SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-20-651710-0000

DATE: 20211112

ONTARIO

BETWEEN:

PACE LAW FIRM PROFESSIONAL CORPORATION

Plaintiff

– and –

ADAM SOMOGYI ET AL.

Defendants

Chris Yung and Larry Thacker, for the Plaintiff

Gordon Capern and Kris Borg-Olivier, for the Defendants

HEARD: May 11, 2021

A.Ramsay J.

Overview

[1] The dispute between the appellant Pace Law Firm Professional Corporation (“PLF), the respondent Adam Somogyi (“Somogyi”, his firm Somogyi Law Group (“SLG”), and PLF’s ninety-five former clients (“respondent clients”) stems from Somogyi’s departure from PLF, the respondent clients firing of PLF, and the hiring of Somogyi. At the heart of the issue is the method by which a determination of the fee owed to PLF for legal services rendered to the respondent clients ought to be made. PLF argues that an undertaking given by Somogyi to pay PLF’s reasonable fees and disbursements should govern the process while Somogyi argues that the determination should be guided by his employment agreement.

[2] Shortly after his resignation, Somogyi sent communications to PLF indicating that he would undertake to pay PLF’s reasonable fees, subject to assessment, at the conclusion of the litigation. He requested the transfer of various client files. His law clerk sent similar emails. PLF did not respond and Somogyi commenced a claim against PLF for, among other things, breach of contract and unjust enrichment. He also commenced an application against PLF for the transfer of the respondent clients’ files (76 at the time). In turn, PLF brought a motion in the application proceeding seeking a solicitor’s lien on the respondent clients’ files and for charging orders against funds recovered by them.

[3] The parties ultimately settled all their claims save for the issue of fee splitting, which they agreed to submit to binding arbitration if not resolved by negotiation within a specified timeframe. They entered into a Settlement Agreement on January 15, 2020 (the Settlement Agreement) with respect to the settled claims and executed releases. Unable to negotiate the fee splitting issues, the parties proceeded to arbitration in accordance with the Settlement Agreement.

[4] In February and March 2020, Somogyi’s law clerk sent authorizations and directions for more client files and indicated that SLG would undertake to pay PLF’s reasonable fees, subject to assessment, upon resolution of the claim.

[5] The parties proceeded to arbitration on August 12 and 19, 2020 in accordance with the Settlement Agreement before Arbitrator Paul Torrie (“the Arbitrator”).

[6] PLF now seeks to vary or set aside the decision of the Arbitrator dated October 23, 2020, which determined certain preliminary issues in favour of Somogyi, namely that the fee split between the parties is governed by Somogyi’s employment agreement.

[7] The appeal is governed by s. 45 of the Arbitration Act, 1991, S.O. 1991, c. 17, which allows appeals on a question of law, with leave.

[8] Leave to appeal was granted by order of Myers J. dated February 3, 2021, on the basis that PLF had identified extricable questions of law at paragraph 3 of their factum.

Background

Somogyi was hired by PLF on April 30, 2014. He resigned in November 2019. At the time of his employment, Somogyi signed an employment agreement dated March 14, 2014 (“the employment agreement”). The employment agreement, drafted by PLF, is signed on behalf of PLF by its managing partner James Murphy (“Mr. Murphy”). Paragraph (i) of the employment agreement contains the following provision (‘the departure clause”):

“If your employment with the Firm is terminated at a future date at the discretion of either party, at the direction of any existing client you will be taking files from the firm when or after you depart, it is agreed that the amount payable to Pace Law Firm would be based on the usual assessment of party and party time and disbursements.

[9] In addition to providing for compensation, vacation, and various benefits, paragraph (h) of the employment agreement provided that Somogyi would docket his time.

[10] Paragraph (g) of the employment agreement contained the following clause:

Any know how, processes, documentation, or material developed, accessed or used by you

during your employment with Pace Law Firm will be the exclusive property of Pace Law Firm. All

files you work on are owned by Pace Law Firm and are subject to periodic review by senior lawyers and by the Firm management.

[11] ..

[12] The respondent clients signed Contingency Fee Agreements (“CFA”) with PLF. Most of the CFAs stipulated that upon termination of the agreement, fees may be calculated on the basis of either an hourly rate and other factors, or on a percentage based on the amount recovered by the client.

[13] In 2016, Somogyi incorporated a professional corporation and was paid Somogyi for his services through his professional corporation. He was no longer issued a T4 and no statutory deductions were made. He became a Team Leader in January 2017, assumed new responsibilities, was paid a draw against income, and became eligible to participate in a profit-sharing formula calculated on his team’s budget expenses multiplied by an overhead factor.

[14] After a dispute about draws in March of 2017, the parties engaged in several rounds of negotiations to incorporate Somogyi’s new responsibilities and compensation which came into effect on January 1, 2017, into a written agreement. The proposed written agreements, which were never signed, indicate that if agreed to, Somogyi’s status vis-à-vis PLF would be “solely that of principal to principal” and the agreement clarified that “and Adam Somogyi shall not under any circumstances be considered to be an officer or employee of PLF”.

[15] During those negotiations PLF had put forward various proposals to amend the apportionment of legal fees on client files in the event of a termination of their relationship. All were rejected by Somogyi on the basis that they were less favourable than the terms of the provision in his employment agreement.

[16] The negotiations to arrive at a new written contract ultimately stalled in March 2017 and was not renewed. No new written agreement was entered into before Somogyi’s departure from PLF in November 2019.

[17] Somogyi resigned from PLF on November 4, 2019.

