ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-12-00444102-0000
DATE: 20120507

BETWEE N:

COVENTREE INC.

Jason W.J. Woychesyn , for the Applicant

Applicant

• and -

STOCKWOODS LLP

Chris G. Paliare , for the Respondent

Respondent

HEARD: April 4, 2012

LEDERMAN J.

REASONS FOR DECISION

Nature of Application

[ 1 ] The Applicant, Coventree Inc. (“Coventree”) seeks an order referring certain accounts rendered by the Respondent, Stockwoods LLP (“Stockwoods”) to assessment.

Background Facts

[ 2 ] Coventree is a public company and before 2007, it was the largest non-bank sponsor of Asset-Backed Commercial Paper (“ABCP”) in Canada. The ABCP market collapsed in August 2007 resulting in Coventree, and certain of its senior officers and directors, being investigated and prosecuted by the Ontario Securities Commission (“OSC”).

[ 3 ] Dean Tai (“Tai”) is a former CEO and director of Coventree and indirectly is a significant shareholder of Coventree.

[ 4 ] Coventree was one of three respondents in the OSC proceeding. It was alleged that Coventree had breached various provisions of the Securities Act , R.S.O. 1990, c. S.5 and had acted contrary to the public interest. Coventree hired two law firms to defend it in the OSC proceeding.

[ 5 ] The other two respondents in the OSC proceeding were Tai and Geoffrey Cornish (“Cornish”). The individual respondents retained separate and independent legal counsel to represent them in the OSC proceeding.

[ 6 ] Tai hired the firm of Stockwoods to represent him in the OSC proceeding and Cornish hired another firm to represent himself.

[ 7 ] Coventree was required by the terms of an indemnity agreement to indemnify both Tai and Cornish for all costs, charges and expenses associated with their defence of the OSC proceeding, including their legal bills.

[ 8 ] The four law firms representing the three respondents to the OSC proceeding worked together under the terms of a Joint Defence Agreement in a relative co-operative manner. The eventual OSC hearing was lengthy and complicated and took over forty-five days of hearing.

[ 9 ] According to Coventree’s public filings, it spent about $16.5 million in legal and consulting fees relating to the OSC proceedings between July 1, 2009 and December 31, 2011.

[ 10 ] Stockwoods’ accounts during that same two and a half year time frame (including disbursements and taxes) totalled just over $1.5 million.

[ 11 ] From the outset of its retainer in July of 2009, Stockwoods submitted monthly accounts to both Tai and to Coventree. Coventree paid the monthly accounts directly to Stockwoods without complaint for more than two years until October 2011 when Coventree alleges that:

(a) it discovered that Stockwoods had billed for three lawyers attending the Sanctions Hearing; and

(b) it was served with a statement of claim prepared by Stockwoods with respect to a law suit that Tai had brought against Coventree.

Stockwoods’ Accounts

[ 12 ] Between July 2009 and December 2011, Stockwoods rendered twenty-four accounts to Tai with copies to Coventree. The accounts varied in amounts from $1,249.50 (December 2009) to $251,206.58 (May 2010). The accounts were part of a continuing retainer with respect to the OSC proceeding against Tai.

[ 13 ] All but the three monthly accounts submitted for October, November and December 2011 were paid by Coventree.

[ 14 ] The accounts for which Coventree seeks assessment can be grouped into three categories:

(a) Those paid more than twelve months prior to this Application which was commenced on January 16, 2012. This category encompasses most of the accounts in issue;

(b) Those paid within twelve months of the date of the Application.

(c) The unpaid accounts. This category includes only the latter three monthly accounts which total approximately $165,000 (including HST and disbursements).

The Governing Principles

[ 15 ] Counsel for both parties agree that the following are the relevant governing principles arising from the Solicitors Act R.S.O. 1990, c. S. 15 and the jurisprudence.

