Ontario – professional negligence claims stem in part from arbitration agreement’s procedural options – #364

In HQIC and Circlemed Inc. v. Hamdani, 2020 ONSC 3403, Madam Justice Cynthia Petersen considered allegations made by clients against their former counsel of record in an arbitration and the negotiations which resolved the arbitration. Though her reasons focus on whether the record was sufficient/appropriate to allow her to grant summary judgment (no, it was not), Petersen J.’s analysis disclosed certain risks inherent for counsel in commercial arbitration when (i) stepping into a new brief and (ii) responding post-resolution to a client’s alleged dissatisfaction over the conduct and settlement of the arbitration.  The record also highlights the opportunities for preliminary skirmishing created by inserting procedural options into an agreement to arbitrate which can be triggered merely by how either party frames its action.

Health Quality Innovation Collaborative and Circlemed Inc. (“Plaintiffs”) operated as information technology companies in Ontario’s healthcare sector, distributing and servicing a medical records software program.  Along with licenses of their software, Plaintiffs often paired those licenses with contracts to provide ongoing technical support. Petersen J. described the customer-support contracts as Plaintiffs’ “most valuable assets”.

Further to a February 2015, letter of intent to sell their software and related assets to another corporation (“TC”), Plaintiffs retained lawyers (“SWL”) to represent them in negotiations and to close the transaction.

The key component of the sale price rested on the extent of the transfer of Plaintiffs’ clients to TC.  In a mechanism which Petersen J. qualified as “complicated”, Plaintiffs and TC agreed to set the sale price as a product of revenues generated over time from four (4) classifications of clients grouped by (a) the manner in which clients transitioned as existing or otherwise potential clients and (b) the timeline in which clients agreed to transition to/contract with TC.

Following negotiations and exchanges of commented drafts on the asset purchase agreement (“APA”), on May 19, 2015 TC sent back to Plaintiffs’ representative a final iteration of the APA but without copying Plaintiffs’ law firm SWL.  That version included a provision, not seen in earlier versions, which stated the transition of clients from Plaintiffs to TC would require the “prior written consent of the customer that is a party to that agreement”. Plaintiffs’ representative e-mailed SWL to clarify his understanding of the latest version but without providing the text of the new provision or the draft APA sent by TC.  SWL replied to the representative’s question and Plaintiffs’ representative signed the APA without having it reviewed by SWL.

After signing the APA, Plaintiffs’ representative and SWL exchanged on the new provision, with the representative instructing SWL to flag anything in the APA “[i]n case you see something that is a disaster”.  SWL replied that “there is not much that can change in an executed agreement and hopefully you are correct and the changes were minor and you are comfortable with it” and expressed surprise that counsel for TC would have sent the APA version without copying SWL.

SWL did receive the APA on May 21, 2015 but did not review it prior to closing on June 1, 2015 or confirm if the changes were minor or discuss the changes made by TC’s counsel.

As set out in more detail at paras 20-24, post-closing, TC and Plaintiffs disputed the sale price. None of Plaintiffs’ former clients had transitioned to/signed on with TC and none had given written consent to assign their existing contracts to TC.  TC also sold the software to a third party and sought reimbursement of a portion of the pre-paid sale amount and payment to it of sums still held in escrow which had been given as a deposit towards future instalments on the sale price.  TC claimed that there were no revenues upon which the sale price could be calculated under the APA.

Arbitration – Plaintiffs disputed TC’s interpretation of the APA and retained a second law firm (“FLPC”) to initiate arbitration against TC under the terms of the APA’s arbitration agreement.

FLPC drafted the pleadings in the arbitration claiming damages for breach of contract, breach of duty of good faith and unjust enrichment as well as claims for punitive and exemplary damages. TC defended and initiated a counterclaim against Plaintiffs seeking recovery of sums paid out of the escrow. 

Preliminary issues arose at the very onset regarding venue of the hearings. The issues stemmed from the way in which the agreement to arbitrate provided alternative venues based on how a claim was framed.

[27] After the close of pleadings in the arbitration proceeding, the FLPC Defendants represented the Plaintiffs in two preliminary motions and an application. The APA provided for arbitration in either Ottawa or Toronto, depending on whether the parties’ dispute concerned a failure to pay or the calculation of the purchase price. The Plaintiffs took the position that [TC] had failed to pay and therefore the proper venue was Toronto. [TC] took the position that the dispute was over the quantum of the purchase price and therefore Ottawa was the proper venue. The Plaintiffs brought and lost an application in the Superior Court of Justice to have the court decide the location of the arbitration. They were ordered to pay [TC] $15,000 in costs as a result of this unsuccessful application. They also lost a subsequent motion before the arbitrator (who ruled that the arbitration would take place in Ottawa) and were ordered to pay [TC] an additional $8,500 in costs. Finally, the Plaintiffs lost a motion brought by [TC] before the arbitrator for security for costs and were ordered to pay $80,000 as security”.

Settlement – With the assistance of FLPC, Plaintiffs negotiated a settlement with TC to settle the arbitration and sign a full and final release of all claims.

Plaintiffs’ action against its law firms – Plaintiffs were unsatisfied with the APA and the arbitration/settlement and initiated an action against both law firms.  Petersen J. summarized Plaintiffs’ allegations against SWL and FLPC at paras 30-37 of her reasons as well as SWL’s and FLPC’s respective responses.

Plaintiffs’ claims against SWL involved the law firm’s involvement in the negotiation of the APA and the closing. 