[18] On November 6, 2019, Somogyi sent the first of several emails sent that month to PLF advising them that he would “pay PLF's reasonable fees and disbursements, subject to assessment, at the conclusion of the litigation” and requesting the transfer of various client files. His law clerk sent similar emails that month and indicated in her communications that SLG would undertake to pay PLF reasonable fees, subject to assessment, at the conclusion of the litigation.

[19] PLF did not respond to Somogyi.

[20] On December 23, 2019, Somogyi issued a claim against PLF for breach of contract, unjust enrichment and quantum meruit arising out of his employment relationship with PLF.

[21] On December 2, 2019, Somogyi issued a Notice of Application against PLF for the transfer of client files, seventy-six at the time.

[22] On December 9, 2019, PLF initiated a motion for a solicitor’s lien on the files and a charging order.

[23] On January 15, 2020, PLF and Somogyi, through their counsel, entered into the Settlement Agreement. Pursuant to the Settlement Agreement, PLF and Somogyi agreed to “settle all of the issues in the application and motion as well all other claims arising out of their relationship”, except for the fee split issue. They agreed to continue to negotiate the fee split issue and agreed that in the absence of a resolution within seven days, they would refer the fee split issue to a binding arbitration (“the Settlement Agreement”). As part of the Settlement Agreement, the parties also consented to a charging order, payment of disbursements to be made by Somogyi, and the files to be transferred to PLF. The parties also agreed in the Settlement Agreement that the respondent clients were parties to the Settlement Agreement.

[24] In February 2020 and March 2020, after the Settlement Agreement, Somogyi’s law clerk sent directions with respect to some clients’ files, requested the transfer of those files, and repeated the same undertaking with respect to SLG.

The Arbitration- The Issues as Framed by the Parties

[25] PLF and Somogyi submitted written submissions to the Arbitrator and their lawyers made oral submissions. The arbitration was bifurcated with preliminary hearing (the decision under appeal) to proceed first to determine whether the fee split issue would be resolved on the basis of Somogyi’s employment agreement.

[26] The respondent clients were joined in the arbitration, however, PLF and Somogyi agreed that they need not participate at that stage of the proceeding.

[27] PLF and Somogyi agreed to submit the following issues to be determined by the arbitrator:

i. At the time of Somogyi’s departure from PLF, was Somogyi an employee of PLF and if so, was the relationship governed by the Employment Agreement;

ii. If the Employment Agreement was operative, how is the Departure Clause to be interpreted and applied; and

iii. If the Employment Agreement is operative, do any of the following factors modify, override or void an otherwise valid Employment Agreement:

a) Somogyi did not keep time dockets;

b) The Somogyi Undertakings;

c) The CFA termination clause; and

d) Pleadings made in the Somogyi Statement of Claim.

[28] At the arbitration, Somogyi requested that:

i. The fee split issue be calculated in accordance with the Fee Split Provision contained in the Employment Agreement;

ii. The fees payable to PLF for each client be based solely on the properly assessable partial indemnity time spent by PLF at partial indemnity rates to the date of Somogyi’s departure;

iii. Any such fees only be payable upon resolution of the individual client matter; and that

iv. The maximum recovery by PLF shall not exceed the amount of fees ultimately paid by the client to Somogyi.

[29] PLF sought the following relief:

i. A declaration that the Fee Split Issue cannot be determined on the basis of the 2014 Employment Contract; and

ii. The Arbitration proceed for a determination of a reasonable division of fees between PLF and Somogyi.

Position of the Parties at the Arbitration

i. Position of PLF

[30] At the arbitration, PLF sought an apportionment of the contingency fee payable under the various CFAs made between Somogyi and each of the respondent clients, which it submitted would give effect to the prior CFAs made between PLF and each of the respondent clients to pay “reasonable charges” to PLF and Somogyi’s solicitor’s undertaking to pay “reasonable fees” to PLF. PLF also argued that the departure clause could not be the basis of resolving the fee split issues because it was superseded by Somogyi’s independent and enforceable obligations under voluntarily given solicitor’s undertaking given in November 2019.

[31] PLF also submitted that the departure clause was superseded by subsequent retainer agreements made between PLF and the respondent clients, which remained enforceable. It argued that the departure clause was of no force or effect as it existed as part of the employment agreement. Finally, PLF submitted that the employment agreement had been frustrated by Somogyi’s failure to docket his billable time in breach of his obligation.

ii. Position of Somogyi

[32] Somogyi argued that he was an employee until he resigned from PLF in November 2019, and neither his change in responsibilities, title, or method of compensation changed his status. He submitted that the departure clause expressly addressees the split of fees to which PLF would be entitled in respect of clients that left PLF to join Somogyi at a different firm. He argued that the departure provided that PLF’s entitlement legal fees was predicated on what the clients may ultimately be obliged to pay and was limited to assessable “party and party” time on the file, together with disbursements. He argued that the fee split provision remained operative and was never altered or replaced, and submitted that the doctrine of contra proferentum should be applied as PLF had drafted the employment agreement at the time when he was a lawyer with less than two years at the bar. He argued that PLF should be held to their bargain.

The Decision of the Arbitrator

[33] The Arbitrator ruled that at the time Somogyi left PLF, he was an employee and the employment agreement was in force. He further found that the departure clause of the employment agreement governed the fee split between the parties. With respect to the calculation of the fees payable to PLF, the Arbitrator ruled that they would be calculated based upon assessable time spent on the client files on a partial indemnity basis, and further held that the fees payable to PLF would be due upon resolution of the clients’ matters. He further held that the maximum payable to PLF should not exceed the fees paid to Somogyi by a client and directed PLF to render its fee accounts pursuant to the departure clause of the employment agreement.

