Watson v. Law Society of Ontario, 2023 ONSC 1154

CITATION: Watson v. Law Society of Ontario, 2023 ONSC 1154

DIVISIONAL COURT FILE NO.: 192/18

DATE: 20230302

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

The Honourable McWatt A.C.J.S.C.J., Molloy and Chalmers JJ.

BETWEEN:

RICHARD KEITH WATSON

Appellant

– and –

THE LAW SOCIETY OF ONTARIO

Respondent

David Moore and Ken Jones, for the Appellant

Brian Gover and Dragana Rakic, for the Respondent

HEARD at: Toronto on August 15, 2022 by Videoconference

MOLLOY J.

REASONS FOR JUDGMENT

A. OVERVIEW

[1] Richard Keith Watson is a lawyer practicing in Ontario and licensed by the Law Society of Ontario (“the Law Society”), the regulatory body for lawyers and paralegals in Ontario. In September 2009, the Law Society initiated discipline proceedings against Mr. Watson based on a complaint by Sylvia Sweeney alleging that, while acting as her lawyer, Mr. Watson misappropriated and mishandled trust funds and altered corporate documents. After investigating the allegations, the Law Society proceeded to a hearing before the Law Society Tribunal Hearing Division, which lasted 56 days before the Law Society sought to withdraw all charges. On April 1, 2013, the Hearing Panel instead dismissed all charges against Mr. Watson.[^1] He sought costs.

[2] The costs motion would normally have proceeded before the three-member hearing panel (the “Original Hearing Panel”) that presided over the discipline hearing. However, before the costs motion could be heard, one member of the Original Hearing Panel was appointed to the Bench. The hearing proceeded before the remaining two members, but they could not agree. A new three-member panel (the “Second Hearing Panel”) was convened to hear the costs motion. Before this panel, Mr. Watson now sought costs of the aborted first costs hearing as well as costs of the discipline proceeding. He also sought disclosure of a memorandum relied on by the Law Society when it decided to proceed with a discipline hearing. On April 19, 2016, the Second Hearing Panel dismissed Mr. Watson’s motion for production of the memorandum for reasons issued on August 10, 2016.[^2] After hearing the motions for costs of the earlier proceedings, the Second Hearing Panel dismissed Mr. Watson’s costs claims in their entirety.[^3] For reasons dated November 28, 2016, the Second Hearing Panel awarded the Law Society its costs of the disclosure motion and the costs motions, in the combined amount of $52,000.[^4]

[3] Mr. Watson appealed to the Law Society Tribunal Appeal Division, but for reasons dated February 22, 2018, his appeal was dismissed.[^5]

[4] Mr. Watson now appeals to the Divisional Court from the decision of the Law Society Tribunal Appeal Division.

B. STATUTORY SCHEME

[5] Section 33 of the Law Society Act[^6] prohibits a licensee from engaging in “professional misconduct or conduct unbecoming a licensee.” One of the functions of the Law Society is to investigate any complaint as to the conduct of a member and determine its merits. Not every complaint will proceed to a hearing. After an investigation, Law Society staff provides a report to the Proceedings Authorization Committee (“PAC”), which then decides what action should be taken, including whether the matter should be referred to the Law Society Tribunal Hearing Division.[^7]

[6] Where the PAC refers a complaint with respect to the conduct of a member to the Hearing Division, the parties will be the Law Society (which plays a prosecutorial role) and the member (essentially, the defendant). There is scope to add other parties, but that does not arise in this case.[^8] Typically, the Hearing Division tribunal is composed of a three-person panel.[^9] The Hearing Division Tribunal has broad powers, which include disbarment.

[7] The successful party at a Hearing Tribunal is not automatically entitled to costs. The Act provides a discretion to award costs under s. 49.28(1) as follows:

Subject to the rules of practice and procedure, the costs of and incidental to a proceeding or a step in a proceeding before the Hearing Division are in the discretion of the Division, and the Division may determine by whom and to what extent the costs shall be paid.

[8] The entitlement to costs against the Law Society is also subject to r. 25.01(1) of the Rules of Practice and Procedure of the Law Society Tribunal,[^10] which states:

Costs may only be awarded against the Society,

(a) in a licensing, conduct, capacity, competence or non-compliance proceeding,

(i) where the proceeding was unwarranted; or

(ii) where the Society caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence or other default; and

(b) in a proceeding not mentioned in clause (a) where the Society caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence or other default.

[9] A party before a Hearing Division Tribunal is entitled to appeal any final order to the Law Society Tribunal Appeal Division.[^11] The Appeal Division Tribunal is also typically a panel of three. It has the jurisdiction to determine any question of fact or law that arises in a proceeding before it.[^12] The Appeal Division Tribunal may: make any order or decision that ought to or could have been made by the Hearing Division Tribunal; order a new hearing; or, dismiss the appeal.[^13]

[10] For a proceeding that started as a conduct hearing under s. 34 of the Act (which includes this case), the Act provides a right of appeal to the Divisional Court from a final decision or order of the Appeal Division Tribunal.[^14]

C. PROCEDURAL HISTORY

The Complaint and Investigation

[11] On October 24, 2008, Ms. Sweeney filed a complaint with the Law Society alleging that Mr. Watson had acted as a lawyer for her and her companies, International Performing Arts for All (“IPAFA”) and Elitha Peterson Productions (“EPP”), for a period of two years. The companies were involved in a project to stage a concert series in China in and around the 2008 Olympic and Paralympic Games in Beijing. Ms. Sweeney alleged that Mr. Watson: misappropriated $150,000; fraudulently altered corporate documents relating to shareholders; falsely altered corporate documents to make himself a 48 percent shareholder of the companies; misappropriated $34,000 of corporate funds to his own use; and misappropriated trust funds.

[12] Mr. Watson’s response was that he had not acted as a lawyer for Ms. Sweeney or her companies, but rather was a business partner and executive in the companies. He denied any misappropriation, stated that all monies were properly accounted for, and that the $34,000 he received was payment for work he completed.

[13] Joseph DiPietro, a forensic auditor employed by the Law Society, was assigned to conduct the investigation. On March 9, 2009, Mr. DiPietro completed an investigation report that was submitted to Amanda Worley in-house counsel with the Law Society Discipline Committee. In that report, he recommended that the Law Society seek authorization to commence a conduct application against Mr. Watson. On April 1, 2009, subsequent to that report, Mr. DiPietro conducted a final three-hour interview with Mr. Watson.

[14] On August 17, 2009, Ms. Worley advised Mr. Watson’s counsel that she had completed her review of the file and submitted a letter to the PAC. On August 25, 2009, the PAC authorized conduct proceedings. A Notice of Application was issued on September 11, 2009, alleging four particulars of professional misconduct, namely, that Mr. Watson:

(i) improperly withdrew $178,978 USD from funds received on behalf of his client, IPAFA;

(ii) failed to act with integrity in connection with a factoring agreement, in particular, by failing to make adequate disclosure, purporting to transfer IPAFA’s shares to himself without authority, fabricating corporate documents, and signing other documents without authority;

(iii) misappropriated a total of $178,978 USD from funds received in trust on behalf of his client IPAFA; and,

(iv) practised law while under suspension.

Problems with Disclosure

[15] The Law Society made initial disclosure to Mr. Watson on October 28, 2009. However, shortly before the hearing was to commence, it was discovered that the complete investigation file, including all of Mr. DiPietro’s correspondence, had not been disclosed. As a result, the hearing was adjourned until November 2010. These problems with delayed and incomplete disclosure continued up to, and even after, the commencement of the hearing. These are detailed in the Second Hearing Tribunal’s decision dismissing Watson’s motion for costs as follows, at paras. 28-37:

[28] In August, 2010 the Lawyer’s counsel, David Moore, wrote two letters to Law Society counsel regarding disclosure. He pointed out that Sweeney appeared to have provided the Law Society with certain records supportive of her allegations but had not produced all documents and communications relevant to her allegations. He noted that, given the fundamental issues of credibility between Sweeney and the Lawyer, it was essential for the Lawyer to have access to these files. He also requested that searches be conducted within certain e-mail addresses used by Sweeney.

[29] By letter dated August 17, 1990 [sic, 2010], Law Society counsel responded that she could not compel third parties to produce documents at the prehearing stage. She indicated that she would have the investigator meet with Sweeney to ask for certain categories of materials but raised concerns about the relevance of other categories and asked for evidence to establish the relevance of these materials.

[30] In October 2010, a large number of e-mails and attachments responsive to certain of the Lawyer’s requests were made available to him in four banker’s boxes at the Law Society. The Law Society took the position that none of these materials were “pertinent,” but nevertheless made them available to the Lawyer. Many of these documents were in fact helpful to the Lawyer’s position that he had been a senior executive of IPAFA and had extensive authority with respect to the financial affairs of both IPAFA and EPP.

[31] The hearing was adjourned yet again in November, 2010 and rescheduled to April, 2011, as a result of the late production of further e-mails from Sweeney.

[32] On April 15, 2011, shortly before the hearing was to commence, the Lawyer’s counsel requested the production from Sweeney of QuickBooks accounting records relating to IPAFA and EPP. No explanation of the relevance of these records was provided. The Law Society initially took the position that they were irrelevant and that the Lawyer had not met his obligation to request further disclosure with due diligence.

[33] After the hearing had commenced, the Lawyer renewed his request for these records. On April 27, 2011 the chair made comments on the record about the obvious relevance of these records to the issues in the case, in particular to the allegations made by the Law Society that the Lawyer had received a personal benefit from the Samsung Funds. As a result, a consent order was issued on May 18, 2011 requiring Sweeney to produce these records. These records ultimately assisted the Lawyer in demonstrating that Sweeney had budgeted to pay him a salary in connection with the Beijing Project.

[34] The hearing commenced on April 27, 2011. Sweeney was the first witness. Her cross-examination was adjourned pending the production of the accounting records and the Law Society proceeded to call other witnesses in the interim.

[35] In August 2011, during the continued cross-examination of Sweeney, counsel for the Lawyer requested the signed contract between IPAFA and Who’s Who (a Chinese company with which IPAFA had partnered). Sweeney had only provided the Law Society investigator with a draft. The following day, Sweeney produced the signed contract, which was significantly different than the draft.

[36] The cross-examination of Sweeney continued in November and December of 2011. In December 2011 the Lawyer’s counsel advised Law Society counsel that, based on information he had received from an accounting expert, certain information in EPP’s corporate accounting records had been altered in a manner so as to effectively conceal debts owed to the Lawyer.

[37] In March 2012, the Lawyer brought a motion for production of additional records from Sweeney. The panel granted the motion on April 3, 2012.[^15]

The Conduct Hearing and Decision of the Original Hearing Panel

[16] The hearing into the misconduct allegations began in April 2011 before a three-person panel: Heather J. Ross (Chair); Adriana Doyle; and Andrew Oliver. It was adjourned multiple times due to ongoing problems with disclosure, as mentioned above. Nearly two years later, after the close of the cross-examination of Ms. Sweeney, counsel for the Law Society sought to withdraw the application as she acknowledged there was no reasonable prospect of proving the allegations.

[17] By then, there had been several teleconference sessions involving counsel, but not witnesses, and 61 hearing days during which 6 witnesses testified. Of those 61 hearing days, 34 days were spent on the examination-in-chief and cross-examination of the complainant, Ms. Sweeney.

[18] For oral reasons delivered on April 1, 2013, the Original Hearing Panel agreed with counsel for Mr. Watson that his client was “entitled to a public statement that the allegations against [him] have been dismissed” (brackets in original). Instead of permitting the Law Society to withdraw the allegations, the Original Hearing Panel dismissed the entire application. In coming to that conclusion, the Panel Chair noted that, “it is clear to the panel that the evidence and credibility of the Complainant is central to the ability of the Law Society to prove its case to the requisite standard of proof.”[^16]

The First Costs Hearing

[19] Mr. Watson sought costs from the Law Society. In his costs application he sought a declaration that r. 25.01 be declared of no force and effect and that his entitlement to costs should be determined based on the common law. Alternatively, he sought costs pursuant to that rule. The application proceeded in two parts, with the issue relating to the invalidity of the rule proceeding first. That issue was argued on January 13 and 14, 2014 before the Original Hearing Panel. On May 5, 2014, the Original Hearing Panel issued written reasons dismissing that aspect of the application, with Chair Ross writing the majority decision (Panel Member Doyle concurring) and dissenting reasons by Panel Member Oliver.[^17] That decision is not part of the appeal before this court.

