Court File and Parties

COURT FILE NO.: CV-19-00626511-00CL DATE: 20230421 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN: OZ OPTICS LTD. and OMUR SEZERMAN Plaintiffs

COUNSEL: Michael Lesage, for the Plaintiffs

– and –

XL INSURANCE COMPANY PLC, EMOND HARNDEN LLP, PORTER W. HEFFERNAN and SEBASTIEN HUARD Defendants

COUNSEL: Michael Kestenberg, for the Defendants, Porter W. Hefferman, Sebastien Huard and Emond Harnden LLP

HEARD: November 24, 2022

KIMMEL J.

Reasons for Decision – Defendants’ Motion for Summary Judgment

The Motion

[1] The defendant lawyers, Porter W. Hefferman, Sebastien Huard and Emond Harnden LLP (the “EH Defendants”), move for summary judgment and the dismissal of this action against them. The action was previously dismissed on consent as against the defendant XL Insurance PLC (“XL”).

[2] The EH Defendants have met their burden to show that there is no genuine issue requiring a trial with respect to the plaintiffs’ claims. The plaintiffs, OZ Optics Ltd. (“OZ Optics”) and Omur Sezerman, have failed to prove that they have a real chance of success. Therefore, the EH Defendants’ motion for summary judgment is granted, with costs payable on a partial indemnity scale by the plaintiffs to the EH Defendants forthwith.

The Plaintiffs’ Claims

[3] The crux of the plaintiffs’ complaint in this action is grounded in an alleged conflict of interest. The plaintiffs assert that the EH Defendants were in a conflict of interest while they were representing the plaintiffs in an earlier proceeding that has since settled.

[4] In 2011, the plaintiffs sued their former employees, Mr. Nai-Guang Wang and Ms. Jin Ru Zhang, for claims associated with misuse and misappropriation of the plaintiffs’ intellectual property (the “Employee Action”). Wang and Zhang defended the Employee Action and brought a counterclaim for, inter alia, wrongful dismissal and alleged outstanding employment benefits. The plaintiffs’ insurer, XL, eventually responded to that counterclaim on behalf of the plaintiffs.

[5] The EH Defendants were initially retained by the insurer XL to act on behalf of the plaintiffs in their defence of the counterclaim in the Employee Action. They subsequently agreed to act for the plaintiffs in the Employee Action. Their retainer confirmed that they were being retained to act for the plaintiffs in the Employee Action and by XL in respect of the counterclaim.

[6] The plaintiffs allege that the EH Defendants were conflicted from the outset and should not have accepted that joint retainer. [1] The plaintiffs say that there is an inherent conflict in any such retainer that involves matters that are both insured and uninsured.

[7] Even if that starting premise is not correct, the plaintiffs maintain that in this case there was a conflict because the EH Defendants were aware from the outset of the mandate that the plaintiffs intended to insist upon an apology or admission of wrongdoing from their former employees as a non-monetary term of any resolution of the Employee Action as part of the plaintiffs’ “General Deterrence Policy” (the “Non-Monetary Settlement Term”). The plaintiffs say that the prospect of that Non-Monetary Settlement Term created a conflict with their insurer from the outset and the joint retainer should not have been accepted from the outset.

[8] Alternatively, the plaintiffs allege that the EH Defendants became conflicted in July of 2017 when settlement discussions were initiated by Wang and Zhang and that the EH Defendants waited too long to withdraw from their joint retainer, which they eventually did but not until October of 2017. The plaintiffs’ desire to protect their intellectual property interests through their insistence upon the Non-Monetary Settlement Term is alleged to be in conflict with the objectives of their insurer, who expressed the view to the plaintiffs in the summer of 2017, after a settlement proposal was received from Wang and Zhang, that the plaintiffs’ insistence upon the Non-Monetary Settlement Term was “ridiculous”.

[9] The plaintiffs complain that the EH Defendants should not have persistently recommended to them that they accept proposed settlement offers or that they negotiate with Wang and Zhang on terms that did not include their desired Non-Monetary Settlement Term. These recommendations were viewed by the plaintiffs as contrary to their instructions and led to some heated exchanges. These exchanges are what eventually led the EH Defendants to withdraw from their representation of the plaintiffs in October of 2017 due to a loss of confidence and breakdown in the solicitor-client relationship.

[10] The plaintiffs ask that all fees they paid to the EH Defendants for the three active litigation mandates that the EH Defendants were retained on as at October 2017 (totaling $372,768.99) be disgorged. In the alternative, they seek $400,000 in damages.

Chronology of Events Leading to this Action

[11] The following is a basic chronology of uncontested events that transpired during the solicitor-client relationship between the plaintiffs and the EH Defendants that are pertinent to the determination of this summary judgment motion.

[12] On September 2, 2011, the plaintiffs commenced the Employee Action, suing their former employees, Wang and Zhang, for breach of contract, unjust enrichment, destruction of proprietary documents, misappropriation of intellectual property and trade secrets and other intellectual property claims following their resignation from OZ Optics.

[13] On October 7, 2011, Wang and Zhang counterclaimed against the plaintiffs, requesting $1 million in damages for wrongful dismissal, abuse of process, intimidation and various outstanding employment benefits. This counterclaim triggered coverage under the XL insurance policy, which was initially denied but later confirmed.

[14] Initially, it was proposed in March 2012 that the EH Defendants be retained by XL to represent the plaintiffs in their defence of the counterclaim, the defence of which was being provided by the insurer XL.