(a) The dispute here is not between the client (Tai) and his lawyer (Stockwoods). Rather, it is the third party, Coventree, that takes issue with Stockwoods’ accounts Coventree is liable to pay Tai’s reasonable legal fees and expenses under the terms of the indemnity agreement with him. Under section 9 of the Solicitors Act , such a party has standing to apply to the Court for an order referring the accounts to assessment as if the Application had been made by the client him or herself.

(b) In addition to the Solicitors Act , a Court has inherent jurisdiction and discretion to direct the assessment of a solicitor’s account.

(c) With respect to those accounts paid more than twelve months prior to this Application, Coventree is statute-barred from bringing this Application unless Coventree can satisfy the Court that the accounts are “interim” and not “final”. If the accounts in question are final, than there can be an assessment only if fraud or gross misconduct is demonstrated but that is not raised in this case.

(d) With respect to those accounts paid within twelve months of the date of the Application, the Court may refer the accounts for assessment if Coventree can satisfy the Court that there are “special circumstances”.

(e) With respect to the unpaid accounts, the jurisprudence indicates that such accounts should be referred to assessment if it is just and equitable to do so in all the circumstances. The threshold for obtaining an order referring recent unpaid accounts to assessment is generally not a high one.

Accounts Paid More than Twelve Months Before the Application: Whether Interim or Final?

[ 16 ] A limitation period of one year is imposed on such accounts to “reflect in part a policy that solicitors should not be required to become involved in an unreasonable expenditure of time and effort in reconstructing day-by-day details of the services rendered to their clients over an extended period of time” (per Cullity J. in Bunt v Assuras (2003), 63 O.R. (3d) 622 (SCJ) at para. 27 ).

[ 17 ] Where interim accounts are rendered in connection with the same matter, the limitation period for assessment under the Solicitors Act begins to run from the date of the final account, even if some of the interim accounts have been paid: See Price v. Sonsini , [2002] O.J. No. 2670 (C.A.) at para. 15 . The rationale for this is that clients should not be required to move for immediate assessment of interim accounts as it would obviously imperil an ongoing solicitor-client relationship before the retainer has ended. As stated in Price, supra at para. 16, “clients should not be forced to choose between harming the solicitor-client relationship and foregoing the right to have an interim account assessed”. Coventree submits that this is particularly so in the instant case as it and Tai had a joint interest in vigorously defending the OSC allegations. To expect Coventree to seek assessment of each monthly account in the midst of this lengthy and complex proceeding would be disruptive and would divert resources away from the OSC hearing.

[ 18 ] Coventree submits that a number of factors demonstrate that the accounts in question were interim, namely:

(a) All accounts relate to one piece of litigation;

(b) The accounts were not marked as final accounts;

(c) The last account received represents but a fraction of the work which was performed in regards to this litigation over a period of two and one-half years;

(d) All accounts relate to the same matter and are part of a continuum. Because of the nature of such litigation, it would have not been possible to appreciate or really assess the value of the services until the end of the retainer.

[ 19 ] In this regard, Coventree relies on Shapiro, Cohen, Andrews, Finlayson v. Enterprise Rent a Car , 1998 1043 (ON CA) , [1998] O.J. No. 727 (C.A.), a case which had many of the same factors.

[ 20 ] It is a question of fact as to whether the prior accounts are, in the circumstances, to be treated as interim or final for the purposes of the limitation period for seeking assessment: See Fellowes McNeil v. Kansa Canadian Management Services Inc ., 1997 733 (ONCA) at para. 7 .

[ 21 ] Perell J. considered this issue in Fiset v. Falconer , 2005 33783 (ONSCJ) and stated as follows at paras. 25-26:

In this area of the law, we discover that much turns on whether an account is “final” or “interim”. Unfortunately, the word “interim” is used in an ambiguous way. It turns out that an account that is “interim” in one sense may actually be a “final” account. Thus, an account that is “interim” in the sense that it comes before the last or “final” account may nevertheless be “final” in the sense that the amount of the account is not provisional but is fixed. Thus, an account that is “interim” in a temporal sense can be “final” in a monetary sense. See: Fellowes, McNeil v. Kansa Canadian Management Services Inc. (1997), 1997 733 (ON CA) , 34 O.R. (3d) 301 (C.A.); Enterprise Rent-a-Car Co. v. Shapiro, Cohen, Andrews, Finlayson (1998), 38 O.R. (3d) 5 (C.A.) ; Bunt v. Assuras (2003), 63 O.R. (3d) 622 (S.C.J.).