[20] The second part of the costs application, Mr. Watson’s entitlement to costs under r. 25.01, remained to be heard. Before that matter was scheduled, one of the members of the Original Hearing Panel (Panel Member Doyle [as she then was]) was appointed to the Bench. The parties were consulted about how to proceed, and it was determined that the remining two members of the Original Hearing Panel would hear the issue of entitlement to costs. The remaining panel members relied, in that regard, on s. 4.4(1) of the Statutory Powers Procedure Act,[^18] which states that “[i]f a member of a tribunal who has participated in a hearing becomes unable, for any reason, to complete the hearing or to participate in the decision, the remaining member or members may complete the hearing and give a decision.”

[21] The second part of the costs application was argued before the remaining two panel members of the Original Hearing Panel on March 30, 31, and April 1, 2015. The panel members reserved their decision. Unfortunately, they were unable to agree. The parties were advised of this impasse and appeared before the Tribunal Chair for a Proceeding Management Conference to determine the appropriate procedural steps. Ultimately, apparently upon the request of both parties, each panel member issued a summary of what their reasons would have been. These were set out in a decision issued on June 30, 2015.[^19]

[22] Chair Ross addressed this procedural step in the Reasons for the Panel’s Failure to Arrive at a Unanimous Decision as follows:

The Proceedings Management Conference was held before the Chair of the Law Society Tribunal. As a result of that appearance, the parties asked that, notwithstanding that the two remaining hearing panel members were unable to reach a unanimous decision, each panel member provide reasons for their conclusion. They asked that the reasons do not address whether in law the motion is dismissed or allowed, and that a final order not be issued.

In our view, there would be little utility in providing full reasons for two opposing conclusions when we cannot reach a unanimous decision. In the circumstances, we do find it appropriate to provide a brief sketch of the key elements of our reasons for holding the views each of us has. These are intentionally meant to be less complete than the reasons we would have provided for a majority or unanimous decision. [Emphasis added.][^20]

[23] Notwithstanding the request by counsel that the reasons not address whether in law the motion is dismissed or allowed, and notwithstanding the panel’s determination that there would be little utility in providing full reasons, Chair Ross set out 21 paragraphs of reasons stating why, in her view, Mr. Watson was not entitled to any costs. She cited case law and provided her interpretation of the relevant sections of r. 25.01. She also stated that in a previous discipline proceeding, Mr. Watson had been found to have “blurred the lines between business and solicitor-client aspects of the relationship” and that because of his failure to make clear in writing his status as either lawyer or corporate officer to Ms. Sweeney, he “became vulnerable to the kind of allegations” made in the case.[^21] Essentially, she found that the credibility issues with Ms. Sweeney only became apparent as a result of the lengthy and skilled cross-examination by Mr. Watson’s lawyer, which she described as a “death by a thousand cuts.”[^22]

[24] Panel Member Oliver provided nine paragraphs of reasons for why he would have awarded costs, primarily based on his conclusion that the investigation was one-sided and not thorough, and that the conduct hearing was therefore unwarranted. In the course of his reasons, he was critical of Mr. DiPietro’s report to the Law Society Discipline Committee, which he said included serious allegations of misappropriation of funds. He stated that “the report did not express the misappropriation accusations as allegations but as facts.”[^23] He then went on to state that the report was completed and submitted almost a month before Mr. DiPietro interviewed Mr. Watson for over three hours and that the key allegations were never put to Mr. Watson. He concluded that because the report did not reflect due diligence, was biased, and led to the issuance of the Notice of Application, Mr. Watson should have his full costs of the proceeding.

[25] I will deal later in these reasons with the propriety of releasing the Reasons for the Panel’s Failure to Arrive at a Unanimous Decision and the use that was later made of them.

[26] The role of the Original Hearing Panel was not yet concluded. The Law Society took the position that because Mr. Watson did not succeed in obtaining the costs relief sought from the Original Hearing Panel, that meant he had lost his claim, and that was the end of the matter. His only remedy was to appeal; there could be no re-hearing of the costs motion. After hearing the parties on this issue, both panel members held that if the two members of a two-member panel cannot agree on the result, there has been no decision and that an entirely new panel should be constituted to hear the costs issues.[^24]

The Second Costs Hearing Panel: Disclosure of the PAC Memorandum

[27] In effect, the first costs hearing before the Original Hearing Panel was a nullity. The parties started over again before a new three-member panel, the Second Costs Hearing Panel, consisting of Chair Peter Wardle and Panel Members Jan Richardson and Frederika Rotter. Before the Second Costs Hearing Panel, Mr. Watson sought: (1) production of the PAC Memorandum (the memorandum provided to the PAC when the Notice of Authorization was issued); (2) costs of the conduct hearing that had proceeded before the Original Hearing Panel; and (3) costs of the abortive costs hearing before the remaining two members of the Original Hearing Panel.

[28] The motion for production of the PAC Memorandum proceeded first and was dismissed by the Second Costs Hearing Panel in the unanimous Reasons Dismissing Watson’s Motion for Production.[^25] The facts relating to this issue relied on by the Second Hearing Panel included the following:

• Mr. DiPietro completed and signed an investigative report on March 6, 2009, which he passed along to the Law Society Discipline Committee counsel, Amanda Worley, on March 31, 2009. He subsequently interviewed the Mr. Watson in detail on April 1, 2009. It was the Law Society’s position that the investigation was ongoing at that time.[^26]

• Ms. Worley reviewed the investigation in summer 2009, and on August 17 she advised Mr. Watson that she had submitted the matter to the PAC for its consideration at its August 25, 2009 meeting. On September 4, 2009, she sent a letter advising Mr. Watson that the PAC had authorized a conduct application. The Notice of Application against Mr. Watson was issued on September 11, 2009.[^27]

• The PAC materials were referred to by the Law Society in an affidavit it filed in the original costs motion. The Law Society referred to the fact that discipline counsel had reviewed the evidence and submitted a letter to the PAC, and that the PAC had authorized a conduct application based on the investigation. The contents of counsel’s letter to the PAC were otherwise not disclosed.[^28]

• The Law Society also referred to the PAC materials in its written argument on the original costs motion, where it affirmed that discipline counsel reviewed the investigation and subsequently submitted the matter to the PAC. Again, the Law Society did not refer to the contents of the material submitted to the PAC.[^29]

• Counsel for the Law Society also referred to the PAC process in oral argument, explaining that the contents of the PAC Memorandum are relied on by the PAC in its decision to authorize. Counsel suggested that the results of Mr. Watson’s April 1, 2009 interview with Mr. DiPietro would have been included in the PAC Memorandum.[^30]

[29] Relying on a number of previous Law Society Tribunal decisions, the Second Costs Hearing Panel held that there was a reasonable expectation of privacy in the PAC Memorandum and that it was confidential and privileged. Further, that privilege was not waived merely because counsel referred to it in describing the procedural steps taken in the hearing, given that the actual content of the memorandum was not disclosed. Given that conclusion, the Second Costs Hearing Panel declined to deal with whether the principles of work product or litigation privilege applied.

[30] The Second Hearing Panel ruled that the PAC Memorandum was not relevant to the issue of whether the conduct hearing was “unwarranted” and that a determination as to whether it was unwarranted could be based solely on the evidentiary record before the tribunal, without recourse to the material that was before the PAC.[^31] Further, the PAC Memorandum was irrelevant to whether the Law Society unreasonably caused costs to be incurred without reasonable cause, as this branch of the test is directed towards “the procedural efficiency and care with which the conduct application is conducted.”[^32]

[31] In the result, the Second Hearing Panel ruled that Mr. Watson was not entitled to production of the PAC Memorandum for purposes of the costs hearing.

The Second Costs Hearing: Watson’s Entitlement to Costs

[32] After ruling that the PAC Memorandum would not be produced to Mr. Watson, the Second Costs Hearing Panel proceeded to a separate hearing on the issue of Mr. Watson’s claim for costs. In the Reasons Dismissing Watson’s Motion for Costs, the Second Costs Hearing Panel held Mr. Watson was not entitled to any costs. Those reasons were authored by Chair Wardle and were unanimous.

[33] In its reasons, after first setting out the factual context, the Second Costs Hearing Panel traced the history of the applicable costs provisions and made the following general rulings:

(i) costs of a Law Society discipline proceeding do not follow the event, but rather must be determined in a manner that recognizes and respects the Law Society’s public interest mandate;

(ii) the risk of costs must not deter the Law Society from vigilantly fulfilling its public interest mandate;

(iii) for a self-governing profession to maintain public confidence in its ability to regulate the profession, it is sometimes important to publicly air serious cases;

(iv) the costs regime for discipline cases is covered by r. 25.01 of the Law Society Tribunal’s Rule of Practice and Procedure;

(v) some of the historic jurisprudence on costs had not developed in a coherent fashion due to different versions of the rules relating to costs entitlements in place at various time. Therefore, it was appropriate to reformulate the test under r. 25.01;

(vi) rule 25.01 contemplates costs being awarded against the Law Society under two branches: Branch 1, where the licensee can establish that the proceeding was unwarranted at the outset, and Branch 2, where (a) the Law Society, in the conduct of the hearing, caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence, or other fault, or (b) where the proceeding becomes unwarranted at some point after commencement;

(vii) under Branch 1 of the rule, “unwarranted” had been interpreted as meaning “without reasonable justification, patently unreasonable, malicious, taken in bad faith or for a collateral purpose.” For purposes of the hearing before it, the Second Costs Hearing Panel treated an “unwarranted” conduct application as one commenced or continued without a reasonable prospect of proving professional misconduct to the requisite standard, namely on a balance of probabilities based on clear, cogent, and convincing evidence;

(viii) the burden of establishing that a proceeding was unwarranted rests with the party making that allegation;

(ix) the Law Society’s assessment must be analyzed at the time it was made, rather than with the benefit of hindsight; and

(x) even if the tribunal concludes that proceedings were unwarranted, there is a residual discretion not to award costs based on the circumstances of the case.[^33]

[34] In its analysis of whether Mr. Watson met the test under Branch 1, the Second Costs Hearing Panel considered the scope of the investigation, the investigative steps taken by the Law Society investigator, Mr. DiPietro, and the “red flags” relied upon by the defence.

[35] The panel disagreed with Mr. Watson that the critical issue was his role and authority within IPAFA and EPP and noted two areas of investigation (the “Samsung Funds” and the “Liquid Capital loan”) that gave rise to serious concerns about Mr. Watson’s conduct. In this regard, the panel noted:

The Samsung Funds were deposited into the Lawyer’s trust account on August 1, 2008. He had advised Samsung that “I am a lawyer in Canada and will be receiving the Contract Funds into a Legal Trust Account for IPAFA.” Despite this, he immediately transferred the Samsung Funds into an account in the name of Evergreen, a company under his sole control. Those funds were then disbursed for a variety of purposes, some connected with the Beijing Project, some not. Funds were also transferred from the Evergreen account into the account of a second company, 1355394 Ontario Inc. (“135”), controlled by the Lawyer, from where they were invested in a mortgage. It is undisputed that Sweeney knew nothing about what happened to the funds. At the time of the deposit of the Samsung Funds, the Lawyer was suspended pursuant to a prior order.

With respect to the Liquid Capital loan, the Lawyer had referred to himself as General Counsel to IPAFA in an undertaking given to the lender. The funds were deposited into his trust account. Sweeney had never been told that the loan had been approved or advanced. The loan application showed the Lawyer as having a 48% interest in IPAFA, which Sweeney denied having given him. The Lawyer had advised Sweeney by e-mail dated October 28, 2008 (the date her complaint was received by the Law Society) that he had “put shares into my name solely for the purposes of putting the Liquid Capital deal in place” and had then “signed the shares back,” comparing himself to a plumber who comes to a house, fixes a leak and then “puts everything all back together again the way it was” (the “Plumbing E-mail”). The Liquid Capital loan funds had also been transferred to an account in the name of Evergreen, from where some of the funds had been disbursed appropriately in connection with the Beijing Project and the remainder had found their way to 135.

