Legal Blog

Direction

You are acting for a vendor on a real estate transaction. The vendor has signed a direction irrevocably directing you to pay the commission owing on the sale from the sale proceeds. This direction is contained either in the agreement of purchase and sale or in a separate document, a copy of which has been given to you. The deal closes and your client, the vendor, directs you to ignore the previous “irrevocable direction” and to pay none of the sale proceeds to the agent. What do you do?

Seal 

The first question you must ask is whether there is any consideration for the direction or whether the direction is under seal. The next question is whether, regardless of the answer to the first question, you want to become embroiled in litigation. This second question is even more important if you have chosen the option of a low insurance premium, but high risk in the event you are sued. Under this option your deductible kicks in when legal costs are expended on your behalf, regardless of whether you are subsequently found to have not been negligent.

In Re/Max Garden City Realty v. 828294 Ontario Inc. (1992), 8 O.R. (3d) 787 (O.C.G.D.), the facts were substantially as stated above. The solicitor paid part of the commission owing to the vendor after obtaining an indemnification. The real estate agent sued the lawyer and the vendor. The direction was contained in the agreement of purchase and sale. Opposite the vendor’s signature was a black pre-printed mark looking suspiciously like a seal and under the mark was the word “(Seal)”. To the left of the signature was the place for the signature of the witness. It said “signed, sealed, and delivered in the presence of”.

The court held that “it is clear from the document that the parties intended that that black printed circle be deemed a seal”. The judge decided that the direction was an assignment by the vendor to the agent and that the lawyer paid the vendor in the face of that assignment at his own peril.

 We wonder if the client’s indemnification had any utility.

In Kuhn v. Thiebault, an unreported 1996 Ontario Court (General Division) decision, a lawyer came into funds as a result of a personal injury settlement. His client had previously executed an irrevocable direction to pay $12,000 from the funds to the plaintiff, the live-in partner of the client. The live-in had loaned the funds to help the client through her bad times and subsequently took the direction as a precaution. The lawyer had notice of the direction. However, the client changed her mind after the settlement funds were obtained and directed the lawyer to ignore the direction and pay her instead. The lawyer did so.

The Court relied on Re/Max to characterise the direction as an equitable assignment. However, the Court could not find any consideration; the direction was not signed as consideration for forbearance to sue. Since there was also no seal, the direction was unenforceable and the lawyer did not have to pay the money twice. The lawyer did, however, have to expend money for legal fees and pay the psychic costs of defending a lawsuit.

The next time this case was reported in Quicklaw was at the Court of Appeal level. Presumably, there was a previously unsuccessful appeal to the Divisional Court. The Court of Appeal denied leave to appeal. As is usual on these applications for leave, no reasons for decision were given.

The latest case is Bitz, Szemyei, Ferguson & MacKenzie v. Cami Automotive Inc, a 1997 unreported Ontario Court (General Division) decision. In this case, a law firm was the plaintiff. It had acted for a client in obtaining wrongful dismissal benefits pursuant to an arbitration and, later, a settlement. Before the settlement monies were paid, the law firm provided the defendant employer with an irrevocable direction to pay the law firm from the settlement monies. As a result of a mix-up, the employer paid the client and not the law firm. The client, of course, scuttled away without paying the law firm.

The Court first held that there was no legal assignment under the Conveyancing and Law of Property Act. There cannot be a legal assignment of only part of a debt. However, the Court found that there was an equitable assignment. The lawyers testified that the direction was given in consideration of the law firm agreeing not to render any further accounts for the work that they were doing. The Court, therefore, decided that there was consideration for the assignment and awarded judgment against the employer. 

Moral

The lesson is obvious. If you do not want to be entangled in a lawsuit, do not pay anybody. Either hold the money pending a court decision or settlement that determines which of the two antagonists should obtain the funds, or interplead and pay the money into court.

HUDAC Revisited

The HUDAC warranty covers major structural defects. Assume that there are cracks in the foundation wall that allow the seepage of water, but that do not affect the structural integrity of the load-bearing walls. Are these cracks major structural defects?

This question was answered by O’Connor J. in Grudzinski v. Ontario New Home Warranty Program (1997), 32 O.R. (3d) 377 (O.C.G.D.). HUDAC argued that the homeowner had to show that by virtue of the cracks, the entire home had become virtually uninhabitable, uncomfortable beyond reason, unsafe, or in a state of imminent collapse. It argued that since the homeowner still had two-thirds of the house that was perfectly liveable, there were no major structural defects. The Judge disagreed. He noted that the regulations defined a major structural defect as one “that materially and adversely affects the use of such building for the purpose for which it was intended“. Material, he decided, simply meant significant. Since one-third of the house was unusable for any reasonable purpose, because of water seepage, that was significant. Accordingly, the homeowner’s claim was allowed.