[15] In April 2012, after researching the general rules and exceptions around a lawyer’s ability to represent a client and their insurer in the same matter and considering the circumstances in which a named party in a proceeding can have more than one lawyer representing them, the EH Defendants concluded that they could (and agreed to) accept a joint retainer from the plaintiffs and their insurer XL to both prosecute the Employee Action and defend the counterclaim.

[16] On or about May 2, 2012, the EH Defendants delivered a Notice of Change of Lawyer in the Employee Action (replacing the lawyers at Norton Rose Fulbright Canada LLP who formerly represented the plaintiffs in the Employee Action).

[17] At or about the time the EH Defendants were retained, the plaintiffs made them aware of their General Deterrence Policy and their intention to insist upon the Non-Monetary Settlement Term.

[18] The XL insurance policy had a deductible of $100,000. As there was a claim and counterclaim, it was agreed that incurred expenses would be allocated against that deductible on a 50 percent basis (such that the first $200,000 of legal expenses would be paid entirely by OZ Optics).

[19] In early 2017, the billed legal fees and expenses began to approach the insurance deductible.

[20] Wang and Zhang made their first settlement offer on July 13, 2017. It did not contain any offer of an apology or admission of wrongdoing. The EH Defendants forwarded this offer to the plaintiffs and recommended making a counteroffer. The plaintiffs reiterated to the EH Defendants that their Non-Monetary Settlement Term was essential to any settlement, including written confirmation under oath about what Wang and Zhang were attempting to do with the allegedly stolen intellectual property.

[21] There was a conference call on July 20, 2017 to discuss the settlement offer with XL, during which the plaintiffs’ insistence upon the Non-Monetary Settlement Term was re-affirmed.

[22] In a July 26, 2017 conference call, the EH Defendants expressed concerns to the plaintiffs that their continued insistence upon the Non-Monetary Settlement Term would likely bring an end to the settlement discussions with Wang and Zhang. XL advised the plaintiffs that it was prepared to negotiate within the structure proposed by Wang and Zhang. XL expressed the view to the plaintiffs that their insistence upon the Non-Monetary Settlement Term was “ridiculous”. This provoked a hostile reaction from the plaintiffs and the termination of the call.

[23] Nonetheless, the EH Defendants followed the plaintiffs’ instructions and approached counsel for Wang and Zhang on August 4, 2017 about the possibility of an apology that might satisfy the plaintiffs’ Non-Monetary Settlement Term.

[24] The plaintiffs advised the EH Defendants in an email on or about August 11, 2017 that the plaintiffs were “re[-]evaluating the whole thing about your law firm” and also stated that: a. from now on they would be recording calls or meetings with anyone from the law firm; b. they were unhappy because one of the EH Defendants, Mr. Heffernan, was “forcing” them to settle the claim; and c. they considered the law firm to be in a conflict of interest in the continued representation of OZ Optics under the joint retainer by OZ Optics and XL in this matter.

[25] The EH Defendants wrote to the plaintiffs on August 14, 2017 indicating that they did not consider themselves to be in a conflict of interest by continuing with the joint retainer simply because their settlement recommendations did not include the Non-Monetary Settlement Term. They considered themselves to be duty bound to recommend any settlement that they considered to be in the plaintiffs’ best interests, even if it was not what the plaintiffs wanted to hear. However, the EH Defendants expressed concern about the plaintiffs’ August 11, 2017 comments that implied that there had been a loss of confidence and requested a meeting to discuss this.

[26] The plaintiffs did not respond to the meeting request. The EH Defendants made another request for a meeting on August 22, 2017. The plaintiffs’ response to this request was that they did not want to meet as their position was clear.

[27] Wang and Zhang then made a further settlement proposal on August 28, 2017. This offer was thereafter forwarded to the plaintiffs with an acknowledgment from the EH Defendants that it did not contain the Non-Monetary Settlement Term that the plaintiffs wanted. The EH Defendants asked the plaintiffs to reconsider their position and recommended the plaintiffs accept this offer, even though it did not contain the Non-Monetary Settlement Term.

[28] After some follow-up by the EH Defendants, the plaintiffs eventually responded on September 20, 2017 indicating that they were not prepared to abandon the Non-Monetary Settlement Term that they considered to be in furtherance of their General Deterrence Policy. The plaintiffs noted their displeasure with the EH Defendants’ recommendation to settle without this Non-Monetary Settlement Term and their appreciation of the risk they were taking by continuing to insist upon it (specifically, at this point, their insistence upon an apology). The allegation of a conflict of interest was also raised again, with the assertion that the EH Defendants were preferring the interests of the insurer XL over the plaintiffs’ interests.

[29] Upon the plaintiffs’ instructions (and against their own advice and recommendation), the EH Defendants submitted a counter-offer to counsel for Wang and Zhang that included an apology as part of the settlement. Specifically, in accordance with the plaintiffs’ instructions, the EH Defendants wrote as follows to counsel for Wang and Zhang on September 29, 2017: Our client has instructed us to confirm that any settlement must be conditional on a written statement by your clients that they acknowledge they were wrong for copying OZ Optics’ confidential information to their personal email accounts, and a statement by Mr. Wang and Ms. Zhang that they were treated fairly by OZ Optics, Mr. Sezerman and Mrs. Sezerman while employed by OZ Optics.

[30] Wang and Zhang indicated that they were not prepared to provide this statement or any apology and that their last settlement offer would expire on October 3, 2017. This was communicated to the plaintiffs on September 29, 2017. The EH Defendants advised the plaintiffs that: Insisting on the admission that they were wrong and a statement that they were treated fairly makes a settlement of this case impossible, and exposes OZ Optics to considerable risk and cost in the litigation. Settling the matter on the terms proposed, without the above admission, is in my opinion in the best interests of OZ Optics by any reasonable measure and I do not believe that we are likely to achieve a better outcome for you with or without a trial.