On November 21, 2008 the Lawyer provided Sweeney with a reconciliation that demonstrated that he had retained approximately $34,000 out of the Samsung Funds and Liquid Capital loan funds for “compensation.”

These undisputed facts obtained during the investigation raised numerous concerns about the Lawyer’s conduct. For example, what was Evergreen and why were the funds transferred into its name? Why were funds moved from Evergreen to 135? Why was Sweeney not told that this was taking place? Why were the funds deposited into the Lawyer’s trust account if he was not acting as a lawyer? Was his conduct here similar to that for which he had just been disciplined? Was it appropriate for him to pay himself out of the loan proceeds? Was he practising while under suspension?[^34]

[36] The panel held that the investigation centered on a forensic tracing exercise to determine what happened to the funds Mr. Watson received. The panel rejected the submission that the investigation was one-sided and sought only to find evidence to support Ms. Sweeny’s allegations. The evidence showed that the investigator asked Ms. Sweeny and other witnesses a number of questions arising from information obtained from interviews with Mr. Watson. Ms. Sweeny had told the investigator that the lines were blurred as to whether Mr. Watson was sometimes acting as a business associate rather than a lawyer. The panel concluded:

As outlined earlier, the Lawyer concedes that the investigation was not carried out in bad faith, maliciously or for an improper purpose. He does allege, however, that the investigation was biased, in the sense that it was one-sided, and simply attempted to gather evidence to support Sweeney’s allegations. He points to a number of things to support this allegation, including: certain statements made by DiPietro in e-mails to Sweeney, his failure to look for evidence to support the Lawyer’s position, his rush to judgment in his investigation report, and Law Society counsel’s statements in the third party production motion.

The record does not support this allegation. DiPietro testified before us that he understood his obligation was to look for both inculpatory and exculpatory evidence and that he had an obligation to be fair to the Lawyer. This evidence was not impugned in cross-examination. Certain e-mails can be read as if DiPietro was simply asking Sweeney to provide confirmatory evidence; however, it is also clear (particularly from his December 23, 2008 e-mail, discussed further below) that he did ask her to comment on the Lawyer’s explanations so that he could evaluate the two competing versions of events. As outlined earlier, DiPietro interviewed several witnesses at the request of the Lawyer. Most importantly, DiPietro appears to have relied on the forensic banking analysis to support his investigative conclusions, perhaps because he knew that Sweeney and the Lawyer had widely varying versions of what had taken place.

We agree that it is unfortunate that DiPietro finalized his investigative report before he interviewed the Lawyer for the last time. However, nothing appears to turn on this for purposes of this motion.[^35]

[37] One of the arguments advanced by counsel for Mr. Watson in support of his position that the investigation was biased and one-sided was that counsel for the Law Society at earlier production motions had repeatedly stated that the duty of the Law Society in its investigation was to produce evidence to support the allegations made, and not to investigate issues involving Ms. Sweeny’s credibility or to inquire about exculpatory evidence that supported Watson’s defence. The Second Costs Hearing Panel noted that these statements had been made by counsel at that time (not the counsel before us) and agreed that this is not an accurate statement as to the Law Society’s obligations. The panel referred to the comments as “troubling” but found that because there was no further evidence to support the argument that the investigation was one-sided, counsel’s statements in argument were not sufficient to support such a finding.

[38] The panel considered the “red flags” which Mr. Watson argued should have alerted the investigator to Ms. Sweeny’s utter lack of credibility. One of these red flags (an allegation of forgery) was put to Ms. Sweeny and she explained she had simply been mistaken, which the investigator accepted as possible. The investigator considered the evidence of three witnesses about Ms. Sweeny’s history of lying, but also noted that other witnesses supported her position. He considered the numerous documents in which Ms. Sweeny referred to Mr. Watson as her business partner, but also noted that she said he had multiple roles and the fact that Mr. Watson himself had done things consistent with being the corporate lawyer (such as receiving funds into his trust account). The investigator failed to do a corporate search, which would have revealed that Ms. Sweeny had lied about Mr. Watson fraudulently altering the Articles of Amendment for IPAFA. The panel considered this omission and found it to be “inexplicable in retrospect” but that it was inappropriate to review the investigation with the benefit of hindsight.[^36]

[39] The panel concluded that the red flags were not definitive and “would [not] have led the Law Society to conclude that Sweeny’s evidence was so fundamentally flawed as to prevent it from being accepted by a hearing panel.”[^37] The investigator recognized there were issues of credibility involved but did not conclude that Ms. Sweeny’s position was devoid of merit. The panel held, “[w]e were provided with no authority for the proposition that an investigator has a legal obligation to cross-examine a complainant as if she were giving evidence at trial.”[^38] Although the investigation could have been more thorough and Ms. Sweeny could have been interviewed more vigorously, the panel held that this would not have changed the result, stating that “this appears to have been one of those classic cases where the public interest demanded a hearing so that the serious allegations she made against the Lawyer, which appeared to have been corroborated in a number of respects, could be publicly aired and determined on their merits.”[^39]

[40] With respect to Branch 2, the panel held that there was no single point during the hearing that demonstrated the prosecution was doomed to fail, and therefore no point at which it could have been said that it was apparent the proceeding had become unwarranted.

[41] The panel also considered whether the Law Society had wasted costs by undue delay, negligence, or other default and concluded it had not.

[42] With respect to the protracted delays and disputes in obtaining disclosure, the panel held:

In hindsight, the Society’s initial position with respect to the relevance of certain documents he sought appears to have been wrong. However, this is not the same as saying that those positions were unreasonable. As said in Law Society of Upper Canada v. Feldman: “There is no ‘wasting’ of costs or ‘other default’ in simply advancing the losing argument.”

It is also unclear why the Lawyer did not take steps earlier to compel the production of records from Sweeney. In her letter of August 17, 2010, counsel for the Law Society pointed out to counsel for the Lawyer that she could not compel Sweeney to produce records at the prehearing stage. However, the Lawyer could have compelled Sweeney by way of summons duces tecum to produce documents at the hearing. The Law Society took the position on this motion that the Lawyer should have brought his third party production motion much earlier. There appears to be some merit to this argument.

In short, while the history of the proceeding suggests that at times the Law Society was less than responsive to the Lawyer’s requests, we cannot find that it had no defensible legal basis for the positions it took, or that it wasted identifiable costs by an unreasonable tactic. [Footnotes omitted.][^40]

[43] In the decision’s concluding paragraphs, the panel referred to the task of obtaining all the relevant documents and using them to impeach Ms. Sweeny’s credibility as a “monumental struggle which took place over the entirety of 56 days of hearing between April 2011 and April 2013.”[^41] The panel then adopted the statement of the Chair of the abortive Original Hearing Panel: “[a]s Ms. Ross put it, Sweeney’s credibility at the hearing was ‘gradually eroded through the indefatigable cross-examination by the lawyer for the Respondent. The complainant’s credibility suffered a ‘death by a thousand cuts’.’”[^42]

[44] The panel held that the destruction of Ms. Sweeny’s credibility could not have been reasonably foreseen at the outset even if the investigation had turned up all the documents eventually produced at the hearing, stating that it took “a lengthy hearing and a skilled and determined cross-examination” which is “precisely why some cases have to be tried.”[^43]

[45] The Second Hearing Panel also dismissed Mr. Watson’s claim for costs of the proceedings before the First Hearing Panel. Its entire reasons on that point being, “[w]e see no basis on which to award the Lawyer his costs of the first costs motion, given the conclusion we have reached.”[^44]

The Second Costs Hearing: The Law Society’s Entitlement to Costs

[46] In a separate decision, Reasons Granting Costs to the Law Society, the Second Costs Hearing Panel awarded $52,000 in costs to the Law Society. The Law Society had sought $22,317 for costs of the motion for disclosure of the PAC Memorandum and $81,073 for the costs proceeding before the Second Costs Hearing Panel. The Law Society argued that it was necessary to incur such costs because the motion raised significant issues involving the integrity of the Law Society’s investigation and the precedent-setting amount of costs claimed by Mr. Watson (approximately $900,000).

[47] Counsel for Mr. Watson did not challenge the quantum of costs claimed, but argued that, as a threshold issue, no costs should be awarded against Mr. Watson given the context (a lengthy unsuccessful prosecution with serious allegations of misconduct and substantial costs thrown away because of the abortive hearing before the Original Hearing Panel). With respect to the PAC Memorandum motion, counsel pointed out that success was divided given that the panel directed the Law Society that it could not rely upon the PAC Memorandum during the course of its costs submissions.

[48] The Second Hearing Costs Panel awarded costs to the Law Society for the PAC Memorandum disclosure motion, reasoning that the motion was unnecessary and did not raise any novel arguments.

[49] With respect to the costs hearing itself, the Second Costs Hearing Panel noted that the position taken by Mr. Watson on the motion “inevitably drew the panel into a painstaking examination of a 56-day hearing, including a review of voluminous exhibits and transcripts” as well as oral testimony, which involved 3 days of hearing time and lengthy written submissions.[^45] The panel therefore accepted that the Law Society incurred substantial fees and disbursements. However, the panel recognized that “broader questions of fairness” required a recognition of the enormous cost burden on Mr. Watson in proceedings in which he was wholly successful, as well as the costs thrown away in respect of the abortive first cost hearing, which was neither party’s fault. Accordingly, the panel discounted the amount the Law Society should receive in costs and awarded $40,000 for the second costs hearing.

The Appeal Division Hearing

[50] Mr. Watson appealed from the Second Costs Hearing Panel’s decisions: (1) dismissing his motion for production of the PAC Memorandum; (2) denying him costs of the first costs motion and the second costs motion; and (3) awarding costs to the Law Society for the production motion and the costs proceedings before the Second Costs Hearing Panel. That appeal was heard by a five-member panel (Chair Christopher D. Bredt and Panel Members Malcolm Mercer, Sandra Y. Nishikawa [as she then was], Linda Rothstein and Marilyn Thainon) on April 20 and 21, 2018. After the hearing and before a decision was made, Panel Member Nishikawa (as she then was) was appointed to the Bench. She did not participate in the decision. In the unanimous Reasons Dismissing the Appeal of the Second Hearing Panel Decisions released on February 18, 2018, the Appeal Division Panel upheld all the decisions made by the Second Costs Hearing Panel. The Appeal Division Panel further ordered that if the Law Society wished to request costs of the appeal, this could be done by written submissions.

[51] The Appeal Division Panel held that the standard of review it would apply to review the decisions was correctness with respect to issues of law, and reasonableness with respect to issues of mixed fact and law. It adopted the definition of “reasonableness” set out by the Supreme Court of Canada in Law Society of New Brunswick v. Ryan[^46] and Dunsmuir v. New Brunswick:[^47]

The Supreme Court of Canada has provided guidance on the meaning of a reasonableness standard of review.

In Law Society of New Brunswick v. Ryan, the Supreme Court defined an “unreasonable decision” as follows:

A decision will only be unreasonable if there is no line of analysis within the given reasons that could reasonably lead the tribunal from the evidence before it to the conclusion at which it arrived. If any of the reasons that are sufficient to support the conclusion are tenable in the sense that they can stand up to a somewhat probing examination, then the decision will not be unreasonable and a reviewing court must not interfere (see [Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1 S.C.R. 748], at para. 56). This means that a decision must satisfy the reasonableness standard if it is supported by a tenable explanation even if this explanation is not one that the reviewing court finds compelling (see Southam, at para. 79).

In Dunsmuir v. New Brunswick, the Supreme Court of Canada commented as follows on the nature of a reasonableness standard of review:

A court conducting a review for reasonableness enquires into the qualities that make a decision reasonable, referring both to the process of articulating reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision making process. But it is also concerned with whether a decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and the law.

