This recent Court of Appeal (ONCA) decision serves as a great reminder that retainer agreements should be carefully drafted to reflect the true nature of the solicitor-client relationship and that they should be adapted to account for all foreseeable outcomes.
Contrary to the typical situation where a client seeks the assistance of the court not to enforce the terms of a retainer agreement, the court in Bimman v. Igor Ellyn Professional Corporation (Ellyn Law), 2022 ONCA 781 (“Bimman”), reviewed the principle in which a retainer agreement between a lawyer and their client may be set aside because it would not be fair and reasonable to the lawyer in accordance with section 24 of the Solicitors Act, R.S.O. 1990,c. S.15 (the “Act”).
Facts
The appellants in Bimman, Mr. Igor Ellyn and his former law firm Ellyn Law, were retained by Mr. Bimman and 2182474 Ontario Inc (the “respondents”) for a complex shareholder dispute that spanned over a period of five years (the “action”). Mr. Bimman approached Ellyn Law after the action had been ongoing for two years. $4,000,000 was already being held in court as security for the action.
At the heart of the dispute in Bimman was the interpretation of section 3(e) of the retainer agreement (the “agreement”), which states that Ellyn Law was retained to take such further steps as are required to bring a resolution to the action. The appellants’ evidence at trial was that the agreement’s overall goal was to assure they would only see the matter through to trial.
The agreement included a retainer fee and a hybrid compensation structure based on hourly billing plus an amount if the recovery exceeded $1,800,000. However, Section 16 enacted an overriding cap of the legal fees at 30% of the total recovery. Finally, under Section 17, the agreement addressed disbursements in the event of an appeal.
It was agreed by the parties, through an irrevocable direction in January 2014, that the proceeds of any settlement or judgment in the action would be paid to “Ellyn Law” in trust out of the funds held by the court. After a six-week trial of the action in 2014, the appellants were able to secure a favourable result for Mr. Bimman. The parties filed appeals, which were dismissed except for correcting an error in the calculation of damages. For the appeal, no separate retainer agreement was prepared or agreed to.
After the appeals, the total award for the action was $1,984,100, including partial indemnity costs of $780,312.50.
In May 2017, Mr. Bimman informed Mr. Ellyn that he was withdrawing the irrevocable direction and asked that the funds be paid directly to him. Mr. Ellyn rejected these instructions as they were contrary to the previous direction and the trial judge’s order. As a result, the respondents terminated the agreement. To ensure the court funds would not be paid out contrary to the directions and judgment of the main action, the appellants retained Chitiz Pathak LLP.
From January 2013 to January 2015, the appellant rendered regular accounts to the respondents. No other accounts were rendered until June 2017, after the respondents terminated the agreement. After the completion of the appeals in 2017, the appellants rendered their final account requesting payment for fees of $552,954.89 all-in, which was more than the 30% recovery cap of $356,315.55 plus HST, but still less than the docketed time.
Some of the additional fees requested by the appellants were the following:
- $25,000 for the costs argument needed to finalize the trial judgment;
- $5,000 for negotiation of advance costs;
- $9,000 for a motion in the appeal;
- $25,000 for the cross-appeal;
- $5,000 for arguing costs on the appeal; and
- $11,600.90 for the services of Chitiz Pathak LLP (the “Chitiz disbursement”).
The respondents did not accept these additional charges. As a result, they filed a motion under the Act to determine how the agreement would impact their legal fees. The respondents requested that the motion judge determine that the agreement caps fees at 30%, that the agreement subsumes the five other accounts claimed by the appellant, and that the Chitiz disbursement should not be paid.
Motion Judge Decision
In his ruling, the motion judge indicated that the Agreement was valid and enforceable, capping the Appellant’s fees at 30%. No other fees or disbursements were allowed by the court, except for the Appellant’s assessment of the prior counsel’s account, which was remitted to the assessment officer.
According to the motion judge, section 3(e) of the Agreement was drafted very broadly and was not limited to litigation through the end of the trial of the Action. A reference to an appeal was made in the Agreement, implying that an appeal was reasonably foreseeable by the parties at the time of execution of the Agreement.
The motion judge also indicated that, as a general rule, a court would usually order an agreement enforced against the lawyer who drafted it. There is no reason why the Appellant, as the drafter, could not have included exceptions in the Agreement or imposed a separate retainer for the appeal.
Having concluded that the Agreement was valid, the motion judge found that all additional fees were expressly contemplated by, or reasonably included in, section 3(e). In addition, he determined that the Agreement did not cover the Chitiz disbursement as it related more to a dispute between a lawyer and a client than to resolving the dispute itself.
The Appeal
The main issues on appeal were the following:
Did the motion judge err in finding that the retainer agreement was valid and enforceable under section 24 of the Act?
The parties agreed that section 24 of the Act has to be interpreted in light of the ONCA decision of Raphael Partners v. Lam (2002), 2002 CanLII 45078 (“Raphael”).
In Raphael, the court established a two steps test to examine a retainer fee agreement being challenged under the Act. A decision maker must first determine if the retainer agreement was fair and whether it was reasonable based on the outcome of the case.
A significant difference between Raphael and Bimman is that Raphael involved a client challenging the fee agreement, whereas Bimman was the opposite. Bimman was also the first ONCA decision with such dynamics.
Following an in-depth analysis of the origins of section 24 of the Act, the court concluded that its purpose is to protect clients from unfair and unreasonable retainer agreements, which are generally drafted by lawyers who are themselves parties to them. Therefore, the section should be interpreted and applied to protect clients.
Section 24 of the Act requires a fairness assessment based upon the circumstances surrounding the execution of the agreement and whether the client understands and appreciates the nature of the agreement they signed. According to the court, there was no reason why this onus should shift in the case of a lawyer seeking to invalidate a retainer agreement. Based on the motion judge’s findings, this requirement was met.
With respect to reasonableness, Raphael indicates that the following elements must be taken into consideration: (1) the time expended by the lawyer; (2) the legal complexity of the matter; (3) the results achieved; and (4) the risk assumed by the lawyer.
The court indicated that this framework should be modified in the rare case of a lawyer challenging their retainer agreement. As a result, retainer agreements should be presumed to be fair and reasonable in these circumstances. Those lawyers who wish to challenge the validity of retainer agreements must demonstrate some exceptional circumstances to rebut this presumption.
In Bimman, the appellants were unsuccessful in proving the exceptional circumstances, and the motion judge’s findings on the agreement’s validity were upheld.
Did the motion judge err in finding that the additional fees claimed were covered by the retainer agreement or that the disbursement should not be allowed?
The court then moved on to the question of the additional fees claimed and stated that the motion judge did not err in finding that the additional fees claimed were covered by the agreement, with the exception of the Chitiz disbursement.
The court overturned the motion judge finding that the Chitiz disbursement fell outside the agreement’s scope and was not payable by the respondents. The appellant had a legal and professional obligation to ensure that the funds from the action were not disbursed contrary to the judgment of the action. The disbursement was reasonably necessary to fulfill this obligation, and the court allowed the appeal in part and ordered that the respondents pay the Chitiz disbursement of $11,600.90.
