Echo Energy Canada Inc. v. Lenczner Slaght Royce Smith Griffin LLP et al.

[Indexed as: Echo Energy Canada Inc. v. Lenczner Slaght Royce Smith Griffin LLP]

104 O.R. (3d) 93

2010 ONCA 709

Court of Appeal for Ontario,

Rosenberg, Goudge and Feldman JJ.A.

October 27, 2010

Professions -- Barristers and solicitors -- Accounts -- Assessment -- New management of corporation seeking to have accounts of lawyers retained by former management assessed after accounts had been paid -- Application judge erring in finding that special circumstances did not exist -- Application judge erroneously looking at case from prospective of lawyers rather than client, failing to take into consideration evidence rebutting presumption that client accepted account as proper and reasonable, and relying on speculative theory that lawyers would not undertake similar work if they knew their accounts might be assessed when new management came in -- Application judge overlooking evidence that former directors may not have been acting in best interests of corporation and were indifferent as to how corporation's money was spent. [page94 ]

E Inc. and five of its directors retained two law firms, LSRSG and V & Co., to act for them in corporate litigation. Once some of the litigation was finished and another group had obtained control of E Inc., E Inc. sought to have the law firms' accounts assessed. Because the accounts had been paid, s. 11 of the Solicitors Act, R.S.O. 1990, c. S.15 required E Inc. to establish special circumstances. E Inc. also sought to refer the paid accounts of MT for assessment. MT had been retained by the former control group as E Inc.'s corporate lawyers. The application was dismissed. E Inc. appealed.

Held, the appeal should be allowed in part.

Per Rosenberg J.A. (Feldman J.A. concurring): The application judge erred in principle in several respects. He looked at the case from the perspective of the lawyers rather than the client. He failed to take into consideration evidence rebutting the presumption that the client accepted the account as proper and reasonable. He relied on a speculative theory that lawyers would not undertake this kind of work if they knew their accounts might be assessed when new management came in. He failed to consider evidence showing that E Inc. was not well served by those within the company tasked with decisions about the conduct of the litigation, including payment of the accounts. Specifically, he overlooked evidence suggesting that the former directors may not have acted in the best interests of E Inc. and were indifferent as to how E Inc.'s money was spent. Special circumstances existed regarding the accounts of LSRSG and V & Co. No special circumstances existed regarding the accounts of MT.

Per Goudge J.A. (dissenting): The application judge did not fall into the errors identified by Rosenberg J.A. and did not commit reversible error in concluding that E Inc. failed to establish the special circumstances required to justify the assessment of the LSRSG and V & Co. accounts.

APPEAL from the judgment of D.M. Brown J., [2010] O.J. No. 28, 84 C.P.C. (6th) 309 (S.C.J.) dismissing an application for an order referring the solicitors' accounts for assessment. [page95 ]

Cases referred to Andrew Feldstein & Associates Professional Corp. v. Keramidopulos, [2007] O.J. No. 3683, 160 A.C.W.S. (3d) 724 (S.C.J.); Cohen v. Kealey & Blaney, [1985] O.J. No. 160, 10 O.A.C. 344, 26 C.P.C. (2d) 211, 31 A.C.W.S. (2d) 436 (C.A.); Echo Energy Canada Inc. v. Challenge Gas Holding AB (2008), 2008 63183 (ON SC), 94 O.R. (3d) 254, [2008] O.J. No. 4843, 55 B.L.R. (4th) 243, 173 A.C.W.S. (3d) 638 (S.C.J.); Enterprise Rent-a-Car Co. v. Shapiro, Cohen, Andrews, Finlayson (1998), 1998 1043 (ON CA), 38 O.R. (3d) 257, [1998] O.J. No. 727, 157 D.L.R. (4th) 322, 107 O.A.C. 209, 18 C.P.C. (4th) 20, 80 C.P.R. (3d) 214, 77 A.C.W.S. (3d) 1089 (C.A.); Guillemette v. Doucet (2007), 88 O.R. (3d) 90, [2007] O.J. No. 4172, 2007 ONCA 743, 48 C.P.C. (6th) 17, 287 D.L.R. (4th) 522; Katana v. McComb Dockrill, [2008] O.J. No. 1195, 2008 ONCA 224, 164 A.C.W.S. (3d) 883, 237 O.A.C. 220, affg [2007] O.J. No. 3194, 160 A.C.W.S. (3d) 176 (S.C.J.); Plazavest Financial Corp. v. National Bank of Canada (2000), 2000 5704 (ON CA), 47 O.R. (3d) 641, [2000] O.J. No. 1102, 185 D.L.R. (4th) 78, 133 O.A.C. 100, 44 C.P.C. (4th) 288, 96 A.C.W.S. (3d) 320 (C.A.); Tripkovic v. Glober (2003), 2003 43027 (ON CA), 64 O.R. (3d) 481, [2003] O.J. No. 1930, 227 D.L.R. (4th) 718, 172 O.A.C. 116, 34 C.P.C. (5th) 316, 122 A.C.W.S. (3d) 1151 (C.A.)

Statutes referred to Securities Act, R.S.O. 1990, c. S.5 [as am.] Solicitors Act, R.S.O. 1990, c. S.15, s. 11 [as am.]

Patricia Virc, for appellant. Malcolm M. Mercer, for respondent McCarthy Tétrault LLP. Benjamin Zarnett, for respondents Lenczner Slaght Royce Smith Griffin LLP and Voorheis & Co. LLP.

