The Ontario Court of Appeal made a key decision this month holding that law firms working under a contingency-fee agreement don’t have to post security for costs when representing cash-strapped clients.
The decision is also the first time the court has recognized the risk law firms face in being stuck with disbursement costs in contingency-fee agreements and the significant barrier that could create for lawyers involved in them, according to appeal court Justice Robert Armstrong.
“In my view, as a matter of principle, the lawyer who acts on a contingency-fee basis is already carrying the significant risk of not being paid and, as in this case, being stuck with the costs of paying the disbursements,” Armstrong wrote in Indcondo.
“To add the additional burden of posting security for costs would no doubt have a chilling effect on those lawyers who might otherwise make their services available on a contingency basis — thus creating another problem for access to justice.”
In Indcondo, Cave Hill Properties Ltd., the main defendant in the matter, argued that Ontario should adopt the U.S. approach to the matter and require law firms in some circumstances to post security for costs on behalf of a client.
As a result, Cave Hill Properties and the remaining defendants in the case sought an order requiring the law firm Brauti Thorning Zibarras LLP, which was acting for Indcondo Building Corp., to pay into court $300,000 as security for costs of the action, which was dismissed as an abuse of process. They also sought a similar order of $75,000 as security for costs of the appeal.
But Brauti Thorning Zibarras partners James Zibarras and Trung Nguyen successfully argued that doing so would create a significant barrier to access to justice and cause law firms to shy away altogether from contingency-fee agreements with clients.
Indcondo originally launched an action to reverse several fraudulent conveyances entered by the defendants in 2010 aimed at circumventing a $9-million court order. Cave Hill Properties Ltd. then declared bankruptcy. That stayed the action and prevented Indcondo from seeking enforcement of the judgment.
But in March 2011, the appeal court delivered another major decision that found that a creditor must file a claim within two years of discovering it and thus found in Indcondo’s favour.
The new ruling is good news for lawyers who operate on a contingency-fee basis, says Toronto litigator Antonin Pribetic.
“Justice Armstrong’s decision seems to say you can’t look to lawyers to pay for a client’s costs and recognizes that they are already taking on significant financial risks without the added burden of posting security,” says Pribetic.
“So in a sense, it’s saying lawyers can’t be held responsible for their client’s costs simply because they are representing clients in a contingency-fee agreement.”
Pribetic believes that if a future decision were to impose an order for security for costs against lawyers or law firms operating on a contingency basis, those arrangements would likely disappear.
“The decision is very important in saying an order for securities for costs is not the normal course to take,” says Pribetic. “It recognizes that law firms who take on contingency-fee agreements will shy away if they feel the risk is too high, and that could become a huge liability for the system.”
For Pribetic, the question then becomes whether or not law firms and lawyers will begin to insert indemnification clauses into their contingency-fee retainers with added general security agreements padded into them as well given what he says was an “escape clause” in the ruling.
“It does seem Justice Armstrong added in an escape clause of sorts, and while the interpretation of it would probably be fairly narrow, there are certainly ramifications if that interpretation is widened,” says Pribetic.
“The alternative to the indemnification clauses may be indemnity insurance, but I am unaware of any existing [comprehensive general liability] policies that would cover that.”
But Osgoode Hall Law School professor Trevor Farrow says a widened interpretation of the decision is unlikely to happen any time soon given the court’s current views on security costs.
“This appears to be new terrain,” says Farrow. “What matters is that it is a contingency-fee case and it appears to try to strike a balance between the different voices in the room.
The courts rarely order lawyers to pay costs except in cases of misconduct, and I think it was a wise decision by the court to not close the door completely on similar cases in the future.”
Farrow adds that because the Court of Appeal often makes decisions with far-reaching implications, not closing the door completely on future cases also means the decision avoids making it much harder to bring such claims later on.
“This policy choice was made in favour of an open and accessible court system,” he says. “It says lawyers didn’t create the world, and they shouldn’t have to bear the financial burden of their client’s case. If they did have to, it would create a significant chilling effect, in my opinion.”
Farrow also says that while the decision may not sit well with some members in the justice system, he feels the ruling was fair and will help balance the different needs and voices of those in court.
“If lawyers were required to pay for security for costs in contingency-fee agreements, it would push that risk too far and create a double risk for lawyers.
While contingency fees work for a number of people in the system, if lawyers became responsible for securities for costs, that would certainly chill the ability of applicants to file claims in the future.”
In the meantime, Farrow isn’t surprised that Armstrong dismissed the motion without costs.
“The court rarely orders lawyers to pay costs and it appears this is no exception,” he says.
“I think as long as people remember the underlying policies behind the decision, its importance will
continue to be recognized.”
For more, see "Appeal court sets time limits."