[34] In arriving at his decision, the Arbitrator found that Somogyi’s undertakings were given in the context of his effort to obtain possession of client files from PLF, but PLF had rejected Somogyi’s early undertakings for files transfers.

[35] The Arbitrator found that the files were transferred under the terms of the Settlement Agreement and found that the undertakings had “merged in the settlement”. He stated at paragraph 52 of his d Reasons:

The client file transfers subsequently took place on the terms of the Settlement Agreement and differed from those originally proposed by Somogyi. In my opinion, once the Settlement

Agreement was executed, the Somogyi Undertakings merged in the settlement and came to an end. The fact a few additional undertakings were given after the January 15, 2020 does not change the general effect of them merging in the Settlement Agreement.

[36] With respect to the interrelationship between the employment agreement and the CFAs, he found that the PLF had agreed to limit its recovery of legal fees and disbursements on the terms set out in the departure agreement. At paragraph 54 of his Reasons, he stated:

In this instance, both the Departure Clause of the Employment Agreement and the Termination Provisions of the CFAs had the same purpose and intent which was to ensure PLF received compensation for its services when a client left the firm. The CFAs’ Termination Provisions were more detailed and broader than the terms contained in the Employment Agreement. The CFAs’ provisions allowed PLF the option of calculating fees payable by a former client either on an hourly rate or as a percentage of the fees paid on settlement. As an incentive to induce Somogyi to join their firm, PLF had agreed to limit its recovery of fees and disbursements to the terms set out in the Departure Clause. In my opinion, this was what both parties intended.

The Grounds for Appeal and Position of the Parties

[37] PLF advances two errors of law made by the arbitrator as follows:

i. The Arbitrator erred by ruling, without citing any authority, that the solicitor’s undertaking for payment of legal fees did not need to be performed because it “merged” into the Settlement Agreement. A solicitor’s undertaking is not a contractual obligation, and in any event the Settlement agreement explicitly carved out the Fee Split Issue; and

ii. The Arbitrator conflated two distinct contracts, when he ruled that the contingency fee agreements between the PLF and the Former Clients, should be interpreted with regard to a separate employment agreement between the Applicant and Mr. Somogyi, who was not a party to the contingency fee agreements.

[38] PLF argues that the employment agreement was not applicable and that the fee split issue ought to be resolved as a fair apportionment of the contingency fee arrangements. It further argues that Somogyi was liable under a solicitor’s undertaking to pay “reasonable fees” and the respondent clients were liable for “reasonable charges” under their own contingency fee agreements.

[39] PLF submits that the Settlement Agreement did not terminate Somogyi’s undertaking, his employment contract, or the CFAs, all of which remained in force.

[40] Somogyi’s position remains consistent with his position at the arbitration. Where appropriate, they are fleshed out below.

What is the Standard of Review on Appeal?

[41] The parties cannot agree on the applicable standard of review. PLF submits the standard is correctness while Somogyi submits the standard is reasonableness.

[42] The arbitration was conducted pursuant to an arbitration agreement between PLF and Somogyi in accordance with s. 2(1) of The Arbitration Act, 1991, S.O. 1991, c. 17.

[43] The arbitration agreement was silent on the right of appeal. Therefore, s. 45(1) of the Arbitration Act governs the parties appeal rights. The section provides that:

45(1) If the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant only if it is satisfied that,

(a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and

(b) determination of the question of law at issue will significantly affect the rights of the parties.

[44] Leave to appeal was granted by Myers J.

[45] The Arbitration Act is silent on the standard of review.

[46] The jurisprudence establishes the choice of standard of review is a question of law and the court is not bound by the parties' positions and must determine the correct standard of review: Monsanto Canada Inc. v. Ontario (Superintendent of Financial Services), 2004 SCC 54, [2004] 3 S.C.R. 152 (S.C.C.), at para. 6; Intact Insurance Co. v. Allstate Insurance Co. of Canada 2016, ONCA 609, at para. 22.

[47] In December 2019, the Supreme Court of Canada released a trilogy of cases in which the court reconsidered the administrative framework for appellate and judicial review and put forward a clarified framework to assist a reviewing court in determining the standard of review to be applied by reviewing courts to an administrative decision. In Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 [Vavilov], the Supreme Court of Canada makes clear that in all cases, there is presumption that reasonableness is the applicable standard of review: see Vavilov, supra at para. 10.

[48] However, the presumption of a reasonableness standard may be rebutted in two instances. First, where a statute provides a different standard of review or statutory appeal mechanism. In either case, the appellate standard of review, and the attendant jurisprudence will apply. Second, the presumption of reasonableness review will be rebutted where the rule of law requires that the standard of correctness be applied. In the latter case, requiring a correctness review may involve constitutional questions, questions of law of central importance to the legal system as a whole, and questions related to the jurisdictional boundaries between two or more administrative bodies.

[49] In this case, as mandated by Vavilov, the starting point is a presumption of reasonableness. As directed by Vavilov, this case may subject to one of the limited circumstances where the reasonableness standard is rebutted. Section 45 of the Arbitration Act sets out an appeal mechanism, either as of right, or with leave.

