Court File and Parties
Court File No.: 14-988 SR Date: 2016/04/20 Ontario Superior Court of Justice
Between: Christopher Stephen Guest, Appellant – and – Beverley Evelyn Fletcher and Michael Patrick Fletcher, Defendants
Counsel: In Person, for the Appellant Eric Lavictoire, for the Defendants
Heard: March 11, 2016 at Cornwall
Reasons for Decision on Leave to Appeal a Costs Decision
R. Smith J.
[1] The appellant, Christopher Guest (“Mr. Guest”) is a lawyer who seeks leave to appeal the decision of Laliberté J. dismissing his claim for costs against his former clients. The motion judge exercised his discretion and refused to award Mr. Guest any costs because he found that he purchased his clients’ interest in their action, which breached section 28 of the Solicitors’ Act, 2002, c. 24, Sched. A, s. 4. He found that the agreement whereby Mr. Guest acquired his clients’ right to claim for damages against the vendors, in return for abandoning his claim against them for fees of approximately $15,000, was void ab initio.
[2] The underlying issue involved in this case is whether a lawyer can acquire their client’s cause of action against a defendant and receive 100% of the damages recovered therefrom as legal fees. Mr. Guest submits that he acquired such a right pursuant to the initial unsigned retainer agreement and by way of Minutes of Settlement signed after he sued his clients for the amount they could have recovered in damages from the Vendors.
[3] Mr. Guest submits that he acquired a right of subrogation of his clients’ cause of action for damages against the Vendors in return for abandoning his claim for $15,000 in legal fees. Mr. Guest alleges that his clients refused to cooperate and refused to pursue their action against the Vendors. Mr. Guest then commenced action against his former clients for the amount of damages they could have recovered and received if they had continued with their lawsuit against the Vendors.
[4] The following issues are raised:
(a) Should leave to appeal be granted of the motion judge’s decision refusing to award costs? Underlying this issue are the following issues:
(i) Can a lawyer acquire a right of subrogation in his or her clients’ action?
(ii) Is this agreement between Guest and his clients an illegal Contingency Fee Agreement?
(iii) Is this agreement prohibited by s. 28 of the Solicitors’ Act?
Background Facts
[5] Mr. Guest initially acted as the solicitor for the defendants (the “Fletchers”) to make a claim against Stewart Title Guaranty Company (“the Title Insurance Company”) to cure a defect in their title. The garage of the property that they purchased from the vendors was located on the neighbour’s property.
[6] Mr. Guest alleged that the terms of his retainer agreement with the Fletchers was an initial deposit of $6000 plus HST, plus any additional costs he recovered from the Title Insurance Company and in addition, he alleged that the Fletchers agreed to transfer to him as additional legal fees 100% of the amount they recovered from their cause of action against the Vendors. The Fletchers disagreed and claimed that their retainer agreement with Mr. Guest was for a maximum amount of $6,000 plus HST, which they paid at the outset, plus whatever he recovered as legal costs from the Title Insurance Company.
[7] Mr. Guest negotiated a settlement with the Title Insurance Company on behalf of the Fletchers wherein the Title Insurance Company purchased additional land on which the garage was located. The Title Insurance Company also agreed to pay $8,300 towards the Fletchers’ legal costs and also released its right to pursue a subrogated claim for damages against the Vendors (the “Sloans”).
[8] Mr. Guest and the Fletchers then had a disagreement over the amount of Mr. Guest’s legal fees. Mr. Guest claimed that the Fletchers owed him approximately $21,000 for his legal services for negotiating a settlement with the Title Insurance Company; less the $6,780 they had already paid him as a retainer, leaving a balance owing to him of approximately $15,000. The Fletchers refused to pay Mr. Guest any additional amount for his legal fees above the $6,000 plus HST already paid.
[9] Mr. Guest then sued the Fletchers (the “First Action”) for the balance of his legal fees of approximately $15,000 plus the amount of damages that the Fletchers could have recovered if they had pursued a claim for damages against the Vendors.
[10] In this First Action, the Fletchers signed Minutes of Settlement with Mr. Guest wherein they agreed to give Mr. Guest a subrogated right to claim for damages in their names against the Vendors. In return, Mr. Guest agreed to abandon his claim of $15,000 for the additional amount of legal fees that he claimed was owing to him for negotiating the settlement with the Title Insurance Company.