[1] ROSENBERG J.A. (FELDMAN J.A. concurring): -- The issue in this case is the meaning of "special circumstances", which, under s. 11 of the Solicitors Act, R.S.O. 1990 c. S.15, is the pre-condition a client must show where the client seeks to have solicitors' accounts that have already been paid referred for assessment. In this case, the appellant Echo Energy Canada Inc. and five of its directors retained the respondent Lenczner Slaght Royce Smith Griffin LLP ["Lenczner"] in relation to certain litigation. On the recommendation of Lenczner, the appellant retained Voorheis & Co. LLP ["Voorheis"] to assist with some aspects of the litigation. Once some of the litigation was finished and another group had obtained control of the appellant, the appellant sought to assess the Lenczners and Voorheis accounts. Because the accounts of the two firms, totalling almost $840,000, had all been paid, the appellant had to establish special circumstances.

[2] At the same time, the appellant sought to refer the paid accounts of McCarthy Tétrault LLP ["McCarthy"] for assessment. McCarthy had been retained by the former control group as the appellant's corporate lawyers because the previous corporate lawyers had a conflict of interest. It had submitted accounts of $144,000 for its work over a one-year period. All but one of these accounts were paid before the change of control.

[3] The application judge, Brown J., found there were no special circumstances with respect to any of the accounts and refused to direct the references. For the following reasons, I would allow the appeal in relation to Lenczner and Voorheis but dismiss the appeal with respect to McCarthy.

The Facts

The litigation

[4] The appellant Echo Energy Canada Inc. is a corporation with natural gas operations in Ontario. In 2007, one of the directors, Salvatore Fuda, who also controlled a substantial number of shares, came to believe that the public disclosure of the appellant's gas reserves was not accurate. In November 2007, the appellant received a request from Challenge Gas Holding AB, which held over 11 million shares and was controlled by Mr. Fuda, to appoint an independent consulting engineer to review the appellant's gas reserves and to appoint an additional [page96 ]director. When Mr. Fuda did not receive a response, he requisitioned a meeting of the appellant's board of directors. This meeting was held on November 20, 2007, and Mr. Fuda's proposals were rejected. At this same meeting, the board authorized a private placement of shares that would have had the effect of diluting the shareholding position of the Fuda group. The following day, the Fuda group requisitioned a special shareholders' meeting for the purpose of voting two of its nominees onto the board.

[5] The November 2007 events set in motion various pieces of litigation, including an oppression action by the Fuda group, which included an application for an injunction to stop the private placement; an application by the appellant and five non-Fuda directors led by the president, Gary Conn, alleging that the Challenge shares had been acquired by an illegal takeover; and a counter-application by the Fuda group seeking contribution and indemnity from the appellant's then corporate secretary, whose firm was also corporate counsel. A special shareholders' meeting was held on April 22, 2008, with the question of whether the votes of the Challenge shares could be counted to be determined by the court.

[6] On November 28, 2008, Morawetz J. dealt with some of the litigation [reported at (2008), 2008 63183 (ON SC), 94 O.R. (3d) 254, [2008] O.J. No. 4843 (S.C.J.)]. Most importantly, he held that the Challenge shares had been legally obtained and therefore its votes should be counted. This resulted in a change of control of the board. New management led by the Fuda group replaced Mr. Conn and retained an independent reserves engineering firm. The engineering firm found that there had been significant declines in the appellant's gas reserves, causing it to take a write- down on its gas reserves from $44 million to $11.8 million. Since taking control, new management has found evidence indicating that former management may have known about the decline in reserves. The appellant has commenced litigation against some of its former officers and directors for breach of fiduciary duty.

The retainer of Lenczner and Voorheis

[7] At a meeting of the appellant's board on December 31, 2007, the board passed a resolution to establish a special committee to deal with matters arising out of the Fuda litigation. The special committee was compromised of three of the five directors being sued by the Fuda group: Mr. Conn, Salvatore Pacifico and Robert Moore. Mr. Fuda objected to the composition of the special committee. However, he was outvoted and the resolution passed. The resolution establishing the special committee included the following: [page97 ]

The special committee will have the responsibility to supervise litigation, negotiate any details related to litigation or to address any matters of concern that may be identified by the special committee related to the litigation.

[8] The special committee was authorized to retain such external financial, legal and other advisors as it considered necessary. Importantly, it was also required to "keep and maintain minutes of [its] proceedings". New management has been unable to locate any minutes of proceedings of the special committee.

[9] Prior to the December 31 meeting, the appellant had retained Lenczner to act for it in defending the oppression action brought by the Fuda group. The retainer agreement was dated December 17, 2007 and authorized Lenczner to employ "such counsel, agents or experts as you deem necessary". The retainer letter was executed by Mr. Conn on behalf of the appellant. Lenczner understood that it had also been retained to act for the five directors who had been made parties to the oppression action. Lenczner understood that the fees of the appellant and the five directors would be paid by the appellant.

[10] Sometime in December 2007, the appellant and the five directors accepted Lenczner's recommendation to retain Voorheis to act as special counsel to provide specific specialized corporate expertise. There is no letter of retainer relating to Voorheis.

[11] In December 2008, with the change in management, the appellant discharged Lenczner and Voorheis.

