CITATION: Chrusz v. Cheadle LLP, 2010 ONCA 553

DATE: 20100816

DOCKET: C49707

COURT OF APPEAL FOR ONTARIO

McCOMBS, SWINTON and WILTON-SIEGEL JJ. (Ad Hoc)

BETWEEN:

DANIEL CHRUSZ and POLI-FIBREGLASS INDUSTRIES (THUNDER BAY) LIMITED

Appellants

And

CHEADLE JOHNSON SHANKS MacIVOR, also known as CHEADLES LLP, ROBERT D. WEILER, Q.C. and PETRONE HORNAK GAROFALO MAURO

Respondents

Roderick W. Johansen, for the Appellants

J. Douglas Crane, Q.C., for the Respondent Petrone Hornak Garofalo Mauro

John W. Erickson, Q.C., for the Respondents Cheadle Johnson Shanks MacIvor, also known as Cheadles LLP, and Robert D. Weiler, Q.C.

Heard: May 21, 2010

On appeal from the decision of G.P. Smith J. of the Superior Court of Justice dated October 24, 2008

The Court

[1] The appellants, Daniel Chrusz (“Chrusz”) and Poli-Fibreglass Industries (Thunder Bay) Limited (collectively, the “Appellants”), appeal a judgment dated October 24, 2008 of G.P. Smith J. in which he determined that the amount of $177,344.18 was payable jointly to the law firm of Cheadle Johnson Shanks MacIvor and Robert D. Weiler, Q.C., (collectively, “Cheadle”) and that the amount of $300,576.67 was payable to the law firm of Petrone Hornak Garofolo Mauro (“Petrone”), in each case out of funds currently held in trust by Petrone.

Background

Origin of the Settlement Agreement

[2] The funds in the Petrone trust account represent one-third of the proceeds of settlement of two actions involving the Appellants.

[3] Initially, Cheadle acted for the Appellants in the litigation. On August 31, 1998, Cheadle advised the Appellants that it proposed to terminate the retainer agreement existing at that time between Cheadle and the Appellants and that it proposed to assess its account to the date of termination. The Appellants requested a mediation, at which they were represented by Petrone, which they had retained to replace Cheadle in the two actions.

[4] The parties reached an agreement which was embodied in an arrangement dated July, 2000 (the “Settlement Agreement”) signed by Cheadle and the Appellants, and which provided, among other things, that:

1. the “recovery amount” in the actions would be split one-third with the lawyers and the balance to Chrusz;

2. Cheadle and Petrone would divide the amount allocated to the lawyers on a 30/70 basis;

3. costs in the action would be split on the basis of 50% to Chrusz and the balance apportioned 70/30 in favour of Petrone; and

4. a consent charging order would be granted to Cheadle to secure a solicitor’s lien in its favour over any proceeds of the litigation or costs and a consent order would be granted by Cheadle releasing the litigation files to Petrone.

A consent charging order was subsequently granted in favour of both Cheadle and Petrone.

[5] After settlements were reached in late 2006 and mid-2007 in the amount of $1,650,000 in one action and $60,000 in the other, respectively, the Appellants instructed Petrone not to pay any amount to Cheadle. The Appellants then commenced an application seeking a determination of rights under the Settlement Agreement and a declaration of the amount due and payable by the Appellants to Cheadle and Petrone or, in the alternative, an order referring this issue to an assessment officer.

[6] Cheadle responded with a cross-application also seeking a determination of rights under the Settlement Agreement and a declaration confirming the amount due and payable to it pursuant to that Agreement.

The Application and Cross-Application

[7] The Appellants’ application set out two specific issues:

1. that the Appellants are entitled to a credit for all amounts previously paid against any remaining obligation under the Settlement Agreement; and

2. that the terms of the Settlement Agreement are unfair and unreasonable.

[8] The first issue related only to Cheadle as Petrone acknowledges that all amounts paid to it are a credit in favour of the Appellants. The application judge concluded that, as a matter of contractual interpretation, the Settlement Agreement did not provide a credit in favour of the Appellants in respect of legal fees and disbursements paid to Cheadle prior to the execution of the Settlement Agreement. The Appellants do not appeal this finding of the application judge. Instead, they assert on the appeal that the absence of any such credit should have been taken into account by the application judge in assessing the fairness and reasonableness of the Settlement Agreement.

