Chudy v. Merchant Law Group et al., (2008) 262 B.C.A.C. 210 (CA)

• Judge: Low, Smith and Lowry, JJ.A.
• Court: Court of Appeal (British Columbia)
• Case Date: Wednesday November 26, 2008
• Jurisdiction: British Columbia
• Citations: (2008), 262 B.C.A.C. 210 (CA);2008 BCCA 484

Chudy v. Merchant Law Group (2008), 262 B.C.A.C. 210 (CA);

    441 W.A.C. 210

MLB headnote and full text

Temp. Cite: [2008] B.C.A.C. TBEd. DE.014

Clifford Chudy and Linda Chudy (respondents/plaintiffs) v. Merchant Law Group (appellant/defendant) and Earl Shaw (third party)

(CA034921; 2008 BCCA 484)

Indexed As: Chudy v. Merchant Law Group et al.

British Columbia Court of Appeal

Low, Smith and Lowry, JJ.A.

November 26, 2008.

Summary:

In 1995, the 56 year old plaintiff was seriously injured in a motor vehicle accident. As liability was admitted, only the quantum of the plaintiff's damages were in issue. Shaw was his lawyer. In March 1998, the plaintiff signed a contingency fee agreement (30% plus disbursements) with Shaw's professional corporation (Shaw PLC). Shaw PLC ceased to operate in 2000. Shaw continued to represent the plaintiff as a sole practitioner. No new contingency fee agreement was entered into. In October 2001, Shaw joined the defendant law firm as an associate. Ten days later, Shaw made an assignment into bankruptcy. In January 2002, the Law Society refused to renew Shaw's licence to practise and required the law firm to supervise his practice. Shaw continued to represent the plaintiff in obtaining an $860,000 settlement through mediation. The plaintiff was unaware that Shaw was not licensed to practise law until just prior to the mediation. No law firm lawyer attended the mediation with Shaw. The plaintiff's uncontested evidence was that had he known of Shaw's status, he would have obtained another lawyer. Several weeks after the settlement, to remedy a concern with the validity of the contingency fee agreement, which would limit the law firm to fair and reasonable fees under the Legal Profession Act, Shaw told the plaintiff that he was legally obligated to sign a contingency fee agreement (30%) with the law firm. That was not true and a law firm lawyer present did not correct Shaw. On the basis of the agreement, the law firm withheld over $250,000 from the settlement proceeds. The plaintiff and his wife sued the law firm for a return of the fees and punitive damages.

The British Columbia Supreme Court, in a judgment reported [2007] B.C.T.C. Uned. B74, allowed the action and awarded damages totalling $300,404.17 against the law firm, including $50,000 punitive damages, plus special costs. The court held that the first contingency fee agreement was void and there was no equitable assignment to the law firm. The second contingency fee agreement was unenforceable because it resulted from the law firm's breach of fiduciary duty to the plaintiff. Further, the law firm was precluded from succeeding on a quantum meruit basis because that was an equitable remedy and the law firm came to the court with unclean hands. The court held that the law firm was entitled only to $51,319.96 in disbursements. The law firm appealed, submitting, inter alia, that the trial judge erred (1) in not finding that the law firm was the successor by equitable assignment of the first contingency fee agreement and in finding that agreement unenforceable; (2) in finding that the second contingency fee agreement was unenforceable; (3) in failing to award the law firm fees on a quantum meruit basis absent an enforceable contingency fee agreement; (4) in finding that Shaw converted $18,662.43 of the settlement monies to his own use; (5) in awarding punitive damages; and (6) in awarding special costs. The law firm also argued that the trial judge was biased and erred in making adverse credibility findings against Shaw and the law firm's principal witness, warranting a new trial. The plaintiff cross-appealed, seeking an increase in punitive damages to $200,000.

The British Columbia Court of Appeal, Smith, J.A., dissenting, dismissed the appeal, except for finding that the trial judge erred in finding that Shaw converted $18,662.43 to his own use and erred in requiring the law firm to pay back $8,751.15 in disbursements. Accordingly, the damage award was reduced by $27,413.58. The court dismissed the cross-appeal. Smith, J.A., would have ordered a new trial on the ground that the trial judge's decision was tainted by a finding of fraud, which was not pleaded and of which Shaw and the law firm had no prior notice.