The Lenczner and Voorheis accounts

[12] From December 2007 to October 2008, Lenczner rendered 13 accounts totalling $520,000. The accounts are all stamped as being approved, with Mr. Conn's signature or initials.

[13] Voorheis rendered five accounts over the period from February to June 2008 totalling $317,000. Three of the five accounts bear the initials of Mr. Conn as having approved them. The exceptions are the accounts of April 3 and April 18, 2008, for almost $74,000 and over $34,000 respectively, which were paid on the day after receipt and the same date as receipt respectively. Although they have the approved stamp on them, there are no initials to verify that Mr. Conn approved those two accounts.

McCarthy's retainer and accounts

[14] In December 2007, the appellant retained McCarthy to act as corporate lawyers with respect to the requisition of the special shareholders' meeting. McCarthy was asked to assist because of a conflict of interest with the corporate secretary whose firm, as set out above, had acted as the corporate lawyers. [page98 ]In February 2008, the appellant also retained McCarthy in respect of a private placement. In March 2008, the corporate secretary resigned and McCarthy then attended meetings to act as de facto secretary and to provide legal advice as requested. Finally, on March 25, 2008, the board unanimously appointed McCarthy as corporate lawyers. Mr. Fuda participated in that decision.

[15] After the change of directors in 2008, the appellant terminated the retainer of McCarthy. McCarthy delivered seven accounts between February 2008 and February 2009 totalling $144,000. Most of the accounts appeared to have been approved by Mr. Conn. All of the accounts were paid, including an account for over $9,000, rendered in February 2009, when new management was in control.

The dispute about the lawyers' accounts

[16] On December 4, 2008, the appellant terminated the retainers of all three law firms. The letter terminating the retainers asked the firms to make available the company's books and records as well as files in respect of the firms' representation of the appellant. A problem arose in respect of the files held by Lenczner and Voorheis because of ongoing litigation in which Lenczner continued to act for the five former directors. While this matter was also before Brown J., it was adjourned to be dealt with later. We were told that the issue was recently resolved. In any event, in my view, the dispute about the litigation files does not assist in resolving the question of special circumstances that is central to this appeal.

[17] The first formal written concern raised about the firms' accounts is found in a letter of August 5, 2009, from the appellant's in-house counsel. In this letter, she stated that the appellant was reviewing the firms' accounts and was willing to discuss a negotiated settlement. The letter did not contain any specific allegations concerning the accounts. In the letter, counsel wrote that to develop a proposal for settlement she required the retainer agreements, hourly rates and year of call of the lawyers, certain information about disbursements and, from Lenczner and Voorheis, detailed dockets. She also asked the firms if they would consent to an assessment if they were not interested in negotiating a reduction of the accounts. Lenczner and McCarthy did not provide their retainer letters until shortly before the application was heard.

[18] The appellant issued its application for an order directing a reference of the respondents' accounts on September 1, 2009. The application was served on the respondents on October 23, 2009. [page99 ]The affidavit in support of the application was made by Charles Edey, the appellant's new president and chief operating officer. He had not been a member of the board prior to December 2008. Lawyers from each of the firms swore affidavits in the application. Neither Mr. Fuda nor Mr. Conn nor any of the other directors with first-hand knowledge of the events of 2007 and 2008 provided any evidence in the application.

The reasons of Morawetz J.

[19] The appellant and Lenczner and Voorheis relied to some extent on the findings made by Morawetz J. in his reasons dismissing the application for a declaration that the acquisition by Challenge of the appellant's shares was violation of the Securities Act, R.S.O. 1990, c. S.5. I do not intend to review his reasons on the substantive issue. Of greater interest on this appeal are his findings concerning some of the players in the litigation. He found [at para. 50] that Mr. Fuda was not a credible witness in relation to the negotiations leading up to the acquisition of the Challenge shares. He held that "Mr. Fuda would fabricate any version of events, if he believed that it would assist his case". Near the end of his reasons, he characterized one aspect of Mr. Fuda's conduct as "shameful" because of his involvement in the production of a false letter designed to exert pressure on the board.

[20] Morawetz J. made equally devastating findings against Mr. Conn. He noted that Mr. Conn only raised concerns about the Challenge shares after Mr. Fuda inquired about the gas reserves and took steps to possibly change the composition of the board. This raised a serious question about Mr. Conn's motives. He found that Mr. Conn's evidence lacked credibility and was tailored to avoid losing his position as an officer and director of the appellant.

[21] Morawetz J. was also unimpressed with the evidence of two of the other directors who testified, including Mr. Moore, who was a member of the special committee supervising the litigation. He found [at para. 55] that Mr. Moore and the other director, Mr. Hunter, "only seemed to be concerned in taking steps that would ensure their continued involvement on the Board at Echo Energy when it became clear that their positions were in jeopardy".

The reasons of the application judge

[22] The application judge held [at para. 38] that the evidence of special circumstances adduced by the appellant consisted of the assertion that the total amount of the legal fees [page100] was disproportionate to the company's financial health, and the bald assertions in Mr. Edey's affidavit "that the three law firms 'were aware or ought to have been aware that the [Five] Directors were indifferent to: (a) how the company's money was spent; (b) what the solicitors were doing to earn it; (c) whether the work benefited Echo Energy; (d) whether the benefit, if any, to Echo Energy was proportional to the legal bills; and, (e) whether the company could afford the bills'".