[31] The plaintiffs instructed the EH Defendants to continue with the action and asked the EH Defendants to “[p]lease stop telling me the same thing over and over again.

[32] On October 3, 2017, the EH Defendants advised the plaintiffs that they would be withdrawing from their representation of the plaintiffs in the Employee Action (and in two other active litigation matters that they were handling for the plaintiffs at the time). The reason being a loss of confidence between the law firm and clients. At that time, approximately $27,000 in eligible legal fees remained to be incurred before reaching the $100,000 deductible. Thus, none of the EH Defendants’ legal fees had been paid by XL.

[33] On October 6, 2017, XL notified the plaintiffs that if the Employee Action did not settle, it would withdraw from providing defence and indemnity (although it did not actually deny coverage until May 24, 2018). In so doing, it cited the cooperation clause of its policy, which provided that “[t]he Insureds agree to provide the Insurer with all information, assistance and cooperation that the Insurer may reasonably request, and further agree that it will do nothing which in any way increases the Insurers’ exposure under this Policy or in any way prejudices the Insurer’s potential or actual rights of recovery.”

[34] In the meantime, notwithstanding their October 3, 2017 notification of withdrawal from continued representation of the plaintiffs, the EH Defendants agreed that the effective date of their withdrawal would not be until October 31, 2017 (unless the plaintiffs replaced them earlier). They offered to assist the plaintiffs to meet existing deadlines in the other litigation matters if the plaintiffs wished them to do so. To that end, the EH Defendants continued to communicate with the plaintiffs and complete tasks that were underway in the ongoing matters upon the plaintiffs’ instructions. They also co-operated with the plaintiffs and their new counsel to provide the relevant file materials and spent time bringing their new counsel up to speed, all without charge.

[35] The total amount billed by the EH Defendants to the plaintiffs for the three litigation matters that they were acting on was $382,817.64, of which $372,768.99 is acknowledged to have been paid, leaving an unpaid balance of $10,048.65. The plaintiffs retained a new law firm to represent them in the Employee Action and counterclaim. They provided an authorization and direction for their files to be transferred on November 23, 2017. The EH Defendants provided a detailed transfer memo on November 27, 2017, when the files were sent to new counsel.

[36] The plaintiffs claim to have paid $16,998.84 in wasted legal fees to bring the new lawyers up to speed.

[37] Discoveries in the Employee Action and counterclaim proceeded in early May 2018 with the plaintiffs’ new counsel, at which time the plaintiffs inquired as to whether a settlement that included an apology could be reached. A settlement was reached shortly after that which included the following jointly signed statement: The parties wish to make the following statement. In July 2011 Mr. Wang and Ms. Zhang’s employment ceased with OZ Optics and a dispute arose. Over the course of [the] sic litigation process the parties have come to understand there were a number of misunderstandings. Through the process [the] sic parties have come to understand no one acted in bad faith. Mr. Wang and Mrs. Zhang regret forwarding information in contravention of OZ Optics policies. Mr. Wang and Ms. Zhang confirm they were not underpaid and not mistreated by OZ optics. Mr. Sezerman regrets that anyone concluded that Mr. Wang was a Chinese spy. Mr. Wang and Mrs. Zhang appreciate the opportunity to work at OZ Optics. OZ Optics appreciates the work of Mr. Wang and Mrs. Zhang. [2]

[38] This action was commenced on August 29, 2019.

The Test for Summary Judgment

[39] The plaintiffs are familiar with the test that the court must apply in determining whether to grant summary judgment in favour of lawyer defendants seeking a dismissal of claims for breach of fiduciary and other duties against them. In close proximity to the motion in this case, a motion for summary judgment was granted in favor of lawyer defendants sued by OZ Optics in another case: OZ Optics Ltd. v. Evans, 2022 ONSC 5890. The test, equally applicable in this case, was conveniently summarized by Vermette J. in Evans, at paras. 118-21, as follows:

On a motion for summary judgment, the court must first determine if there is a genuine issue requiring trial based only on the evidence in the motion record, without using the fact-finding powers set out in Rules 20.04(2.1) and (2.2) of the Rules of Civil Procedure. There will be no genuine issue requiring a trial if the summary judgment process provides the court with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure. See Hryniak v. Mauldin, 2014 SCC 7 at para. 66.

A party moving for summary judgment has the evidentiary burden of showing that there is no genuine issue requiring a trial with respect to a claim or defence: Rule 20.04(2)(a). The burden shifts to the responding party to prove that its claim or defence has a real chance of success only after the moving party has discharged its evidentiary burden of establishing that there is no genuine issue requiring trial. See Sanzone v. Schechter, 2016 ONCA 566 at para. 30 and Kinectrics Inc. v. FCL Fisker Customs & Logistics Inc., 2020 ONSC 6748 at para. 35.

Each party must put its best foot forward to establish whether or not there is a genuine issue requiring a trial. The court is entitled to assume that the record contains all the evidence that the parties would present at trial: see Toronto-Dominion Bank v. Hylton, 2012 ONCA 614 at para. 5. Thus, if the moving party meets the evidentiary burden of producing evidence on which the court could conclude that there is no genuine issue of material fact requiring a trial, the responding party must either refute or counter the moving party’s evidence or risk a summary judgment: see Soliman v. Bordman, 2021 ONSC 7023 at para. 133. A responding party cannot rely on allegations or denials in the pleadings, but must present evidence demonstrating that there is a genuine issue for trial: Sylvite v. Parkes, 2020 ONSC 5569 at para. 16.