Barristers and Solicitors - Topic 1548

Relationship with client - Duty to client - General - Fiduciary duty - [See Barristers and Solicitors - Topic 3133].

Barristers and Solicitors - Topic 1554

Relationship with client - Duty to client - General - Duty to inform or advise client - [See Barristers and Solicitors - Topic 3133].

Barristers and Solicitors - Topic 3133

Compensation - Agreements - Contingent fees - Invalid agreements - A plaintiff was seriously injured - Liability was admitted - Shaw was his lawyer - The plaintiff signed a contingency fee agreement with Shaw's professional corporation (Shaw PLC) - Shaw PLC subsequently ceased to operate - Shaw continued to represent the plaintiff as a sole practitioner - No new contingency fee agreement was entered into - Shaw joined the defendant law firm as an associate - Ten days later, Shaw made an assignment into bankruptcy - The Law Society refused to renew Shaw's licence to practise and required the law firm to supervise his work - Shaw continued to represent the plaintiff, without advising the plaintiff of his inability to practise, in obtaining an $860,000 settlement through mediation - No law firm lawyer attended the mediation with Shaw - Several weeks after the settlement, to remedy a concern with the validity of the contingency fee agreement, which would limit the law firm to fair and reasonable fees under the Legal Profession Act, Shaw told the plaintiff that he was legally obligated to sign a contingency fee agreement with the law firm - That was not true and a law firm lawyer present did not correct Shaw - On the basis of the agreement, the law firm withheld over $250,000 from the settlement proceeds - The British Columbia Court of Appeal affirmed that the second contingency fee agreement was invalid - The first contingency fee agreement was invalid and was not assigned - The second contingency fee agreement was invalid for want of consideration and was based on the false representation that the plaintiff was legally obligated to sign it - Since the settlement proceeds were already received, the law firm had no risk of non-recovery - The law firm breached its fiduciary duty to the client, as it had a duty to advise the plaintiff that he had no legal obligation to sign the agreement, as there was no risk of non-recovery - The law firm was in a conflict of interest, as fulfilling its fiduciary duty would result in giving up its $250,000 fee in favour of what was a fair and reasonable fee - See paragraphs 55 to 65.

Barristers and Solicitors - Topic 3141.1

Compensation - Agreements - Contingent fees - Where lawyer's licence to practise suspended or not renewed - A plaintiff was seriously injured - Liability was admitted - Shaw was his lawyer - The plaintiff signed a contingency fee agreement with Shaw's professional corporation (Shaw PLC) - Shaw PLC subsequently ceased to operate - Shaw continued to represent the plaintiff as a sole practitioner - No new contingency fee agreement was entered into - Shaw joined the defendant law firm as an associate - Ten days later, Shaw made an assignment into bankruptcy - The Law Society refused to renew Shaw's licence to practise and required the law firm to supervise his work - Shaw continued to represent the plaintiff, without advising the plaintiff of his inability to practise, in obtaining an $860,000 settlement through mediation - No law firm lawyer attended the mediation with Shaw - The British Columbia Court of Appeal held that it was unnecessary to decide whether Shaw's ceasing to be licensed to practise terminated the contingency fee agreement (agreement was unenforceable on other grounds) - See paragraphs 50 to 51.