[11] Mr. Guest alleges that the Fletchers refused to cooperate with him in pursuing the alleged subrogated action brought in their names against the Vendors. Mr. Guest then sued the Fletchers a second time (the “Second Action”) claiming damages in the amount of approximately $80,000. He alleged that the Fletchers had breached the terms of the Minutes of Settlement by not cooperating to allow Mr. Guest to pursue their claim for damages against the Vendors.
[12] The issue before the motion judge was the amount of costs to be awarded for two motions which were settled on consent except for the question of costs. In the first motion, Mr. Guest sought costs to have himself removed as a solicitor of record for the Fletchers in the so called subrogated action that he had commenced in the Fletchers name against the Vendors. Mr. Guest also sought costs for a second motion where he opposed the appointment of a litigation guardian for Mrs. Fletcher when she was in a fragile state. The Fletchers consented to the motion to allow Mr. Guest to be removed as solicitor of record and withdrew their motion to appoint a litigation guardian for Mrs. Fletcher. They agreed to have the costs of these two motions fixed by a judge. Mr. Guest claimed $13,424.40 in costs for these two motions.
[13] The motion judge dismissed Mr. Guest’s claim for costs for both motions because he found that the alleged subrogation agreement between Mr. Guest and his clients was really a purchase of his client’s interest in the litigation against the Vendors, which was prohibited by s. 28 of the Solicitors’ Act.
Analysis
Issue – Should Leave to Appeal be Granted under Rule 62.04(4)(a) or (b)?
[14] Rule 62.04(4)(a) and (b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 sets out the grounds on which leave to appeal may be granted. Rule 62.04(4) read as follows:
62.04(4) Leave to appeal shall not be granted unless,
a) There is a conflicting decision by another judge or court in Ontario or elsewhere on the matter involved in the proposed appeal and it is, in the opinion of the judge hearing the motion, desirable that leave to appeal be granted; or
b) There appears to the judge hearing the motion good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that, in his or her opinion, leave to appeal should be granted. R.R.O. 1990, Reg. 194, r. 2.02(4)
a) Rule 62.04(4)(a)
[15] The plaintiff relies on this subsection on a secondary basis as his main argument for leave to appeal was under Rule 62.04(4)(b). The plaintiff referred to the Court of Appeal decision of Koliniotis v. Tri Level Claims Consultants Ltd., 2005 ONCA 603, [2005] O.J. No. 3381, 257 DLR (4th) 297, para. 34 and submitted that it was a conflicting decision. I find that the above Court of Appeal decision is not a conflicting decision of another court under this Rule but rather a decision that must be followed by all Ontario Superior Court Judges. The Koliniotis case stands for the proposition that the law of Champerty has evolved over time so that “it would continue to catch only conduct that interfered with the proper administration of justice”.
[16] At paragraph 34 of the Koliniotis decision, the Court of Appeal held that quantum meruit may be applied to a contingency fee agreement, which the Court of Appeal found to be unlawful at the time, provided the contingency agreement was created in fair circumstances, with both parties being fully aware of what they bargained for, where any imbalance of power was remedied by giving the vulnerable party time to consult with others, and where there was no evidence of sharp or dishonest practice, or that the lawyer was in conflict of interest.
[17] Given the lack of any conflicting decisions, I do not find that it is desirable that leave to appeal be granted under Rule 62.04(4)(a) as there is no issue of law that needs to be clarified as a result of conflicting decisions.
Disposition of Leave to Appeal Under 62.04(4)(a)
[18] Due to the absence of any conflicting case law, I dismiss the appellant’s request for leave to appeal the motion judge’s decision on costs under Rule 62.04(4)(a).
b) Rule 62.04(4)(b)
[19] Rule 62.04(4)(b) requires that there appears, to the judge hearing the motion, good reason to doubt the correctness of the order and that the proposed appeal involves matters of such importance that leave should be granted.