In my view, this is an appropriate case for summary judgment. There is no meaningful dispute and no credibility issues with respect to material facts. The documentary evidence, including the e-mails exchanged by the parties and the decisions of the court, is reliable and establishes what happened. I conclude that there is sufficient evidence before the court to fairly and justly adjudicate the dispute between the parties, and that it is appropriate to make dispositive findings on this motion. Providing a timely, affordable and proportionate procedure to the parties is also an important consideration in this case.

[40] Like that earlier case, there are no issues of material fact or other genuine issues requiring a trial in this case. The parties have agreed that this is an appropriate case for summary judgment. The plaintiffs not only agree that this is an appropriate case for summary judgment, but they also ask for a so-called “boomerang” or reverse summary judgment against the EH Defendants on their claims, [3] which the court has the authority to grant even if a cross-motion has not been formally brought: Graham v. Toronto (City), 2022 ONCA 149, at paras. 4-13.

[41] I agree that there is sufficient evidence before the court to fairly and justly adjudicate the dispute between the parties, having regard to the nature of the issues and the size, complexity and cost of the dispute and other contextual factors: see Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at paras. 68, 82.

Issues to be Decided

[42] The court is tasked with determining whether the EH Defendants breached any duty to the plaintiffs in accepting and/or continuing to act in their joint retainer by the plaintiffs and their insurer XL in the Employee Action and counterclaim. If so, the court must also determine whether that breach and the eventual withdrawal by the EH Defendants as counsel for the plaintiffs in three active litigation matters in October of 2017 caused any compensable loss to the plaintiffs or gives rise to any other basis for a remedy in their favour.

[43] The court must decide the following issues: a. Did the EH defendants breach any duty owed to the plaintiffs? i. What was the fiduciary duty and standard of care owed by the EH Defendants to the plaintiffs? ii. Does the court need expert opinion evidence of a standard of care owed and breached by the EH Defendants to decide this motion? iii. Were the EH Defendants acting from the outset in a situation of a reasonable apprehension of a conflict of interest, or did one develop during their retainer for the plaintiffs which led them to fall below their fiduciary duty and standard of care owed to the plaintiffs? iv. Did the EH Defendants withdraw from their representation of the plaintiffs in a timely manner? b. What if any damages are the plaintiffs entitled to if there was a breach of duty? i. Did the EH Defendants profit from any established breach of duty? ii. Did any breach the court may find the EH Defendants to have committed cause the plaintiffs’ alleged loss? c. Are the plaintiffs’ claims an abuse of process? d. Did the EH Defendants act in bad faith?

Analysis

[44] I will consider each issue to be decided in turn.

a. Did the EH Defendants Breach Any Duty Owed to the Plaintiffs?

i. What was the fiduciary duty and standard of care owed by the EH Defendants to the plaintiffs?

[45] A lawyer owes a duty to their client not to act in a conflict of interest. That would necessarily include conflicts arising in the context of joint retainers in addition to those arising in two independent and unrelated mandates. The bright line rule laid down in R. v. Neil, 2002 SCC 70; [2002] 3 S.C.R. 631, at para. 29, has not waivered over time:

[A] lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client – even if the two mandates are unrelated – unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.

[Emphasis in original.]

[46] This duty to avoid conflicting interests is part of a lawyer’s duty of loyalty to their client: see Neil, at para. 19 (i). Under the Rules of Professional Conduct of the Law Society of Ontario and longstanding appellate authority, a lawyer cannot serve two masters if a conflict arises between their interests that cannot be resolved: see e.g. Rules of Professional Conduct, r. 3.4-5(c). See also Davey v. Woolley, Hames, Dale & Dingwall; Woolley et al. (Third Parties) (1982), 35 O.R. (2d) 599 (C.A.); Neil, at para. 3.

[47] The plaintiffs rely on the case of Reeb v. The Guarantee Company of North America, 2017 ONCA 771, 72 C.C.L.I. (5th) 217. In that case, the Court of Appeal cautioned, at para. 14, citing Brockton (Municipality) v. Frank Cowan Co. Ltd. (2002), 57 O.R. (3d) 447, at para. 43, that where a lawyer is retained by an insurance company to represent its insured, a conflict of interest may arise where the interests of the insurance company and the insured do not align:

The balance is between the insured’s right to a full and fair defence of the civil action against it and the insurer’s right to control that defence because of its potential ultimate obligation to indemnify. In my view, that balance is appropriately struck by requiring that there be, in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer’s expense. The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured’s right to a defence and the insurer's right to control that defence can satisfactorily co-exist.

[48] I agree with and adopt the formulation of the fiduciary duty and standard of care regarding conflicts of interest that a lawyer owes an insurer and an insured as set out in Reeb above.

ii. Does the court need expert opinion evidence of a standard of care owed and breached by the EH Defendants to decide this motion?

[49] Neither side adduced expert reports on the duty or standard of care owed by a solicitor acting for both an insured and insurer under a joint retainer to prosecute claims and defend counterclaims.

[50] The plaintiffs contend that they do not need an expert report to defeat the summary judgment motion and avoid the dismissal of their claims because the EH Defendants have the onus to show there is no genuine issue requiring a trial: see Correct Group Inc. v. Cameron, 2019 ONSC 3901, at paras. 98-99.