[50] The legislature therefore intended that the Arbitrator’s decision should be subject to the court’s appellate review either as of right or with leave. In the first instance, in this case, as the right of appeal is governed is by s. 45(1), the reasonable standard is initially rebutted. However, as directed by Vavilov, resort must be had to jurisprudence on appellate standard of review, which is set out in the Supreme Court of Canada decision of Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 SCR 235 [Housen]. That is, a reviewing court will not interfere with a decision of an arbitrator on issues of findings of fact or inferences of fact drawn by the arbitrator unless there is “palpable and overriding error”: Housen at paras. 10 and 19. On a question of mixed fact and law where the legal principle is not readily extricable, the standard of review is “palpable and overriding error”: Housen at paras. 29 and 36; Jaegli Enterprises Ltd. v. Taylor, 1981 CanLII 26 (SCC), [1981] 2 S.C.R. 2, at p. 4, and on questions of mixed fact and law where the arbitrator has made an extricable error in principle amounting to an error of law, the applicable standard of review would be correctness: Housen at paras. 36 -37.

[51] In accordance with the revised framework in Vavilov, the principles governing appellate review of the decision of the arbitrator is governed by the guidelines in Housen: see Vavilov at paras. 36-37, it would initially appear that questions of law and extricable questions of law are reviewed on a correctness standard. When appellate review is engaged under the revised administrative framework, Vavilov also makes clear “that the applicable standard is to be determined with reference to the nature of the question and to this Court’s jurisprudence on appellate standards of review”, at para. 37.

[52] Since the heart of the question is the interpretation of a contract in a commercial context, reconciling the direction in the Vavilov framework to look to the jurisprudence on appellate review, the Supreme Court of Canada's decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633 comes into play. At paragraph 106, Justice Rothstein, speaking for the Court, stated:

In the context of commercial arbitration, where appeals are restricted to questions of law, the standard of review will be reasonableness unless the question is one that would attract the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole and outside the adjudicator’s expertise.

[53] The Supreme Court in Sattva and appellate authority in Ontario since that decision, make it clear that “contractual interpretation remains a mixed question, not a legal question, as it involves applying contractual law (principles of contract law) to contractual facts (the contract itself and its factual matrix)”: Sattva, supra at paras. 53 -54, at para. 50; Groves v. UTS Consultants Inc., 2020 ONCA 630, at para. 8

[54] In Sattva, para. 53, Rothstein J. noted that, “Legal errors made in the course of contractual interpretation include ‘the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor’ (King, at para. 21).”

[55] The Supreme Court of Canada noted in Sattva that errors in law made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” (King, at para. 21). In such instances, extricable questions of law are reviewed on a correctness standard: Sattva, supra, at para. 52; Groves, supra at para. 8.

[56] As Sattva makes it clear that extricable questions of law are reviewed on a correctness standard, the standard of review on this appeal is correctness.

What is the relationship between the Settlement Agreement and the Undertaking?

[57] The Arbitrator found that the only issue not included in the Settlement Agreement was the fee split issue which was the subject of this Arbitration. He interpreted the Settlement Agreement as including all issues, including the undertakings given by Somogyi, which he determined had merged in the Settlement Agreement.

[58] The Settlement Agreement dated January 15, 2020 provided as follows:

I confirm that the parties, Pace Law Firm and Adam Somogyi and Adam Somogyi Professional Corporation, have agreed today, through exchange of letter and emails, to the following terms to settle all of the issues in the application and motion as well all other claims arising out of their relationship, on the following terms:

1. The parties consent to a Court charging order for all fees and disbursements of PACE, subject to the client's right to assessment, said charge to be 100% of the disbursements, and 66.7% of each Applicant's contingency fee arrangement with SLG.

2. The manner in which the clients are informed of the order ad their obligations thereunder, is Somogyi's responsibility, and Pace leaves this to him to determine.

3. Payment of Disbursements, Bonus and File Exchange: PACE will wire $201,140 to Somogyi within 24 hours of confirmed receipt of cleared funds in the amount of $348,199 from Somogyi. PACE will deliver digital copies of all remaining files including annotations in Primafact within 7, days thereafter, with complete original files to be made available for pick-up thereafter. Should Pace receive payment from any insurance companies with respect to any disbursements invoiced to Mr. Somogyi, Pace shall return same to Somogyi (emphasis added).

4. The parties will work in good faith to negotiate a division of client fees, as between PLF and SLG, either on a file by file basis, or through a mutually agreeable formula. If the parties are unable to reach a resolution on the fee splitting issue within seven (7) days; the parties will agree to enter into a confidential and binding arbitration with respect to the fee splitting issue before one of Pace's suggested arbitrators…. or ….chosen by Somogyi (emphasis added).

5. Concurrent with delivery of all remaining files Somogyi will advise PACE on all funds received to date, and provide information forthwith and an ongoing basis, as a result of any judgment, order, settlement or ,other resolution of the claims of the former clients, including particulars on settlement amounts, fees charged, dates of payment; and names of payers.

6. The parties to the minutes of settlement, and any arbitration under paragraph 4, include all parties to the Application (including the clients), any other former client of PACE now with Somogyi, and Somogyi.

7. Somogyi will prepare transfer memos on all files that remain with Pace that have not yet been resolved in full.

8. The parties will jointly inform the Court that the motion and application has been fully resolved without the need for a decision. There will be no costs on the motion.

9. Parties will exchange mutual releases of all claims existing to date (excepting the fee issue described in paragraph 4 and a breach of the settlement), whether known or unknown and exchange non-disparagement covenants…

Did Somogyi give an undertaking his professional capacity? If so, did Somogyi’s undertaking survive the Settlement Agreement?