Barristers and Solicitors Topic 3145

Compensation - Agreements - Contingent fees - Assignment of - A plaintiff was seriously injured - Liability was admitted - Shaw was his lawyer - The plaintiff signed a contingency fee agreement with Shaw's professional corporation (Shaw PLC) - Shaw PLC subsequently ceased to operate - Shaw continued to represent the plaintiff as a sole practitioner - No new contingency fee agreement was entered into - Shaw joined the defendant law firm as an associate - Ten days later, Shaw made an assignment into bankruptcy - The Law Society refused to renew Shaw's licence to practise and required the law firm to supervise his work - Shaw continued to represent the plaintiff, without advising the plaintiff of his inability to practise, in obtaining an $860,000 settlement through mediation - No law firm lawyer attended the mediation with Shaw - Several weeks after the settlement, to remedy a concern with the validity of the contingency fee agreement, which would limit the law firm to fair and reasonable fees under the Legal Profession Act, Shaw told the plaintiff that he was legally obligated to sign a contingency fee agreement with the law firm - That was not true and a law firm lawyer present did not correct Shaw - On the basis of the agreement, the law firm withheld over $250,000 from the settlement proceeds - At issue was whether Shaw's employment contract with the law firm specifically assigned the benefits of the contingency fee agreement to the law firm and, if not, whether there was an equitable assignment - The trial judge interpreted the employment contract as not requiring Shaw to bring anything of value to the firm other than the fees that might be earned in the future (i.e., no express assignment in writing) - Since Shaw was a bankrupt, to interpret the employment contract as assigning pre-bankruptcy income, as suggested by the law firm, would constitute a fraud on Shaw's bankruptcy trustee and creditors - The trial judge rejected that interpretation - The structure and wording of the employment contract also precluded the finding of an equitable assignment - Finally, the court stated that "it seems to me that he could not lawfully have assigned any debt due to him or his company, whether such assignment was specific and in writing or whether it arose by application of equitable principles" - The British Columbia Court of Appeal held that the trial judge did not err in finding that the contingency fee agreement was not assigned to the law firm - See paragraphs 24 to 54.

Barristers and Solicitors - Topic 3304

Compensation - Measure of compensation - Quantum meruit - Reasonable charges - A plaintiff was seriously injured - Liability was admitted - Shaw was his lawyer - The plaintiff signed a contingency fee agreement with Shaw's professional corporation (Shaw PLC) - Shaw PLC subsequently ceased to operate - Shaw continued to represent the plaintiff as a sole practitioner - No new contingency fee agreement was entered into - Shaw joined the defendant law firm as an associate - Ten days later, Shaw made an assignment into bankruptcy - The Law Society refused to renew Shaw's licence to practise and required the law firm to supervise his work - Shaw continued to represent the plaintiff, without advising the plaintiff of his inability to practise, in obtaining an $860,000 settlement through mediation - No law firm lawyer attended the mediation with Shaw - Several weeks after the settlement, to remedy a concern with the validity of the contingency fee agreement, which would limit the law firm to fair and reasonable fees under the Legal Profession Act, Shaw told the plaintiff that he was legally obligated to sign a contingency fee agreement with the law firm - That was not true and a law firm lawyer present did not correct Shaw - On the basis of the agreement, the law firm withheld over $250,000 from the settlement proceeds - The British Columbia Court of Appeal affirmed that both contingency fee agreements were unenforceable - The law firm's alternative claim was for fees on a quantum meruit basis equal to the 30% contingency fee - The court affirmed the trial judge's denial of the quantum meruit claim - This was an equitable claim requiring the law firm to come to court with clean hands - It did not - The law firm allowed Shaw to represent the plaintiff without supervising his work - There was uncontested evidence that had the plaintiff been advised of Shaw's status he would have obtained another lawyer - Although the plaintiff clearly derived a benefit from legal services provided, Shaw's deceit clearly made a quantum meruit claim untenable in equity - See paragraphs 66 to 77.

Barristers and Solicitors - Topic 3313.1

Compensation - Measure of compensation - Effect of negligence, breach of contract or fiduciary duty - [See Barristers and Solicitors - Topic 3304].

Choses in Action - Topic 301

What constitutes an assignment - General - [See Barristers and Solicitors - Topic 3145].

Choses in Action - Topic 363

Equitable assignments - What constitutes an equitable assignment - [See Barristers and Solicitors - Topic 3145].

