ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-13-487390
DATE: 20140825
BETWEEN:
MNP LLP (formerly MSCM LLP)
Applicant
– and –
MIGAO CORPORATION
Respondent
Shara N. Roy and Brendan F. Morrison, for the Applicant
David Shiller, for the Respondent
HEARD: July 2, 2014
t. mcewen j.
reasons for decision
[1] The Applicant, MNP LLP (formerly MSCM LLP) (the “Applicant”), brings this application against the Respondent, Migao Corporation (the “Respondent”). It seeks a declaration that the Respondent is obligated to indemnify the Applicant in accordance with the terms of their audit engagements and an order pursuant to the declaration that the Respondent is required to pay the Applicant the following:
(a) Legal fees incurred in respect of an investigation of the Regulatory Proceeding commenced by the Respondent’s Regulator; and
(b) The Applicant’s own time incurred in respect of the investigation of the aforementioned Regulatory Proceeding.
background
[2] The Applicant is an auditing firm with offices in Toronto. The Respondent is a company with operations in the People’s Republic of China that produces potash-based fertilizers. It is listed on the Toronto Stock Exchange.
[3] For a number of years, the Applicant acted as the Respondent’s auditor (the “audit engagements”). The audit engagements were conducted pursuant to letters executed each year between the parties.
[4] Amongst other things, the letters confirming the audit engagements provided for the following indemnities:
Indemnity Provisions
The Company [Migao] hereby agrees to release and indemnify MSCM and its partners and employees, and hold them harmless from all claims, liabilities, losses, costs (including solicitors’ fees), damages, expenses and demands arising out of or in consequence of:
• The breach by the Company, or its directors, officers, agents or employees, of any of the covenants made by the Company herein, including, without restricting the generality of the foregoing, the misuse of, or the unauthorized dissemination of, our [MSCM’s] engagement report or the consolidated financial statements in reference to which the engagement report is issued, or any other work product made available to the Company by MSCM; and
• The services performed by MSCM pursuant to this engagement, unless, and to the extent that, such losses, costs damages and expenses are found by a court of competent jurisdiction to have been due to the negligence of MSCM…
[5] The letters further provided for reimbursement with respect to the production of the Applicant’s working papers should it have to respond to, amongst other things, government regulation or legal processes. The letters stated as follows:
Working Papers
If with respect to this audit engagement, we [MSCM] are required by government regulation, subpoena, Canadian Public Accounting Board (CPAB) or other legal process to produce our [MSCM’s] working papers or to respond to information requests, we [MSCM] will bill the time incurred based on our [MSCM’s] regular rates and applicable GST.
[6] The Applicant ceased acting as the Respondent’s auditor as of July 24, 2012. Before and after that time, the Applicant received requests from the Respondent’s Regulator to produce documents, respond to other requests for information, and attend interviews with respect to its audit work for the Respondent. The order included statutory confidentiality provisions that restricted the Applicant from disclosing certain information. The record discloses, however, that the Respondent was aware of the fact that the Applicant had been required by the Respondent’s Regulator to cooperate with the Regulator’s investigation of the Respondent.
[7] The Applicant now claims that as a result of the Regulatory Proceedings, it has expended a significant amount of its professional time (for which it has billed the Respondent), and has incurred significant legal fees from the law firm Lenczner Slaght Royce Smith Griffin LLP to provide it with legal assistance and advice in connection with the Regulatory Proceedings.
[8] Both the Applicant’s fees and the legal fees have been submitted to the Respondent over time without payment. In a March 8, 2013 letter to the Applicant’s solicitor, however, J. Hussey, Vice President of Corporate Finance with the Respondent, advised the following, amongst other things:
We would like to clarify that our position is that Migao is not responsible for the legal fees incurred by MSCM in dealing with the Respondent’s Regulator.
We believe that the section in the engagement letter titled ‘Working Papers’ best reflects the situation as communicated to us, however limited that has been, by MSCM. I mention the limitation of information only as recognition of MSCM’s restriction by the RESPONDENT’S REGULATOR to provide details on the work being performed. Therefore we accept the time incurred by MSCM based on the regular rates.
