Lawyers may ask courts to invalidate their retainer agreements: Ontario Court of Appeal

In a case of first impression, the Ontario Court of Appeal has been asked to strike a written retainer agreement because it was not “fair and reasonable” to the lawyer.

But the court declined to do so, upholding the motion judge’s conclusion that the agreement between Toronto’s Igor Ellyn Professional Corporation and the firm’s clients, Alexander Bimman and 2182474 Ontario Inc., was fair and reasonable.

“Both the Superior Court and the Court of Appeal held that section 24 of the Solicitors Act contemplates the possibility that a retainer agreement could be found not to be fair and reasonable to the lawyer but found that the agreement in the particular case was neither unfair nor unreasonable,” says Gavin MacKenzie of MacKenzie Barristers Professional Corporation, a Toronto litigation boutique, and a former treasurer of the Law Society of Ontario.

The case arose when the clients retained Ellyn to act on a complex shareholder dispute that spanned almost five years. They also retained him to assess the accounts of the counsel he had replaced.

Ellyn drafted the retainer, which required him to “take such further steps as are required to bring a resolution to this action.”

The agreement contained a modest retainer fee and a hybrid compensation structure composed of hourly billing plus a premium if recovery exceeded $1.8 million. It also included an overriding fee cap of 30 percent of the total recovery.

Ellyn succeeded at trial and on appeal. The clients’ recovery was $1,984,100.

Ellyn sought payment of $552,894 all-in, an amount greater than the 30 percent recovery cap of $356,314 but less than the time docketed. He argued that the cap was unfair and unreasonable given a “difficult client, an excellent result in litigation, and the many unforeseen activities that were required on the file.”

The motion judge found he had jurisdiction to decide whether a lawyer could seek to invalidate a retainer agreement. After concluding that he had such jurisdiction, he found that the agreement was drafted very broadly and that the steps in this type of matter would necessarily be extensive. He concluded that the agreement was valid, fair and reasonable and capped the fees at the agreed-upon 30 percent.

The Court of Appeal agreed that the motion judge had the necessary jurisdiction to decide Ellyn’s motion to invalidate.

“To begin, nothing in the Solicitors Act precludes a lawyer from bringing a motion for relief on the basis that a retainer agreement is unfair and/or unreasonable. Section 23 explicitly allows for an application by ‘a party to the agreement’, which includes the lawyer. That said, it is clear that these provisions were developed in order to protect clients.”

Keeping in mind the purpose of the provision, specific rules apply when lawyers challenge their agreements.

“In these circumstances, it should be presumed that retainer agreements are made fairly and that their terms are reasonable. The lawyer seeking to challenge the validity of a retainer agreement will bear the burden of demonstrating some exceptional circumstances to rebut this presumption. Presumptively holding lawyers to the agreements they draft is consistent with the purpose and policy context of s. 24, especially when read together with s. 21, which is to protect clients.”

As the Court of Appeal saw it, the motions judge correctly identified the “nasty” nature of the litigation, that there was nothing unusual about the 30 percent fee cap, that Ellyn had achieved an excellent result utilizing “considerable skill,” and had taken a “considerable risk” in entering into the agreement.

But the motion judge had also correctly concluded that it was not “unfair or unreasonable to hold counsel to a contract [in] respect of specific matters that fall within the scope of the agreement, was reasonably foreseeable, and which Mr. Ellyn could have protected himself from by drafting differently.”

Accordingly, there were “no exceptional circumstances rebutting the presumption of validity” given that Ellyn had drafted the agreement, “freely agreed” to discounted legal services and a “clear” 30 percent cap on fees, could reasonably have foreseen the financial consequences of the agreement and did not seek to renegotiate it at any time.

Barbara MacFarlane, a partner and personal injury lawyer at MD Lawyers in London, says the court’s articulation means that the onus on lawyers seeking to invalidate their agreements is considerable.

“The court sent a very strong message about the overriding goal of protecting clients, so the onus on lawyers is pretty heavy,” she said. “My view is that it’s almost unheard of that a court would say that an agreement to which the client consented and which the lawyer drafted is unfair or unreasonable to the lawyer.”

But it could happen.

“One instance involves motor vehicle cases, particularly those heard by a jury, where the costs award after a long trial is substantially more than the damages awarded,” MacFarlane explains.

MacFarlane posits a situation involving a damages award of $100,000 and a costs award of $300,000.

“If the contingency agreement embraces costs awards and is for 30 percent, the lawyer would get $120,000, and the client would get $280,000. If the agreement didn’t include a share of the costs, the lawyer would get $30,000 and the client $370,000. In either case, the client gets substantially more than the damages award, and that might be a circumstance where the agreement turned out not to be fair to the lawyer.”

But a court could also see the inherent risk lawyers know they take in contingency fee arrangements as justifying such an outcome.

“In most cases, there’s an upside for the lawyer, which a court could well take into consideration,” MacFarlane says.

MacKenzie is of a similar mind. He believes the decision will not lead to a “flood of applications by lawyers to nullify retainer agreements.”

“Judges will continue to consider their main role in cases challenging retainer agreements to be to protect clients. And since retainer agreements are drafted by lawyers, it will be a challenge for a lawyer to show that the agreement was unfair – a question that must be decided prospectively based on the situation at the time the agreement is entered into.”

Like MacFarlane, MacKenzie would not say that lawyers could never succeed in invalidating their retainers.

“There may be situations where lawyers are able to show that the retainer agreement is unreasonable based on developments in the case or transaction that could not be foreseen at the time the agreement was entered into,” MacKenzie explains. “This situation has resulted in findings that retainer agreements are unreasonable to the client where, for example, a retainer based on a contingent fee would result in an unreasonable fee where a large claim has settled early.”

So the door is open. But only slightly.

“The ability to walk through that door is very slim, especially because contingency fees are regulated these days,” MacFarlane says.