[Footnotes omitted; emphasis and brackets in original.][^48]

[52] The Appeal Division Panel held that the formulation of the test to be applied in determining entitlement to costs is a question of law and is required to be correct, without deference to the reasoning of the Second Costs Hearing Panel. All other issues were found to be issues of mixed law and fact and reviewable on a reasonableness standard.[^49]

[53] The Appeal Division Panel recognized the general principle that issues of natural justice and procedural fairness are reviewable on a standard of correctness. However, it pointed out that there was no issue of fairness with respect to the hearing itself, but rather as to the conduct of the Law Society’s investigation prior to the hearing. Therefore, the Appeal Division Panel held that the Second Hearing Panel’s conclusions about that process were only required to be reasonable.[^50]

[54] The Appeal Division Panel upheld the Second Costs Hearing Panel’s decision that Mr. Watson was not entitled to production of the PAC Memorandum. The Appeal Division Panel first held that the Second Costs Hearing Panel correctly identified the legal principles to be applied in determining whether the PAC Memorandum was privileged (the Wigmore criteria as set out in Slavutych v. Baker[^51]).[^52] Next, the Appeal Division Panel held that the application of the facts to those principles by the Second Costs Hearing Panel was reasonable, noting that the PAC Memorandum is merely a summary and recommendation and does not include evidence not already disclosed to the member facing discipline. The Appeal Division Panel held that the Second Cost Hearing Panel’s conclusion that privilege had not been waived was reasonable, and that there was no fairness issue given that there was no allegation that the proceeding was initiated maliciously, in bad faith, or for a collateral purpose. Whether the proceeding was “unwarranted” involved an assessment of the evidence available, all of which had been disclosed to Mr. Watson.

[55] On the issue of entitlement to costs, the Appeal Division Panel held that the Second Costs Hearing Panel correctly stated the legal test applicable to a motion for costs against the Law Society.[^53] It also held that the panel applied the correct approach in determining whether a proceeding was “unwarranted” under Branch 1 of the test and how to deal with issues of credibility within that determination.[^54] Further, the Appeal Tribunal held that the Second Hearing Tribunal had correctly stated the principles to be applied in determining whether costs were appropriate under Branch 2 of the test. In short, the Appeal Division Panel found that there were no errors of law committed by the Second Costs Hearing Panel in relation to the test it had to apply in determining costs.

[56] The Appeal Division Panel reviewed the reasons given by the Second Costs Hearing Panel in rejecting Mr. Watson’s entitlement to costs under both Branch 1 and Branch 2 of r. 25.01 and found them to be reasonable. The Appeal Division Panel found that the ultimate conclusion of denying costs “falls within a range of possible, acceptable outcomes that are defensible in respect of the facts and the law.”[^55] In coming to that conclusion, the Appeal Division Panel specifically referred to the reasons of the Second Costs Hearing Panel quoting the Chair of the First Hearing Tribunal (Ms. Ross): “Sweeny’s credibility at the hearing was ‘gradually eroded through the indefatigable cross-examination by the lawyer for the Respondent. The complainant’s credibility suffered a ‘death by a thousand cuts’.”[^56]

[57] The Appeal Division Panel agreed with the Second Costs Hearing Panel that any entitlement to costs thrown away as a result of the first costs hearing was governed by r. 25.01 and held that the Second Costs Hearing Panel’s reasons for refusing such costs were adequate and its decision reasonable.

[58] Before the Second Costs Hearing Panel, the Law Society had sought its costs of $22,000 for the disclosure motion and costs of $82,000 for the second costs proceedings. The Appeal Division Panel declined to interfere with the Second Costs Hearing Panel’s costs award of $52,000 to the Law Society ($12,000 for the disclosure motion and $40,000 for the costs hearing) on the basis that “this decision was a discretionary one which is not plainly wrong or based on an error in principle.”[^57]

D. ISSUES ON THIS APPEAL

[59] This appeal raises the following issues:

(i) What is the appropriate standard of review?

(ii) Was Mr. Watson entitled to production of the PAC Memorandum?

(iii) Were the investigation against Mr. Watson and the decisions made and positions taken by the Law Society during the merits hearing in accordance with principles of fairness and natural justice?

(iv) Did the Appeal Division Panel err in failing to hold that Mr. Watson was entitled to costs of the merits hearing?

(v) Did the Appeal Division Panel err in failing to hold that Mr. Watson was entitled to costs of the abortive costs hearing before the Original Hearing Panel?

(vi) Did the Appeal Division Panel err in awarding costs of the appeal to the Law Society?

E. THE STANDARD OF REVIEW

[60] At the time of the hearings in this matter, and at the time the parties filed their original factums on this appeal in 2018, the standard of review was governed by the Supreme Court of Canada’s decision in Dunsmuir, as correctly articulated in the reasons of the Appeal Division Panel. Under that regime the standard applied by this court in reviewing decisions of the Appeal Division was, for the most part, reasonableness. The standard applied by the Appeal Division Panel would have been correctness on questions of law and reasonableness for findings of fact or mixed fact and law.

[61] In December 2019, the Supreme Court of Canada released its decision in Canada (Minister of Citizenship and Immigration) v. Vavilov,[^58] which changed the standard to be applied with respect to statutory appeals. Pursuant to a direction of Corbett J. on April 6, 2022, the parties filed supplementary factums addressing this issue.

[62] In Vavilov, the Supreme Court held that where (as here) the legislature has provided a statutory right of appeal from an administrative tribunal to a court, appellate standards of review will apply.[^59] Thus, the applicable standard will depend on the nature of the question. For questions of law, the decision-maker is required to be correct. For questions of fact, or for questions of mixed fact and law where the legal principle is not readily extricable, the appellate court is only entitled to interfere if there is a palpable and overriding error.[^60]

[63] The standard articulated in Vavilov applies to this court’s analysis of the decision of the Appeal Division Panel. In Law Society of Ontario v. Diamond,[^61] the Ontario Court of Appeal considered a decision of the Ontario Divisional Court delivered in May 2019, dismissing an appeal from a decision of a Law Society Appeal Tribunal from September 2017 (both lower decisions having been made prior to Vavilov). The Court of Appeal held that in reviewing the Divisional Court’s decisions, it essentially “steps into the shoes” of the Divisional Court.[^62] Further, the Court of Appeal held that the standard of review for the Divisional Court to apply post-Vavilov would have been correctness for errors of law, and palpable and overriding error for mixed questions of fact and law. The Court of Appeal determined that the issue in the case was a question of mixed fact and law, from which the legal principle was not extricable, such that the applicable standard was palpable and overriding error. Finally, the Court of Appeal applied that standard to the decisions below and held that there was no palpable or overriding error made by the initial Law Society Tribunal Hearing Division, nor by the Appeal Division. Accordingly, the Court of Appeal dismissed the appeal from the decision of the Divisional Court, upholding those two Law Society Tribunal decisions.

[64] It follows from this decision, that the standard to be applied by this court to the Appeal Division decision is the standard test on appeal, as established in Housen. Further, it is a necessary implication that the standard to be applied by the Law Society Tribunal Appeal Division to decisions of the Hearing Division is also the Housen test, as was confirmed by this court in Khan v. Law Society of Ontario.[^63]

[65] The Khan decision also provides a useful summary of the appellate standard of review applicable in this case, which I adopt, as follows:

Where a ground of appeal raises an issue of law alone, the standard of review is correctness.

Where the ground of appeal raises a question of fact, the appellate court must pay substantial deference to it. Before it may properly interfere, the appellate court must conclude that the submitted error amounts to a “palpable and overriding error”. The word “palpable” means “clear to the mind or plain to see”, and “overriding” means “determinative” in the sense that the error “affected the result”. The Supreme Court has held that other formulations capture the same meaning as “palpable error”: “clearly wrong”, “unreasonable” or “unsupported by the evidence”.

Examples of palpable error include: (a) findings made in the complete absence of evidence (this could also amount to an error in law); (b) findings made in conflict with accepted evidence; (c) findings based on a misapprehension of the evidence; (d) findings of fact, drawn from primary facts, that are a result of speculation rather than inference; and (e) findings of fact based on evidence that has no evidentiary value because it has been rejected by the trier of fact.

Matters of mixed fact and law lie along a spectrum; where the error of the decision-maker can be traced to a clear error in principle, it may be characterized as an error of law and subjected to a standard of correctness; where the legal principle is not readily extricable, then the matter is subject to standard of palpable and overriding error. [Footnotes omitted; emphasis added.][^64]

[66] There is a slightly more nuanced approach for appellate review of costs awards. As stated by Swinton and Backhouse JJ. in Dell v. Zeifman Partners Inc.[^65] (a post-Vavilov decision):

However, it is important to remember that the present appeal is from a costs award. An award of costs is in the discretion of the judge or the administrative tribunal that makes the award. Appellate courts do not interfere with orders of costs made by a judge unless there has been an error of principle, or the award of costs is plainly wrong (Hamilton v. Open Window Bakery Ltd., 2004 SCC 9 at para. 27). A similar approach should be taken in an appeal from a costs decision of an administrative tribunal.

[67] Vavilov does not change the standard of review for issues of procedural fairness and natural justice. An administrative tribunal of the nature involved here is required to adhere to principles of natural justice and procedural fairness and a failure to do so will result in the decisions being set aside. Issues of deference do not arise in determining the issue. What the reviewing court must decide is whether there was an appropriate level of procedural fairness having regard to the principles established in Baker v. Canada (Minister of Citizenship and Immigration).[^66] However, there may be findings of fact underlying the assessment of what happened and, therefore, whether there was a breach of fairness. If those facts are extricable issues from the law to be applied, the standard of review would be palpable and overriding error.

[68] Thus, to summarize, the appropriate standard of review with respect to all the decisions under review is correctness for questions of law and palpable and overriding error for questions of fact and mixed questions of fact and law where the law is not extricable from the facts. Given the nature of the tribunals involved, and the implications for the lawyers subject to the discipline process, a high level of procedural fairness and natural justice is required. Failure to comply with such standards would result in the decisions being set aside.

F. ANALYSIS: PRODUCTION OF THE PAC MEMORANDUM

[69] It is important to distinguish between Mr. DiPietro’s investigation report (which was forwarded to Law Society counsel, Ms. Worley, on March 31, 2009) and the PAC Memorandum (which was prepared by Ms. Worley and provided to the PAC in summer 2009 prior to the PAC meeting on August 25, 2009). The investigation report was produced to Mr. Watson in advance of the hearing and was an exhibit to the affidavit of Jandina Ravao, which was filed by the Law Society on Mr. Watson’s application for costs. The Law Society objected to disclosing the PAC Memorandum, which was the subject of the motion for production and one of the issues on this appeal.

[70] The Appeal Division Panel found that the PAC Memorandum was both irrelevant and privileged, and that fairness did not require its disclosure.

[71] Relevance is a question of law.[^67] As such, the tribunal is required to be correct on this issue. “To be relevant, the evidence must not only be logically relevant but must be sufficiently probative to justify admission.”[^68] Relevance is both “a requirement that the evidence have a tendency as a matter of human experience and logic to make the existence or non-existence of a fact in issue more or less likely than it would be without that evidence” (i.e., logical relevance) and “a requirement that evidence be not only logically relevant to a fact in issue, but also sufficiently probative to justify its admission despite the prejudice that may flow from its admission” (i.e., legal relevance).[^69] It is important not to lose track of the central issue to be determined on the eligibility for costs, which is whether the proceeding was “unwarranted.” That must not be confused with a review and examination of whether, on the evidence before it, the PAC should or should not have authorized a conduct hearing. An examination of whether the proceeding was unwarranted may well inquire into the adequacy or fairness of the investigation conducted by the Law Society, but that is not the same thing as a judicial review of the internal PAC decision-making process.

[72] Suppose, for example, a hypothetical case in which only a small portion of the evidence available was provided to PAC and a hearing was ordered. At the hearing itself a huge volume of evidence was provided to the tribunal. In that situation, the question would be whether, on the whole of the evidence the proceeding was warranted, and not whether it was warranted based on the small amount of evidence provided to the PAC. That is not to say that this happened here. However, there was considerable discussion before the tribunal about the nature of the PAC Memorandum.

[73] In the absence of any actual evidence, counsel for the Law Society made representations to the tribunal about the content of the PAC Memorandum. For example, Mr. Watson’s counsel had pointed to the unfairness of Mr. DiPietro submitting his final report on March 9, 2009, which necessarily would not have included any information and documents received from his final interview with Mr. Watson three weeks later. In argument, counsel for the Law Society stated that the PAC Memorandum would have included information about the April 1, 2009 interview with Mr. Watson. Not only is that inappropriate as a factual submission in the absence of an evidentiary record, it is unfair to opposing counsel who, in the absence of the memorandum, is completely unable to refute it.