[59] PLF argues that Somogyi gave a personal undertaking acting in his professional capacity which is still alive. PLF argues that Somogyi delivered the undertaking voluntarily, and in doing so, this choice is inconsistent with his belief that the employment contract remained in effect. PLF argues that if that were the case, he would not have thought the undertaking necessary, but rather would rely on the contract alone.

[60] PLF argues that the Arbitrator erred in concluding that the solicitor’s undertaking for payment of legal fees merged into the settlement agreement which created the arbitration.

[61] The materials filed before the Arbitrator indicate that most of the undertakings were given by the law clerk on behalf of SLG. On November 6, 2019, Somogyi sent the following email to PLF:

Take notice that the following clients have signed retainers with my firm. For added clarity, they have also signed directions instructing PLF to not contact them and to deliver their complete files to my attention.

With respect to the above-noted files and all files being transferred from PLF to my firm, I hereby undertake to pay PLF's reasonable fees and disbursements, subject to assessment, at the conclusion of the litigation….

The email went on to list six clients and concluded with the following statement: “I expect to be contacted by PLF within seven days to arrange for the immediate transfer of clients files.”

[62] Similar emails were sent by Somogyi to PLF with respect to other clients.

[63] Somogyi’s law clerk sent an email to PLF on the same day, identifying a list of seven clients who had signed retainers with his new firm, the respondent Somogyi Law Group. The email indicated that:

With respect to the above noted files and all files being transferred from PLF to Adam Somogyi of Somogyi Law Group Somogyi Law Group hereby undertake to pay PLF's reasonable fees and disbursements subject to assessment at the conclusion of the litigation.

We expect to be contacted by PLF within seven days to arrange for the immediate transfer of clients files.

[64] Similar emails were sent by Somogyi’s law clerk in November 2019. The emails from Somogyi or his clerk during this period either advised of signed retainers with his new firm or provided authorizations and directions from the clients for the transfer of their files to Somogyi. In each case the same term was contained in the email with respect to the undertaking with respect to files being transferred, and a request made for PLF to arrange for the transfer of the files within seven days.

[65] On February 10, 2020, Somogyi’s law clerk forwarded an authorization from another client. She indicated that:

“…Somogyi Law Group hereby undertakes to pay Pace Law Firm’s reasonable disbursements upon receipt of an account for same, and fees, subject to agreement or assessment, at the conclusion of the litigation.”

The law clerk went on to request the transfer of the file.

[66] On March 16, 2020, the law clerk forward two authorizations to PLF from clients for the release of their file. She noted in her communication:

Kindly send us the list of disbursements so that we can prepare a check which we will exchange for the files. We undertake to pay your reasonable fee account, subject to agreement or assessment, upon conclusion of the litigation. Thank you.

[67] At paragraph 29 of his Preliminary Reasons, the Arbitrator indicated:

“…. Most of the undertakings had the following wording:

With respect to the above-noted files and all files being transferred from PLF to my

firm, I herby undertake to pay PLF’s reasonable fess (sic) and disbursement, at the

conclusion of the litigation.

After providing the undertaking and listing the files he was seeking to be transferred, Somogyi added:

I expect to be contacted by PLF within seven days to arrange for the immediate transfer of clients’ files.”

[68] For reasons unexplained, the Arbitrator omitted the qualification noted in all the undertakings, “subject to assessment”.

[69] PLF argues that Somogyi’s undertakings were personal undertakings, and those of the law clerk committed the respondent SLG to perform the undertaking. Before the Arbitrator, PLF took the position that the undertakings overlap and either form equally applies “as they were given in respect of ‘all files being transferred from PLF’”.

[70] In their written submissions before the Arbitrator, PLF indicated that the undertakings made by the law clerk, committed the “Somogyi Law Group” to perform the undertaking. In their factum, PLF cites paragraph 45 of Perell J.s decision in Thomas Gold Pettinghill LLP v. Ani-Wall Concrete Forming Inc., 2012 ONSC 2182, which does not stand for the proposition put forward.

[71] Black's Law Dictionary, 5th edition, abridged, at p. 794, defines an "undertaking" as follows:

“A promise, engagement, or stipulation. An engagement by one of the parties to a contract to the other, as distinguished from the mutual engagement of the parties to each other. It does not necessarily imply a consideration. In a somewhat special sense, a promise given in the course of legal proceedings by a party or his counsel, generally as a condition to obtaining some concession from the court or the opposite party. A promise or security in any form.

[72] In Hudson v. Andros, 2010 ONSC 3417 (Ont. S.C.J.) (), Pierce J. was asked to determine whether communications by a lawyer to a nonlawyer, given in the lawyer's professional capacity, was an undertaking. In this case, the lawyer had cited the definition quoted by G.B. Smith in Professional Conduct for Canadian Lawyers (Toronto: Butterworths, 1989), at p. 203 as follows:

"An undertaking is the promise given by a solicitor through a written statement, a verbal communication or inferred from his acts, or any combination thereof, in reliance on which promise the recipient of the undertakings gives up to the solicitor or to another party, a document or right, or performs an act which that recipient would not have done were it not for the receipt of the promise from that solicitor."

[73] In Andros, the plaintiff’s former lawyer had indicted to an adjuster that he would amend the statement of claim to the defendants’ policy limits. The lawyer had not sought instructions from his clients.

[74] An undertaking is binding personally on the lawyer, unless the undertaking states in unambiguous terms that it is the client who has made the undertaking: Andros, supra at para. 24.

[75] No consideration is necessary for an undertaking to be binding: Andros, supra at para. 24.

[76] An undertaking may continue to bind clients even where the client changes lawyers: see: Lysyk, Dodek and Hoskins, Barristers and Solicitors in Practice, LexisNexis Canada Inc. 2009, (looseleaf); Andros, supra at para. 24.

