Legal Blog

Contingency Fees

The Solicitors Act was amended a while ago to specifically allow for contingency fees, although, before the amendment, the practice was widespread and judicially recognised. Are lawyers following the rules set out in the Act? We suspect not. This has unintended consequences, some of which were set out in  Du Vernet v. 1017682 Ontario Ltd. 2009 CarswellOnt 3275 (Ont SCJ).

Agreement

The solicitors commenced an action on behalf of the clients in 2002. By 2004, the clients had run out of money and the solicitors agreed to change their remuneration from a time basis to a contingency fees basis of 30% of recovery plus disbursements.

In 2006, the solicitors and the clients agreed on a new retainer agreement. Unfortunately, the reasons for decision did not set out its terms. However, we gather that the new agreement specified that the client would pay rates at $425 per hour plus 40% of the recovery.

By January 2009, the solicitors had already funded the litigation for over 6 years and had paid $48,000 of their own funds into court pursuant to security for costs orders. Their fees, based on time alone, and other disbursements were $478,000.

The solicitors obtained an offer from the defendants for $418,000. The solicitors then informed the clients that they were not willing to fund the litigation any further and were certainly not willing to pay large amounts pursuant to a security for costs order that they knew was coming.

The clients signed the minutes of settlement knowing that, as far as the solicitors were concerned, all of the settlement proceeds would be used to pay the solicitors’ fees and disbursements. Of course, once the defendants paid the funds, the clients disputed the entitlement of the solicitors to all of the proceeds.

Validity

The application judge determined that the contingency agreement was not valid. It did not comply with the requirements of section 28.1 of the Act in many respects. Most importantly, it did not contain a statement informing the clients of their right to make all critical decisions regarding the conduct of the action and it contained no statement that the solicitors “shall not recover more in fees than the client recovers as damages or receives by way of settlement”. Finally, the Act specifies that the contingency percentage can only be applied to damages, excluding compensation for costs. The judge stated that this means that the solicitors must ensure that a settlement amount is broken down into damages and costs. The settlement amount in this case did not allocate between the two.

The judge could have ended there, but he went further. He was disturbed that the 2006 agreement transformed the 2004 agreement from a contingency agreement to a fees plus premium agreement. He accepted the clients’ contention that they had understood the 2006 agreement to be just a 40% contingency agreement.

Again, the judge could have stopped, but went further. He held that if there had been a meeting of minds on the 2006 agreement, he would have refused to enforce it because he felt it was oppressive and unreasonable and negotiated between solicitors and clients with a clear inequality of bargaining power.

Assess

Since there was no agreement, the judge had to fix the fees. This meant to him that he had to account for financial risk, skill, diligence, and success achieved.

The solicitors argued that they bore all of the risk and that the clients had originally misled them regarding their financial situation. The clients argued that the settlement proceeds ought to be shared. The judge noted that a cause of action belongs to a client, not to a solicitor.

The judge felt that the clients should receive some funds because the case had merit from the outset, as the settlement corroborated. However, he decided that the solicitors deserved more of the settlement funds because of the time they invested in the action and the risks they assumed. He therefore allocated to the solicitors all of their disbursements, including interest on them at 24% per year as the parties had agreed, and from the balance of about $370,000, awarded the solicitors $255,000 plus GST. This left the clients with about $102,250.

Costs

Success was divided and it seemed that the clients had attempted to thwart the solicitors by way of untoward conduct. However, the clients’ conduct was offset by the judge’s criticisms of the contingency agreement. Accordingly, the judge declined to award any costs of the application.