[51] The EH Defendants, on the other hand, maintain that once they have established that there is no genuine issue requiring a trial (in this case, because there are no facts in dispute) the plaintiffs have the onus to put their best foot forward and establish that their claim has some chance of success, which they cannot do without an expert on the standard of care in a solicitor’s negligence case: see McPeake v. Cadesky & Associates, 2018 ONCA 554, at para. 11.

[52] Further, although this is a motion by the EH Defendants for summary judgment and the dismissal of the plaintiffs’ clams, the plaintiffs are themselves seeking summary judgment against the EH Defendants on their claims and have the onus of proving their claims.

[53] The plaintiffs nonetheless maintain that expert reports are unnecessary where the issue to be determined is non-technical, within the knowledge of an ordinary person, or so egregious as to render an expert opinion unnecessary: see Greenspan v. Goldman, Khosla and Cook, 2022 ONSC 5578, at para. 75. As such, the plaintiffs contend that an expert opinion is not required for the court to determine whether counsel breached a duty of loyalty in a circumstance such as this, because it is within the purview of the court to determine the existence of a conflict.

[54] The court is being asked to determine the question of whether the EH Defendants were acting in a situation in which there was a reasonable apprehension of a conflict of interest such that they should not have accepted the joint retainer from the plaintiffs and their insurer from the outset, or should have withdrawn earlier, without any expert evidence about the way this type of conflict is typically handled by counsel jointly acting for insureds and their insurer.

[55] I do not find the absence of any expert opinion evidence to be fatal to the plaintiffs’ claims. I assume that if there had been instructive opinion evidence on this point, it would have been provided, absent which, the court is free to consider the issue based on common sense and a general understanding of a lawyer’s duties regarding conflicts, with regard to the relevant authorities referred to by the parties.

iii. Were the EH Defendants acting from the outset in a situation of a reasonable apprehension of a conflict of interest or did one develop during their retainer for the plaintiffs which led them to fall below their fiduciary duty and standard of care owed to the plaintiffs?

[56] The plaintiffs allege that the EH Defendants were acting in a conflict of interest on three related grounds: a. that a conflict was inherent in the joint retainer to act for the plaintiffs in the Employment Action and for the insurer in the counterclaim and that representation should have remained split between two law firms from the outset; b. that the conflict existed in this joint retainer to act for the plaintiffs in the Employment Action and for the insurer in the counterclaim because of the plaintiffs’ stated intention from the outset of their retainer of the EH Defendants that they would insist upon the Non-Monetary Settlement Term; and/or c. that a conflict of interest arose at the point in the joint retainer when the settlement negotiations were underway, and the insurer expressed the view that the plaintiffs’ insistence upon the Non-Monetary Settlement Terms was ridiculous.

[57] The plaintiffs’ starting position was that there was a conflict from the outset because the mandate involved representing both the uninsured claims of the plaintiffs in the Employee Action and defending the insured counterclaim. In other words, they would say that a lawyer can never act for both an insurer and insured in these circumstances.

[58] The context in which the point of “conflict” discussion arose in Reeb is different than in this case, but the analysis can still apply. In any case involving the appointment of counsel by an insurer to defend an insured there may be a potential for a conflict from the outset, but that is not the focus of the analysis. Rather, the focus in Reeb is on the point at which it can be reasonably said that the lawyer should have a reasonable apprehension of a conflict. I take this to mean that there is a reasonable apprehension of an actual, existing, conflict. Under the Reeb analysis that the plaintiffs rely upon, it would not be enough that there was a mere possibility that a conflict might arise.

[59] Taking this one step further, advancing claims and defending counterclaims (or vice versa, defending claims and advancing counterclaims) can also co-exist within the same legal mandate without an automatic disqualifying conflict for the lawyer. I have concluded that there was no conflict of interest that prevented the EH Defendants from accepting the joint retainer from the plaintiffs and XL from the outset.

[60] The plaintiffs’ next contention is that, in the circumstances of this case, it could reasonably be said that the mandate to defend the counterclaim from the insurer conflicted with the mandate from the plaintiffs to prosecute the Employee Action from the outset. The plaintiffs assert that this is because of the plaintiffs’ General Deterrence Policy and their stated intention from the outset that they would be seeking not only damages in the Employee Action but also the Non-Monetary Settlement Term, in any settlement scenario. The plaintiffs say that this meant that their interests were not aligned with the interests of the XL because the insurer’s goal would have been to minimize the cost of defending and settling the counterclaim, without regard to any non-monetary considerations.

[61] I do not accept the contention that the introduction of the plaintiffs’ requirement for its Non-Monetary Settlement Term created an automatic conflict with their insurer. While the insurer would reasonably be expected to be focussed on monetary exposure and outcomes, monetary and non-monetary settlement terms are not automatically in conflict with each other. Further, it is not uncommon for reputational and other non-monetary considerations to be factored into the conduct and resolution of insured claims. An apology is not inherently antithetical to an insurer’s position or interests. They may not be asking for it, but they also may not oppose it being requested as a settlement term. If they do, then an actual or perceived (or reasonable apprehension of) conflict may arise and must be addressed at that time.

[62] The plaintiffs’ further alternative and last contention is that, by July 26, 2017, the point was reached when the EH Defendants ought to have had a reasonable apprehension of a conflict between the two mandates: when the insurer expressed the view that the plaintiffs’ insistence upon the Non-Monetary Settlement Term was “ridiculous.”

[63] The EH Defendants do not agree that this gave rise to a conflict of interest. They maintain that they were giving the advice that they were duty bound to give the plaintiffs, which was that they did not think that the plaintiffs’ Non-Monetary Settlement Term was achievable and that they believed the best outcome for the plaintiffs would be to negotiate a settlement along the lines of what was being proposed without such a term. The EH Defendants essentially say that they would have given that advice irrespective of the involvement of the insurer and its defence of the counterclaim.