[77] However, the court will not compel the performance of an undertaking if it made by a lawyer in his professional capacity: Wilson v. Beatty (1885), 12 O.A.R. 253 (C.A.).

[78] A lawyer’s undertaking may, at times, amount to a contract in circumstances where consideration exists: See Gagro v. Morrison, [1995] O.J. No. 1611 , leave to appeal dismissed, [1996] O.J. No. 1612 (Ont. C.A.).Gagro v. Morrison [1995] O.J. No. 1611. As Perell J. explained in Thomas Gold Pettinghill LLP v. Ani-Wall Concrete Forming Inc. 2012 ONSC 2182, at paras. 47 – 48:

[47] Sometimes the exposure of a lawyer for liability for breach of a personal undertaking may be explained as a matter of the law of contract. This explanation will follow if the rules of contract formation are satisfied for the promise or undertaking. The case of Frankel Structural Steel Ltd. v. Goden Holdings Ltd., (1971), 1971 CanLII 6 (SCC), 16 D.L.R. (3d) 736 (S.C.C.), revg. (1969), 1969 CanLII 27 (ON CA), 5 D.L.R. (3d) 15 (Ont. C.A.), is an example. In this case, a law firm’s undertaking to pay funds to a manufacturer was a binding contract.

[48] More often, however, the enforcement of the undertaking cannot be explained as a matter of contract because, for example, the element of consideration may be missing. The enforcement of these undertakings is then explained as an incident of the court’s inherent jurisdiction to supervise its officers and to secure their honest conduct: Re Hilliard, Ex. P. Smith (1845), 2 Dow. & L. 919; Watton v. Parsons (1977), 1977 CanLII 1702 (NL SC), 80 D.L.R. (3d) 297 (Nfld. Dist. Ct.); Regatta Investments Limited v. Haig, 1985 CanLII 3670 (MB QB), [1985] 6 W.W.R. 635 (Man. Q.B.).

[79] Somogyi’s undertaking with respect to paying PLF’s reasonable fees upon resolution of the files was not given in the context of litigation, i.e, in his professional capacity. Each of the undertaking which PLF points to require the transfer of the file, which was not carried out until after the Application was commenced and the settlement reached. Undertakings, which the court may enforce under its supervisory power of lawyers, would also bind the clients. There is no evidence before the court is any of the materials filed at the arbitration to indicate that Somogyi had authority to bind his clients. On its face, the undertaking was given to facilitate the transfer of files. It is clear from the undertaking given that it was being provided in exchange for the client files. There was, in fact, some consideration for the undertaking being advanced by Somogyi. The Arbitrator made no palpable error in finding that it was rejected by PLF.

[80] As for the Settlement Agreement, the very preamble of the Settlement Agreement makes it abundantly clear that this contract was to settle “all of the issues in the application”, i.e. the transfer of the client files, and motion, i.e. PLF’s motion for a solicitor’s lien and charging order, “as well all other claims arising out of their relationship”. The only expressed issue carve out to be dealt with was the fee split.

[81] The Settlement Agreement in fact addressed the fee split issue, and in turn the undertaking given by Somogyi to pay reasonable fees, subject to assessment, in that it expressly indicated that the parties would attempt to “negotiate a division of client fees ….either on a file by file basis, or through a mutually agreeable formula”. That provision is also the heart of the departure clause. PLF and Somogyi agreed in the Settlement Agreement that the agreement covered all the parties to the minutes of settlement, and any arbitration, including “all parties to the Application (including the clients), any other former client of PACE now with Somogyi, and Somogyi”.

[82] The Settlement Agreement was formalized in mutual releases, which refers to all the proceedings, and incorporates, by reference, communications between the parties counsel with their demands. The consent charging order for all fees and disbursements of PLF, on the basis set out in the Settlement Agreement, accomplishes more than Somogyi’s undertaking ever did and protects PLF’s right to recovery of legal fees, enforceable by court order if breached.

[83] Black’s Law Dictionary Abridged 5th ed. (1983: West Publishing Co.), at p. 511, defines a “merger” as:

“The fusion or absorption of one thing or right into another; generally spoken of a case where one of the subjects is of less dignity or importance than the other. Here the less important ceases to have an independent existence.

Contract Law: the extinguishment of one contract by its absorption into another and is largely a matter of intention of the parties.

[84] In my view, the Arbitrator made no errors in law in concluding that the undertaking had been rejected, and, if still outstanding, had merged in the Settlement Agreement. On the face of the contract (Settlement Agreement) negotiated between the parties, they made it clear that they were resolving “all” issues and all claims. All means all and the intention of the parties is apparent from the plain language they usse in the Settlement Agreement. Neither side can now ask the court to rewrite the agreement, by carving out exceptions not expressly included.

Was Somogyi an Employee at the time of his resignation in November 2019? Was the employment agreement still in force?

[85] PLF argued that the employment agreement was of no force or effect as Somogyi had become an independent contractor and formed a new contract with PLF when he became a Team Leader in January 2017, and the terms of his contract were further altered by his negotiations in March 2017.

[86] Somogyi argues that the employment agreement remained in force and the method for calculating the fees in the Departure Clause of the Employment Agreement governed the process to determines the fee split between the parties.