[23] The application judge referred to the responding affidavit of the Lenczner partner with carriage of the litigation. The partner deposed that he understood a resolution had been passed by the board confirming that the company would pay the legal fees of the appellant and the five directors. The Lenczner partner further stated that the appellant made no complaint about the accounts as they were submitted and disputed the assertion that the five directors were indifferent to the legal expenses incurred by the company. The application judge quoted [at para. 40] an excerpt from the affidavit where the partner stated, "The opposite is true as the Five Directors were closely involved in all of the steps taken at their direction and the direction of Echo Energy." The application judge also referred [at para. 41] to Mr. Voorheis' affidavit, in which he stated that his firm reported to "all clients, or as directed, in a clear and transparent manner" and that the appellant never complained about the accounts as they were submitted.

[24] The application judge held that Mr. Edey's assertions did not establish special circumstances. He considered the context in which the firms provided their services to be important. The appellant and the five directors were entitled to defend themselves in the litigation initiated by the Fuda group and to launch their own counter-suits. There was nothing out of the ordinary in a corporation retaining special litigation counsel like Voorheis to deal with discrete issues that arise in the course of the litigation. He found [at para. 45] that a majority of the board "evidently concluded that it was in the company's best interests to retain Voorheis". He saw nothing in the record to show that the litigation counsel did anything other than what would be expected of counsel and that they acted on the understanding that the appellant had agreed to pay them to represent the company and the five directors. The firms' accounts were paid in the ordinary course without complaint. He noted that new management did not challenge the accounts for eight months. This delay told against the genuineness of the application. He considered Mr. Edey's complaints to be "oblique" and more about the conduct of the five directors than the law firms. [page101]

[25] The application judge considered that the argument that the firms should have known that the five directors were not acting in the best interest of the company was without merit. He was concerned [at para. 48] that companies would find it very difficult to retain counsel to defend themselves if the winners of the corporate litigation could challenge the accounts of the losing side's lawyers "for no other reason than that the lawyers provided legal services to the losing side". He was also concerned [at para. 49] that allowing the assessment would result in "repetitious litigation, with the end of the corporate litigation simply signalling the start of a rehash of all the details of the lawsuits through an assessment of the accounts of the losing corporation's lawyers".

[26] The application judge rejected the appellant's argument that there was a lack of proportionality between the accounts and the appellant's financial resources. As he said [at para. 51]:

According to its financial statements, Echo Energy, at the end of 2008, was a company that was asset rich, but revenue thin. Both factions thought the company was worth fighting over -- the Fuda Group started the litigation war, and the company and the Five Directors responded. Was one faction on the side of the angels and the other on the side of the demons? That is not how I read the reasons for judgment of Morawetz J. He was highly critical of the credibility of the main players on both sides of the dispute. Were the legal costs worth the fight? I find it impossible to give credence to new management's "lack of proportionality" argument in regards to the company's former lawyers when no evidence was placed before me about the legal costs incurred by the Fuda Group in this litigation. Both sides were sophisticated business groups who could only reasonably expect that hotly contested corporate litigation using Toronto counsel would generate large legal bills. Such is the reality of contemporary corporate litigation. Given the multiple proceedings and attendances involved in the corporate litigation, I see nothing in the amount of the challenged bills to suggest, in and of itself, the existence of a special circumstance. (Emphasis added)

[27] The application judge rejected the submission that there was unnecessary duplication by the work of the three firms. He also rejected the submission that payment by the appellant could not be considered voluntary because the old management never really reviewed the accounts for reasonableness. The application judge believed that the starting point for considering that submission must be the perspective of the law firms who understood that their accounts had been properly reviewed and approved in the ordinary course. The evidence all pointed to the firms operating on the reasonable premise that their accounts were appropriate. Finally, the application judge rejected the submission that the Voorheis accounts were not sufficiently detailed. [page102]

Analysis

The standard of review

[28] Section 11 of the Solicitors Act provides as follows:

11. The payment of a bill does not preclude the court from referring it for assessment if the special circumstances of the case, in the opinion of the court, appear to require the assessment. (Emphasis added)

[29] The section has been interpreted as giving the court a broad discretion to be exercised on a case-by-case basis. As such, this court will defer to the decision of the application judge absent an error in principle or a clearly unreasonable result: Plazavest Financial Corp. v. National Bank of Canada (2000), 2000 5704 (ON CA), 47 O.R. (3d) 641, [2000] O.J. No. 1102 (C.A.), at para. 33; Guillemette v. Doucet (2007), 2007 ONCA 743, 88 O.R. (3d) 90, [2007] O.J. No. 4172 (C.A.), at para. 4.

The Lenczner and Voorheis accounts

[30] As indicated, under s. 11 of the Solicitors Act a client may obtain an order referring its lawyers' paid accounts for assessment only where it demonstrates "special circumstances". The term "special circumstances" is used in other parts of the Act but in the context of s. 11, those special circumstances relate to the underlying principle that payment of the account implies that the client accepted that the account was proper and reasonable: see Enterprise Rent-a-Car Co. v. Shapiro, Cohen, Andrews, Finlayson (1998), 1998 1043 (ON CA), 38 O.R. (3d) 257, [1998] O.J. No. 727 (C.A.).