[64] I would approach the consideration of whether a reasonable apprehension of a conflict of interest arose in the context of the EH Defendants’ joint mandate for the plaintiffs and XL by slightly reframing the Reeb question as follows: was a point reached when counsel ought to have reasonably apprehended that its mandate to defend the insured in the counterclaim could be in conflict with the insured’s pursuit of uninsured claims?

[65] I am not aware of any authority to the effect that the mere fact that two clients have a different perspective on the importance of a particular settlement term, in and of itself, gives rise to a reasonable apprehension of conflict or necessarily puts the lawyer in a position of a disqualifying conflict. In my view, an airing of perspectives on the importance of different settlement terms does not mean that the two mandates can reasonably be said to be in conflict with each other.

[66] There is no evidence that XL was insisting that the counterclaim be settled without the plaintiffs’ Non-Monetary Settlement Term (even if the insurer thought it was ridiculous).

[67] The issue at that time (in July and August of 2017) was that the plaintiffs did not like the advice that the EH Defendants were giving them about the prospects of settling the Employee Action if they continued to insist upon their Non-Monetary Settlement Term. The plaintiffs perceived that this advice was the result of a conflict between their settlement objectives and the settlement objectives of the insurer. The EH Defendants did not consider this to be a conflict of interest. However, the plaintiffs’ perception of a conflict, and the other statements in the plaintiffs’ August 11, 2017 email, were concerning to the EH Defendants insofar as they reflected a loss of confidence and breakdown in the solicitor-client relationship.

[68] Absent any specific authority on this point, it is not obvious to me that the EH Defendants were in a conflict of interest at this time. In this case, I do not consider a point to have been reached in the EH Defendants’ mandate of a reasonable apprehension of a conflict between the plaintiffs and XL that prevented the EH Defendants from continuing with the joint retainer to explore the possibility of a settlement with Wang and Zhang that included settlement terms acceptable to both clients.

iv. Did the EH Defendants withdraw from their representation of the plaintiffs in a timely manner?

[69] Next, I turn to the question of the timing and manner of the EH Defendants’ withdrawal from their representation of the plaintiffs in the Employee Action. The plaintiffs confirmed in oral argument that they are not alleging that the EH Defendants breached any duty by their withdrawal from representing the plaintiffs. The issue is one of timing.

[70] The EH Defendants acknowledge that the August 11, 2017 email from plaintiffs marks the breakdown in their solicitor-client relationship, leading them to eventually withdraw from representing the plaintiffs, but not before they carried out the plaintiffs’ instructions to see whether Wang and Zhang were prepared to agree to the Non-Monetary Settlement Term (notwithstanding that the EH Defendants expected that that Wang and Zhang would not agree). There is no evidence that XL interfered with or objected to the EH Defendants exploring this possibility.

[71] I have not been directed to any authority that says it was inappropriate for the EH Defendants to continue in this limited capacity once this breakdown in the solicitor-client relationship had occurred. Their actions were, rather, an attempt to overcome the breakdown and see if a satisfactory resolution to both clients could be reached.

[72] If Wang and Zhang had been willing at the time to entertain the possibility of an apology or any non-monetary settlement terms along those lines, it might have been necessary for the EH Defendants at that point to send the clients for independent legal advice. However, that did not transpire. As the EH Defendants expected, Wang and Zhang did not agree to this term, as confirmed on September 29, 2017. The EH Defendants withdrew from their representation of the plaintiffs, citing a breakdown in their relationship, on October 3, 2017.

[73] The plaintiffs agree that the withdrawal was appropriate. In either scenario, whether it be a breakdown in the solicitor-client relationship or a reasonable apprehension of conflict, the lawyer is required to withdraw. Their complaint is with the timing of it. The plaintiffs say that a point had been reached in counsel’s mandate to defend the insured that ought to have caused counsel to reasonably apprehend there was a conflict with the insured’s pursuit of uninsured claims in July 2017, at which time they were not advised to seek independent legal advice and only did so after the EH Defendants withdrew at the beginning of October 2017.

[74] This contention is not borne out (as discussed earlier in this endorsement). The interests of the plaintiffs and their insurer were not perfectly aligned in the sense that they prioritized different aspects of the settlement of the Employee Action. As I have already found, the EH Defendants were not acting in a situation of a reasonable apprehension of conflict during the period in which they were attempting to determine whether a settlement satisfactory to both clients could be achieved. However, the earliest point at which they could have reached the point of a reasonable apprehension of conflict was not until after the EH Defendants followed the plaintiffs’ instructions to ask for the Non-Monetary Settlement Terms and it was communicated clearly by the opposing counsel that Wang and Zhang would not agree to it.

[75] It is only at that point that, under Reeb, the insured must be advised to seek independent legal advice regarding the potential or actual conflict with the insurer and/or counsel should withdraw from representing one or both the insured and the insurer. I have concluded that point was never reached. However, even if the definitive communication from Wang and Zhang on September 29, 2017 that they would not agree to the plaintiffs’ Non-Monetary Settlement Term marked the point of a reasonable apprehension of conflict in the EH Defendants’ joint retainer, I find that the EH Defendants withdrew from the mandate in a timely manner, within days thereafter, once it was confirmed by opposing counsel that such a settlement could not be achieved.