[9] In respect of the second issue, the application judge addressed the fairness and reasonableness of the Settlement Agreement in the context of a consideration of whether special circumstances existed that would entitle the Appellants to an assessment under section 4 of the Solicitors Act, R.S.O. 1990, c. S.15 (the “Act”). He concluded that special circumstances did not exist. This is addressed further below.

[10] Although it is not expressly stated in the decision of the application judge, the Appellants did not dispute that Petrone was a party to, or otherwise entitled to the benefit of, the Settlement Agreement. We have proceeded on the same basis based on the position taken by the Appellants in their Notice of Application and confirmation of their counsel in the hearing before us.

[11] Similarly, the application judge proceeded on the basis that, if he found there were no special circumstances that warranted an order directing an assessment under section 4 of the Act, there were no other legal issues to be addressed in determining the entitlement of Petrone and Cheadle under the Settlement Agreement. Having found there were no such special circumstances, the application judge therefore determined that Cheadle and Petrone were entitled to the amounts set out above. These amounts represent the amounts due to each of them respectively in accordance with the terms of the Settlement Agreement, subject to a credit in respect of Petrone equal to the amounts paid previously to that firm.

This Appeal

Positions of the Parties

[12] The Appellants principally argue on this appeal that the Settlement Agreement was either unenforceable as not being fair and reasonable for purposes of section 24 of the Act or, alternatively, should not be enforced by the Court in the exercise of its inherent jurisdiction to supervise solicitors’ accounts. They also submit that the application judge erred in law in addressing the operation of section 4 of the Act. They acknowledge, however, that if the Settlement Agreement is an enforceable agreement, Cheadle and Petrone are entitled to the amounts declared to be owing to each of them by the order of the application judge.

Standard of Review

[13] The standard of review on a question of law is correctness while the standard of review on a question of mixed fact and law is a palpable and overriding error: see Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at paras. 8 and 10. Deference should be given to a judge’s exercise of discretion unless he or she made an error of principle or a palpable and overriding error of fact.

Analysis and Conclusions

[14] The principal issue on this appeal is whether the application judge held that the Settlement Agreement was fair and reasonable and, if so, whether he erred in doing so. Before addressing this issue, however, it is necessary to consider two other issues of a preliminary nature raised by the Appellants.

Preliminary Issues

[15] First, we conclude that the application judge did not err as a matter of law in considering the issue of the fairness and reasonableness of the Settlement Agreement in the context of section 4 of the Act, rather than in the context of section 24. It is clear from the transcript of the hearing that, on the hearing of the application, the Appellants presented the issue, at least in part, in these terms. It is also clear that the only argument regarding the presence of special circumstances that the application judge addressed was the allegation that the Settlement Agreement was unfair and unreasonable.

[16] Accordingly, we are satisfied that the application judge addressed the correct legal issue of the fairness and reasonableness of the agreement even if he did so in the context of section 4 of the Act.

[17] Second, on this appeal, the Appellants raised the more general issue of whether the Settlement Agreement was enforceable as a contingency fee agreement given the provisions of the Act at the time of execution of the Agreement. This requires a separate conclusion of this issue in respect of each of Cheadle and Petrone.

[18] The Appellants’ argument that the arrangements pertaining to Cheadle are unenforceable rests on two provisions of the Act.

[19] The Appellants must first establish that the Settlement Agreement is an agreement to which the Act applies insofar as it pertains to Cheadle. To this end, the Appellants rely on the language in the concluding phrase of the definition of a “client” in section 15 of the Act, which in its entirety is defined as a “person who, as principal, or on behalf of another person, retains or employs or is about to retain or employ a solicitor, and a person who is or may be liable to pay the bill of a solicitor for any services”. The Appellants argue that, under section 15 of the Act, a client includes a person whose relationship with a solicitor is being terminated on the ground that such person is “liable to pay the bill of a solicitor for any services”. From this conclusion, they argue that the Settlement Agreement is an agreement to which sections 17 to 33 of the Act apply.

