Legal Blog

Legal Fees

The very mention of legal fees strikes terror in the hearts of clients. Often the legal fees, and who gets the privilege of paying them, are as hotly contested as the merits of an action. University Plumbing & Heating Ltd. v. Dynasty Executive Suites Ltd., a 1998 decision of the Ontario Court (General Division), is a case in point. 

Pro Rata 

The Construction Lien Act stipulates that all parties on the same tier are treated equally when it comes to a share of proceeds paid from a tier above. For example, all subs with a valid lien receive a pro rata share of the monies available once monies come down the line from an owner to a general to subs of that general.

However, often only one sub has carriage of the action and does all of the work on behalf of the other subs, who do nothing but show up at trial, prove the amount of their liens and sit back to reap their share of the benefits. The sub with carriage has had to prepare the entire case for trial and possibly conduct examinations for discovery of the general and owner. The sub with carriage has the task of proving that the owner and general ought to be paying more money down the line than they have admitted they owe. For example, the claim by the owner for setoff could be inflated.

Salvage Costs 

The costs that are incurred by the sub with carriage of the action are known as salvage costs and are usually the actual legal fees and disbursements incurred by that sub in prosecuting the action on behalf of the other subs. The costs are paid to the sub with carriage off the top of any monies that the subs receive as a group. The subs then share the remaining monies coming in from the action pro rata.

However, what if the action is unsuccessful or the monies coming down the line are less than the salvage costs. Do the other subs have to pay their proportionate share of the salvage costs to the sub with carriage?

Trust Action 

A similar question arises in a trust fund action. The owner’s only duty is to pay monies owed to the general. If the owner does not do so, the general commences an action against the owner for breach of contract. The owner can then defend that action based on a number of defences: the general delayed the owner, the extras claimed by the general are invalid or inflated etc. Once the action is completed and the issues are settled, the owner pays the general the amount owed and the general pays the monies that it owes to its subs.

This works in theory if the general has a genuine claim and is financially sound. Sometimes, unfortunately, the general is in its death throes and does not have the funds either to pay its subs or to fight the owner. The principals of the general simply choose to do nothing and walk away from their obligations. This is the scenario in which the subs bring a trust fund action against the owner claiming that the owner actually does owe money to the general and is, therefore, in breach of its trust fund obligations under the Act. In this type of action, the issues are almost identical to the issues in a normal action by a general against the owner. The question in both actions is what does the owner owe to the general.

Once a trust fund action is commenced, it is commenced on behalf of all subs on the same pyramid level. Any funds that come in are paid to the sub who has commenced the action in trust for all other subs on a pro rata basis. Just as in a lien action in which one sub has carriage, the actual legal fees incurred by the sub bringing the trust fund action will normally be paid to that sub off the top and the balance is paid to that sub and all others pro rata.

The same question applies to the trust fund situation as it did to a lien action. What happens when the trust fund action is unsuccessful or the proceeds of the action are less than the costs that the sub incurs in prosecuting the action?

The Answer 

The answers to the questions in both the lien and the trust fund situations are identical. The party who has carriage of the lien action or brings a trust fund action bears the risk of losing. That party will only be compensated for its costs if there are sufficient fruits of the action to pay them. This is usually the reason why the sub that has the most to lose if nothing is done is the sub who assumes the risk of carriage of a lien action or the risk of a trust fund action.

It’s Only Fair 

In the University case, a sub had commenced a trust fund action against an owner. It is difficult to ascertain from the decision but we believe that the owner acted as its own general contractor and had financial difficulties. A court appointed a trustee to sell the condominium units and the sub was footing the bill for all costs incurred, including the costs of the action against the owner.

The sub was not stupid. It knew that it would be expending a substantial amount of money on the trust action and the trusteeship and wanted to have the other 22 subs either contribute to the costs or be cut out of the distribution of any proceeds from the action. The sub that had commenced the action claimed that the other subs were getting a free ride. It claimed that those subs ought to either pony up their share of the costs or take their share of the proceeds only once the subs who had paid their share of costs up front received their entire, not their pro rata, claims from the proceeds. In essence, it was a “to the victor belongs the spoils argument”.

Can’t Do It 

The judge was sympathetic but declared that her hands were bound by the trust fund section of the Act. The proceeds had to be shared pro rata with the other subs who were hangers-on, once the plaintiff’s legal fees were paid off the top – if there was a top from which to pay them.