[87] The Arbitrator made the following findings of facts (underlined) with respect to Somogyi’s status between January 1, 2017 March 23, 2017, that is after he became a Team Lead and during the period of his aborted attempts to negotiate a written contract reflecting his increased responsibility and compensation, as follows:

Somogyi worked exclusively for PLF and PLF controlled the work performed by Somogyi. The members of Somogyi’s team were employed by PLF and Somogyi had to comply with the rules and regulations of PLF. Somogyi was economically dependent on PLF. In my opinion, Somogyi meets the test of that of an employee as set out in 671122 Ontario Ltd. v. Sagaz Industries of Canada Inc. and the changes in compensation and responsibilities on January 1, 2017 did not change this status.

[88] As for the period between March 23, 2017 and the date of his departure in November 2019, 2017, the Arbitrator found that there was no meeting of the minds during the negotiations of Somogyi’s compensation and the proposals for the fee split, no new contract was formed, and PLF was content to have the relationship continue. This was a reasonable inference from the evidence.

[89] the Arbitrator found that “(th)roughout Somogyi’s time at PLF he was bound by the rules, regulations, and systems for operating the firm as directed by PLF.” The Arbitrator’s finding is supported by the last offer dated March 20, 2017 from Mr. Murray (PLF) to Somogyi, before the negotiations to attempt to agree to a new written contract ceased. The offer stated, in part:

“If your tenure with the Firm is terminated at a future date at the discretion of either party, and at the direction of any existing clients you will be taking files from the firm when or after you depart, it is agreed that the amount payable to Pace Law Firm would be the greater of 50% of the fee generated on the file or our account based on the usual assessment…We are looking forward to you continuing your employment with our team and look forward to a long and mutually worthwhile relationship.”

[90] PLF’s offer to Somogyi during the negotiations made it clear there was a continuing employment relationship. In my view, the fact that Somogyi started to receive his compensation through a professional corporation did not change his status from employee to independent contractor. The evidence before the Arbitrator supported his conclusion that Somogyi met the test for an employee as laid down by the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. 2001 SCC 59, despite his change in compensation and responsibilities.

[91] The Arbitrator also rejected PLF’s argument that the “Changed Substratum Doctrine” could be applied in their favour, noting that he was unaware of any cases where the doctrine is available to an employer or where the doctrine has been applied except in respect of notice provisions in written employment contracts.

[92] In David J. Doorey, The Law of Work, 2nd edition (Toronto: Emond Publishing), at p. 124 under the subheading “When the ‘Changed Substratum Doctrine’ Applies”, the author explains:

“Finally, if an employee’s job functions have changed substantially since the date they originally agreed to a notice of termination clause, a court may refuse to enforce the original notice term. The refusal involves the application of what is known as the changed substratum doctrine (emphasis in original text).”

[93] Indeed, the jurisprudence also supports the Arbitrator’s view that it is a term of the contract (the notice period) which the court may refuse to enforce in the event that the employee’s responsibilities and job functions have substantially changed since the employment contract was entered into. See: Celestini v. Shoplogix Inc., 2021 ONSC 3539, at paras. 31-33;Toronto-Dominion Bank v. Wallace (1983), 1983 CanLII 1907 (ON CA), 41 OR (2d) 161 (CA) at p. 180, leave to appeal refused [1983] SCCA No 98; Sawko v. Foseco Canada Ltd., [1987] OJ No 2376 (Dist Ct) at paras 19-20; MacGregor v. National Home Services, 2012 ONSC 2042, at paras 11 and 12.

[94] In MacGregor v. National Home Services, supra, Perell J. provides a helpful explanation of the doctrine as follows:

[11] The changed substratum doctrine is a part of employment law. The doctrine provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed (citations omitted).

[12] The idea behind the changed substratum doctrine is that with promotions and greater attendant responsibilities, the substratum of the original employment contract has changed, and the notice provisions in the original employment contract should be nullified. In Rasanen v. Lisle-Metrix Ltd. (S.C.J.), supra, at para. 41, Justice Dambrot approved the following description of the doctrine from Ball, Canadian Employment Law:

Canadian jurists have recognized that contractual terms that are fair in the early part of the employment relationship may be unfair when the employee has developed new skills, has acquired a new position, receives greater remuneration or has additional responsibilities. When these circumstances exist, the Court may hold that the “substratum” of a written contract of employment has disappeared or eroded sufficiently so that, inter alia, terms purporting to limit the amount of notice required for termination of employment no longer have contractual force.

[95] Therefore, the Arbitrator made no error in his interpretation of the law as to it’s availability to the employer (PLF), and in rejecting their position, as neither the authority nor the jurisprudence supports PLF’s position with respect to the application of the doctrine.

[96] PLF also raised the argument that the employment contract had been frustrated by the failure of Somogyi to keep time dockets. There was evidence before the Arbitrator from the managing partner, Mr. Murphy, who signed Somogyi’s employment agreement, that it was not the firm’s practice to keep dockets and he assumed the lawyers were not docketing their time. Mr. Murphy’s evidence was that if dockets were required, for example for an assessment, this could be generated from PLF’s computer TM Docket software. The Arbitrator made a finding of fact that PLF’s computer system could create dockets post facto when required. He noted that there was no evidence PLF had taken any steps to enforce the requirement for dockets with Somogyi or any other PLF lawyers.

[97] The court finds no error in the Arbitrator’s ruling that the employment agreement was not frustrated by Somogyi’s failure to keep time dockets.

