A law firm, acting for a plaintiff, performs the bulk of the work on a file. After a dispute with the client arises, or perhaps before, the law firm finds that it is fired and that another law firm has taken over the file. The law firm has grave doubts whether the client will voluntarily pay the firm for the work it did, regardless of whether the retainer was on contingency or hourly basis. What does the law firm do? Get a charging order. We discuss two cases in which a law firm did exactly that: Dalcor Inc. v. Unimac 2017 ONSC 945 (SCJ) and Fancy Barristers, PC v. Morse Shannon, LLP 2017 ONCA 82.
What is it?
As stated by Justice Perell in another case, “a charging order is a statutorily-based proprietary right of a lawyer to claim property owned by a client or former client when the lawyer’s acts were instrumental in recovering the property. The charging order or charging lien is for the lawyer’s fees, costs and disbursements in the proceeding.”
There are two charging remedies. The first is a statutory remedy under section 34 of the Solicitors Act. It states the following: “Where a solicitor has been employed to prosecute or defend a proceeding in the Superior Court of Justice, the court may, on motion, declare the solicitor to be entitled to a charge on the property recovered or preserved through the instrumentality of the solicitor for the solicitor’s fees, costs, charges and disbursements in the proceeding.”
What do you need to prove? “To obtain a charging order or charging lien, a lawyer must demonstrate that: (a) the fund, or property, is in existence at the time the order is granted; (b) the property was recovered or preserved through the instrumentality of the lawyer; and (c) there must be some evidence that the client cannot or will not pay the lawyer’s fees.”
The second remedy has been referred to as a “manifestation of the inherent jurisdiction of common law courts and courts of equity” allowing the courts “to charge assets recovered or preserved through the instrumentality of a lawyer for a client.”
Fancy Barristers (you have to love the name) is topical, particularly given the recent controversy dealing with personal injury referrals.
Law firm #1 had the initial relationship with the client; it entered into a contingency agreement in which it was to receive 25% of the clients’ recovery plus party and party costs and disbursements (as an aside, this arrangement does not seem to be enforceable because of the manner in which it deals with costs – but that issue is not the subject of this discussion). Law firm #1 then retained law firm #2 on an agency basis to actually perform the work. The two firms agreed to equally split the fees ultimately to be received.
After law firm #2 performed a significant amount of work, the relationship between the two law firms deteriorated and law firm #1 terminated the agency agreement. It did not pay law firm #2 for any of its time or disbursements, both of which were substantial. It did not even provide an undertaking to pay law firm #2 out of any eventual proceeds from the action.
Law firm #2 applied for a charging order under section 34 of the Solicitors Act. The application judge granted the application, ordering that when any funds (ultimately changed to fees, not funds) were received from the action, they were to be paid into court until the respective entitlements of law firm #1 and law firm #2 were determined. Law firm #1 appealed.
Chose in Action
The difference in this scenario and others that we have seen is that there was no property or money actually being received from the action; indeed, there was no indication whether there would ever be property or money being received from the action. This did not bother the Court of Appeal at all. It held that the property was a chose in action and it therefore existed at the time that the charging order was granted.
The Court noted that law firm #2 was (i) employed to prosecute litigation, (ii) the funds (i.e. the chose in action) would be recovered through the instrumentality of the law firm, and (iii) there was evidence that the account of law firm #2 would not be paid. The tests for a charging order were therefore satisfied and the appeal was dismissed.
Neither the application judge nor the Court of Appeal was concerned that the amount to be charged in the charging order had not been determined at the time of the application. That was to be left for another day.
In Dalcor, a lawyer had obtained money for the client by way of an action, but the proceeds obtained were being claimed by a creditor of the client who had registered a PPSA financing statement to perfect a security interest under an indemnity agreement. That claim would have eaten up most, if not all, of the proceeds of the action – leaving the lawyer with little or nothing.
The lawyer applied for a charging order under section 34 of the Solicitors Act even before his fees had been determined. At the same time, the creditor brought a motion for a declaration that, because of its perfected security, its claim had priority over any charging order that might be issued to the lawyer. The judge first dealt with the creditor’s motion for priority and left the lawyer’s motion for a charging order to be dealt with later.
However, the judge first noted that there were strong reasons to protect the right of a lawyer to a charging order.
“It protects solicitors for their fees and disbursements on work that is instrumental to the preservation of one’s client’s property and thus, benefits the client as well as the solicitor. Further, it fosters and creates an environment that protects solicitors to act for persons who, upfront, are unable to pay for legal service. In effect, it is an access to justice issue as well as an equity issue.”
The creditor argued that, under sections 4 and 20 of the PPSA, its perfected security interest had priority over any subsequent charging order. I will not bore you with the judge’s interpretation analysis. In essence, the judge held that if the legislature had wanted the PPSA to exclude the right of a lawyer to a charging order, it needed to do so explicitly.
Relying on the common law “first in time” rule, the creditor also argued that it should have priority because its claim arose before the charging order. The judge noted that it was impossible to have a first in time rule when there was no practical registration possible for a charging order. The charge arises by operation of law the moment that the property has been recovered or preserved. Further, the judge held that the equities of a charging order were in favour of the lawyer. A secured creditor ought not to collect on property obtained through the instrumentality of the lawyer without paying for the costs incurred to obtain the property.
The judge granted priority to a charging order in favour of the lawyer – assuming that, on the lawyer’s motion to be subsequently heard, the judge decided that the lawyer should be granted a charging order.
Moral of Story
These two cases demonstrate that, when a lawyer senses that the client is dissatisfied and will not pay an account, the lawyer ought not to simply sit back and wait for payment out of funds or property that the lawyer, through his or her efforts, has obtained on behalf of the client. The lawyer must be proactive and, if necessary, take immediate action to ensure payment. The tools are available and judges are sympathetic to the equities of a lawyer’s position.
Image courtesy of taliesin.
Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.