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Appeal court orders assessment of fees

|Written By Michael McKiernan

Intra-corporate litigators must rethink the way they construct retainers in the wake of an Ontario Court of Appeal decision to refer the fees of two Toronto law firms for assessment after they had already been paid, according to a practitioner in the area.

‘You can’t rely on the boilerplate anymore,’ says Antonin Pribetic.

In a split 2-1 decision, the court granted Echo Energy Canada Inc.’s application for an assessment of fees paid by the company to Lenczner Slaght Royce Smith Griffin LLP and Voorheis & Co. LLP that totalled 840,000.

Echo Energy challenged the fees following a bitterly contested change of management. It argued the old administration had failed to check them for reasonableness.

In its ruling, the Court of Appeal found it had shown special circumstances, a precondition for assessment of paid accounts under the Solicitors Act, and thereby reversed an earlier ruling by a Superior Court judge.

Lenczner Slaght was retained by the company after one director, Salvatore Fuda, became embroiled in a dispute with several other directors, including Echo Energy’s president.

Several lawsuits were launched on behalf of Fuda, the company, and the other directors. Although the law firm had a written retainer with Echo Energy, the court found it didn’t cover the full scope of the separate actions, while Voorheis had no written retainer at all.

The Fuda faction eventually prevailed over the president and other directors on the board.

In the wake of the ruling, Antonin Pribetic, a lawyer with Steinberg Morton Hope & Israel LLP, says litigators need to protect themselves from retaliatory assessments in the event they end up representing the losing side in a takeover battle.

“You really have to revisit your retainer agreements. You can’t rely on the boilerplate anymore. We’ll have to look at it with a more jaundiced eye and have some specific wording or clauses with respect to change of control.”

Patricia Virc, legal counsel at Echo Energy, says she’s pleased with the ruling. “I was very happy to have won it after a bad experience in the Superior Court. It’s not about depriving lawyers of their fees.

It is all about maintaining the integrity of the profession and the transparency of billing. In a context when the decision-maker is spending other people’s money, the lawyers have to be a little careful to ensure that the constituents whose money is being spent are actually considered.”

Ben Zarnett, a partner at Goodmans LLP who represented Lenczner Slaght and Voorheis at the appeal court, wouldn’t comment on the case. Ronald Slaght, managing partner of Lenczner Slaght, also declined to speak about it, while Wesley Voorheis of Voorheis & Co. didn’t return phone calls by press time.

The problems began in November 2007, when Fuda became suspicious about the company’s reported gas reserves. He tried to have an independent engineer appointed to confirm them but was rebuffed at a board meeting, which prompted Fuda to nominate two new appointees selected by him to the board.

Meanwhile, Gary Conn, then Echo Energy’s president, claimed Fuda had obtained his shares illegally. As a result, the company formed a special committee to handle the explosion of lawsuits, including litigation by Fuda against all three of its members.

In November 2008, Superior Court Justice Geoffrey Morawetz ruled Fuda’s shares had been purchased legally and his directors were appointed, which gave his group control of the company. Nevertheless, Morawetz called both Fuda and Conn’s credibility as witnesses into question.

In the meantime, a consulting engineer appointed by the new management eventually found significant declines in the company’s gas reserves, which forced it to write them down to $12 million from $44 million.

In the intervening period, Conn had authorized 13 accounts with Lenczner Slaght worth $520,000. Lenczner Slaght had recommended the company also hire Voorheis, who rendered five accounts worth $317,000.

The new management applied for the assessment in September 2009. But in January, Superior Court Justice David Brown found they had failed to show that the directors on the litigation committee hadn’t acted in the best interests of the company.

Reversing that decision, Court of Appeal Justice Marc Rosenberg, writing for the majority, said Brown had erred by viewing the case from the lawyers’ perspective rather than from the client’s point of view.

“By taking this approach, he failed to consider the evidence showing that the appellant was not well served by those within the company tasked with making the decisions about the conduct of the litigation, including payment of the accounts,” Rosenberg wrote.

“Specifically, the application judge overlooked evidence suggesting that Mr. Conn was spending the appellant’s money without regard for the impact on the appellant.”

Rosenberg said Brown should have considered Morawetz’s earlier findings that Conn and his fellow directors on the litigation committee had an interest in preserving the status quo.

He also ruled the size of the legal bills at $840,000, when compared with the company’s revenues of $2.8 million during the same period, went some way towards proving special circumstances in the case.

“It cannot be forgotten that it was the appellant, a public company, that was paying the bills, not the directors,” Rosenberg wrote.

According to Pribetic, the court was right to reinforce the “client focus” when determining whether special circumstances exist. “It’s funny that it’s called the Solicitors Act because really it’s all about the client,” he says. “It’s a form of consumer protection.

The ethical lawyer has to put the client’s interest first. It reinforces the view that lawyers are in a unique position among professions. Our case is always subject to scrutiny, notwithstanding the accounts are paid.”

In his dissenting opinion, Court of Appeal Justice Stephen Goudge repeated a fear expressed by Brown that companies involved in intra-corporate litigation might find it difficult to retain counsel if the accounts could be assessed “for no other reason than that the lawyers provided legal services to the losing side.”

Pribetic agrees that could be a problem but suggests lawyers can cover themselves by tailoring their retainers at the outset. Apart from change-of-control clauses, he says lawyers could insert arbitration clauses to avoid the assessment process.  

Pribetic adds they could also ensure all directors approve the retainer. In fact, the Court of Appeal refused to order an assessment on $140,000 in fees paid to McCarthy Tétrault LLP because all of the directors, including Fuda, had signed off on its appointment in the matter.

For her part, Virc says lawyers should never be afraid to submit their accounts for review. “If you’re going to deliver a fair account, there’s not going to be much of an adjustment anyway,” she says, noting she hopes the process will result in a reduction in the company’s fees.

“We wouldn’t have gone through this if we weren’t hoping for a reduction. I don’t know how easy it’s going to be. To the extent they will be reduced at all, they’re going to have to make a refund to the company, which is a little harder than just writing down your account before being paid.”

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