[20] The Appellants then argue that section 28 of the Act as it read at the time of execution of the Settlement Agreement rendered that Agreement unenforceable:

Nothing in sections 16 to 33 gives validity to a purchase by a solicitor of the interest or any part of the interest of his or her client in any action or other contentious proceeding to be brought or maintained, or gives validity to an agreement by which a solicitor retained or employed to prosecute an action or proceeding stipulates for payment only in the event of success in the action or proceeding, or where the amount to be paid to him or her is a percentage of the amount or value of the property recovered or preserved or otherwise determinable by such amount or value or dependent upon the result of the action or proceeding.

[21] The respondents submit that the Appellants are not entitled to raise this argument for the first time on this appeal. While there would appear to be considerable force to this argument, it is unnecessary to address this issue in view of the determination on the merits below.

[22] In our view, the arrangements pertaining to Cheadle do not constitute the Settlement Agreement an agreement that is subject to the provisions of the Act.

[23] If the Legislature had intended to extend the definition of a client to persons who have terminated a retainer, they could easily have done so within the structure of the definition of a client in section 15 by referring to persons who retain or employ, have retained or employed, or are about to retain or employ, a solicitor. The absence of language speaking to the previous engagement of a solicitor is significant. The concluding phrase in the definition cannot be relied upon to remedy the absence of any direct language on this issue, particularly given the fact that it also addresses an important and quite different circumstance of a guarantor.

[24] On this basis, the arrangements in the Settlement Agreement pertaining to Cheadle do not constitute an agreement for the purposes of sections 17 to 33 of the Act. In the absence of any issue of the application of sections 24 or 28 of the Act, we conclude that the Settlement Agreement is an enforceable agreement as between the Appellants and Cheadle, subject to operation of the Court’s inherent jurisdiction which is addressed below.

[25] We note that this result also accords with the policy behind the Court’s authority to review the fairness and reasonableness of retainer agreements under section 24 of the Act. In the Settlement Agreement, the parties terminated their relationship and provided for a highly speculative payment to Cheadle for past services as an alternative to immediate assessment of fees otherwise payable by the client. Such an agreement raises none of the issues pertinent to contingency fees that have invoked the Court’s inherent jurisdiction to address such agreements.

[26] The Appellants’ argument that the arrangements pertaining to Petrone contemplated by the Settlement Agreement constitute an unenforceable contingency fee agreement in respect of Petrone also rests on the operation of section 28 of the Act. For its part, Petrone does not dispute that the arrangements in respect of it under the Settlement Agreement constitute an agreement to which sections 17 to 33 of the Act apply. It is, however, unclear whether Petrone takes the position that these arrangements constituted a contingency fee agreement or an agreement to “cap” legal fees at a stipulated level, i.e. an agreement to limit whatever premium for success might otherwise be appropriate. At the hearing before the application judge, counsel for Petrone took the position that these arrangements did not constitute a contingency fee arrangement; at the hearing of this appeal, counsel took the contrary position. The significance of this issue is addressed below.

[27] Regardless of the characterization of such arrangement, however, Petrone argues that such agreements were not void ab initio under the legislation as it existed in 2000. We agree. Insofar as the arrangement in respect of Petrone under the Settlement Agreement constituted no more than an agreement on the part of Petrone to limit its fees to the proportion of any settlement funds contemplated for such purpose under the Settlement Agreement, no issue of enforceability arises in respect of section 28 of the Act. Insofar as the arrangement constituted a contingency fee agreement, section 28 of the Act as it existed in 2000 did not render contingency fee agreements void ab initio. This is implicit in the decision of this Court in Rafael Partners v. Lam (2002), 2002 CanLII 45078 (ON CA), 61 O.R. (3d) 417 (C.A.) per Cronk J.A., which indicates that the enforceability of such agreements is subject to a determination under section 24 of the Act. Accordingly, it is necessary to consider the conclusions of the application judge that the Settlement Agreement was fair and reasonable.

Is the Settlement Agreement Fair and Reasonable?

[28] The Appellants make two separate arguments relating to the fairness and reasonableness of the Settlement Agreement. They argue that the Settlement Agreement, insofar as it pertains to Petrone, is unenforceable under section 24 of the Act because it fails to satisfy the standard of fairness and reasonableness. In addition, they argue that, insofar as the Settlement Agreement pertains to Cheadle, the Court should declare the Agreement to be unenforceable in the exercise of its inherent jurisdiction to supervise solicitors’ accounts.

