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Discovery

Posted on June 1, 2013 | Posted in Lawyers' Issues

When does a client discover a cause of action against a lawyer: when a third party sues the client regarding the work that the lawyer performed or when that action is detrimentally decided against the client? That question was answered in two decisions of the Ontario Court of Appeal: Ferrara v. Lorenzetti, Wolfe [2012] O.J. 135, 2012 CarswellOnt 957 and Lipson v. Cassels Brock & Blackwell LLP 2013 ONCA 165.

Ferrara Facts

The vendor in a real estate transaction gone bad, twice sued the purchaser client. After the first action was commenced, the parties entered into minutes of settlement and then closed the transaction. The vendor then claimed that an error had been made in the statement of adjustments and sued the client for the money it said was due. It also sued its own lawyers.

That action went to trial and the vendor was successful. The client was adjudged to owe the vendor over $430,000. We do not know what happened with the claim against the vendor’s lawyers. Presumably, if the client paid the money due, an adverse decision against the lawyers would be moot.

Less than one year after the trial decision, but more than 2 years after the vendor commenced the action, the client sued his own lawyer for negligence in the lawyer’s handling of the minutes of settlement.

The lawyer brought a motion for summary judgment, contending that the limitation period had passed.

Start

The motions judge focused on the client’s objective knowledge (i.e. when a reasonable person in the client’s position ought to have known about a potential claim against his own lawyer). The judge granted judgment dismissing the action. He held that the client ought to have known that his lawyer in the transaction could have been negligent, once the client was served with a statement of claim, which alleged that there was a mistake in the transaction and specifically mentioned the lawyer as being part of the impugned transaction. The client appealed.

Fight Back

All three judges of the Court of Appeal panel agreed that, under the circumstances, the limitation period did not start to run when the statement of claim was served. The minority held that the limitation period started to run when the client retained litigation counsel (who were not the lawyer) to defend the client in the action. On that basis, the minority would have dismissed the appeal. The majority held that the limitation period started to run when the client was unsuccessful in the action; accordingly, the majority allowed the appeal and dismissed the summary judgment motion.

The majority relied on four factors:

1. Although the lawyer was not litigation counsel in the action, he was involved in it and testified on behalf of the client. The lawyer had maintained throughout that the client would ultimately be successful in the action.

2. The lawyer had acted for the client for over 20 years and the client trusted him implicitly.

3. The client testified that no one, neither the lawyer nor his litigation counsel, ever suggested that he may have a cause of action against the lawyer.

4. The Rules of Professional Conduct require that when a lawyer discovers a possible error that may be damaging to his client, he must promptly inform the client of the possible error. The lawyer did not do so.

A reader knows that the lawyer’s position has problems when the majority describes it as follows:

“I told you all along that I was right and that you were entitled to the rollover credit; I never told you that I may have made a mistake; and I never complied with my professional obligation under r. 6.09 of the Rules of Professional Conduct to inform you of my possible error. However, you should still have known that you had a claim against me once the deficiency action started.”

Once the lawyer’s position was described in that fashion, an adverse decision was inevitable.

Lipson Facts

Another tax scheme; another CRA attack. We will not bore you with the details of the scheme, but it involved taxpayers getting something for nothing through technical means. As is its wont, in 2004 the CRA disallowed the credits that the taxpayers claimed. The taxpayers waited for the outcome of two test cases. In 2008, the litigation lawyers in the two test cases settled the actions; the taxpayers in those cases received credit for money that they put into the venture, but not for the remaining benefits they expected to get.

The other taxpayers then settled with CRA on the same basis. In 2009, Lipson commenced a class action against counsel (the “Tax Lawyers”) for the promoter of the tax scheme. The Tax Lawyers had given an opinion on which Lipson said he relied. The Tax Lawyers claimed that the class participants discovered their cause of action against the Tax Lawyers in 2004. Lipson asserted that he did not discover that he had a claim against them until 2008.

When Lipson attempted to certify the class action, the motions judge refused the certification; he decided that the limitation period commenced in 2004, five years before Lipson brought the class action. Lipson appealed to the Court of Appeal.

Central

The Tax Lawyers and the motions judge relied on Central & Eastern Trust v. Rafuse [1986] 2 S.C.R. 147 (S.C.C.). The judge interpreted that case to say that a client discovered the possibility of solicitor’s negligence when the solicitor’s work (in this case, the validity of a mortgage) was challenged in another court action.

The Court of Appeal pointed out that the Supreme Court did not say that the time ran from the date of the challenge; rather, it said that the earliest the client discovered or should have discovered the negligence was when the validity of the mortgage was challenged. Since the client commenced its action within the then 6 years limitation period after that time, the client’s action was allowed to continue.

The Court concluded that Central Trust left it open as to when the time commenced. The Court stated that the date upon which the client can be said to be in receipt of sufficient information to start the limitation period depends on the circumstances of the case.

Circumstances

In the circumstances of this case, the Court determined that the limitation period did not start to run until 2008. Why? Because the very opinion of the solicitors, on which Lipson was suing, stated that CRA would probably attack the scheme, but that the attack would not be successful. Accordingly, when CRA did just that, why would Lipson believe that the Tax Lawyers had erred? The Tax Lawyers anticipated the very thing that happened. Lipson was alerted to the possibility of negligence only when the test cases did not go well and that did not occur until 2008, within one year of the commencement of the class action.

Moral

Since the limitation period does not necessarily run from when an action is commenced, and since there is a positive obligation to notify a client about possible negligence, a solicitor should adhere to the Rules of Professional Conduct. At minimum, a solicitor should not positively reinforce, in the client’s mind, the chances of success.

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