of the Law Society of Upper Canada focuses on the lawyer's conduct of the litigation rather than the economic relationship between lawyer and client. In my view, it cannot be said that simply by conducting this litigation while having this economic relationship with his clients the appellant was in breach of that rule.
27I therefore conclude that even if the appellant had shared this common financial interest with his clients, it would not place him in a conflict with his duty to the court.
28The reasons that could underpin the order appealed from therefore are fatally flawed. I would thus allow the appeal, set aside the costs order against the appellant and dismiss the motion seeking costs from him. The appellant is entitled to his costs in this court and in the court below, both on a partial indemnity basis, fixed at $7,500 in each case, inclusive of disbursements and GST.
Appeal allowed.