[9] Notwithstanding this correspondence, as noted, the Respondent has not paid the Applicant’s own fees.
[10] As a result, the Applicant has brought this application seeking reimbursement.
issues
[11] The application essentially raises the following four issues: a) is the Respondent required to reimburse the Applicant for its legal fees?; b) is the Respondent required to reimburse the Applicant for its own fees?; c) the amount of the legal fees; and d) the amount of the Applicant’s fees.
analysis
Issues a) and b): Is the Respondent Required to Reimburse the Applicant for the Legal Fees and Its Own Fees?
[12] The short answer to the first two questions is “yes”.
[13] First, with respect to the legal fees, I accept the Applicant’s argument that the plain meaning of the Indemnity Provisions provides that the Respondent will indemnify the Applicant for its costs and expenses, including legal fees, incurred in connection with the audit engagements unless caused by the negligence of the Applicant. There is no allegation that the Applicant was negligent. The record discloses that the legal fees were incurred as a result of the Regulator’s investigation of the Respondent. In my view, this conclusion accords with the plain language used in the Indemnity Provisions and accords with sound commercial principles. The Indemnity Provisions are broad and unambiguous and specifically provide for the payment of legal fees.
[14] The Respondent, amongst other arguments, submits that the Working Papers indemnity provides for the entirety of the Respondent’s exposure and does not confer an entitlement to legal fees. Once again, however, the Indemnity Provisions are unambiguous, and when read together with the Working Papers indemnity harmoniously provide for indemnity with respect to the Applicant’s legal fees.
[15] Similarly, with respect to the Applicant’s own fees, the Working Papers indemnity also plainly states that the Respondent agrees to pay the Applicant for its time incurred when required by government regulation, subpoena or other legal process. The Respondent argues that there is no specific reference to the Respondent’s Regulator process, and that it would not be captured by the wording of the provision. This argument has no merit. The Regulator’s investigation fits well within the definition of “government regulation” or “other legal process”. In my view, the Respondent also conceded this issue when Mr. Hussey wrote the aforementioned letter to the Applicant’s solicitors. Subsequent to writing that letter, he swore an affidavit in this application attempting to explain that at the time he wrote the letter he had very little information about the services the Applicant had provided. While this may have been the case, it is my view that he clearly agreed in principle to pay the Applicant’s accounts in accordance with the provisions of the Working Papers indemnity. This agreement further undermines the Respondent’s position on this issue.
[16] I therefore find that the Applicant is entitled to the declaration that the Respondent is obligated to indemnify the Applicant for legal fees incurred and the Applicant’s own time incurred with respect to the regulatory proceeding. The only remaining issue is the quantum to which the Applicant is entitled.
Issue c) and d): The Amount of the Legal Fees and Applicant’s Fees
[17] First, with respect to the legal fees sought, it is my view that the dockets provided by the Applicant’s solicitors clearly and completely set out the time spent by the lawyers in providing legal services to the Applicant with respect to the Regulatory Proceeding. It is important, in my view, to note that the Respondent did not seek to cross examine the Applicant (or for that matter the Applicant’s solicitors) with respect to any of the accounts. The Respondent submits that the issue of quantum of legal fees and the Applicant’s fees should be subject to a hearing and should not be determined summarily. In this regard, the Respondent requested that I direct both issues to trial. With respect to the legal fees, I see no reason to do this in light of the straightforward presentation of the fees themselves, which appear to be reasonable, and in light of the Respondent’s decision not to challenge them in any way through cross examination. The Respondent simply requested the dockets from the Applicant, and the Applicant subsequently provided them.