An account rendered during an ongoing matter will be a final account if it was clear that the amount of the account was not provisional and subject to later adjustment: Enterprise Rent-a-Car Co. v. Shapiro, Cohen, Andrews, Finlayson (1998), 38 O.R. (3d) 5 (C.A.) ; Fellowes, McNeil v. Kansa Canadian Management Services Inc. (1997), 34 O.R. (3d) 301 (C.A.) It is a question of fact whether an account is interim or final: Fellowes , McNeil v. Kansa Canadian Management Services Inc . (1997), 34 O.R. (3d) 301 (C.A.); Bunt v. Assuras (2003), 63 O.R. (3d) 622 (S.C.J.)

[ 22 ] Stockwoods submits that although the factors relied on by Coventree were present in the Shapiro, supra case, there was “other equally compelling evidence” (para. 14) in Shapiro which supported the conclusion that the accounts were “interim”. Of particular note, substantial adjustments were made to the accounts several months after they were delivered; and the solicitor’s conduct after the final account was rendered, indicated that the solicitor was not treating those accounts as final. These factors are not present in the instant case.

[ 23 ] Moreover, in the instant case, Coventree was a sophisticated client and could appreciate the nature of the services as the bills were rendered. It had its own lawyers – two sets of law firms in fact – working for it and in attendance at the OSC hearing. The Stockwoods’ accounts were sent to Cornish who himself was a respondent in the OSC proceeding and a lawyer. The accounts were sent on to the special committee comprised of Wesley Vorheis and Peter Dey, both experienced securities lawyers in their own right. Thus, Coventree had every opportunity to assess and evaluate the work billed for in the monthly accounts on an ongoing basis. Further, Coventree’s public reports spelled out the amount spent on legal fees and there was no indication that the accounts were provisional or subject to a later adjustment in any way.

[ 24 ] The accounts in question were all paid by Coventree without complaint. They were not labeled “interim” and were payable immediately upon delivery. Each account related to a specified time period.

[ 25 ] In these circumstances, I would conclude as Dunnet J. did in Kayor Energy Systems v. Davies, Ward & Beck. [2001] O.J. No. 2436 (SCJ) at para. 33 :

…I conclude that on the facts of this case, each account was considered final. In these circumstances, an assessment officer would be in a position to determine fairness without having regard to all of the accounts.

[ 26 ] Also, the language in section 11 of the Solicitors Act clearly implies that assessment after payment will be the exception rather than the rule. This is because payment is an implied acceptance of the reasonableness of the account. (See Kayor Energy, supra at para. 38).

[ 27 ] Accordingly, as a question of fact, I find that the accounts in this category were final and therefore will not be referred to assessment.

Accounts Paid Within Twelve Months of the Date of the Application: Do Special Circumstances Exist?

[ 28 ] Coventree submits that the following factors constitute special circumstances so as to justify assessment of this category of accounts:

(a) There was there a complete breakdown of trust between Coventree and Tai during the entirety of the Stockwoods retainer;

(b) During the OSC retainer, Stockwoods provided legal advice to Tai on a separate and unrelated matter and commenced an action against Coventree by way of Notice of Action in April of 2011 relating to Coventree’s purported cancellation of certain share certificates issued to Tai and his holding companies pursuant to Coventree’s Share Allocation Plan (“SAP”). Coventree did not know about it until it was served with the Notice of Action in October 2011;

(c) Stockwoods also provided advice to Tai concerning another share certificate issue. Stockwoods did not open a separate file for this matter but, rather, included these services in an invoice for its OSC work on behalf of Tai. While the services on that invoice did not relate to the OSC proceedings, Coventree agreed to pay Tai’s legal fees incurred with respect to that matter;

(d) Given Stockwoods secondary role and limited participation in the OSC proceeding the total quantum of their accounts was significantly high;

(e) Most importantly, Stockwoods breached its agreement that it had with Coventree not to bill for more than two lawyers’ attendance as counsel at the OSC hearing.

