In the civil litigation context, it has been a client’s longstanding right to challenge the reasonableness of his or her lawyer’s account for services rendered. Clients may apply to have a lawyer’s costs assessed by a court under Rule 58 of the Rules of Civil Procedure, RRO 1990, Reg 194.
Evans Sweeny Bordin LLP v Zawadzki, 2015 ONCA 756 [Zawadzki], raises an important issue over how far this right can extend, namely whether a contingency agreement willingly entered into between a lawyer and client entered into before the period of representation is subject to review.
In allowing the $500,000 contingency agreement in Zawadzki to ultimately stand, the Ontario Court of Appeal (“ONCA”) in effect recognized that contractual agreements between lawyers and their clients should stand. However, this decision leaves a potential grey area of lawyer-client relations unaddressed, namely how a court would treat a contingency agreement entered into during the course of representation as opposed to before. The contours of this issue are explored below. I conclude that although the limits of contractual freedom between lawyer and client are unclear, it is open to courts to rely on principles from the doctrine of consideration.
Facts and Analysis
Joseph Zawadzki, the principal of Frenchmen’s Creek Estates Inc. and 550075 Ontario Inc. (the “Appellants”) entered into an agreement with Evans Sweeny Bordin LLP (the “Respondents”) for representation in a foreclosure action. The Appellants initially consented to the foreclosure, but when the mortgagee obtained ex parte final orders against the properties, the Appellants appealed the decision. The appellants sought relief from foreclosure, which would allow them to sell the property and keep the difference between the sale price and the outstanding mortgage debt. Under foreclosure law in Ontario, a mortgagee can realize any surplus proceeds. Selling the properties was in Zawadzki’s interests, as their value was likely to increase over this short period.
The Respondents estimated the legal costs of the Appellants’ original appeal at $35,000. For reasons not entirely clear, Zawadzki offered $500,000 to the Respondents as a bonus, presumably to incentivize them into succeeding. The properties were worth $20,000,000, thus the Appellant would have had a surplus from which to pay the bonus if relief from foreclosure were successfully obtained. While the ethical ramifications of accepting substantially more money than what a particular retainer is admittedly worth are questionable, the parties freely and willingly consented to the arrangement, and signed an agreement accordingly.
A dispute subsequently arose over the arrangement. The Respondents were successful in obtaining relief from forfeiture, and billed the client $200,307.96 in time and disbursements and a further $112,275.95 when subsequent hurdles arose with respect to discharging the mortgages on title. This was in addition to claiming the $500,000 contingency fee. While details of the terms of the retainer agreement are scant, it appears that it permitted the Respondents to bill for time and disbursements, in excess of the $35,000 estimate, plus the $500,000 bonus. Why Zawadzki would agree to this is unclear.
The process for challenging a lawyer’s account set out under the Rules of Civil Procedure requires the client to obtain an Assessment Order from the court, which refers review of the account to an assessment officer. In this case, following a successful motion, the account was referred for assessment. The assessment officer reduced the Respondents’ billings by over $44,000, and denied the bonus on the basis that it was neither fair nor reasonable.
The respondents brought a motion to have the assessment set aside on the basis that the assessment officer exceeded his jurisdiction in assessing the fairness and reasonableness of the agreed upon bonus. In the alternative, the respondents submitted that the bonus was fair and reasonable. The Superior Court of Justice agreed with the Respondents. The Appellants then appealed to the ONCA.
The ONCA looked at two issues: 1) whether the motions judge erred in holding the assessment officer had no jurisdiction to consider the enforceability of the contingency agreement; and 2) whether the motions judge erred in holding that the agreement was fair and reasonable.
The ONCA relied on its own jurisprudence in Cookish v Paul Lee Associates Professional Corporation, 2013 ONCA 278 [Cookish], where it had held that:
“Issues involving the enforceability of contingency fee agreements, including whether they are fair and reasonable, should be resolved by judges [and that] although a judge can refer issues to an assessment officer for determination pursuant to the reference procedure in rule 54 of the Rules of Civil Procedure, a judge should not refer issues concerning the enforceability of a contingency fee agreement.”
Thus, by relying on the precedent set by Cookish, the Court confirmed that assessment officers are unable to rule on the validity of contingency agreements between lawyers and clients, but recognized that the Superior Court could interfere with such arrangements on the basis of fairness and reasonableness.
Potential Grey Areas and the Doctrine of Consideration
The interesting aspect of the ONCA’s holding on the assessment officer’s jurisdiction was its conclusion that the assessment officer lacked jurisdiction “because the Assessment Order had not referred to him any issue concerning the enforceability of the Agreement.” Although not fatal to the outcome, this holding directly contradicts the jurisprudence in Cookish, specifically that assessment officers cannot be delegated the task of reviewing the enforceability of contingency agreements.
The likely reason for the ONCA’s approach is that reviewing the enforceability of a contingency agreement requires answering questions of law and applying the law to the facts of a given case, a task that assessment officers are not equipped to perform.
In its analysis of the fairness and reasonableness of the contingency agreement, the ONCA deferred to the findings of the motion judge, looking instead at whether the record in front of the judge in the motion hearing was adequate to conduct a consideration of the agreement.
However, it remains unclear whether such an analysis should properly be conducted within the existing framework of contract law, or whether the Rules of Civil of Procedure permit or even require courts to look at additional factors when assessing the enforceability of such a contract. The jurisprudence in this respect is not clear. The ONCA endorsed the motion judge’s finding that Mr. Zawadzki was a sophisticated party, and made no mention of the doctrines of unconscionability, duress or non est factum. However, in the absence of invoking such doctrines, it is unclear what relevance Mr. Zawadzki’s status as a sophisticated party has.
The ONCA also accepted the motion judge’s finding that “on the evidence, including the factual matrix, the written contract must be what the parties agreed” and “the assessment officer erred by making the contract something he thought it should be, instead of deciding what the parties agreed to.”
While the latter language strongly favors the application of traditional contract law principles and a deference to the agreement between the parties, the former language implies that findings of fairness and reasonableness could undermine an otherwise legal contract. This conflict is further supported by the ONCA’s finding that “the motions judge also properly informed himself about the factors relevant to determining the reasonableness of the Agreement as of the date of the assessment hearing.”
The concern with such an analysis is that it creates uncertainty over when the principles of contract law apply in their traditional form or when considerations of fairness or reasonableness can override them in the context of a lawyer-client relationship. While the size of the bonus seems at first glance unethical for a lawyer to accept, the ONCA did remark on the proportionality of this to the value of the property in question and the risk that the lawyers would not get paid.
For example, imagine a scenario, exactly like the one in Zawadzki, except that halfway through the representation period, the parties agree on a modest and quite reasonable contingency fee if the lawyers were to win the case. Assuming further that the original retainer contemplated compensation of the lawyers’ time regardless of whether they won, such a scenario would entail agreeing to provide an additional benefit without fresh consideration.
In the above scenario, it could reasonably be argued that the rule from the old English case Stilk v Myrick applies on the basis that the lawyers were already bound to do everything they possible could to secure a win for their client and that the bonus is thus unenforceable for lack of fresh consideration. Could such a transaction be upheld merely on the basis that it was fair and reasonable, despite violating this rule?
While the limits of contractual freedom between lawyer and client are ambiguous, it is open to courts to rely on principles from the doctrine of consideration to determine whether a contingency agreement is enforceable. However, it remains unclear whether a court can or should decide such a matter on the basis of fairness and reasonableness when longstanding principles of contract law have been violated.
BY DEZSO FARKAS · DECEMBER 1, 2015
PUBLISHED AT thecourt.ca