[74] Some of the representations made by counsel found their way into the reasons of the tribunals. For example, the Appeal Division Panel stated that the PAC Memorandum “summarizes and analyzes evidence” and “does not include evidence not disclosed elsewhere.”[^70] All of these references are unfortunate, as they only serve to muddy the waters. The issue here is relevance. The only relevance of the PAC authorization is that it is a required step in the process towards a hearing, and that it was obtained. What the PAC did or did not have before it when it made its decision is completely irrelevant to the issue of whether, at the outset of the hearing, on the whole of the evidence available to the Law Society, the proceedings were unwarranted. As pointed out by the Appeal Division Panel, the situation might be different if there was an allegation that the Law Society acted in bad faith or that the proceedings were initiated for a collateral purpose.[^71] However, there is no such allegation here.

[75] Accordingly, I agree with the Appeal Division Panel’s conclusion that the PAC Memorandum is irrelevant to the issue of costs.

[76] With respect to the question of whether the PAC Memorandum was privileged, the Appeal Division Panel correctly identified the legal principles to be considered in determining the issue, relying on the four Wigmore criteria, as set out by the Supreme Court of Canada in Slavutych v. Baker.[^72] Those four criteria are as follows:

(1) The communications must originate in a confidence that they will not be disclosed.

(2) This element of confidentiality must be essential to the full and satisfactory maintenance of the relation between the parties.

(3) The relation must be one which in the opinion of the community ought to be sedulously fostered.

(4) The injury that would inure to the relation by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation.[^73]

[77] Applying the first three of those principles to the nature of the PAC Memorandum and the circumstances in which it was created and used, is a question of mixed fact and law. In my view, the Appeal Division Panel committed no palpable error in that analysis.

[78] The fourth criterion requires the weighing of the injury that would inure to the Law Society if PAC Memoranda were not protected from disclosure to the benefit that would be gained if it was disclosed. This is a question of mixed fact and law, but is also the kind of decision-making to which greater deference is typically given by the appellate court. That said, in conducting the weighing process, it is necessary for the tribunal to apply the correct law, which includes relevance. As I have already indicated, given that the PAC Memorandum is not relevant to the central issue in the proceeding, the balancing exercise at the fourth step, is properly balanced in favour of non-disclosure.

[79] I do not necessarily agree with the Appeal Division Panel’s conclusion that the Law Society did not waive any privilege attaching to the PAC Memorandum. In my view, by making representations as to what was or was not contained in the PAC Memorandum, counsel for the Law Society may well have waived the privilege, at least in part. However, given that the PAC Memorandum is irrelevant, it does not matter whether privilege was waived. Irrelevance, standing alone, is sufficient to deny production.

[80] Finally, on the issue of fairness, I again part company somewhat with the conclusion of the Appeal Division Panel. In my view, it is fundamentally unfair for the Law Society to resist production of a document by referring to its nature and contents during argument, without there being some evidence before the tribunal. How can counsel for Mr. Watson respond to such arguments without having the document itself? Counsel for the Law Society could have filed affidavit material about the general nature of the PAC Memorandum and its purpose, or a redacted version removing advice and opinion could have been filed. However, given that I have found the memorandum to be irrelevant to the question of costs, there is no overall unfairness for Mr. Watson.

[81] Finally, because of references in the reasons of the Hearing Division and Appeal Division panels to the content of the PAC Memorandum, I had concerns that the tribunal members had the PAC Memorandum, but it had not been given to counsel for Mr. Watson. In my view, this would raise issues of procedural fairness. I raised this issue with counsel during the argument of this appeal. Subsequently, counsel provided a joint written submission to this court confirming that the PAC Memorandum had not been provided to any of the panels. That resolves my concerns.

[82] Accordingly, I conclude that there is no issue of procedural fairness or natural justice requiring the production of the PAC Memorandum to Mr. Watson.

G. ANALYSIS: ISSUES OF FAIRNESS IN THE CONDUCT OF THE INVESTIGATION AND POSITIONS TAKEN BY THE LAW SOCIETY DURING THE MERITS PROCEEDING

Position of the Appellant

[83] Mr. Watson argues that the Law Society, through its investigator and in-house legal counsel, failed to adhere to important principles of procedural fairness and natural justice in the course of the investigation and the initial stages of the Merits Hearing. He alleges that the investigation was one-sided and focused only on finding support for Ms. Sweeny’s allegations, rather than searching for the truth in an even-handed manner. Even after the PAC had ordered a hearing, the Law Society, through its counsel, failed to make complete disclosure, necessitating motions for production by Mr. Watson before and during the Merits Hearing, all of which were decided in his favour.[^74] There is considerable support for Mr. Watson’s position in the record before the tribunals and before this court.

Nature of the Duty

[84] It is well-settled that the Law Society has a duty to deal fairly with complainants, to investigate their complaints thoroughly, and to take action against any member’s wrongdoing for the protection of the public. However, the Law Society also has an obligation of fairness to any member against whom a complaint is filed, recognizing the seriousness of any negative finding to the career and livelihood of that member. Investigators and counsel for the Law Society do not stand in an adversarial position to the member against whom proceedings are brought, but rather have a duty to act fairly and impartially, more akin to the function of the police and Crown prosecutor in a criminal matter, than to private combatants in civil litigation. As stated by Dickson J. (as he then was) in Ringrose v. The College of Physicians and Surgeons (Alberta):

The provision contained in The Medical Profession Act, R.S.A. 1970, c. 230, permitting a degree of overlapping between the council and the discipline committee, does not justify overlapping between the discipline committee and the executive committee. I think that, to avoid criticism, reliance should be placed upon such an overlapping provision as infrequently as the practicalities of the situation permit, since there rests upon the governing bodies of the professions in the exercise of their statutory disciplinary powers the duty to be scrupulously fair to those of their members whose conduct is under investigation and whose reputations and livelihood may be at stake. That is not to say that a profession should be slow to discipline. On the contrary, the public interest and the integrity of the profession may require immediate and stern action against a transgressor. But the investigation of the alleged breach, and the steps taken to determine culpability, must be such that justice is manifestly seen to be done, impartially and, indeed, quasi-judicially.[^75] [Emphasis added]

[85] Unfortunately, in this matter the Law Society’s investigator and its in-house counsel at times failed to adhere to this standard. In particular, their approach appeared to be fixated on finding support for Ms. Sweeney’s claims, rather than towards testing their truth and the truth of explanations put forward by Mr. Watson.

Conduct and Positions Taken by Counsel

[86] I will deal first with statements made by the Law Society’s in-house counsel both in writing and in oral submissions to the tribunal, which demonstrate that this was the approach taken. Those statements include the following:

• The other principle that is important to note is that the Law Society does not have an obligation to unearth every possible piece of evidence. Our obligation is to hand over the fruits of the investigation, and we have to be reasonably diligent to obtain all of the evidence we seek to rely on in support of the particulars we are alleging. Otherwise, when we go to Proceedings Authorization Committee, they are not going to be satisfied there is sufficient evidence to authorize a conduct allegation, and that is at our peril if we don’t do that.

• But it is not the Law Society’s obligation to conduct every possible inquiry. I would suggest to you that our duty to inquire is to make reasonable efforts to obtain evidence that supports the allegations that we are advancing in the Notice of Application.

• I would not agree, and I am not sure Mr. Moore is asserting this, but perhaps impliedly, that there was some obligation on the Law Society to pursue some of these inquiries which have resulted in his requests for productions from Ms. Sweeny. I strenuously object if that is his assertion because the majority of the inquiries that Mr. Moore is making, or requests for production I would suggest to you, related to Ms. Sweeney’s credibility, which he is entitled to explore, or relate to matters, as he said yesterday, to affirm his defence. They are documents he is seeking to obtain to further his defence.

• They are not documents that the Law Society should have obtained at first instance to support the allegations in the Notice of Application.

[87] This was a position Ms. Worley continued to take at the Merits Hearing. One of Ms. Sweeney’s allegations, which was supported in Mr. DiPietro’s investigation report, was that Mr. Watson was never entitled to any remuneration, and that the $33,000 he retained personally from monies owing to IPAFA (which flowed through his trust account), amounted to theft. Mr. Watson had provided cash flow projections showing $40,000 payable to him. Ms. Sweeney’s explanation, which the Law Society investigator and counsel accepted, was that they were merely projections and did not reflect any actual agreement to pay Mr. Watson. Prior to the hearing, counsel for Mr. Watson requested the actual financial and accounting records of the company, which was refused by Ms. Worley on the grounds that it was “irrelevant”. The hearing commenced. In her evidence in chief, Ms. Sweeney again made reference to the cashflow spreadsheets being merely projections and not proof of any agreement to pay Mr. Watson. Elsewhere in her evidence she made reference to the company’s QuickBooks, which would record payables and receivables. Mr. Moore, for Mr. Watson, renewed his request for the financial and accounting records. Again, Ms. Worley objected, stating that those documents were irrelevant and characterizing the request as a fishing expedition. The First Hearing Panel disagreed with that characterization and directed production. The following comments from Board Chair Ross in the course of argument on that issue are illuminating:

THE CHAIR: Let me voice my concern, and I haven’t talked to my fellow panel members. It is this: Your own witness has said, “I don’t want to make a mistake here. This is, basically, my working document, my moving target, my wish list.” It is very clear they are not her actual accounting books and records. They are a tool she uses in management of a project and in the deployment of resources and people, and whether she can afford to pay for those.

They are not books and records, and as I understand it, the issue about money, from whence it came and where it went to, is strongly in issue in this case. I think it is only appropriate that the books and records she appears to be referencing should be made available to Mr. Moore and his client. It strikes me as logical, and I am not, in the middle of a hearing, going to force him to spend money bringing a motion for a simple disclosure request that is confined to her books and records.

THE CHAIR: It is particularly relevant, Ms. Worley, when you see under this cash flow document that Mr. Watson was to receive $40,000, and if that is not actually what he received and the books and records show that he actually was paid or not paid, then the books and records are relevant and probably more reliable evidence than the cash flow. To this Panel, and I think I am speaking fairly on behalf of my colleagues here, our job is not to stand in the way of the fair exchange of disclosure. Our job is to make sure we are not off on a fishing expedition into areas that are none of our business related to the witness’s businesses and projects.

On the other hand, our duty is to ensure that fairness is done between the parties: fairness to the Law Society, and fairness to the lawyer who is under charge here. If his counsel - - experienced counsel, I think - - is saying he needs those documents and that next week sometime is going to be satisfactory - - and he will have a better idea after Friday when that is - - then that request, if it is reasonable and relevant, ought to be simply dealt with without a lot more discussion about it. That is the view of the Panel.

[88] Notwithstanding this exchange, Ms. Worley continued to maintain that the QuickBooks were not relevant to the hearing. In a letter to Mr. Moore dated May 11, 2011, Ms. Worley wrote:

I have now reviewed your extensive letter regarding the QuickBooks produced to you for inspection in response to your request set out in your letter of April 28, 2011. I am in the process of discussing your letter later with Joe DiPietro, who has an accounting expertise.

As discussed, we disagree about the relevance of these QuickBooks. You maintain that Mr. Watson has an entitlement to $40,000 by virtue of the cash flow projection and that this provides him with a defence to the allegations of misappropriation if he can establish that he was entitled to some money from IPAFA. In my view, even if a debt to Mr. Watson was borne out by the QuickBooks, it would not constitute a defence to the allegation of misappropriation as it would not provide him with the authorization to handle the trust money in the manner of which he did. At best, it would provide him with some evidence of mitigation to assist him on the issue of penalty.