[31] Thus, special circumstances will tend to either undermine the presumption that the account was accepted as proper or show that the account was excessive or unwarranted. The appellant relies upon both aspects. It submits that the presumption was rebutted in this case because the person approving the accounts had no real interest in reviewing them and ensuring that they were reasonable. It also submits that on their face the accounts are excessive given that a company with limited resources spent almost $840,000 in litigation. I can deal with this latter submission summarily. The appellant adduced no evidence that this amount was grossly excessive given the nature and complexity of the litigation. That said, it seems to me that the size of the accounts can be a factor to consider under the first leg of special circumstances.

[32] The cases identify a number of circumstances in which the presumption may be rebutted. For example, clients cannot be expected to bring assessment applications while a solicitor is [page103] still representing them for fear of alienating the solicitor. Special circumstances may also exist if the client makes known its concerns within a reasonable time: see Enterprise Rent-a-Car, at p. 265 O.R. However, in the end, special circumstances is a fact-specific inquiry: Guillemette v. Doucet, at para. 4. Any number of factors specific to the particular case can amount to special circumstances if they undermine the presumption. See, for example, the reasons of Murray J. in Andrew Feldstein & Associates Professional Corp. v. Keramidopulos, [2007] O.J. No. 3683, 160 A.C.W.S. (3d) 724 (S.C.J.), at para. 67.

[33] In my view, the motion judge erred in principle in several respects. He looked at the case from the perspective of the lawyers rather than the client. He failed to take into consideration evidence rebutting the presumption that the client accepted the account as proper and reasonable. And, he relied on a speculative theory that lawyers would not undertake this kind of work if they knew their accounts might be assessed when new management came in.

[34] The application judge's lawyer-focused, rather than client-focused, approach is found in two key passages. In the first passage, the application judge considered what he termed the "all-important" context for considering the appellant's assertion that the directors were indifferent to how the appellant's money was spent. Thus, the application judge found as follows [at para. 46]:

I cannot see any evidence in the record before me that the company's litigation counsel did anything other than what one would expect from counsel -- "fearlessly to raise every issue, advance every argument, and ask every question, however distasteful, which he thinks will help his client's case" and to endeavour "to obtain for his client the benefit of any and every remedy and defence which is authorized by law": Commentary to Rule 4.01(1) of the Rules of Professional Conduct of the Law Society of Upper Canada. Litigation counsel did so on the understanding that Echo Energy had agreed to pay for them to represent both the company and the Five Directors in the litigation. They performed legal services and rendered periodic accounts, which were paid by the company in the ordinary course without complaint. (Emphasis added)

[35] In the second passage, the application judge deals directly with the assertion that former management never really reviewed the accounts. He held as follows [at para. 53]:

The starting point for considering this submission must be the perspective of the law firms. Each of the three firms filed evidence that they understood their submitted accounts had been reviewed, approved and paid in the ordinary course; they had no reason to understand otherwise. There is no evidence that the law firms exerted any pressure on Echo Energy to pay their accounts, or that Echo Energy paid the accounts by mistake. The evidence all points to the law firms operating on the reasonable premise that by [page104] paying their bills Echo Energy was satisfied that the services rendered were appropriate to the retainers. (Emphasis added)

[36] In my view, the starting point was not the perspective of the lawyers. Section 11 of the Solicitors Act attempts to strike a balance between a solicitor's legitimate interest in finality and the client's interest in access to an independent process for review of accounts for legal services. However, the starting point ought to be the perspective of the client. As Murray J. said in Andrew Feldstein & Associates Professional Corp. v. Keramidopulos, at para. 63:

At a time when access to justice is such an important issue, and when lawyers' fees are getting so far out of reach for many ordinary people, it is crucial that an individual's right to a fair procedure for assessment of lawyers' fees exists. As Justice Sharpe said in Price v. Sonsini, [Price v. Sonsini (2002), 2002 41996 (ON CA), 60 O.R. (3d) 257, [2002] O.J. No. 2607 (C.A.)] public confidence in the administration of justice requires the court to intervene where necessary to protect the client's right to a fair procedure for assessment of a solicitor's bill. His admonition that solicitors should facilitate the assessment process when a client objects to a solicitor's account rather than frustrating the process is more than just a guideline for law firms. It is essential. Clients must be able to assess their lawyers' accounts or they will be or will perceive themselves to be powerless in the face of unfair billing practices. There can be little doubt that if the courts permit lawyers to avoid scrutiny of accounts in appropriate cases, the administration of justice will be brought into disrepute.

[37] The application judge's error in taking a law-firm- focused approach led him to conclude that the manner in which the accounts were approved did not constitute special circumstances. By taking this approach, he failed to consider the evidence showing that the appellant was not well served by those within the company tasked with making the decisions about the conduct of the litigation, including payment of the accounts.

[38] Specifically, the application judge overlooked evidence suggesting that Mr. Conn was spending the appellant's money without regard for the impact on the appellant.

[39] The application judge rejected Mr. Edey's assertions that the law firms were aware or ought to have been aware that the five directors were indifferent as to how the company's money was spent and preferred instead the Lenczner lawyer's affidavit stating that the five directors "were closely involved in all the steps taken at their direction and the direction of Echo Energy". However, while the board had established a special committee to oversee the litigation, there were no minutes of meetings showing what steps the committee took to oversee the litigation and ensure the reasonableness of the legal fees. There was also no evidence from any member of that committee, merely the [page105] assertion from counsel that the five directors were not indifferent as to how the appellant's money was spent.