[98] PLF also relied upon allegations Somogyi made in his statement of claim commenced on December 23, 2019 against PLF for breach of contract, unjust enrichment and quantum meruit. Somogyi characterized his compensation arrangement as a new contract and alleged that when he became a Team Leader, he ceased to be an employee and that the 2014 Employment. The Arbitrator indicated that Somogyi had pleaded that his employment with PLF had been terminated on January 1, 2017 and characterized himself as an independent contractor. Somogyi’s position was that that description was made in error. The arbitrator found that Somogyi’s characterization of his relationship with PLF in the claim was an error had had no bearing on the assessment of the evidence at the hearing.

[99] No authority is cited by PLF for their position that they are able to rely on the allegations in pleadings in another proceeding and treat those allegations as admissions in another proceeding (the application (which was settled) and the arbitration under the Arbitration Act). Both the statement of claim and application were commenced in the Superior Court. Admissions in pleadings are governed by Rule 51.06 (2) which provides that:

(2) Where an admission of the truth of a fact or the authenticity of a document is made by a party in a pleading or is made or deemed to be made by a party in response to a request to admit, any party may make a motion in the same proceeding to a judge for such order as the party may be entitled to on the admission without waiting for the determination of any question between the parties, and the judge may make such order as is just.

[100] Error or not, the allegations or possible admissions are made in another proceeding PLF may not rely on it. While no finding is being made, presumably, had they sought any appropriate order as result of the alleged pleadings, it would have been open to Somogyi to move to either amend to plead alternative relief or withdraw the admissions, or prove, on the evidence, that even if he were an independent contractor, there was sufficient control over his work, activities (including the requirement to keep track of his time), ownership of the equipment used in his work, etc. to meet the test of being an employee. In 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 SCR 983, at para. 47. The Supreme Court of Canada has stated that the key question for determining whether an individual is an employee, or an independent contractor is whether the person is engaged in services in business or their own account. The court also indicated that the level of control that the employer has over the worker’s activities is a factor. The Court stated:

Although there is no universal test to determine whether a person is an employee or an independent contractor, I agree with MacGuigan J.A. that a persuasive approach to the issue is that taken by Cooke J. in Market Investigations, [1968] 3 All E.R. 732, supra. The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker's activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker's opportunity for profit in the performance of his or her tasks.

[101] There is no evidence before the court in any if the submissions filed before the Arbitrator to displace paragraph (g) of the employment agreement, regardless of any compensation being made through a professional corporation. Indeed, in the Application proceeding, which culminated in the Settlement Agreement, Somogyi alleges that he was a former employee and that he had resigned from PLF. In its motion materials PLF noted: “On Monday, November 4, 2019, Adam Somogyi resigned from Pace Law Firm effective immediately, without any notice period.”

[102] Even if PLF were able to rely on the allegations in the statement of claim, the evidence before the Arbitrator and this court is that PLF itself indicated that Somogyi was still in an “employment” relationship during the failed negotiations in March 2017 and at the time of his departure in November 2019. As Perell J. noted in Fisher v Hirtz, 2016 ONSC 4768, at para. 26: “The analysis of the classification of the relationship ends if the worker is determined to be an employee.”

[103] The Arbitrator made no error in his conclusion that Somogyi was still an employee at the time he resigned and that the employment agreement was still in force.

The Contingency Fee Agreement

[104] The respondent clients had all entered into CFAs with PLF. The CFAs were all terminated when the respondent clients fired PLF and retained Somogyi.

[105] Before the arbitrator, Somogyi raised the issue of the enforceability of all but four of the CFAs. He noted the vast majority of the CFAs (76) contemplates that the respondent clients would pay “reasonable charges” as defined, based on a number of factors set out in the agreement, where the agreement ended prior to the resolution of the claim, with a provision for arrangements to be made to protect PLF’s account if the charges, as determined, could not be paid. Sixteen of the CFAs did not include a termination provision. Four of the CFAs required the departing clients to pay the disbursements upon termination of the retainer.

[106] The only issue addressed by the Arbitrator with respect to the CFAs, as it affects the dispute about the fee split between PLF and Somogyi, was whether the departure clause or the provisions in the various CFAs should govern the process for determining the fee split.

[107] The only evidence of PLF’s practice of dealing with fee split issues for departing lawyers was provided by Mr. Murphy in the context of the departure of another lawyer. In calculating the fee split with that lawyer, Mr. Murphy indicated PLF did not have regard to the PLF Contingency Fee Agreement (“CFA”) termination provisions but rather the work done by the lawyer while employed at the firm.

[108] Given the court’s agreement with the Arbitrator that Somogyi remained an employee of PLF until his resignation, therefore, the departure clause in Somogyi’s employment agreement would govern the determination of legal fees owed to PLF for services rendered while the respondent clients were with PLF.

[109] Neither the departure clause nor the Settlement Agreement infringe the respondent clients rights to have their accounts assessed. In that case, as mandated by the departure clause “the amount payable to Pace Law Firm would be based on the usual assessment of party and party time and disbursements”. PLF and Somogyi are free to determine or arbitrate the share of legal fees for each client.

[110] The Arbitrator simply gave effect to the intention of the parties in the employment agreement drafted by PLF and in concluding that PLF had agreed to limit its recovery of fees and disbursements to the terms set out in the departure clause. The court finds no error in his interpretation of the contract.

Disposition

[111] The appeal is therefore dismissed.

[112] If the parties are not able to agree on costs in twenty days, either party may contact my assistant to schedule a case conference for submissions to be made on costs.

A. Ramsay J.

Released: November 12, 2021

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

PACE LAW FIRM PROFESSIONAL CORPORATION

Plaintiff

– and –

ADAM SOMOGYI ET AL.

Defendants

REASONS FOR JUDGMENT

A. Ramsay J.

Released: November 12, 2021