[20] Mr. Guest submits that the motion judge erred in dismissing his claim for costs of $13,424.40 for the two motions. He submits that the motion judge went beyond the issue of the appropriate amount of costs to be awarded for the two motions, and in fact decided the main issue for trial in his action against the Fletchers. The motion judge held that the agreement between Mr. Guest and his former clients, by which Mr. Guest acquired a 100% interest in the Fletcher’s cause of action for damages against the Vendors in return for abandoning his claim against them for about $15,000, breached s. 28 of the Solicitors’ Act and was void ab initio. The motion judge made this finding because he found that Mr. Guest’s agreement with his clients was a purchase of his clients’ cause of action which was prohibited by s. 28 of the Solicitors’ Act. As a result of this finding, the motion judge exercised his discretion under s. 131 of the Courts of Justice Act, R.S.O., 1990 c. C.43 and refused to award any costs whatsoever to Mr. Guest for the two motions.
[21] Mr. Guest submits that if his agreement with his clients contravenes s. 28 of the Solicitors’ Act, it is only illegal and is not void ab initio. He submits that if his agreement is illegal, he may still make a claim for legal fees on a quantum meruit basis based on the 2005 Court of Appeal decision of Koliniotis. In the Koliniotis decision, the Court of Appeal held that a Contingency Fee Agreement that breached the provisions of the Solicitors’ Act at that time was illegal, and not void ab initio. In Koliniotis, the lawyer was able to claim for fees on a quantum meruit basis for services rendered under an illegal contingency agreement, where the retainer agreement was entered into in fair circumstances that did not interfere with the proper administration of justice.
[22] Mr. Guest argues that the motion judge exercised his discretion improperly by finding his agreement acquiring 100% of the Fletchers’ cause of action against the Vendors in return for foregoing his claim against them for outstanding fees of $15,000 breached s. 28 of the Solicitors’ Act and was void ab initio.
Is there reason to doubt the correctness of the motion judge’s decision?
[23] In this case, Mr. Guest settled a claim that his clients had against one potential defendant, namely the Title Insurance Company. He then became involved in a dispute with his clients over the legal fees that he charged for his services. He then sued his clients (now former clients) for $70-80,000 being the balance he claimed was owed for legal fees, plus his alleged loss of 100% of the value of the Fletchers’ claim for damages against the Vendors. Mr. Guest’s conduct of suing his former clients for damages, equal to 100% of the amount of their claim for damages against the Vendors as additional legal fees, appears very unfair and inequitable to his former clients.
i) Can a lawyer acquire a right of subrogation in his or her clients’ action?
[24] Mr. Guest alleges that he acquired a right of subrogation for 100% of the amount his clients could recover from their cause of action against the Vendors in return for abandoning his claim for $15,000 of additional legal fees that he claimed were owing. Mr. Guest alleges that he acquired a right of subrogation of the Fletchers’ claim for damages against the Vendor as part of his retainer and pursuant to the Minutes of Settlement they signed in the First Action.
[25] Section 152 of the Insurance Act, R.S.O. 1990, c. I.8 gives an insurer that has made a payment under an insurance contact the right to be subrogated to all rights of recovery of the insured against any person, and may bring an action in the name of the insured to enforce such rights, and to make a claim in the insured’s name as to recover the amount it has paid to indemnify their insured.
[26] In this case, Mr. Guest is not an insurer as defined under the Insurance Act and he has not made any payment to his clients to indemnify them for a loss they suffered. As a result, I find that Guest could not acquire any right of subrogation to bring an action in the name of his clients where he is not an insurer’ but rather their lawyer, and where he never indemnified the Fletchers for any damages suffered.
ii) Is this agreement between Guest and his clients an illegal Contingency Fee Agreement?
[27] Mr. Guest referred to the Koliniotis decision which relates to Contingency Fee Agreements. He submits that his retainer agreement with the Fletchers allowed him to recover 100% of the amount they recovered in their cause of action against the Vendors as legal fees. Such an agreement would be a Contingency Fee Agreement. Ontario Regulation 195/04 sets out what must be included in a Contingency Fee Agreement. Mr. Guest submitted that he sent letters to the Fletchers but acknowledged that his clients never signed a agreement with him containing any such terms. Pursuant to s.1 of the above Regulation, a Contingency Fee Agreement must clearly state that it is a “Contingency Fee Retainer Agreement”, it must be in writing, dated, and signed by both the lawyer and the client. The initial retainer agreement did not comply with all of these requirements and the Minutes of Settlement did not state that it was a “Contingency Fee Retainer Agreement”, and so, it also did not comply with the requirements.