[89] Even at this juncture, Ms. Worley failed to appreciate how the official books of the company showing a debt to Mr. Watson for $40,000 could be relevant to a charge that he misappropriated $33,000. In her view, this was relevant only to penalty. Since the charge of misappropriation carries with it a requirement that the person intended to take what was not lawfully his, this position is puzzling to say the least. The Law Society Hearing Panel confirmed in Law Society of Upper Canada v. Norma Jean Walton[^76] that the correct definition of “misappropriation” was as set out in an earlier Hearing Panel decision in Law Society of Upper Canada v. Reiten, which states:

[47] “Misappropriation” refers to a deliberate (i.e., knowing) taking with a dishonest intention, usually theft, or fraud or some other serious wrong. Such allegations are among the most serious that can be brought. The usual consequences – disbarment, or permission to resign, subject to unusual circumstances such as a small amount, the absence of loss, medical or psychological evidence – are commensurate with that specific intent. They do not form a rule, but rather reflect the experience of the Bench year after year, case after case.[^77]

[90] In the result, Mr. Watson was required to bring a motion to get the production he sought. He was successful in obtaining an order for production, but then had to retain an expert to review the financial records. This not only resulted in considerable expense, but also delay of the proceedings. However, the result was fruitful. From these records, the expert retained by the defence ascertained that the accounting books and records of IPAFA and EPP had recorded debts to Mr. Watson exceeding the amount he was alleged to have misappropriated, and further that the records had subsequently been altered to hide those debts.[^78]

[91] This approach was apparent not only during the hearing, but prior to its commencement, particularly with respect to disclosure. It is clear that the disclosure obligations of the Law Society in cases of this nature are governed by the principles established by the Supreme Court of Canada in Stinchcombe.[^79] The Court held in Stinchcombe that the Crown must disclose all “relevant material whether it is inculpatory or exculpatory” and that the duty applies to everything in the Crown’s possession unless it is “clearly irrelevant.”[^80] Where there is a “reasonable possibility” that the materials “might be of use to the defence” they must be disclosed.[^81] This has been described as a very low threshold.

[92] The Ontario Divisional Court has emphasized the importance of disclosure to procedural fairness in professional discipline proceedings, as follows:

The importance of full disclosure to the fairness of the disciplinary proceedings before the Board cannot be overstated. Although the standards of pre-trial disclosure in criminal matters would generally be higher than in administrative matters (See Biscotti et al. v. Ontario Securities Commission, supra), tribunals should disclose all information relevant to the conduct of the case, whether it be damaging to or supportive of a respondent's position, in a timely manner unless it is privileged as a matter of law. Minimally, this should include copies of all witness statements and notes of the investigators. The disclosure should be made by counsel to the Board after a diligent review of the course of the investigation. Where information is withheld on the basis of its irrelevance or a claim of legal privilege, counsel should facilitate review of these decisions, if necessary. The absence of a request for disclosure, whether it be for additional disclosure or otherwise, is of no significance. The obligation to make disclosure is a continuing one. The Board has a positive obligation to ensure the fairness of its own processes. The failure to make proper disclosure impacts significantly on the appearances of justice and the fairness of the hearing itself. Seldom will relief not be granted for a failure to make proper disclosure. For comparable principles in the context of criminal prosecutions see M.H.C. v. The Queen (1991), 1991 94 (SCC), 63 C.C.C. (3rd) 385 (S.C.C.); R. v. Stinchcombe (1991) 1991 45 (SCC), 68 C.C.C. (3rd) 1 (S.C.C.); R. v. Egger (1993), 1993 98 (SCC), 82 C.C.C. (3rd) 193 (S.C.C.); R. v. McAnespie (1993), 1993 14716 (ON CA), 82 C.C.C. (3rd) 527 (Ont. C.A.); R. v. Hutter (1993), 1993 8478 (ON CA), 16 O.R. (3rd) 145 (Ont. C.A.); R. v. L.A.T. (1993), 1993 3382 (ON CA), 84 C.C.C. (3rd) 90 (Ont. C.A.); R. v. T (1993), 14 O.R. (3rd) 378 (Ont. C.A.) and "The Report of the Attorney General's Advisory Committee on Charge Screening, Disclosure and Resolution Discussions" at pp. 143-273 prepared by The Honourable G. Arthur Martin, O.C., O.Ont., Q.C. LL.D.[^82]

[93] In my view, the position taken by Law Society counsel to disclosure, both during and before the hearing, is at odds with these principles. Although the hearing was scheduled to commence in July 2010, the discovery of an inadvertent error in failing to disclose a significant quantity of the Investigator’s file resulted in a one-month adjournment. Upon receiving the initial disclosure, counsel for Mr. Watson learned that the disclosure did not include all of the relevant material in particular categories, but rather only some documents selected by Ms. Sweeney. He requested that the full materials be provided, and some but not all, were requested by Law Society counsel. Eventually, in September 2010, Ms. Worley advised Mr. Moore that the Law Society now had four banker’s boxes full of documents and had reviewed all of them and determined there was “nothing pertinent” in them. In fairness to Ms. Worley, she did advise counsel for Mr. Watson that he could review the documents himself if he wished, and he took advantage of that opportunity. The wealth of relevant material he found in those four boxes is staggering. The relevant information found in these documents is summarized in approximately six pages of text in the Written Submissions provided to the Appeal Tribunal and were part of the record before this Court.[^83] I will not set it out in detail here. They included many documents authored by Ms. Sweeney herself corroborating Mr. Watson’s position that he held a senior executive position in both EPP and IPAFA, with significant authority in financial matters. In those written submissions, Mr. Moore submitted, “It is incomprehensible that the LSUC could have considered that there were no ‘pertinent’ documents in the Four Bankers Boxes – that is, unless the LSUC was only looking for documents that supported Sweeney’s allegations and that it intended to rely upon in presenting the case against Watson.” I agree entirely with that assessment.

Conduct of Investigation

[94] Mr. Watson argues that the Law Society failed in its duty to provide procedural fairness at the investigative stage by refusing to interview witnesses suggested by Mr. Watson, and failing to acquire all of the relevant documents in order to assess the reliability of the allegations made by Ms. Watson. Further, he submits that the investigation was one-sided in that the Law Society saw its role as finding evidence to support the complainant’s allegations and avoiding any assessment of her credibility.

[95] The most glaring example of this attitude can be found in the timing of the investigator’s final report, which was filed on March 6, 2009, almost a month before the investigator’s final intensive three-hour interview with Mr. Watson. Many of the negative conclusions made in the report about Mr. Watson’s conduct were not even put to him in that interview in order to obtain his explanation. Other information and documents he provided were never put to the complainant, and no amended report or supplementary report was ever filed. While it is clear that the other investigation was still ongoing, the fact that a final report would be filed without interviewing the member about many of the allegations says a lot about the general approach to the investigation.

[96] The position taken by the Law Society on matters relating to credibility betrays the same fundamental misapprehension of its role at the investigation stage (and is consistent with the position repeatedly taken by in-house counsel as referred to above). Essentially, the position taken was that there was no obligation to explore and assess the credibility of the complainant, relying on a directive of the Law Society, adopted by Convocation, entitled “Standards for the Authorization of Sexual Impropriety and Related Issues.” Therefore, the investigator did not interview witnesses suggested by Mr. Watson, who were deemed to be relevant only to credibility. Further, counsel took the position that documents contradicting what Ms. Sweeny was saying would not be sought, nor produced.

[97] I have great difficulty with this position. The policy for dealing with credibility issues in sexual impropriety cases is a sound one. In such cases, there are rarely witnesses to the offending behaviour and they typically involve a “he said/she said” scenario. In that situation, complainants should not be cross-examined vigorously at the investigation stage, nor should they be disbelieved merely because there is no corroboration for their story. Those kinds of credibility issues are not to be determined by the Law Society staff, nor by the PAC at the stage of determining whether to have a hearing. By their very nature, they require a hearing. However, this was not such a case. This was a documents case. The allegations against Mr. Watson related to matters of fraud, theft, and corporate responsibilities. Testing the veracity of the complainant by reference to corporate documents and communications between the parties is part of a competent investigation and must be undertaken for the investigation to accord with principles of procedural fairness. Merely taking the complainant’s word at face value without testing it by reference to documents other than the ones she herself provided, is not consistent with procedural fairness.

[98] Another glaring example of the unfairness resulting from this approach is the manner in which the investigator dealt with Ms. Sweeny’s allegation that Mr. Watson had fraudulently altered the Articles of Incorporation of IPAFA by deleting some shareholders. She produced and attached to her complaint a version of the Articles of Incorporation that did appear to have been doctored and deletions having been made. She alleged that Mr. Watson had done this and filed it with the government. Astoundingly, the Law Society investigator did not take the very basic step of doing a corporate search. Had he done so, he would have learned that this allegedly falsified version of the Articles of Incorporation had in fact been filed with the appropriate government Ministry by Ms. Sweeney herself, before she had even met Mr. Watson.

[99] This was one of the three allegations against Mr. Watson that amounted to criminal conduct. Indeed, Ms. Sweeney also went to the police with these allegations and criminal charges were also filed against him, although they were dropped by the Crown prior to the preliminary hearing. The other two allegations amounting to criminal conduct were also disproven by documentary evidence. One such allegation was that Mr. Watson had forged Ms. Sweeney’s signature on an application by IPAFA to Liquid Capital for a loan. However, the documentary evidence proved that Ms. Sweeney knew about and had approved the loan application and had specifically, in writing, given Mr. Watson her authority to affix her electronic signature to one of the documents. With respect to this issue, the investigator did put to Ms. Sweeny the documents contradicting her complaint about the forgery. He accepted her explanation that she was extremely tired and confused at the time and had simply made a mistake. The third allegation of criminal conduct was Ms. Sweeny’s accusation that Mr. Watson was an unpaid volunteer with the company and had no entitlement to the $33,000 he paid to himself out of monies flowing to the company. This was also proven to be untrue as a result of documents produced only as a result of persistent efforts by Mr. Watson’s counsel over the objections of counsel for the Law Society. The documents eventually produced contained numerous references to Mr. Watson’s role as a business executive with extensive decision-making authority, including in financial matters.

[100] At the outset, Ms. Sweeny had maintained that the only role Mr. Watson played was as a lawyer for IPAFA and EPP, and that he had no decision-making authority. She was very clear about that in the beginning. In an email to the police on November 8, 2008, she stated that Mr. Watson “had nothing to do with that company other than in the capacity as a lawyer.”[^84] Similarly, in an email to Mr. DiPietro on December 24, 2008, she stated that Mr. Watson “was not part of the IPAFA decision making process. He had no authority in that company, nor was he invited to make decisions for IPAFA.”[^85]

[101] Although Mr. Watson did not have the actual complaint against him until well into the investigation and was unaware of many of the details of Ms. Sweeny’s allegations right up to the time of the hearing, he was aware from the beginning that she was saying he acted solely as a lawyer and denied that he was a business partner. He made his position clear to Mr. DiPietro right from the beginning that he was in fact a business partner, and never acted as lawyer for any of the companies. He provided Mr. DiPietro with many documents, some of them authored by Ms. Sweeny herself, referring to him as a “business partner,” “VP Corporate”, and “CEO of EPP.” I was only after Mr. DiPietro put some of these to Ms. Sweeney that she began characterizing the relationship with Mr. Watson as being a “grey area” in which sometimes he acted as an executive and sometimes as a lawyer. Mr. DiPietro seems to have readily accepted this explanation and referred to the fact that Mr. Watson had previously been disciplined and subjected to a short period of license suspension for not being clear about the lines between his role as a lawyer and his business dealings (in a case that had nothing to do with Ms. Sweeney). Subsequently, Mr. DiPietro asked Ms. Sweeny on at least two occasions for documents supporting her position that Mr. Watson acted as a lawyer. He did not ask for all documents relating to any role played by Mr. Watson, nor did he seek documents to corroborate Mr. Watson’s version of his role, nor did he seek to examine the records of the company himself. It was only upon the production of the records sought by Mr. Watson, and records ordered produced by the tribunal that the truth of the matter emerged. The documents were replete with references to Mr. Watson’s role as a business executive with extensive decision-making authority, including in financial matters.

Conclusion: The Investigation Was Procedurally Unfair

[102] The case law with respect to deference on issues of procedural fairness and natural justice can be somewhat inconsistent in how the standard is described. Some cases refer to it as an issue to which the standard of correctness applies.[^86] Other cases hold that there is no standard, but that rules of procedural fairness and natural justice must be followed and findings on such issues are not entitled to deference.[^87] Regardless of how one approaches the issue, deference is not required in reviewing a decision about whether a proceeding accorded with principles of fairness.

[103] There is no issue with respect to the fairness of the hearing itself. However, in my opinion, the investigation stage, right up to the time of the hearing, was tainted by procedural unfairness. The investigation was one-sided, seeking to confirm the allegations made without approaching the issues with an open mind and looking for evidence to confirm and/or refute the positions taken by both sides. The approach to disclosure at the initial stages suffered from the same flaw. Counsel for the Law Society stated the Law Society’s position clearly multiple times, in writing and in oral submissions. That position is, quite simply, wrong.