Damage Awards - Topic 2030.5

Exemplary or punitive damages - Breach of fiduciary duty - A plaintiff was seriously injured - Liability was admitted - Shaw was his lawyer - The plaintiff signed a contingency fee agreement with Shaw's professional corporation (Shaw PLC) - Shaw PLC subsequently ceased to operate - Shaw continued to represent the plaintiff as a sole practitioner - No new contingency fee agreement was entered into - Shaw joined the defendant law firm as an associate - Ten days later, Shaw made an assignment into bankruptcy - The Law Society refused to renew Shaw's licence to practise and required the law firm to supervise his work - Shaw continued to represent the plaintiff, without advising the plaintiff of his inability to practise, in obtaining an $860,000 settlement through mediation - No law firm lawyer attended the mediation with Shaw - Several weeks after the settlement, to remedy a concern with the validity of the contingency fee agreement, which would limit the law firm to fair and reasonable fees under the Legal Profession Act, Shaw told the plaintiff that he was legally obligated to sign a contingency fee agreement with the law firm - That was not true and a law firm lawyer present did not correct Shaw - On the basis of the agreement, the law firm withheld over $250,000 from the settlement proceeds - The British Columbia Court of Appeal affirmed that the contingency fee agreements were unenforceable and that Shaw's deceit precluded equitable relief on a quantum meruit basis - The court also affirmed an award of $50,000 punitive damages, notwithstanding that the law firm was deprived of any fees - The law firm took substantial legal fees after deceiving the plaintiff - Without addressing the conflict of interest, the law firm placed its own interests ahead of the unsophisticated plaintiff and failed to supervise the work of Shaw with full knowledge of the Law Society's requirements - The award was based on an independent wrong, being breach of fiduciary duty and breach of the law firm's contractual duty of good faith owed to the plaintiff - The law firm's conduct was as reprehensible as Shaw's and the award was justified where the law firm was complicit in Shaw's misconduct - The court dismissed the plaintiff's cross-appeal seeking to increase the award to $200,000 - See paragraphs 98 to 119.

Damage Awards - Topic 2030.6

Exemplary or punitive damages - Breach of duty of good faith - [See Damage Awards - Topic 2030.5].

Equity - Topic 1483

Equitable principles respecting relief - Clean hands doctrine - Prohibition from profiting from own wrong - [See Barristers and Solicitors - Topic 3304].

Equity - Topic 3649

Fiduciary or confidential relationships - Breach of fiduciary relationship - Conflict of interest - [See Barristers and Solicitors - Topic 3133].

Cases Noticed:

Lawson Graphics Pacific Ltd. v. Simpson (1987), 12 B.C.L.R.(2d) 126; 36 B.L.R. 223 (S.C.), refd to. [para. 44].

Campney & Murphy v. Arctic Installations (Victoria) Ltd. et al. (1994), 39 B.C.A.C. 173; 64 W.A.C. 173; 86 B.C.L.R.(2d) 226; 109 D.L.R.(4th) 609 (C.A.), refd to. [para. 51].

Hill v. Church of Scientology of Toronto and Manning, [1995] 2 S.C.R. 1130; 184 N.R. 1; 84 O.A.C. 1, refd to. [para. 100].

Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085; 94 N.R. 321, refd to. [para. 102].

Whiten v. Pilot Insurance Co. et al., [2002] 1 S.C.R. 595; 283 N.R. 1; 156 O.A.C. 201, refd to. [para. 102].

Norberg v. Wynrib, [1992] 2 S.C.R. 226; 138 N.R. 81; 9 B.C.A.C. 1; 19 W.A.C. 1, additional reasons [1992] 2 S.C.R. 318, refd to. [para. 105].

Insurance Corp. of British Columbia v. Eurosport Auto Co. et al. (2007), 242 B.C.A.C. 249; 400 W.A.C. 249; 2007 BCCA 279, dist. [para. 113].

Asselstine v. Manufacturers Life Insurance Co. et al. (2005), 213 B.C.A.C. 102; 352 W.A.C. 102; 2005 BCCA 292, refd to. [para. 116].

Wewayakum Indian Band v. Canada and Wewayakai Indian Band, [2003] 2 S.C.R. 259; 309 N.R. 201, refd to. [para. 121].

Esso Petroleum Co. v. Southport Corp., [1956] A.C. 218 (H.L.), refd to. [para. 163].

London Passenger Transport Board v. Moscrop, [1942] A.C. 332; [1942] 1 All E.R. 97 (H.L.), refd to. [para. 163].

Rainbow Industrial Caterers Ltd. v. Canadian National Railway (1988), 30 B.C.L.R.(2d) 273; 54 D.L.R.(4th) 43 (C.A.), refd to. [para. 168].

Wallingford v. Mutual Society (1880), 5 A.C. 685 (H.L.), refd to. [para. 168].