[28] Section 2(10) of the Regulation states that a Contingency Fee Agreement requires that “the client retains the right to make all critical decisions regarding the conduct of the matter.” This would include the right not to proceed with the claim or to discontinue it. The retainer agreement and the Minutes of Settlement between Guest and his clients did not contain such a term.
[29] Section 4(4) of Regulation 195/24 on Contingency Fees also states that the agreement shall not contain a provision that requires the solicitor’s consent before a claim may be abandoned, discontinued or settled. The intent of s. 4(4) and s. 2(10) of the Regulation is that the client remains in control of all decisions including the decision not to proceed with or to discontinue an action. In this case as the Fletchers did not wish to pursue the Vendors for damages and they should have been able to make that decision without Mr. Guest’s consent.
[30] Mr. Guest’s unsigned retainer agreement with his clients and the minutes of settlement, whereby he allegedly acquired 100% of the amount of damages they could recover in their cause of action against the Vendors as additional legal fees, would also be in breach of 3.1 of the above Regulation. Section 3.1 requires that it contain a statement that the lawyer cannot recover more in fees than the client recovers as damages.
[31] The unsigned retainer agreement and the Minutes of Settlement purport to allow Mr. Guest to recover 100% of the amount recovered from his clients’ claim for damages against the Vendors. This is prohibited by s. 3.1 of the Regulation as the client would recover 0% of the amount recovered from the Vendors and Mr. Guest would recover the 100% of the amount recovered.
iii) Is this Agreement prohibited under s. 28 of the Solicitors’ Act?
[32] The motion judge found that Mr. Guest’s agreement with the Fletchers, where he acquired a 100% interest in the proceeds of their claim against the Vendors in return for foregoing his claim against them for fees of $15,000, breached s. 28 of the Solicitors’ Act and was void ab initio. The motion judge dismissed Mr. Guest’s claim for costs based on his finding that the agreement breached s. 28 of the Solicitors’ Act and was very unfair in all of the circumstances. Whether the agreement was illegal or void ab initio was not essential to exercise of his discretion. I find that there is no reason to doubt the correctness of the motion judge’s decision to dismiss Mr. Guest’s claim for costs as being very unfair and in breach of s. 28 of the Solicitors’ Act when the factors identified in the Koliniotis decision are considered.
[33] In addition to the breach of s.28 of the Solicitors’ Act, the motion judge considered the fact that the costs claimed by Mr. Guest for one of the motions was to have himself removed as solicitor of record. He was in a conflict in interest situation as he was both suing the Fletchers and acting for them in their claim for damages that he had issued in their names against the Vendors. I agree with the motion judge that it would be inappropriate for Mr. Guest to recover costs for removing himself as solicitor of record as a result of a conflict of interest that he created.
[34] In the second motion, Mr. Guest opposed the Fletchers’ motion to appoint a litigation guardian for Mrs. Fletcher because of her fragile mental health at one period of time. This motion was also settled on consent and was not argued. I see no error in the motion judge’s exercise of his discretion under s. 131 of the Courts of Justice Act, c. C.43 to dismiss Mr. Guest’s claim for costs for these two motions in all of the circumstances. Based on the nature of the motions, Mr. Guest’s breach of s. 28 of the Solicitors’ Act, his inability to acquire a right of subrogation and the breach of several provisions of the Regulations governing Contingency Fee Agreements, I find that there is no reason to doubt the correctness of the motion judg’s decision dismissing Mr. Guest’s claim for costs.
Public Importance
[35] I also find that the issue of the amount of costs which Mr. Guest was entitled to receive for these two minor motions is not a matter of public importance.
Disposition of Leave to Appeal under 62.04(4)(b)
[36] For the above reasons, Mr. Guest’s motion for leave to appeal is dismissed.
Costs
[37] The Fletchers have successfully opposed Mr. Guest’s motion for leave to appeal and seek costs of $3,500 on a substantial indemnity basis. The conduct of Mr. Guest in suing his former clients for 100% of the value of their cause of action against the Vendors, which he acquired in breach of s. 28 of the Solicitors’ Act, and in breach of several provisions of the Regulations governing contingency fee agreements, is conduct that I find is very unfair to the Fletchers, is reprehensible and outrageous and justifies costs being awarded against Mr. Guest on a substantial indemnity basis.
Disposition of Costs
[38] As a result, Mr. Guest is ordered to pay costs to the defendants in the amount of $3,500.00 on a substantial indemnity basis.