[76] I find the withdrawal of the EH Defendants from their representation of the plaintiffs to have been justified and appropriate. A client’s refusal to accept the lawyer’s advice on an important issue can be grounds for a court recognizing that a breakdown in the solicitor-client relationship has occurred: see Baradaran v. Alexanian, 2020 ONSC 4759, at para. 6 (d). Here, there was more to the loss of confidence and break down in the relationship than just a refusal to accept the EH Defendants’ advice. The plaintiffs had threatened to record all conversations and had accused the EH Defendants of preferring the insurer XL’s interests over the plaintiffs’ because of the advice being given.

[77] There is no genuine issue requiring a trial and the court does not need to use its enhanced fact-finding powers under r. 24.02 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 to find that the EH Defendants did not breach their fiduciary duty or duty of care to the plaintiffs. They were not in a conflict of interest, and they avoided being in the position of serving two masters whose interests were not aligned by their timely withdrawal from their representation of the plaintiffs on October 3, 2017.

b. What if any Damages are the Plaintiffs Entitled to if there was a Breach of Duty?

[78] Having found the EH Defendants were not acting in a conflict of interest and withdrew in a timely manner, it is not necessary to consider what, if any, damages the plaintiffs might have been entitled to if the court had found differently. I will, however, briefly, consider the damages questions raised in the interests of completeness.

i. Did the EH Defendants profit from any established breach of duty?

[79] The plaintiffs seek disgorgement of fees as an equitable remedy arising out of the alleged breach of fiduciary duty owed by the EH Defendants. This remedy is not based on any loss causation associated with the breach of duty, but rather on a theory that the EH Defendants should not benefit from having breached their fiduciary duty and fallen below the standard of care. The plaintiffs cite Strother v. 3464920 Canada Inc., 2007 SCC 24, [2007] 2 S.C.R. 177 and Campbell v. Ragona, 2010 BCSC 1339 to support their position.

[80] Disgorgement is a remedy that is intended to serve either prophylactic or restitutionary purposes. In Strother, at para. 77, the Supreme Court of Canada adopted the respondent’s assertion that disgorgement can be an appropriate remedy for a lawyer’s breach of fiduciary duties for acting in a conflict of interest and personally benefitting from the breach through profits earned:

[W]here a conflict or significant possibility of conflict existed between the fiduciary’s duty and his or her personal interest in the pursuit or receipt of such profits ... equity requires disgorgement of any profits received even where the beneficiary has suffered no loss because of the need to deter fiduciary faithlessness and preserve the integrity of the fiduciary relationship.

[Brackets and ellipsis in original].

[81] Strother was not a case of disgorgement of fees billed and paid for past work, but rather for profits earned on a scheme employed by the lawyer outside predicated upon the legal work performed for the client. Campbell was a case of disgorgement of fees in a situation where a conflict arose, the lawyer did not insist that the client obtain independent legal advice before waiving the conflict and the lawyer continued to act for the client through to the ultimate settlement of the underlying matter while in a position of conflict.

[82] Campbell is a very different case than this case. Here, the EH Defendants withdrew before a final settlement was negotiated in the underlying proceeding with Wang and Zhang. In this case, there is no suggestion that the fees and disbursements previously billed and paid for work done by the EH Defendants on behalf of the plaintiffs in the course of the three litigation mandates in which they were acting were not commensurate with work that the EH Defendants did for the plaintiffs. There is no allegation that the EH Defendants were negligent in their handling of those three litigation matters on behalf of the plaintiffs. The court was not advised of the EH Defendants’ accounts for those services rendered having been assessed or challenged. The EH Defendants did not render any accounts for their fees to transition the files.

[83] The EH Defendants did not earn any profits as a result of, or benefit from, the alleged breaches of duty and conflicts. I would not have found disgorgement of earned fees disbursements incurred to have been an appropriate remedy in this case if the EH Defendants had been found to have been acting in a conflict in breach of their duties to the plaintiffs.

ii. Was any breach the court may find the EH Defendants to have committed causative of the plaintiffs’ alleged loss?

[84] The plaintiffs’ alternative claim for the additional legal fees of almost $17,000 said to have been incurred to bring their new litigation counsel up to speed might have been found to have been causally connected to the alleged breaches of the fiduciary duty or the duty of care if the plaintiffs had established that a conflict existed from the outset of the joint retainer, but I have found that not to be so.

[85] If a conflict had been found to have arisen in the course of the retainer, the EH Defendants would have had a duty to withdraw. In such circumstances, any expenses associated with the withdrawal and to bring new counsel up to speed would have been incurred even if the duty was strictly adhered to. Thus, such expenses cannot be said to have been caused by the alleged breach of the duty, where the plaintiffs ended up in the exact same place as they would have been if the duty had been met (e.g. they had been advised to seek independent legal advice and the EH Defendants had withdrawn).

[86] In any event, here the EH Defendants argue that they were duty bound to withdraw because of the plaintiffs’ conduct. Thus, the plaintiffs cannot claim damages for the cost of bringing new counsel up to speed necessitated by their own behaviour. Further, the EH Defendants maintain that if the plaintiffs had a legitimate complaint about having to bring new counsel up to speed, they should have raised it when the EH Defendants withdrew.

[87] The plaintiffs have not established any causal connection between the alleged additional legal expenses incurred to bring their new counsel up to speed and any alleged breaches of duty by the EH Defendants. Aside from the nearly $17,000 that the plaintiffs say they had to pay their new lawyers to get up to speed, the plaintiffs have not claimed or pointed to any loss that they have suffered because of the alleged breaches of fiduciary duty and conflicts of the EH Defendants.

c. Are the Plaintiffs’ Claims an Abuse of Process?