General Distrust

[ 29 ] The distrust between Coventree and Tai arose even before Stockwoods was first retained in the summer of 2009. Months earlier, Tai had ceased to be an employee, director and officer of Coventree and that obviously strained their relationship. By the summer of 2009, it was anticipated that Coventree, Tai and others could be facing allegations from the OSC that they had breached the Securities Act . Tai was concerned that Coventree did not have his best interests in mind and thus wanted independent counsel. From the outset, Coventree was obliged to cover Tai’s reasonable legal fees pursuant to the indemnity agreement notwithstanding the animosity that existed between Tai and Coventree.

[ 30 ] It was clear that Tai’s counsel, Stockwoods, in order to act in Tai’s best interests would not simply ride the coat tails of Coventree’s lawyers but would act independently in this regard and do its own independent assessment of the case and provide Tai with strategic recommendations. This became particularly important during the sanctions part of the proceeding as OSC staff intended to seek an order requiring Tai to pay $5 million administrative monetary penalty and an order that Tai be prevented from seeking indemnity from Coventree with respect to that penalty. This was a matter of enormous consequence for Tai.

[ 31 ] There were other matters straining the relationship between Coventree and Tai. A dispute arose out of Coventree’s decision in April of 2009 to cancel certain shares that had been issued to Tai’s holding companies (the “SAP Dispute”). It was agreed that the parties would hold the matter in abeyance as much as reasonably possible in light of the OSC proceeding and work co-operatively where their interests overlapped in matters at issue in the OSC proceeding.

[ 32 ] Accordingly, the fact that there was this distrust was not a new factor as it had existed prior to the retention of Stockwoods and was something that the parties knew they had to manage during the OSC proceeding.

The SAP Dispute

[ 33 ] From the summer of 2009 onwards, Tai and Coventree were having a dispute about the cancellation of the SAP shares. Coventree was aware of Stockwoods SAP retainer with Tai.

[ 34 ] Well into the Stockwoods’ retainer on this issue, and as seen by email letters in February 22, 2010, Tai was reserving his rights on this issue while he and his counsel were preparing for the OSC proceeding.

[ 35 ] Coventree submits that it was not aware that Stockwoods in fact issued a Notice of Action on Tai’s behalf until it was served with it in October of 2011. It argues that the surprise of this adverse litigation against it put in issue the accounts previously rendered by Stockwoods.

[ 36 ] Mr. Le Vay, on behalf of Stockwoods has deposed that Stockwoods has not charged to Coventree any of the time spent advising and representing Tai on matters not covered by Tai’s indemnity including the SAP proceeding. His evidence was not challenged on cross-examination. Coventree has not identified a suspicious docket entry in this regard.

[ 37 ] The SAP Dispute is not a new development. In view of the ongoing and simmering nature of the SAP Dispute, I do not view this as a “special circumstance”.

Stockwoods’ Invoice Combining OSC with Share Certificate Services

[ 38 ] Coventree submits that although Stockwoods claims that it opened separate files for Tai and docketed time exclusively to each specific matter, this is contradicted by its melding of services rendered with respect to the OSC proceeding with services related to the share certificate issue on the same account.

[ 39 ] One invoice rendered by Stockwoods related to a share certificate matter in which shares owned by Tai’s holding companies were inadvertently released from escrow. These services were included in a Stockwoods account relating to OSC services.

[ 40 ] While these services did not in any way relate to the OSC proceeding, Coventree agreed to pay Tai’s legal fees with respect to the share certificate matter.