[18] With respect to the Applicant’s own fees, the situation is somewhat more complicated. Unlike the legal fees, the dockets produced by the Applicant and the subsequent invoices that were provided to the Respondent are somewhat confusing and contradictory. For example, on occasion, the hourly rates are lower in the Applicant’s own internal dockets than the hourly rates charged to the Respondent in the invoices that were submitted to the Respondent by the Applicant. Further, on at least one occasion the invoice did not reflect the docketed time. This occurred with respect to the July 12, 2013 invoice, which was approximately $12,000.00 higher than the actual totals disclosed in the docketed time. The Applicant explains the discrepancies by stating that the internal documents are merely working papers, which would explain why lower amounts are used. The Applicant concedes that where there is a difference in the docket amount and the submitted invoice amount, it is prepared to take the lesser amounts provided for in the dockets as opposed to those amounts set out in the invoices. Furthermore, it submits that the Respondent only asked for the Applicant’s dockets, which were provided, and again no cross examination was conducted, nor were the amounts in the dockets questioned until the Respondent delivered its factum.
[19] The Respondent submits that it is not up to the Respondent to buttress the Applicant’s case and to point out problems with its productions for the purposes of the Application. The Respondent submits that it is up to the Applicant to prove its case on a balance of probabilities at the application with respect to the issue of quantum. Given the above difficulties, the Respondent argues that the Applicant’s fees should be subject to a hearing within the application in which viva voce evidence can be provided to address the inconsistencies.
[20] The Respondent also points to the fact that some of the Applicant’s dockets do not provide explanations as to how the time was spent by the Applicant. The Applicant counters with the argument that there are only a few dockets that do not have explanations, and when one compares those dockets to the law firm’s own dockets, it is clear that work was being done on the days in question since the law firm was docketing the time with particulars that included interaction with the Applicant. While this may be the case, my review of the materials also discloses that there are a number of entries in which the Applicant failed to provide explanations for the docketed time where law firm’s dockets do not provide corroboration.
[21] In the circumstances, I am left with a decision as to whether a trial of the issue of quantum of the Applicant’s fees should take place or whether I can make a decision based on the record before me. The Applicant urges me to make a decision based on the record while the Respondent, as noted, requests a trial of the issue. I find that the issue of the Applicant’s fees can be resolved on this application. In my view, this decision accords with the Supreme Court’s recent guidance in Hryniak v. Mauldin, 2014 SCC 7, particularly given that the Respondent failed to cross examine the Applicant’s evidence.
[22] It is my view that the matter can be resolved as follows:
(i) The Applicant’s entitlement to reimbursement should be based on the docketed time and not the invoices submitted. The docketed time provides for an itemized accounting, as opposed to the invoices, which have the aforementioned inaccuracies.
(ii) The hourly rates provided for in the dockets as opposed to the invoices shall be applied. This will result in the lower hourly rates being applied. I am satisfied that the affidavit evidence adduced by the Applicant supports the fact that these rates are in fact the working rates charged by the Applicant.
(iii) The Applicant is not entitled for reimbursement with respect to the docket entries that have no description of the services provided. I accept the Respondent’s submission that it is up to the Applicant to establish that it is entitled to reimbursement for the docketed time. In my view, it has failed to do so with respect to the docket entries that have no description of the time spent. As noted, it is simply not possible to understand from these entries why the time was docketed, and as such the Applicant has failed to establish on the balance of probabilities that the time was reasonably incurred with respect to the Regulatory Proceedings.
[23] If the parties cannot thereafter agree with respect to the total amount owing by the Respondent to the Applicant, I can be spoken to.
disposition
[24] The Applicant is therefore entitled to the declaration sought and an order that the Respondent is required to pay the Applicant’s legal fees as claimed, as well as the Applicant’s own fees in accordance with the above to be agreed upon by the parties or further ordered by the Court.
[25] The Applicant was largely successful at the application and is entitled to its costs on a partial indemnity basis in the amount of $25,000.00 inclusive. The Applicant submitted that it ought to be entitled to its solicitor and client costs given the provisions of the aforementioned Agreements. While I agree that this is the case insofar as I have outlined above, it is my view that the Agreements do not govern litigation between the parties.
[26] Costs are to be paid within 60 days.
T. McEwen J.
Released: August 25, 2014
COURT FILE NO.: CV-13-487390
DATE: 20140825
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
MNP LLP (formerly MSCM LLP)
Applicant
– and –
MIGAO CORPORATION
Respondent
REASONS FOR DECISION
T. McEwen J.
Released: August 25, 2014