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Ounce of prevention

Posted on February 1, 2001 | Posted in Lawyers' Issues

We recently acted for a lawyer in an action for negligence and breach of retainer. The client sued the lawyer along with the listing and selling real estate salespeople.

Found Facts

The trial judge found various facts. We say “found” because, at least as far as the agents were concerned, the facts that they believed to be true and the facts as found to be true were very different.

Husband and wife listed the matrimonial home after a split-up. They sold the home to the purchasers, after it had languished on the market for 10 months. The agreement was unusual regarding the payees of the deposits and convoluted regarding the order of its payment clauses. It stated that the price was $227,500; the deposit to be paid to the broker was $1,000; and the balance was to be paid on closing. However, the purchasers were to pay an additional $21,500 to the vendors on waiver of the financing condition. The offer was conditional on financing for the balance of the purchase price with the financing to be paid to the vendors. Closing was set for approximately 2 months after the condition waiver.

Agents’ Role

The purchasers waived the condition but did not pay the further deposit. The purchasers and their employer led the selling agent to believe that the funds were tied up in commissions about to be paid. The listing agent testified that he assumed that the vendors had been paid the $21,500 directly by the purchasers and that no news was good news.

The agents did not inform the vendors that the further deposit had not been paid until 2 days before closing. There was a meeting between the agents and the husband. The testimony about this meeting diverged wildly. The trial judge found that the agents told the husband that the property was going to be subject to a first mortgage of $170,000 and that, if the husband wanted the deal to close, the vendors would have to take back a mortgage for $21,500. The husband reluctantly agreed. He knew that the sale price was a good one, it would cost him $1,400 per month to hold the property, and he would have to reduce the listing price to sell the property.

Lawyer’s Role

The lawyer was acting for both the purchasers and the vendors. He reviewed the agreement and drafted the adjustments based on deposits of $1,000 and $21,500. He was not told about the non-payment of the further deposit until the wife came to sign the documents and figured out that she was getting too little after closing. She and the lawyer called the listing agent and were told about the financing.

The wife wanted nothing to do with the financing. Either she got her 50% of the correct balance due on closing or there was no deal. The lawyer called the husband and told him of the wife’s position. The husband was angry and rude. He told the lawyer that he would take care of the financing with the purchaser and did not want the lawyer involved in any way. The husband agreed to pay the wife her share of the $21,500 and signed a direction to this effect.

The deal closed. One and one-half months after closing the listing agent drafted the mortgage, had it signed, and registered it. However, the mortgage was not a second mortgage. It was a third mortgage. The purchasers had put on a first and second mortgage in the aggregate of $204,500. This is just about what everybody would have expected the financing to be after subtracting the deposits of $22,500 from the sale price of $227,500. However, this was somehow a surprise to the husband – because, he alleged and the trial judge found, the agents had told him only of the first mortgage of $170,000.

Of course, the purchasers went bankrupt almost immediately and the second mortgagee sold the property under power of sale for $205,000. The husband received nothing on his mortgage.

Agents’ Liability

Not surprisingly, given the finding of fact, the agents were held liable. What is surprising is that the agents were held liable to pay the principal of the mortgage. Since the agents were liable in tort, the measure of damages should have been the monies that would place the husband into the position he would have been had there been no tort. This would have been his position had the deal not closed. Instead, the judge awarded expectation damages. We suggest that the judge erred in this regard and that, given the facts, the husband suffered no damages.

Lawyer’s Liability

The lawyer had not covered his backside. He had not obtained a written direction from the husband to close the transaction regardless of the shortfall and had not obtained an acknowledgement from the husband that the lawyer was not to be involved in obtaining security for the shortfall. The lawyer had thought that obtaining the husband’s written direction to pay half the proceeds of the financing to the wife was sufficient to stay out of trouble; he was mistaken, because any change to a retainer must be clear and unequivocal.

However, the husband agreed that he knew all his options when he decided to take back the financing. He went so far as to agree that he viewed the lawyer as a mere conveyancer and that he directed the lawyer to close the transaction for an amount that was $21,500 less than the purchase price. All witnesses agreed that the lawyer was told nothing of the problem until the day of closing and was not involved in, and knew nothing about, the subsequent third mortgage.

We had a strategic decision to make. Should we call the lawyer as a witness? We decided that the lawyer’s testimony would add nothing, moved for a non-suit following the conclusion of the cases of the plaintiff and the agents, and elected to call no witnesses for the defence.

The judge agreed that the husband, who had relative sophistication in real estate sales, had taken on the duty of obtaining the $21,500 himself and that the lawyer’s retainer had been altered by way of the husband’s instructions to him.

Since the husband in his statement of claim had alleged a conspiracy between the lawyer and the agents to defraud him but did not have a shred of evidence to support that allegation, the trial judge dismissed the action against the lawyer with solicitor-client costs.

Double Moral

The lawyer was lucky. Had the husband lied, the lawyer could easily have lost the action. If the lawyer had simply obtained the written authorisation and direction we referred to above, not only could the lawyer not have lost, he would never have been sued.

At the end of the trial, the husband turned to his new live-in and asked “Did I win?” Even if his damages award against the agents is not set aside on appeal, the husband still loses. The solicitor-client costs of the lawyer, coupled with the costs the husband has to pay to his own lawyer, will easily exceed the damages awarded. Unless one can prove fraud or conspiracy, one should not plead it. At the very least, the plaintiff should have abandoned it at the commencement of trial.


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