[ 41 ] Coventree submits that rather than opening a separate account, Stockwoods included time spent on the share certificate matter with OSC services in November of 2009. The very next month Stockwoods did open a separate account to deal with the share certificate issue and billed services related to that matter separately from the OSC matter.

[ 42 ] Legal services rendered to Tai in connection with the share certificate matter were required to be indemnified by Coventree. Stockwoods expected the time to be quite minimal and the OSC proceeding, at that point, was not active.

[ 43 ] Stockwoods simply included the time for the share certificate issue in the November account designated “OSC”. There seemed to be no purpose, at that point, in opening a separate account to track the time on the share certificate issue. Once the OSC staff issued the Notice of Hearing and Statement of Allegations in early December 2009, Stockwoods became very careful to separate out the time spent on the OSC matter, which was now active, and the time spent on the share certificate issue, even though both accounts were payable by Coventree.

[ 44 ] Coventree did not seem to be too troubled by this at the time for it did not raise the issue until two years later and has always honoured its obligation to indemnify Tai for these services.

[ 45 ] The combining of these two sets of services for the share certificate issue and the OSC proceeding in the one account, rather than separating out the time spent on each, is not sufficient to create a special circumstance to warrant the assessment of all of Stockwoods’ accounts.

Total Amount of Stockwoods’ Accounts

[ 46 ] From July 2009 to December 2011, Stockwoods rendered monthly accounts to Coventree which totalled more than $1.5 million.

[ 47 ] Coventree submits that this is an excessive amount given Stockwoods’ role in the OSC proceeding. They did not lead the evidence of any witness that the respondents called throughout the forty-five day hearing. With respect to witnesses called by OSC staff, Stockwoods started the cross-examination of one witness. That cross-examination lasted only part of a day. Stockwoods’ closing submissions were restricted to thirty minutes on December 9, 2010.

[ 48 ] Coventree submits that in light of the secondary role performed by Stockwoods, the total amount of their accounts is significant and ought to be subject to an independent assessment.

[ 49 ] No complaint is raised by Coventree about the hourly fees charged by Stockwoods or about the work as described in the monthly accounts that had been performed. It does not complain that the monthly accounts are too vague or that it is unable to review or understand the accounts. Tai has been pleased with Stockwoods’ representation of him. The “significance” of the amount in of itself cannot be a special circumstance in this case. That is so because Stockwoods was required to do a very large amount of work both before and during the hearing itself. Throughout the proceeding, Tai instructed Stockwoods to undertake an independent analysis and assessment of the risks and benefits of various strategies. Coventree has not suggested that Tai was not entitled to give Stockwoods those instructions.

[ 50 ] It was not Stockwoods’ role to simply go along with Coventree’s two law firms. An independent analysis or assessment had to be made on their own.

[ 51 ] In any event, the total amount of Stockwoods’ accounts is less than ten per cent of the amount spent overall by Coventree during the same time period on legal and consulting fees relating to the OSC proceeding. The amount charged by Stockwoods was clearly proportional to the nature of the proceeding, the complexity and length of it, the seriousness of it, and the amounts at issue in the proceeding and the consequences for Tai.

The Charging for More Than Two Lawyers on Certain Hearing Days

[ 52 ] Coventree argues that Stockwoods breached its agreement not to bill for more than two lawyers at the OSC hearing. It mentions that at the beginning of the OSC hearing, Stockwoods agreed that it would not bill for three lawyers’ time spent at the hearing on any given day. Coventree submits that despite that agreement and without providing Coventree with any advance notice, Stockwoods unilaterally decided that the attendance of three lawyers was necessary at the OSC hearing on seven specific days.

[ 53 ] Coventree states that it paid the Stockwoods accounts for June 2010 and for December 2010 without detecting that Stockwoods billed for three lawyers attending the OSC hearing on certain days in those months. Coventree submits that had it known at the time it would have raised the issue and would not have paid those accounts. Coventree wants to ensure that there are no circumstances in which more Stockwoods lawyers were involved in matters than was necessary or appropriate and this requires independent assessment.