[104] The Law Society frequently turned to its policy on complaints alleging sexual impropriety to explain its position in this case. I recognize the undesirability of Law Society staff and the PAC making their own assessments of a witness’ credibility in determining whether a complaint should proceed to a hearing. However, this must be distinguished from a duty to investigate a complaint and determine if there are documents or witnesses to confirm or deny the complainant’s version of events. Even in complaints of sexual assault, there is a duty to investigate both sides of the story. That is not the same thing as making findings of credibility. It is merely gathering evidence. To use the easiest and most obvious example from this case, Ms. Sweeney alleged that Mr. Sweeney fraudulently altered and filed with the government incorrect information about one of the companies. A procedurally fair investigation would have examined the truth of that allegation by looking at that documents themselves, not simply taking Ms. Sweeney’s word for it. Likewise, the complainant said that Mr. Watson was a volunteer and not entitled to any payment, whereas Mr. Watson said there was an agreement that he would be paid and this would be reflected in the accounting records of the company. That is not a simple issue of credibility that can be resolved without reference to the documents themselves. A fair investigation would examine the books and records of the company for the relevant period and determine whether they support or contradict the complaint’s version. Those things were not done in this case.

[105] Although I find that the investigation was procedurally unfair and one-sided, that is not to say that the investigator never asked Ms. Sweeney any questions to challenge her version of the events. On one or two points, he did do that, but he then accepted Ms. Sweeney’s explanations for the discrepancies found. I agree with the Second Costs Hearing Panel that the fairness of the investigation must be assessed without the benefit of hindsight. I also agree with the Panel’s findings that the amount of time Mr. DiPietro spent with Ms. Sweeney was “inadequate”, that his failure to do a corporate search was “inexplicable”, and that he “discounted” warnings from three witnesses and numerous documents that challenged the truth of Ms. Sweeney’s allegations. The Panel then went on to note that there were other problems raised by the analysis of Mr. Watson’s trust account and mortgage files and that even if Mr. DiPietro had pursued all the “red flags” noted by counsel for Mr. Watson, the hearing would still be warranted. The Panel also found that that it was “unfortunate” that Mr. DiPietro finalized his report before he conducted his final interview with Mr. Watson, but then held that nothing turned on that for purposes of the costs motion.

[106] The Second Costs Hearing Panel held that the comments made by the Law Society’s counsel “did not accurately reflect its obligations during the investigative phase,” were “troubling” and “could be indicative of an approach to the investigation that was one-sided,” but then went on to hold that they were not prepared to reach that conclusion based on those comments alone. With respect, those comments did not stand alone. They must be seen against the one-sided nature of the investigation, and the positions taken with respect to disclosure and credibility.

[107] It seems to me that the Panel’s analysis on this point merged two questions: (1) whether the investigation was unfair; and (2) whether the hearing was unwarranted. These may be related concepts, but they are not the same question. They should be separately analyzed and the connection between them determined. On the first question, on which there is no deference owed to the tribunal, I find that the investigation was procedurally unfair for the reasons I have stated above.

[108] If the conduct hearing had proceeded based entirely on this flawed investigation, and Mr. Watson was found to have committed any of the breaches with which he was charged, I would likely have set aside those findings. However, due to the diligent efforts of Mr. Watson’s counsel, that did not happen. As a result of his dogged efforts to obtain the relevant documents, to have those documents analyzed by a financial expert he retained, and to use them in cross-examining the complainant, her evidence was completely undermined and Mr. Watson was exonerated. Given that result, the question now is whether the whole proceeding was “unwarranted” such that Mr. Watson should be entitled to costs.

H. ANALYSIS: ENTITLEMENT TO COSTS OF THE MERITS HEARING

Unwarranted Proceeding at the Outset

[109] The Appeal Division Panel did a thorough analysis of the legal principles to be applied in determining whether a proceeding was unwarranted from the outset. There is no legal error in that analysis.

[110] Applying those legal principles to the facts of the case and determining whether the proceeding was unwarranted from the outset is a question of mixed fact and law. This court is only entitled to intervene if there is a palpable and overriding error. Because the Appeal Division Panel applied a reasonableness standard to the Second Costs Hearing Panel’s decision, I will consider the latter decision applying the standard articulated in Vavilov.

[111] The Second Costs Hearing Panel recognized the flaws in the investigation, although stopping short of finding it to be procedurally unfair. However, it went on to find that even if the investigator had turned up all of this evidence during the investigation, the hearing would still be warranted because of some of the conduct of Mr. Watson (for example, holding himself out to be General Counsel to IPAFA in connection with the Liquid Capital loan and advising Samsung that he was a lawyer and that the contract funds would be deposited in a legal trust account for IPAFA). The Panel also determined that even if all the evidence had been obtained during the investigation, this was the kind of case in which the public interest required a hearing so that the allegations could be aired publicly and determined on their merits, which would enable credibility assessments to be made based on the evidence of the witnesses at the hearing. While I do not necessarily agree with that conclusion, it is rational and rooted in an assessment of the whole of the evidence. I see no overriding error that would warrant interfering with it.

[112] I do note that, in coming to this conclusion, both the Second Costs Hearing Panel and the Appeal Division Panel quoted the words of the Original Hearing Panel Chair about Ms. Sweeney’s credibility having been eroded through the skill of counsel and having suffered “death by a thousand cuts.” In my opinion, it was inappropriate for the Original Hearing Panel to have provided reasons once it was determined that they could not come to a decision. Their role was functus. In that context, the “reasons” provided by Chair Ross are of no more import than the opinion of any other person in attendance at the hearing. It is not a decision and should not be relied upon. However, it does not appear that the Second Costs Hearing Panel actually relied upon those reasons, but rather came to its own conclusion, which happened to coincide with hers, and so they used the handy quote in their concluding paragraphs. I do not consider that this reference so tainted the finding as to whether the hearing was “unwarranted” as to amount to a palpable or overriding error. It is, however, a good illustration of the problems that can arise when “reasons” are provided by panel members in the absence of any decision by that panel.

Unwarranted at Any Stage of the Proceeding

[113] Having concluded that the hearing was warranted from the outset, the Second Costs Hearing Panel went on to conclude that there was no one point during the hearing where it could be said that there was “no longer any reasonable prospect of success.” Given the previous finding that this was the kind of case that had to be tried and the credibility of the witness unraveled piece by piece, I see this as a natural and related conclusion. There is no reviewable error.

Costs Due to Undue Delay, Negligence, or Other Default by the Law Society

[114] The Second Costs Hearing Panel held that Mr. Watson was not entitled to any costs under Branch 2 of r. 25.01, which relates to whether the Law Society wasted costs by undue delay, negligence, or other default during the hearing. The focus of Mr. Watson’s claim for costs under this heading was on the myriad of disclosure issues that delayed the hearing.

[115] The Second Costs Hearing Panel acknowledged that the initial hearing date had to be adjourned because of the Law Society’s failure to produce a large portion of Mr. DiPietro’s file, but excused this as being “inadvertent.”

[116] The Second Costs Hearing Panel also acknowledged that the position taken by the Law Society with respect to the relevance of certain documents “appears to have been wrong” but that is not the same as saying those positions were unreasonable. It held that just because the Law Society advanced a losing argument did not mean that there was a wasting of costs or other default. The Panel also pointed out that although some production was initially resisted, the defence eventually got the materials well in advance of the hearing.

[117] Finally, the Second Costs Hearing Panel laid some of the blame at the feet of Ms. Sweeney and was also critical of counsel for Mr. Watson for not having compelled production from Ms. Sweeney earlier than he did. The Panel concluded, “In short, while the history of the proceeding suggests that at times the Law Society was less than responsible to the Lawyer’s requests, we cannot find that it had no defensible legal basis for the positions it took, or that it wasted identifiable costs by an unreasonable tactic.”

[118] The Appeal Division Panel found all these conclusions to be reasonable.

[119] I disagree. These findings by the Second Costs Hearing Panel were neither reasonable nor defensible. The fundamental underlying error is the failure of the Second Costs Hearing Panel to recognize the inherently flawed nature of the investigation. As I have previously noted, this is a separate issue from whether the proceedings would have been warranted even if a full and fair investigation had been conducted. The Second Costs Hearing Panel committed a legal error in finding that there was no breach of the duty of fairness in the investigatory stage of the proceeding, and this infected the whole of its reasoning on the issue of costs caused by delay or other default.

[120] Given the failure of the Law Society’s investigator and its legal counsel to understand the extent of the duty of fairness owed to Mr. Watson in the investigation stage (which was acknowledged by the Panel), much of the investigation had to be done by Mr. Watson’s counsel at Mr. Watson’s own expense. The Law Society obstructed reasonable requests for production of documents resulting in protracted delays and sometimes contested motions, in all of which the Law Society was unsuccessful. This is not a situation in which counsel took a “defensible” position that turned out to be a losing argument. The position taken was fundamentally flawed and inconsistent with the Law Society’s duty of fairness.

[121] The Second Costs Hearing Panel does not appear to have appreciated that costs awarded under this heading might not be an “all or nothing” proposition. It may well be that Mr. Watson does not recover costs of the hearing itself but could be entitled to the costs wasted on fighting about disclosure that should have been provided as a matter of course, or costs thrown away because of the delays occasioned by the failure to make timely disclosure.

[122] With respect to the delay caused by the failure to disclose a substantial part of the investigation file, I have no understanding of how a finding that this was “inadvertent” equates to a determination that it wasted no costs and caused no delay. In this regard, I find the Panel mis-instructed itself on the appropriate test, which does not require deliberate wrongdoing by the Law Society.

[123] I also note that Mr. Watson was required to bear the expense of analyzing documents finally procured by his counsel, over the objections of the Law Society, and used to great effect in the cross-examination of Ms. Sweeney. This ultimately resulted in all charges being dismissed against Mr. Watson without him being called upon to respond. Had those documents been obtained and analyzed by the Law Society investigator, much time and expense would have been averted. This does not appear to have been even considered by the Panel, which is a reviewable error.

[124] In my view, these are palpable and overriding errors because of the failure of the Panel to recognize the implications of the flawed nature of the investigation and the improper positions taken by counsel and the investigator prior to the hearing itself.

[125] Accordingly, I would set aside that aspect of the findings and direct a new hearing before a differently constituted panel to determine the issue of wasted costs due to delay, negligence, and other default by the Law Society, in light of this court’s findings with respect to the procedural fairness issues. In particular, and without limiting the panel’s ability to consider other relevant factors, the new panel should take into account:

• this court’s findings that the Law Society investigation was procedurally unfair to Mr. Watson;

• this court’s finding that the Law Society’s position with respect to disclosure was not simply wrong, but unreasonable;

• the extent to which the Law Society’s position on disclosure caused delay to the hearing, and any additional costs caused by that;

• the extent of the costs to Mr. Watson as a result of dealing with disclosure issues prior to, and during, the hearing;

• the additional costs to Mr. Watson in hiring others to conduct investigations and financial analysis not done by the Law Society; and,

• the overall equities of the situation.

I. ANALYSIS: COSTS OF THE ABORTIVE ORIGINAL COSTS HEARING

[126] The Second Costs Hearing Panel awarded no costs to Mr. Watson. Having found he had no entitlement to costs whatsoever, the Panel was of the view that nothing further needed to be said about the costs of the abortive first costs hearing. I agree with the Appeal Division Panel that, in this context, the reasons are adequate. If no costs are recoverable for the second hearing, any costs payable for the first hearing would be entirely discretionary based on the good will of the Law Society and not on any legal entitlement to same.

[127] However, that conclusion should be re-examined if the new hearing panel determines that some costs are recoverable under Branch 2 of r. 25.01. In particular, the panel may consider whether the Second Costs Hearing would have been necessary, but for the delay caused by the flawed investigation or failure to make proper disclosure. In other words, if the hearing had proceeded as originally scheduled, would the full panel still have been intact and able to render a decision?

J. ANALYSIS: COSTS AWARDED TO THE LAW SOCIETY BY THE SECOND COSTS HEARING PANEL

[128] I see no basis for interfering with the award of costs to the Law Society in the amount of $12,000 for the motion for disclosure of the PAC Memorandum.