[88] The EH Defendants take exception to this proceeding having been commenced by the plaintiffs. They maintain that they were subjected to abusive emails from clients who would not accept their advice and took offence to the advice that was provided, and then sued them after they withdrew due to a loss of confidence and breakdown in the solicitor-client relationship. The EH Defendants argue that this action is an abuse of process because the plaintiffs did not oppose the withdrawal of the EH Defendants as counsel for the plaintiffs back in October 2017. If they had done so, under r. 15 of the Rules of Civil Procedure, they could have raised their concerns about prejudice (e.g. additional legal expenses) at the time, and having failed to do so, they should not be permitted now to argue that the change of counsel prejudiced them.

[89] The plaintiffs counter that the abuse of process doctrine is not applicable. They maintain that they have pursued this action to enforce their right to be represented by lawyers who do not have divided loyalties and should not be penalized for doing so, even if they are ultimately unsuccessful.

[90] It appears that the essence of the EH Defendants’ allegations of abuse of process by the plaintiffs are tied to their characterization of the plaintiffs (and Omur Sezerman in particular) as notorious litigants, citing other cases in which they aggressively pursued claims unsuccessfully: see e.g. Evans; OZ Merchandising Inc. v. Canadian Professional Soccer League Inc., 2021 ONCA 520, generally and at para. 89.

[91] The EH Defendants sought and have been granted summary judgment dismissing the plaintiffs’ claims against them. There is no need for the court to find that these claims were an abuse of process to reach that decision. I decline to do so.

d. Did the EH Defendants Act in Bad Faith?

[92] Conversely, the plaintiffs allege that the EH Defendants acted in bad faith by continuing to represent the plaintiffs in the Employee Action and the counterclaim, billing significant amounts of money and achieving little of substance. Further, they contend that the EH Defendants’ view that the plaintiffs’ requirement of an apology would render any settlement impossible was later shown to be wrong based on the eventual settlement achieved shortly after the EH Defendants withdrew and new counsel assumed carriage of the matter.

[93] Basically, the plaintiffs rely on their contentions that the EH Defendants improperly continued to act while in a conflict of interest in breach of their fiduciary duties, allegedly mishandled the plaintiffs’ litigation files, gave them bad advice and yet billed for their work, to suggest that the EH Defendants were acting in bad faith.

[94] First, having found that the EH Defendants did not breach their fiduciary duty by accepting and carrying out the joint mandate for the plaintiffs and their insurer XL (or in the manner or timing in which they withdrew from that mandate in October 2017), these very same allegations cannot support a finding that the EH Defendants acted in bad faith in their handling of this situation.

[95] Further, it does not appear to me that the joint statement that was eventually agreed to as part of the settlement between the plaintiffs and Wang and Zhang contains the apology or specific Non-Monetary Settlement Term that the plaintiffs were originally insisting upon. Thus, it is not clear to me that the advice from the EH Defendants that the Non-Monetary Settlement Term was not achievable has been demonstrated to be wrong.

[96] There is no basis for a finding that the EH Defendants acted in bad faith, and I make no such finding.

Final Disposition and Costs

[97] The parties advised the court that they agree that the appropriate scale of costs is partial indemnity and that costs should be payable to the winning side.

[98] The parties have also agreed that a further $750 in partial indemnity costs should be added to any award of costs for the previous attendance that led to adjournment of this motion to November 24, 2022.

[99] The parties’ claimed partial indemnity costs amounts are very close. The plaintiffs’ costs outline indicates partial indemnity costs of $37,946.61 (inclusive of fees, disbursements, and taxes), based on a total of 199.5 hours of legal professionals’ time at varying rates. The EH Defendants’ costs outline indicates partial indemnity costs of $39,332.28 (inclusive of fees, disbursements, and taxes) based on a total of 166.5 hours of legal professionals’ time at varying rates.

[100] The EH Defendants’ costs appear to be proportionate and reasonable having regard to the plaintiffs’ own costs outline and having regard to the importance and complexity of the issues in this action in which there were accusations of professional negligence and breach of fiduciary duty that could have reputational implications, and having regard to the time spent and hourly rates of the legal professionals involved, which are very much in line with those of the legal professionals representing the plaintiffs.

[101] The EH Defendants are the successful parties. Their summary judgment motion for the dismissal of the plaintiffs’ claims against them is granted. This action is dismissed.

[102] In accordance with the parties’ agreement, the plaintiffs shall jointly pay forthwith to the EH Defendants their partial indemnity costs, fixed in the all-inclusive amount of $39,332.28 plus an additional $750 in partial indemnity costs for the earlier adjournment of this motion, for a total all-inclusive costs award of $40,082.28, payable forthwith.

Kimmel J. Released: April 21, 2023

Footnotes

[1] The EH Defendants refer to this as a dual retainer, rather than a joint retainer. The analysis proceeds on the basis that it is effectively a joint retainer. Although the EH Defendants were representing the same parties, the plaintiffs, in the Employee Action and counterclaim, their mandate was for two clients, the plaintiffs and their insurer XL. I do not consider there to be a meaningful distinction, for purposes of this decision, between a “dual” and “joint” retainer and will refer to it as a joint retainer.

[2] The plaintiffs have not disclosed the full settlement terms so the EH Defendants do not have any information about what additional settlement terms the plaintiffs provided to secure Wang and Zhang’s agreement to this joint statement.

[3] In their factum, this was requested as an alternative relief, but the plaintiffs confirmed in oral argument that they were seeking judgment on their claims and that they consider summary judgment to be appropriate, there being no genuine issue for trial in respect of their claims nor in respect of the defences.