[ 54 ] Stockwoods submits that there was no formal agreement to this effect. Rather they agreed to exercise responsible judgment on this question.

[ 55 ] If there was not an “agreement”, there was certainly an understanding that Stockwoods would not bring more than two lawyers to a hearing at any one time and if they did, they would not bill for that third lawyer’s time. In fact, Stockwoods wrote down or wrote off the cost of the third lawyer’s attendance at the OSC proceeding on June 2, 3, and 4, 2010.

[ 56 ] Stockwoods did not write down the cost of that lawyer’s attendance at the hearing of the closing arguments on the merits on December 8 and 9, 2010 (a total of $5,225) or the Sanctions Hearing on October 26 and 27, 2011 (a total of $3,600). They thought it was necessary and indeed their obligation in serving Tai’s interest to have their three person team present during those occasions.

[ 57 ] Given the understanding with Coventree, it would have been appropriate for Stockwoods to obtain Coventree’s approval for this measure. However, the breach of the “understanding” does not justify a retroactive assessment of the Stockwoods’ accounts dating back to July 2009. The total amount billed for the third lawyer’s time on those four days amounts to $8,825.00 plus HST. Moreover, the lawyer’s time included not only attendance at the hearings, but preparation as well. In the scheme and context of the total accounts rendered, the amount in question is de minimis.

[ 58 ] Special circumstances require that there be something exceptional to justify an assessment of these paid accounts.

[ 59 ] These complaints arose in October 2011 when Coventree allegedly discovered certain facts. However, that coincided with the time when the ongoing dispute that it had with Tai reached a boiling point with the service of the oppression claim. In the words of Newbould J. in Katana v. Dockrill , 2007 34436 (ONSC), at para. 12 , this attempt to assess the prior two and one-half years of accounts is “a tit-for-tat reaction” to the commencement of adversarial proceedings by Tai. Newbould J.’s characterization of the motivation as a “tit-for-tat reaction” in Katana supra was held by the Court of Appeal ( 2008 ONCA 224 ) to be a rational conclusion in the circumstances noting that no one was unhappy with the legal work performed by the solicitors during the several years that they acted and the legal accounts had been paid in full many years before the issue arose.

[ 60 ] Taking into account the fact that Coventree and its advisors were sophisticated parties with every opportunity to scrutinize and review the time and work performed by Stockwoods and that Coventree’s own lawyers were involved in working with Stockwoods, and could readily monitor their efforts, the only conclusion that can be reached is that Coventree’s attempt to assess the accounts that had been paid over the years was motivated by the litigation brought against it by Tai.

[ 61 ] Accordingly, the matters raised by Coventree, either individually or together, do not constitute special circumstances when one considers the historical relationship between these parties.

[ 62 ] Accordingly, these accounts will not be referred to assessment.

The Unpaid Accounts

[ 63 ] The accounts for October, November and December 2011 which total about $165,000.00 have not been paid. There is a low threshold to be met by a client, or in this case Coventree, who is seeking to have recent unpaid accounts assessed. They should be referred to assessment if it is just and equitable in the circumstances to do so.

[ 64 ] There is no doubt that the difficult relationship between Coventree and Stockwoods completely broke down during the period of October to December 2011. It would be just and equitable that those unpaid accounts be referred to assessment and an order will go referring those three accounts to assessment.

Costs

[ 65 ] I trust that the parties will be able to come to an agreement with respect to the costs of this Application. If not, they may make written submissions within thirty days of the date of release of these reasons.

Lederman J.

Released: 20120507

COURT FILE NO.: CV-12-00444102-0000
DATE: 20120507

ONTARIO SUPERIOR COURT OF JUSTICE BETWEE N: COVENTREE INC. Applicant - and - STOCKWOODS LLP Respondent REASONS FOR DECISION Lederman J.

Released: 20120507