[40] Furthermore, the reasons of Morawetz J. disclose troubling conduct and motives of Mr. Conn and Mr. Moore. Mr. Conn and Mr. Moore were members of the special committee that was supposed to be overseeing the litigation and Mr. Conn approved the lawyers' accounts for payment. Morawetz J. found that many of the witnesses on both sides of litigation were not credible in important respects. But, he made a finding against Mr. Conn that raises the spectre that he may not have been acting in the best interests of the corporation. Morawetz J. was troubled that the issue of the propriety of the Challenge share transaction was raised for the first time three years after the fact, when the result could be that Mr. Conn and the other directors would be ousted from the company. He said the following, at paras. 54 and 55 of his reasons, which are reported at (2008), 2008 63183 (ON SC), 94 O.R. (3d) 254, [2008] O.J. No. 4843 (S.C.J.):

Mr. Conn's evidence lacked credibility. In my view, Mr. Conn's objective in this lawsuit was to find some way, somehow to disqualify Mr. Fuda and Mr. Nepomuceno from being able to vote the Challenge Shares. He was aware that their votes could be pivotal and that if counted, he would potentially be at risk for his position as a director and officer of Echo Energy. In my view, his evidence was tailored to avoid that outcome. There was no complaint until he felt threatened and when his future became uncertain, he went on the offensive.

Likewise, I was unimpressed with both Mr. Moore and Mr. Hunter. They only seemed to be concerned in taking steps that would ensure their continued involvement on the Board at Echo Energy when it became clear that their positions were in jeopardy. (Emphasis added) And, at para. 65:

In considering whether the actions of the respondents in 2004 should lead to the remedy sought by the applicants, it is, in my view, necessary to take into account the fact that a considerable amount of what is now being complained of was known to the applicants by 2004, but it was conduct that they did not feel the need to investigate or challenge until such time as their own positions were being threatened in 2007. The applicants have an interest in preserving the status quo. The actions taken by the applicants in launching these proceedings must, of necessity, be greeted with a degree of scepticism. The remedy being sought is to prohibit Challenge from voting its shares to Echo Energy. (Emphasis added)

[41] As indicated above, Morawetz J. made a similar finding against Mr. Moore: that he only seemed concerned about ensuring his continued involvement on the board rather than coming to grips with a potential problem with the gas reserves. [page106]

[42] In my view, these findings, coupled with the apparent failure of the special committee to fulfill its function in supervising the litigation in a transparent way, go a long way towards establishing special circumstances. Those facts tend to rebut the presumption that the appellant accepted the accounts as proper and reasonable. It cannot be forgotten that it was the appellant, a public company, that was paying the bills, not the directors.

[43] The application judge made only passing reference to the findings of Morawetz J., noting that he was highly critical of the credibility of the main players on both sides and that it could not be said that one side was on the side of the angels and the other on the side of the demons. He failed to deal with the finding by Morawetz J. that Mr. Conn and Mr. Moore may not have had the company's best interests in mind, a finding that could rebut the presumption that the company accepted the accounts as proper and reasonable simply because Mr. Conn approved the accounts and both he and Mr. Moore were on the special committee.

[44] The application judge was also concerned by the fact that the appellant waited eight months before raising the issue of the appropriateness of the accounts. The application judge was of the view [at para. 47] that the eight-month silence "speaks volumes about the lack of genuineness of the present application to assess the accounts of the former lawyers". He would have expected new management to raise the issue immediately if they had a genuine concern about the size of the accounts. It is unclear to me why the relatively short delay of eight months should have such a profound impact. This is not a case where the client waited years before raising the issue: compare Katana v. McComb Dockrill, [2007] O.J. No. 3194, 160 A.C.W.S. (3d) 176 (S.C.J.) and Tripkovic v. Glober (2003), 2003 43027 (ON CA), 64 O.R. (3d) 481, [2003] O.J. No. 1930 (C.A.). The relatively brief delay equally speaks of some care by new management in seeking to obtain the necessary information and understanding the context before moving precipitously. It is also of some significance that Lenczner did not produce its retainer agreement until after the application was launched and two days before the application was heard.

[45] There are other factors that, in my view, point towards this being a case of special circumstances. I would summarize them as follows:

-- the Lenczner written retainer referred only to action brought by Challenge, not to any of the other litigation; [page107]

-- the written retainer is signed by Mr. Conn on behalf of the appellant; there is no written retainer on behalf of the five directors;

-- there was no written retainer with Voorheis;

-- the appellant had total revenue of $2.8 million in 2008, recorded expenses of over $5 million, yet spent almost $840,000 on litigation during that period;

-- the relatively short time that elapsed before the application was brought.

[46] Taking into consideration all of these factors, the appellant made out a case of special circumstances with respect to the accounts from Lenczner and Voorheis.

[47] In my view, the application judge also erred in principle in relying on the proposition that lawyers would not take on this kind of corporate litigation if new management was able to assess litigation counsel's paid accounts. I agree with the application judge that the court should be wary of cases where the application for a reference is nothing more than an attempt by the winning party to strike back at the losing party, rather than a genuine concern about the reasonableness of the accounts: see Katana v. Dockrill, 2008 ONCA 224, [2008] O.J. No. 1195, 237 O.A.C. 220 (C.A.), at para. 5. But, it is quite another thing to say that companies will have difficulty retaining counsel.