[129] I take a different approach to the costs awarded to the Law Society in the amount of $40,000 for the Second Costs Hearing itself. Costs at that stage are discretionary, and governed by a number of relevant factors set out by the Second Costs Hearing Panel in its decision as follows:

a. the amount involved in the proceeding;

b. the complexity of the proceeding;

c. the importance of the issues;

d. the duration of the hearing;

e. the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding;

f. whether any step in the proceeding was improper, vexatious or unnecessary, or taken through mistake or excessive caution;

g. the ability of the party to pay a costs award; and

h. any other matter relevant to the assessment of costs.

[130] I agree that those are the appropriate factors to consider. The Second Costs Hearing Panel noted that the Law Society’s claim was for costs in the amount of $81,073 inclusive of HST, which the Law Society claimed was justified as the motion raised significant issues about the integrity of the law Society’s investigation, which required a vigorous defence, and the precedent-setting amount sought in costs by Mr. Watson ($900,000).

[131] The Second Costs Hearing Panel awarded costs of only $40,000 to the Law Society for the second costs hearing based on “broader questions of fairness” including the “enormous cost burden” Mr. Watson has had to bear for a proceeding in which he was entirely successful and the considerable costs he incurred for the first costs motion which could not be concluded through no fault of either party.

[132] To these considerations I would add that the Law Society has not been successful in defending the integrity of its investigation and has not been wholly successful on the costs motion itself. Further, the Law Society voluntarily paid $105,296.23 to Ms. Sweeney to compensate her for costs incurred in retaining counsel with respect to a motion for intervenor status (which it would appear she lost) and for her counsel’s involvement in production and disclosure issues.

[133] Accordingly, I would set aside that part of the order awarding costs of $40,000 to the Law Society for the costs hearing. Depending on the result reached by the new panel, there may be a basis to award Mr. Watson some costs with respect to the Second Costs Hearing.

K. ANALYSIS: COSTS AWARDED BY THE APPEAL DIVISION PANEL

[134] The Appeal Division Panel made no order with respect to costs but directed that submissions could be made in writing if the Law Society sought costs. Given the result, I would order that Mr. Watson is entitled to costs before the Appeal Division Panel in an amount to be either agreed upon by the parties or fixed by the Panel, after submissions in whatever form directed by the Panel.

L. CONCLUSION AND COSTS OF THIS APPEAL

[135] The decision of the Appeal Division Tribunal is set aside. A new hearing is directed on the issue of whether Mr. Watson is entitled to costs of the Law Society’s proceedings against him based on Branch 2 of r. 25.01. That new panel shall also determine whether Mr. Watson is entitled to: any costs for the Abortive First Costs Hearing; any costs for the Second Costs Hearing; and the costs of the new hearing before it.

[136] As for the costs of this appeal, at the argument before us counsel agreed that the appropriate award for costs would be $17,500 all-inclusive to whichever party was successful. Mr. Watson has been significantly, although not entirely, successful on this appeal. In light of that result and the other equities of the situation (as referred to above), I would award costs of $17,500 to Mr. Watson, payable by the Law Society.

Molloy J.

I agree _______________________________

McWatt A.C.J.S.C.J.

I agree _______________________________

Chalmers J.

Released: March 2, 2023

CITATION: Watson v. Law Society of Ontario, 2023 ONSC 1154

DIVISIONAL COURT FILE NO.: 192/18

DATE: 20230302

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

MCWATT A.C.J.S.C.J., MOLLOY AND CHALMERS JJ.

BETWEEN:

RICHARD KEITH WATSON

– and –

THE LAW SOCIETY OF ONTARIO

REASONS FOR JUDGMENT

Released: March 2, 2023

[^1]: See Law Society of Upper Canada v. Richard Keith Watson, 2013 ONLSTH 60 (“Reasons Dismissing Charges”).

[^2]: See Law Society of Upper Canada v. Watson, 2016 ONLSTH 136 (“Reasons Dismissing Watson’s Motion for Production”).

[^3]: See Law Society of Upper Canada v. Watson, 2016 ONLSTH 135 (“Reasons Dismissing Watson’s Motion for Costs”).

[^4]: See Law Society of Upper Canada v. Watson, 2016 ONLSTH 186 (“Reasons Granting Costs to the Law Society”).

[^5]: See Watson v. Law Society of Upper Canada, 2018 ONLSTA 3 (“Reasons Dismissing the Appeal of the Second Hearing Panel Decisions”).

[^6]: Law Society Act, R.S.O. 1990, c. L.8.

[^7]: Ibid, ss. 33, 34(1) and 49.20.

[^8]: [Footnote missing in original]

[^9]: Ibid, s. 49.21(2).

[^10]: Passed by Convocation in 2009 and updated May 1, 2022.

[^11]: Law Society Act, s. 49.32.

[^12]: Ibid, s. 49.35(1).

[^13]: Ibid, s. 49.35(2).

[^14]: Ibid, s. 49.38(b).

[^15]: [Footnote missing in original]

[^16]: Reasons Dismissing Charges, at para. 9.

[^17]: See Law Society of Upper Canada v. Watson, 2014 ONLSTH 75.

[^18]: Statutory Powers Procedure Act, R.S.O. 1990, c. S.22.

[^19]: See Law Society of Upper Canada v. Watson, 2015 ONLSTH 119 (“Reasons for the Panel’s Failure to Arrive at a Unanimous Decision”).

[^20]: Ibid, at paras. 15-16.

[^21]: Ibid, at paras. 36-37.

[^22]: Ibid, at paras. 26-27.

[^23]: Ibid, at para. 44.

[^24]: See Law Society of Upper Canada v. Watson, 2015 ONLSTH 189, at paras. 35-37.

[^25]: The motion was dismissed in April 2016. The reasons were delivered subsequently on August 10, 2016.

[^26]: See Reasons Dismissing Watson’s Motion for Production, at para. 9.

[^27]: Ibid, at para. 10.

[^28]: Ibid, at para. 18.

[^29]: Ibid, at para. 19.

[^30]: Ibid, at para. 20.

[^31]: Ibid, at paras. 71-88.

[^32]: Ibid, at para. 92, citing Law Society of Upper Canada v. Igbinosun, 2012 ONLSHP 31, at para. 8. See also Reasons Dismissing Watson’s Motion for Production, at paras. 89-91.

[^33]: See Reasons Dismissing Watson’s Motion for Costs, at paras. 41-66.

[^34]: Ibid, at paras. 73-76.

[^35]: Ibid, at paras. 90-92.

[^36]: Ibid, at para. 106.

[^37]: Ibid, at para. 116.

[^38]: Ibid, at para. 111.

[^39]: Ibid, at para. 116.

[^40]: Ibid, at paras. 126, 129-30.

[^41]: Ibid, at para. 131.

[^42]: Ibid, at para. 133, citing Reasons for the Panel’s Failure to Arrive at a Unanimous Decision, at paras. 26-27.

[^43]: Ibid, at para. 134.

[^44]: Ibid, at para. 135.

[^45]: Reasons Granting Costs to the Law Society, at para. 7.

[^46]: Law Society of New Brunswick v. Ryan, 2003 SCC 20, [2003] 1 S.C.R. 247.

[^47]: Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190.

[^48]: Reasons Dismissing the Appeal of the Second Hearing Panel Decisions, at paras. 15-17, citing Ryan, at para. 55 and Dunsmuir, at para. 47.

[^49]: Ibid, at para. 14.

[^50]: Ibid, at para. 13.

[^51]: Slavutych v. Baker, 1975 5 (SCC), [1976] 1 S.C.R. 254.

[^52]: Reasons Dismissing the Appeal of the Second Hearing Panel Decisions, at paras. 67-68.

[^53]: Ibid, at paras. 18-22.

[^54]: Ibid, at paras. 23-27.

[^55]: Ibid, at para. 51.

[^56]: Ibid, at para. 50, citing Reasons Dismissing Watson’s Motion for Costs, citing Reasons for the Panel’s Failure to Arrive at a Unanimous Decision.

[^57]: Ibid, at para. 83.

[^58]: Vavilov, 2019 SCC 65, [2019] 4 S.C.R. 653.

[^59]: Ibid, at paras. 17, 33.

[^60]: Ibid, at para. 37; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 1.

[^61]: 2021 ONCA 255, 458 D.L.R. (4th) 603.

[^62]: Ibid, at para. 34.

[^63]: Khan v. Law Society of Ontario, 2022 ONSC 1951, at para. 93.

[^64]: Ibid, at paras. 72-76.

[^65]: Dell v. Zeifman Partners Inc., 2020 ONSC 3881 (Div. Ct.), at para. 42.

[^66]: Baker v. Canada (Minister of Citizenship and Immigration), 1999 699 (SCC), [1999] 2 S.C.R. 817. See also Longman v. Ontario College of Pharmacists, 2021 ONSC 1610, at para. 31; London (City of) v. Ayerswood Development Corp. (2002), 2002 3225 (ON CA), 167 O.A.C. 120 (Ont. C.A.).

[^67]: See R. v. Mohan, 1994 80 (SCC), [1994] 2 S.C.R. 9, at para. 18.

[^68]: R. v. Abbey, 2009 ONCA 624, 97 O.R. (3d) 330, at para. 83, per Doherty J.A.

[^69]: Ibid, at para. 82.

[^70]: Reasons Dismissing the Appeal of the Second Hearing Panel Decisions, at para. 64.

[^71]: Ibid, at para. 77.

[^72]: Slavutych v. Baker, 1975 5 (SCC), [1976] 1 S.C.R. 254.

[^73]: Slavutych, at para. 15, citing Wigmore on Evidence, 3rd ed., McNaughton Revision, 1961, vol. 8, at para. 2285.

[^74]: This does not include the motion for production of the PAC Memorandum, which was brought during the costs proceedings after the charges against Mr. Watson had been dismissed, and in which he was not successful.

[^75]: Ringrose v. College of Physicians and Surgeons (Alberta), 1976 172 (SCC), [1977] 1 S.C.R. 814 at 818. See also: W.D. Latimer v. Bray (1975), 1974 698 (ON CA), 6 O.R. (2d) 129; Baker v. Discipline Committee of the Law Society of Upper Canada (1999), 1999 19935 (ON SC), 42 O.R. (3d) 413 (Div. Ct.).

[^76]: Law Society of Upper Canada v. Norma Jean Walton, 2013 ONLSHP 110 at paras. 158 and 161.

[^77]: Law Society of Upper Canada v. Reiten, 2007 ONLSAP 7, 2007 ONLSAP 0007 at para. 47.

[^78]: Appeal Book, Vol. 2, Tab 44, para. 146; Exhibit 14 at Second Costs Hearing, at pp. 158-173 (Caselines pp. A3055-A3064)

[^79]: R. v. Stinchcombe, 1991 45 (SCC), [1991] 3 S.C.R. 326.

[^80]: Ibid at paras. 16 and 29.

[^81]: Ibid at para. 22.

[^82]: Markandey v. Ontario (Board of Ophthalmic Dispensers), [1994] O.J. No. 484 at para. 43.

[^83]: See Appeal Book, Volume 2, Tab 44, CaseLines pp. A584-A589.

[^84]: Watson October 2013 affidavit, Exhibit 54.

[^85]: Exhibit G at the Merits Hearing, p. 1126-1131.

[^86]: See Law Society of Upper Canada v. Marshall Stephen Kazman, 2008 ONLSAP 7, at para. 38; Parsons v. Komer, 2017 ONCA 407, 138 O.R. (3d) 357, at para. 33; Canada (Citizenship and Immigration) v. Khosa, 2009 SCC 12, [2009] 1 S.C.R. 339, at para. 43; Ellis-Don Ltd. v. Ontario (Labour Relations Board), 2001 SCC 4, [2001] 1 S.C.R. 221, citing D. J. M. Brown and J. M. Evans, Judicial Review of Administrative Action in Canada (loose-leaf), vol. 2, at para. 14:2300.

[^87]: See London (City of) v. Ayerswood Development Corp. (2002), 2002 3225 (ON CA), 167 OAC 120 (C.A.); Mission Institution v. Khela, 2014 SCC 24, [2014] 1 S.C.R. 502, at paras. 79, 89; Pickering Developments (401) Inc., et al v. The Corporation of the, 2019 ONSC 4322, at para. 18.