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By: Anthony Pugh, Law Works
Editor: Ben Hanuka, Law Works
In 1781807 Ontario Limited v. Cohen Highley LLP, a June 1, 2020, decision of the Ontario Superior Court of Justice, the court dismissed the motions for summary judgment of the defending law firms and solicitors in a negligence action, holding that there were genuine issues for trial about the scope of the retainer and standard of care.
The plaintiffs were two related companies operated by the same two principals. The first, 1781807 Ontario Limited (the “Franchisee”), operated a Gold Gym franchise. The second, 1781808 Ontario Limited (the “Secured Creditor”), held a general security over all the franchisee’s assets.
The gym lost money. The companies’ principals decided to have the Secured Creditor take possession of the Franchisee’s assets and to flip those assets to a new company, which would then begin operating the franchise free of unsecured debts. The franchisor agreed with this scheme.
The companies’ principals retained an insolvency lawyer (the “Insolvency Firm”). The Insolvency Firm assisted the companies with the transaction.
In November 2010, shortly before the transaction was to be finalized, the franchisor terminated the franchise agreement and took possession of the gym’s assets. This occurred a few days after the Franchisee’s two-year limitation period to rescind the franchise agreement expired. The companies’ principals again consulted the Insolvency Firm, which started an action on behalf of the Secured Creditor against the Franchisee and the franchisor. It alleged a priority over the gym’s assets. The franchisor started a separate action against the Franchisee and one of its principals for unpaid fees and rent.
The Secured Creditor eventually retained new counsel, who also referred the Franchisee to another law firm (the “Franchisee’s Firm”). The Franchisee’s Firm represented the Franchisee until 2013. For the Secured Creditor’s action, that representation was on a nominee basis. The Secured Creditor eventually returned to the Insolvency Firm. That law firm got off the record in 2015.
The court dismissed the Secured Creditor’s action on consent in 2017. The franchisor’s action remains in litigation, where the Franchisee is unrepresented.
The plaintiff companies allege that the Insolvency Firm was negligent in failing to advise them of their rights under the Wishart Act, including rescission, and in failing to advise them of a cause of action against the Insolvency Firm for negligence and other remedies under the Wishart Act after the companies returned to it. They allege that they would have opted for rescission instead of the restructuring had they known about it. They also allege that the Franchisee’s Firm was negligent in failing to advise of the Wishart Act and a potential negligence action against the Insolvency Firm.
The Insolvency Firm alleges that its limited scope retainer was for the sole purpose of executing the secured transactions. It also alleges that the plaintiffs would have proceeded with the restructuring plan even if they were advised of remedies under the Wishart Act. The Franchisee’s Firm alleges that it was retained only to defend the franchisee’s interests in the franchisor’s litigation, and to be nominally on the record in the Secured Creditor’s litigation.
There were genuine issues requiring a trial
The court determined there were genuine issues requiring a trial. Underlining its decision were principles that a lawyer’s duty of care can arise beyond the four corners of a retainer agreement and that the court must examine all the surrounding circumstances when defining the scope of the retainer.
There were significant factual disputes about the scope of the Insolvency Firm’s retainer, including the surrounding circumstances. Further, there were factual disputes about whether the plaintiffs’ principals would have opted to rescind the franchise agreement instead of restructuring their businesses had they known about that remedy. Resolving these questions required making credibility assessments about the companies’ principals. The court determined that it could not use its expanded fact-finding powers under the summary judgment rules to resolve the factual disputes.
The court also held that the plaintiffs’ expert report about the standard of care raised genuine issues for trial. The court rejected the defendants’ argument that no expert report was required because the court only had to resolve “non-technical matters or those of which an ordinary person may be expected to have knowledge”, and applied the general rule that it is inappropriate for a court to decide standard of care in a professional negligence case without expert evidence. Among other things, the defendants did not cross-examine the plaintiffs’ expert.
About the Franchisee’s Firm, the court held there were genuine issues for trial about the scope of its retainer with the franchisee and its role as nominee counsel. The court rejected the argument that the fact that the plaintiffs had not obtained an expert report dealing with negligence of the Franchisee’s Firm and therefore failed to put their best foot forward on the motion. Among other things, this argument contradicted the Franchisee’s Firm support of the argument that no expert report was required.
In any event, the court declined to give partial summary judgment in favour of the Franchisee’s Firm, since there were common issues with the claim against the Insolvency Firm about the impact of the Wishart Act. Partial summary judgment would present the danger of contradictory findings on the motion and at trial.Tags : Rescission, Winding-down
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