[48] In my view, there is no evidence to support the proposition that companies will find it difficult to retain counsel and this kind of speculation is inconsistent with the public interest in transparency, fairness and reasonableness of solicitors' accounts. If the facts on the application show nothing more than an attempt by new management to punish old management, then the application will be refused because special circumstances have not been made out. I think it would take evidence as opposed to speculation to justify the theory that lawyers would abandon lucrative corporate litigation for fear they might have to justify their accounts. And that, of course, is the point of the assessment. Granting the application merely sets in motion the opportunity for assessment by an independent and neutral third party; it does not mean that counsel will not be paid or that their fees are at risk.

[49] I have similar concerns about the application judge's observation that to grant the assessment will result in repetitious litigation. The assessment is carried out in accordance with well-established principles set out in cases such as [page108] Cohen v. Kealey & Blaney, [1985] O.J. No. 160, 26 C.P.C. (2d) 211 (C.A.). It is not a no-holds-barred rehashing of the previous litigation. Were it not for the fact that these accounts had been paid, the appellant would have had an absolute right to have their accounts assessed, provided they brought the application within two years: see Guillemette v. Doucet, supra, at para. 33. The exercise of the clients' right to assessment will inevitably prolong the litigation, but that is no reason to deprive them of their rights where special circumstances have been made out.

The McCarthy accounts

[50] I take a different view of the application to assess McCarthy's accounts. The appellant has pointed to no circumstances that would rebut the presumption of propriety and reasonableness arising from the payment of the accounts. The findings by Morawetz J. and the lack of transparency within the special committee do not affect the accounts rendered by McCarthy in its role as corporate counsel and de facto secretary to the board. The appellant adduced no evidence to show that the amounts billed were excessive. The appellant paid McCarthy's last account, without complaint, after the change in management. The suggestion that there may have been some duplication of work with the litigation counsel is not supported by anything in the record. While McCarthy too did not produce its retainer until after the application was launched, Mr. Fuda was part of the process retaining McCarthy.

Disposition

[51] Accordingly, I would allow the appeal, in part, set aside the order of Brown J. as it relates to Lenczner and Voorheis, and order that all accounts rendered by those firms be assessed. I would dismiss the appeal as it relates to McCarthy. McCarthy is entitled to its costs, which I would fix at $9,000, inclusive of disbursements and applicable taxes. The appellant is entitled to its costs as against Lenczner and Voorheis, which I would fix at $11,000, inclusive of disbursements and applicable taxes.

[52] GOUDGE J.A. (dissenting): -- I have had the benefit of reading the thorough and comprehensive reasons of my colleague Rosenberg J.A. While I agree with his disposition of the appeal as it relates to the respondent McCarthy Tétrault LLP, I would come to a different conclusion on the balance of the appeal and would also dismiss the appeal as it relates to the respondents [page109] Lenczner Slaght Royce Smith Griffin LLP ("Lenczner") and Voorheis & Co. LLP ("Voorheis").

[53] In my view, the sole issue is whether the application judge committed reversible error in concluding that the appellant did not establish the special circumstances required by s. 11 of the Solicitors Act to justify the assessment of the Lenczner and Voorheis bills it had received and paid. I can find no such error.

[54] The applicable law is not in doubt and has been clearly described by my colleague. To reiterate, because the appellant paid all the bills that it now seeks to assess, it must demonstrate facts that rebut the common sense inference or presumption that payment of a bill constitutes implied acceptance of its reasonableness, particularly when, as here, the bills are rendered on a regular basis and paid over the course of several years: see Enterprise Rent-a-Car Co. v. Shapiro, Cohen, Andrews, Finlayson (1998), 1998 1043 (ON CA), 38 O.R. (3d) 257, [1998] O.J. No. 727 (C.A.), at p. 265 O.R. The application judge, faced with a request to order an assessment in such circumstances, must engage in a fact-driven exercise of judicial discretion. This court will defer to that discretion absent an error in principle or a clearly unreasonable result: see Guillemette v. Doucet (2007), 2007 ONCA 743, 88 O.R. (3d) 90, [2007] O.J. No. 4172 (C.A.), at para. 4.

[55] My colleague's decision turns on his view that the application judge erred in principle in three respects. These are concisely set out, at para. 33 of his reasons. I part company on each of the three. I read the reasons of the application judge differently, and take a different view both of the facts that were before him and his treatment of them.

[56] My colleague finds that the application judge erred in principle by looking at the case from the perspective of the lawyers rather than the client. At paras. 34 and 35, he cites two passages from the reasons appealed from to demonstrate this.

[57] With respect, I do not agree with his reading of those passages or the conclusion he draws from them. In my view, in the first passage, the application judge is merely saying that there is nothing in the way Lenczner and Voorheis performed their services and billed for them -- as there might be in another case -- that could be advanced by the appellant as special circumstances. This is only one of his reasons for finding that no special circumstances were proven.

[58] The main reason is that he found unsupported the assertion that those approving the bills were indifferent to whether they were reasonable. I do not think there is anything in the application judge's analysis that suggested that he looked at [page110] the appellant's evidence attempting to show indifference, from the perspective of the lawyers.

[59] The second passage addresses not the assertion of indifference, but the argument by the appellant that payment of the accounts could not be considered voluntary. In that context, it is understandable that the application judge would consider whether there is any evidence that the law firms exerted any pressure on the appellant to pay the accounts, or otherwise acted in a way that could have induced the appellant to pay by mistake. He found no such evidence. In my view, that is all that is being referred to in the second passage.

