Legal Blog

Much Ado

Some cases can be described as “much ado about nothing” or “It is a tale … full of sound and fury, signifying nothing.” The case of M. McGrath Canada Ltd. v. Gibson LLP [2008] O.J. 1542 (SCJ) might be similarly described, except for the precedent that it sets.

The Deal

A law firm acted, probably for a franchisee, to obtain a $53,000 judgment against the now infamous “3 for 1 Pizza and Wings”. The law firm then contracted with the plaintiff, McGrath, to collect the judgment.

McGrath did a wonderful job. It received a cheque for $58,000 from Aijon Consulting to pay the judgment. It then paid $44,000 to the law firm, on behalf of the franchisee, and presumably applied the balance to its fees for the great work it performed.

Everyone was happy – until the bank informed McGrath that the cheque from Aijon was a previously valid cheque that had been altered and re-issued and was a forgery. The bank therefore withdrew $58,000 from McGrath’s account. McGrath immediately notified the law firm, but was too late. The law firm had already paid $36,000 to the franchisee and had applied $8,000 to its fees in obtaining the judgment.

McGrath was not impressed with the law firm’s response and sued the law firm for the return of the $44,000. For whatever reason, it did not join the franchisee. At the start of trial, McGrath reduced its claim against the law firm to $8,000 – and, for this vast sum, the parties were embroiled in a one-day trial.

Unjust Enrichment

McGrath claimed that the law firm was unjustly enriched; it obtained a benefit to McGrath’s detriment for no juristic reason. The judge dealt with this claim in two paragraphs. He held that since the franchisee owed the fees that the law firm properly used to pay its account, there was a juristic reason for the law firm retaining the money.

We feel, admittedly without the benefit of research, that this misses the point. The question should not have been whether, as between the law firm and the franchisee, there was a juristic reason for the law firm to keep the money. The question is whether, as between McGrath and the franchisee, the franchisee ought to have been allowed to keep the money. If the franchisee could not keep the money, then, we submit, the law firm, who took the money in his stead, ought not to have been allowed to keep the money.

As far as we can see, there was no juristic reason for the franchisee to retain the money. McGrath paid the money to the law firm only because it had collected the money in trust for the franchisee. As part of that trust, it could retain its own fees and then had to remit the money to the beneficiary of that trust, or to the law firm as the agent of that beneficiary. Once the franchisee knew that the money it received was no longer trust money that was due, there was no longer a juristic reason for the franchisee to have received them.

Accordingly, not only should the franchisee have returned the money, the law firm also should have returned it.

Mistake

The mistake must not only be as to some fact affecting the liability to pay, but it must also be a mistake between the party paying and the party receiving the money. If the fact about which the mistake exists has nothing to do with the payee, the rule does not apply.

McGrath also claimed that the law firm should have returned the money because it was paid under a mistake of fact. The judge noted that the mistake must not only be as to a fact affecting the liability to pay; there must also have been a mistake between the party paying and the party receiving the money. The judge then held that there was no mistake by McGrath in the payment to the law firm. How he could say this is beyond us.

The judge also held that the mistake was not as between McGrath and the law firm and that the law firm had “the legal and equitable and the moral right to remove the moneys in its trust account” to pay its fees. Again, without the benefit of further research, we feel that the judge mistook the law firm’s right to apply money towards its fees, with its duties, as agent of the franchisee, to return money that, when the truth came out, should not have been paid to the franchisee at all.

Costs

The judge then awarded costs of $7,000 to the law firm. Normally, an $8,000 claim, which should have been heard in small claims court, would not attract $7,000 in costs, but McGrath should have transferred the matter into small claims court once it realised that the law firm could not possibly be liable for the money that it had paid to the franchisee and for which it had received no benefit.

Application

Assume that a lawyer accepts a cheque and pays some or all of the money to his or her client. Before his client disburses that money (i.e. the money is still sitting in the client’s bank account), the cheque is returned due to insufficient funds. Applying the McGrath case, the lawyer has no recourse against the client for the return of the money. This, we suggest, is unjust.