[29] We are of the opinion that, in the present circumstances, the standard is identical for a determination of the fairness and reasonableness of the Settlement Agreement for purposes of section 24 of the Act and for a determination whether the Court should exercise its inherent jurisdiction to supervise solicitors’ accounts.

[30] Accordingly, the principal issue on this appeal is the finding of the application judge that the Settlement Agreement was fair and reasonable. The finding that the Settlement Agreement was fair and reasonable is one of mixed fact and law. It attracts a standard of review of a palpable and overriding error.

The Fairness Requirement

[31] The fairness requirement of section 24 is concerned with the making of the fee agreement and whether the client fully understood and appreciated the nature of the agreement that he executed.

[32] The Appellants raise a number of considerations they submit should have been taken into account by the application judge in assessing whether the Settlement Agreement was fair. They say his failure to do so constituted a palpable and overriding error. In particular, they suggest that the application judge should have considered the financial pressure under which Chrusz found himself at the time of the mediation. They also say that the Court should conclude that he did not receive independent legal advice in respect of the Settlement Agreement.

[33] The application judge had ample grounds for reaching the conclusion that the arrangement in the Settlement Agreement in respect of Cheadle was fair in the sense contemplated for the purposes of section 24 of the Act. The fact that Chrusz had invested almost $150,000 in the litigation does not, by itself, render the arrangements under the Settlement Agreement unfair. There is also no basis for finding the Settlement Agreement to be unfair based on a lack of independent legal advice. Chrusz was an experienced businessman. There is no evidence that, at any time, he failed to understand fully the nature of the agreement in respect of Cheadle. He suggested mediation to forestall assessment and immediate payment of the Cheadle account. He suggested the final arrangement to the parties after the mediation had initially failed, with the benefit of consultation with the mediator who was his own solicitor on an appeal in the litigation. He also had the benefit of advice from Petrone. In any event, there is no automatic requirement for independent legal advice when entering into an agreement with a solicitor for legal services.

[34] On the other hand, while it is implicit in his disposition of the application that the application judge also concluded that the arrangement in the Settlement Agreement in respect of Petrone was fair, he does not expressly address this issue in his Reasons. Moreover, the manner in which the application judge addressed the arrangements pertaining to Petrone raises two further issues.

[35] First, a complication of the issue of fairness is the absence of any determination regarding the nature of the arrangements pertaining to Petrone ─ did these arrangements constitute a contingency agreement or an agreement to cap any premium that might be charged if Petrone were successful by some definition of “success”? In the absence of such determination, it is not possible to address the fairness of these arrangements. One cannot answer the question of whether Chrusz fully understood and appreciated the nature of the agreement that he executed without a prior determination as to the substance of that agreement.

[36] More generally, while there appear to be grounds upon which the application judge could have found that the arrangements in the Settlement Agreement pertaining to Petrone were also fair, the application judge did not set out any grounds for this implicit conclusion.

[37] It is our view that, in proceeding in this manner regarding the fairness of the arrangements pertaining to Petrone under the Settlement Agreement, the application judge made a palpable and overriding error.

The Reasonableness Requirements

[38] The factors relevant to an assessment of the reasonableness of fees charged by a solicitor are well recognized: see, for example, Rafael Partners, supra, at para. 50.

[39] The Appellants’ allegation of unfairness is based on the identification of several items in the Settlement Agreement, including in particular the arrangement as to costs, that are not permitted under provisions of the Act and regulations thereunder that have been enacted since execution of the Agreement and, as mentioned, the absence of a credit for previous payments to Cheadle.

[40] Based on the determination above, it is highly doubtful that Cheadle is required to establish the reasonableness of the Settlement Agreement in respect of the arrangement between it and the Appellants. In any event, however, we conclude that the application judge did not err in concluding that the Agreement was reasonable in respect of Cheadle, notwithstanding the considerations raised by the Appellants, for two reasons. First, the current rules pertaining to contingency fee arrangements do not apply retrospectively. Second, while these provisions identify considerations that should be taken into account, they must be addressed as part of an evaluation of the totality of the arrangement between Cheadle and the Appellants. The particular elements of the arrangement identified by the Appellants are not such as to render the arrangement unreasonable on their own.