[60] My colleague also finds that the application judge erred in principle in relying on a speculative theory that lawyers would not undertake this kind of work if they knew their accounts might be assessed when new management came in. I would not read the reasons that way. Rather, I view the application judge as merely observing that companies involved in intra- corporate litigation would find it very difficult to retain counsel to defend themselves if counsel's accounts could be subjected, after payment, to assessment by new management for no reason other than that the lawyers provided legal services to the losing side. While this may undoubtedly be a speculative prediction, it is hardly unrealistic given the bad blood that often accompanies this kind of litigation, as it did in this case. More importantly, I would not read the application judge as relying on this to support his conclusion that no special circumstances were established. Nor do I see how he could have done so. What may happen in the future says nothing about whether there were special circumstances in the past.

[61] Finally, my colleague concludes that the application judge failed to take into consideration evidence rebutting the presumption that the appellant accepted the accounts as being reasonable.

[62] Most important for him are the three comments of Morawetz J. he quotes at para. 40. For several reasons, I cannot agree that these comments assist the appellant in rebutting the presumption.

[63] First, these comments arise from the proceeding in which Morawetz J. heard the claim by the appellant and five directors lead by Mr. Conn (the "Conn directors") to prohibit those seeking to take over the appellant (who ultimately succeeded) from voting their shares in the company. This was only one of five pieces of litigation worked on by Lenczner and Voorheis. The others were all commenced by those seeking the takeover, against the company and/or the Conn directors, forcing them to defend [page111] themselves. These comments can address only one of the pieces of litigation covered by these accounts.

[64] In my view, the first two comments by Morawetz J. are simply about the way Conn, Moore and Hunter gave evidence in that case and their self-interested motive in doing so. I do not think these comments can be taken as judicial findings about their evidence in any of the other pieces of litigation, let alone their motivation in taking any decisions on behalf of the appellant. While the claim that they took any such decisions without the company's best interest in mind may well be an issue in the litigation commenced by the appellant against them (after the takeover) for breach of fiduciary duty, that issue was not before Morawetz J. and I would not take these two comments as addressing it.

[65] The third comment is about the applicants who commenced the proceeding before Morawetz J. and their interest in doing so to preserve the status quo. The appellant was one of those applicants. I do not view these comments as being only about the five Conn directors. Indeed, there can be no doubt that up until the takeover, the appellant and the five Conn directors shared the same interest, namely, to oppose the takeover and preserve the status quo. They had the same lawyers whose instructions were to vigorously advance that interest for all of them.

[66] To put this another way, it is important to underline that the presumption that the appellant must rebut is that when it paid the accounts, that is presumed to reflect its acceptance of the reasonableness of those accounts. It is the appellant's acceptance at the time of payment that matters. There is no doubt that, at that time, the appellant considered it in its best interest to resist the attempted takeover by the Fuda group by vigorously defending the litigation brought by that group and by commencing the proceeding before Morawetz J. The Conn directors, including Mr. Conn, shared the same interest. I do not think anything said by Morawetz J. can be taken to suggest that Mr. Conn and Mr. Moore may not have had the company's best interest in mind when the accounts were approved. They shared that interest.

[67] Moreover, there can be no suggestion that, at that time, the interest of Mr. Conn and the best interest of the appellant (as it saw it) were in conflict. The fact that, after the takeover, the company took the opposite position about what was in its best interest at that time is no more than the client changing its mind. As such, it does not rebut the presumption or otherwise constitute special circumstances. [page112]

[68] I would also differ with my colleague's view that the application judge overlooked evidence that sustains the conclusion that the special committee set up by the appellant to supervise the litigation apparently failed to fulfill its function. Nor do I think that evidence would tend to rebut to presumption.

[69] As I read the evidence, it is simply that the new president can find no records of any work by the committee, something that is true of many of the appellant's other corporate records, which also cannot be located. I do not take the absence of evidence of these corporate records as positive evidence that there were no such records, nor that the committee failed to do its job. More importantly, the evidence of Mr. Curry was that the accounts were considered by the appellant's management, and reviewed and paid in the normal course. Even if the committee failed to fulfill its function, that does not tend to show that the accounts were not authorized after proper review by those with authority to do so and therefore does not go to rebut the presumption.

[70] Nor, in my view, are special circumstances pointed to by the absence of written retainers for much of the litigation, the net revenue of the appellant compared to the amount of the accounts or the time before the application was brought. There is no assertion that Lenczner and Voorheis were not properly retained. The accounts were not excessive and the net revenue comparison does not undermine the appellant's clear position when it paid them that its best interest required the litigation to be vigorously defended by skilled counsel. Neither this comparison nor the timing of the application speak to whether those approving payment were indifferent to their reasonableness.

[71] In summary, I do not think that the application judge overlooked any evidence that would tend to rebut the presumption.

[72] Turning briefly to the application judge's reasons for finding that no special circumstances were proven by the appellant, I see no basis for appellate intervention. The affidavit evidence of indifference by those approving payment offered by the appellant was no more than a bald assertion by someone who was not with the appellant at the time. Moreover, that assertion was flatly contradicted by counsel who dealt with those who approved payment. There was ample basis for the application judge to find that the indifference alleged was not established. That finding of fact attracts appellate deference, and I would not interfere with it.

[73] For these reasons, I would dismiss the appeal in its entirety.

Appeal allowed in part.