Legal Blog

Trustee

 Disgruntled parties will often take a run at a lawyer, even though they are not the lawyer’s clients, claiming that the lawyer was negligent. Some of these actions succeed (e.g. a disappointed beneficiary who failed to receive a legacy under a will that the lawyer drafted negligently or not in a timely manner). However, most of these actions fail because a lawyer normally owes a duty of care only to the lawyer’s client, not to some aggrieved third party.

 Every time we think we have seen it all, something new arises. The latest was a claim by a third party (not the lawyer’s client) alleging that the lawyer, who disbursed money he held in trust, disbursed it improperly: Chris Nash Building Inc. v. Buckland et al, (2010) 95 C.L.R. (3d) 1 (Ont. S.C.J.).

 History

 We are going to simplify the full facts more than usual because they are convoluted, are not completely clear to us, and really do not affect the result or the principles of the case.

 A fire destroyed an owner’s house. The owner hired a general contractor to re-build the house and, at the same time, claimed against her insurer for the funds to do so. She used a lawyer to assist her with the claim against the insurer and to disburse the insurance money.

 The general claimed that the owner did not pay it everything she ought to have paid, sued the owner, and obtained a judgment for $40,000. The owner was insolvent and ultimately lost the house, after it had been rebuilt, due to her mortgagee’s power of sale proceedings. That sale netted less than the mortgage amount so that the general collected nothing from the sale. Worse yet, the general could not even hound the owner for payment because she had the temerity to die.

 Accordingly, the general looked for the only available pocket to satisfy the debt: the lawyer’s.

 All of this transpired at a blazing pace. The fire and the re-building took place in 1993 and 1994; the general commenced its action in 1999; and the action was tried in 2010.

 Character

 The case had a couple of unusual twists. The general’s principal had prior dealings with the owner’s husband. The husband, who worked for an equipment subcontractor, had given the general a deal on equipment rental, but, in consideration, the general had paid the equipment rental cost, not to the sub, but directly to the husband. The principal knew and was complicit in the fraud. Sympathy wanes with these facts.

 The general had given the owner two quotes for the work, one for $258,000 and one for $226,000. The owner had delivered these quotes to the lawyer who, in his wisdom, supplied only the higher quote to the insurer and negotiated the insurance settlement based on that quote. The actual work done differed from the work set out in the quote and the actual cost came in at $216,000. The judge dealt with this, saying:

 “I accept the defendant’s position that the contract was always supposed to be flexible, and that the quotes given by Nash had no bearing whatsoever on the contract price, but that these were requested by Mr. Buckland solely for the purpose of supporting a larger claim from the insurance company. Much reliance was made on the fact that (the lawyer) only used the higher quotes in dealing with the insurance company but this is not unreasonable considering that he was trying to get the maximum amount for his client and that (the lawyer) was still in the process of negotiating with Wellington.”

 We find this statement curious. It implies that it is quite permissible to knowingly supply an inflated quotation to an insurer because it is merely a bargaining stance. While the negotiations with the insurance company did not affect and should not have affected the result in the action, we cannot understand how this conduct was whitewashed.

 Claims

 The general first claimed that the lawyer was liable for a breach of trust under section 7 of the Construction Lien Act. That section imposes a trust on an “owner” (as defined in the Act) to pay money received for an improvement to the persons who supplied the work for the improvement. Without a doubt, the owner was an “owner”. The lawyer, however, was not an “owner”. He had no interest inthe land and did not participate in the breach of trust.

 He did not know the state of accounts between the owner and the general. He had paid the general at least $166,000 and paid the balance according to the owner’s direction. He had no information that would have led him to believe that the owner was not paying the general the balance of money due to it. Indeed, the principal of the general was the only person who knew that the husband was dishonest and that his character traits would probably manifest themselves in the owner. For whatever reason, the principal initially did not seem to care.

 The general then claimed that the lawyer breached his common law duties as a stranger to the owner’s trust. A stranger can be held liable for breach of a trust in three ways:

 1. As a trustee de son tort. To be liable in these circumstances, the stranger must assume dominion and control over the trust property, know the terms of the trust, and act inconsistently with its terms. The judge held that the general failed on the first two criteria. The lawyer had no control over the trust monies and had to follow the direction of his client. Further, the lawyer did not know the terms of the trust. He did not have a copy of the construction contract, did not even know the contract price, which was admittedly a moving target, and knew nothing about the terms of payment. 

 2. Knowing assistance to the breach of trust. To be liable, there must be a trust, knowledge of the trust, and knowledge of and participation in its breach. One case went further and stated that the participation must be dishonest and fraudulent. The judge held that the lawyer did not know of a fraudulent or dishonest design of the owner nor did he participate in any scheme to knowingly and dishonestly withhold money from the general.

 3. Knowing receipt of money impressed with a trust. The general claimed that the lawyer knowingly directed a portion of the insurance settlement to pay his own accounts. However, to be liable for knowing receipt, the lawyer had to have known that the money paid towards his accounts belonged to the general. The judge held that the lawyer had no such knowledge, relied on the representations of the owner that the construction was completed, never saw the house, and never spoke to the general.

 Result

 The judge dismissed the action and awarded costs to the lawyer. The decision on costs was almost as interesting as the decision on the merits of the action. The lawyer claimed substantial indemnity costs of $148,000. The lawyer had offered in 2001 to have the action dismissed without costs and in 2010 had offered to pay $10,000 for a dismissal.

 The judge first tore a strip off the lawyer’s counsel for totalling their claimed disbursements at $53,800 rather than the actual total of $6,900. He noted that “an error of this magnitude undermines the court’s confidence in the submissions as a whole.” Big mistake.

 The judge refused to award substantial indemnity costs. He used rates that lawyers used in the jurisdiction where the action was tried rather than the rates that the out-of-town lawyers wanted to use. Ultimately, he fixed costs at $41,000.