[41] The application judge could reasonably conclude on the totality of the evidence that the fee arrangements pertaining to Cheadle under the Settlement Agreement were reasonable, given the other considerations identified in his decision. As the application judge observes, Cheadle traded the right to immediate taxation and payment of outstanding fees for a position that entailed considerable risk of non-payment as a result of a number of considerations. In addition, the Appellants cannot complain today that there was no information regarding the amount of the Cheadle account given their decision to forestall an assessment and seek mediation with a view to reaching an alternative arrangement. Effectively, by proceeding in this manner and not requesting formal accounts at the time, they waived their entitlement to such accounts.

[42] The analysis with respect to the reasonableness of the arrangement with Petrone is, however, more difficult.

[43] Petrone asserted its claim in an affidavit of John Hornack (“Hornack”) delivered in connection with the application. In that affidavit, Hornack describes the course of the litigation and the services he provided. He also addresses the legal complexity of the matters at issue in the litigation and the results achieved. Hornack concludes by setting out the Petrone claim pursuant to the Settlement Agreement. In addition to the Hornack affidavit, counsel for Petrone addressed the risk assumed by Petrone in oral argument before the application judge.

[44] The evidence before the application judge did not, however, include an account or accounts of Petrone indicating hours worked on the file. Nor did it include billing rates of Petrone to enable a calculation of the premium charged by Petrone on the file. Chrusz does not dispute that a premium is payable in the circumstances but does object to the quantum sought by Petrone. Accordingly, the evidence before the application judge as to the time expended, and if relevant, the premium charged, was of a qualitative, rather than a quantitative, nature.

[45] The application judge determined that Petrone was owed the amount of $300,576.68. This represents the amount owing under the Settlement Agreement, less the total of fees and disbursements previously billed and paid by the Appellants on an interim basis amounting to $103,590. Implicitly, therefore, the application judge must have concluded that the amount owing to Petrone was reasonable. In our view, there are two difficulties with this implicit conclusion.

[46] First, as mentioned, the Reasons are silent as to the characterization of the arrangement under the Settlement Agreement pertaining to Petrone. In our view, it is also necessary to reach a conclusion on this issue in order to assess the reasonableness of the Settlement Agreement insofar as it pertains to Petrone.

[47] Further, while persuasive grounds for the application judge’s conclusion may well exist, the Reasons do not set out any grounds upon which the application judge could have reached the implicit conclusion that the amount found to be owing to Petrone under the Settlement Agreement was reasonable. As mentioned, the factors to be considered on an examination of the reasonableness of a fee agreement are set out in Rafael Partners. According to Cronk J.A., an important factor in the assessment of fairness is the time actually expended by the solicitor. The evidence before the application judge, being of a qualitative, not a quantitative nature, did not permit this factor to be considered appropriately in the assessment of the reasonableness of Petrone’s fees.

[48] In reaching his determination as to the amount owing to Petrone on the foregoing basis, we conclude that the application judge made a palpable and overriding error.

Conclusions

[49] Based on the foregoing, we are satisfied that the application judge did not err insofar as he found that the Settlement Agreement was enforceable as it pertains to the arrangement with Cheadle, including, to the extent applicable, finding that it was fair and reasonable for the purposes of the exercise of his inherent jurisdiction. Therefore, the appeal as against the order in favour of Cheadle is dismissed.

[50] However, for the reasons set out above, the appeal is allowed in part, and the order of the application judge is set aside, in respect of the determination of the amount of the fees owing to Petrone. The issue of the fairness and the reasonableness of the arrangement pertaining to Petrone under the Settlement Agreement is remitted to the Superior Court of Justice.

Costs

[51] The Respondent Cheadle seeks costs in the amount of $15,000.00, which is a fair and reasonable amount for this appeal. As Cheadle was successful on this appeal, the Appellants are ordered to pay such costs forthwith. However, as the Appellants were successful on this appeal as it pertains to Petrone, they are entitled to an order setting aside the costs awarded in favour of Petrone by the application judge. Petrone shall pay the appellants one-half of their costs of this appeal, which are fixed at $7,350 and are payable forthwith.

“McCombs J.”

McCombs J. (ad hoc)

“K. Swinton J.”

Swinton J. (ad hoc)

“Wilton-Siegel J.”

Wilton-Siegel J. (ad hoc)

Date: August 16, 2010 “J. McC.”