Canada Trustco Mortgage Co. v. Renard et al. (2008), 259 B.C.A.C. 140; 436 W.A.C. 140; 2008 BCCA 343, refd to. [para. 168].

Rickards Estate v. Diebold Election Systems Inc. (2007), 241 B.C.A.C. 263; 399 W.A.C. 263; 69 B.C.L.R.(4th) 75; 2007 BCCA 246, refd to. [para. 207].

Petty v. Telus Corp. (2002), 164 B.C.A.C. 152; 268 W.A.C. 152; 2002 BCCA 135, refd to. [para. 207].

Ventas Inc. et al. v. Sunrise Senior Living Real Estate Investment Trust et al. (2007), 222 O.A.C. 102; 85 O.R.(3d) 254 (C.A.), refd to. [para. 207].

Eli Lilly & Co. et al. v. Novopharm Ltd. et al., [1998] 2 S.C.R. 129; 227 N.R. 201; 161 D.L.R.(4th) 1, refd to. [para. 207].

Canadian Pacific Ltd., Re, [1979] 1 W.W.R. 358; 95 D.L.R.(3d) 242 (B.C.C.A.), affd. [1979] 2 S.C.R. 668; 30 N.R. 541, refd to. [para. 207].

Agro Pacific Industries Ltd., Re (2007), 249 B.C.A.C. 258; 414 W.A.C. 258; 75 B.C.L.R.(4th) 252; 2007 BCCA 628, refd to. [para. 207].

Fraser v. Imperial Bank of Canada (1912), 47 S.C.R. 313; 10 D.L.R. 232, refd to. [para. 212].

Tailby v. Official Reviewer (1888), 13 A.C. 523 (H.L.), refd to. [para. 212].

Ritchie v. Jeffrey (1915), 52 S.C.R. 243; 26 D.L.R. 703, refd to. [para. 212].

Neuzen v. Korn, [1995] 3 S.C.R. 674; 188 N.R. 161; 64 B.C.A.C. 241; 105 W.A.C. 241; 127 D.L.R.(4th) 577, refd to. [para. 216].

Ter Neuzen v. Korn - see Neuzen v. Korn.

Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860; 262 N.R. 285; 2000 SCC 60, refd to. [para. 216].

Syncrude Canada Ltd. et al. v. Hunter Engineering Co. and Allis-Chalmers Canada Ltd. et al., [1989] 1 S.C.R. 426; 92 N.R. 1; 57 D.L.R.(4th) 321, refd to. [para. 231].

Doman Forest Products Ltd. et al. v. GMAC Commercial Credit Corp. - Canada (2007), 236 B.C.A.C. 1; 390 W.A.C. 1; 65 B.C.L.R.(4th) 1; 2007 BCCA 88, refd to. [para. 231].

Keefe v. Fort (1978), 27 N.S.R.(2d) 353; 41 A.P.R. 353; 89 D.L.R.(3d) 275 (C.A.), refd to. [para. 235].

Authors and Works Noticed:

Ellis, Mark Vincent, Fiduciary Duties in Canada (1988), p. 20-24 [para. 105].

Fridman, Gerald Henry Louis, The Law of Contract in Canada (4th Ed. 1999), p. 717 [para. 216].

Maddaugh, Peter D., and McCamus, John D., The Law of Restitution (2nd Ed. 2004) (Looseleaf), § 1:200 [para. 220].

Odgers on Civil Court Actions (24th Ed. 1996), pp. 143 to 145 [para. 161].

Wigmore on Evidence (Chadbourn Rev. 1974), §§ 2588 to 2591 [para. 159].

Counsel:

D.B. Kirkham, Q.C., for the appellant;

I.G. Nathanson, Q.C., and J.C. MacInnis, for the respondent.

This appeal and cross-appeal were heard on February 19-20, 2008, at Vancouver, B.C., before Low, Smith and Lowry, JJ.A., of the British Columbia Court of Appeal.

On November 26, 2008, the judgment of the Court was delivered and the following opinions were filed:

Low, J.A. (Lowry, J.A., concurring) - see paragraphs 1 to 137;

Smith, J.A., dissenting - see paragraphs 138 to 240.