Plaintiffs’ claims against FLPC involved the law firm’s involvement in the arbitration and settlement. At para. 45, Petersen J. reproduced the way in which FLPC umbrellaed Plaintiffs’ claims into three (3) groups:

(a) Errors in judgment – by advising the Plaintiffs to bring an application regarding the arbitrator’s jurisdiction to hear the venue dispute and to contest motions about the venue location and [TC]’s request for security for costs;

(b) Failure to plead causes of action – including fraudulent or negligent misrepresentation in respect of the Clarification Email (against [TC] and also Mr. [DS] personally); and

(c) Improvident settlement – by advising the Plaintiffs to settle with [TC] before obtaining relevant information and documentation from [TC] about the client-support contracts that it sold to [K] (to enable quantification of damages)”.

Earlier in her reasons at paras 33-35, Petersen J. outlined the key allegations made by Plaintiffs against FLPC as counsel in the arbitration and settlement. 

At para. 46, Petersen J. itemized FLPC’s arguments addressing each.  In addition to those high-level responses, Petersen J.’s reasons contain further details of the facts brought forward by FLPC later in her reasons. See, for example, paras 49-53.

[33] The Plaintiffs’ allegations of negligence against the FLPC Defendants include the following particulars: that they failed to properly investigate the facts of the dispute with [TC] to determine all available causes of action; failed to claim oppression and seek an oppression remedy from [TC]; failed to claim negligent or fraudulent misrepresentation against [TC] or Mr. [DS] based on the Clarification Email; failed to properly respond to [TC]’s security for costs motion; failed to make any effort to challenge the arbitrator’s jurisdiction based on an apprehension of bias against the Plaintiffs; and advised the Plaintiffs to agree to an improvident settlement without considering all proper heads of damages and without properly assessing the value of the Plaintiffs’ claims.

[34] The Plaintiffs maintain that, had they known about potential claims for fraudulent or negligent misrepresentation against [TC], they would have pleaded them and could have used them as leverage to obtain a more favourable settlement. They argue that, had they pleaded oppression, they could have successfully defended against [TC]’s security for costs motion. They further take the position that had they known about potential claims, they could have pursued a claim against Mr. [DS] personally and they would not have agreed to release Mr. [DS] from all claims as part of the settlement with [TC].

[35] The Plaintiffs claim that Mr. [F], the senior counsel at FLPC, delegated carriage of the file to junior associates who did not have sufficient experience or knowledge and failed to provide proper oversight of the associates’ work on the Plaintiffs’ file. The FLPC Defendants acknowledge that Mr. [F] delegated the day-to-day carriage of the file to associates, but they assert that the associates were appropriately experienced, and Mr. [F] properly supervised the work”.

FLPC denied each of the reproaches made by Plaintiffs.

[36] The FLPC Defendants argue that the Plaintiffs were in a difficult bargaining position with [TC] because the Plaintiffs were aware of the client-consent provision in the APA yet failed to fulfill their obligations under the APA. They submit that they nevertheless achieved a favourable settlement for the Plaintiffs (despite the lack of bargaining leverage) and the Plaintiffs did not suffer any damages.

[37] The FLPC Defendants specifically deny all the allegations of negligence. In their Statement of Defence, they plead the following: they investigated the facts and brought all reasonable claims in the arbitration proceeding; there was no basis for the Plaintiffs to claim an oppression remedy or fraudulent or negligent misrepresentation; they properly responded to the security for costs motion; impecuniosity was not a defence the Plaintiffs could have successfully argued in that motion; there was no basis to successfully challenge the arbitrator for bias; and the settlement was not improvident. The FLPC Defendants take the position that they acted at all times in accordance with the Plaintiffs’ instructions and met or exceeded the standard of care of a reasonably competent lawyer”.

Motion for Summary Judgment – Petersen J.’s decision stemmed from two (2) applications for summary judgment sought by SWL and FLPC under Rule 20.04(2)(a) of Ontario’s Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (“Rules”).  Petersen J. considered the principles stated in Hryniak v. Mauldin, 2014 SCC 7 (CanLII), [2014] 1 SCR 87 paras 49-50 and recent applications of those principles in Butera v. Chown, Cairns LLP, 2017 ONCA 783 paras 29-34, Service Mold + Aerospace Inc. v. Khalaf, 2019 ONCA 369 para. 14, Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450 para. 37 and Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2016 ONCA 922 at paras 36-38.

In her review of the allegations against FLPC, Petersen J. determined that, due to issues of credibility, she would not agree to proceed to make any determinations on the substance of the dispute.  Despite the volume of materials, for reasons set out at paras 47-56 she considered the record was insufficient to allow her to proceed solely on a paper record.

Though she did appear to see SWL’s application as having more ready promise to decide on the face of the record before her, Petersen J. also declined to consider the merits of the claims against SWL.  She declined to proceed if she would be doing so when related claims against FLPC were going to a trial.  She also considered that they could be “an obvious risk of inconsistent findings at trial” and concluded that it was “inadvisable in the context of the litigation as a whole” to proceed with summary judgment on the claims against SWL.

urbitral note – First, the reasons disclose certain risks inherent for counsel in commercial arbitration when stepping into a new brief and, following resolution, responding to a client’s alleged dissatisfaction over the conduct and settlement of the arbitration even when the arbitration is resolved by negotiated settlement.  The outline of FLPC’s defense sketches the lines of defense to such risks and dissatisfaction, including standard of care of a reasonably competent lawyer in the circumstances, incomplete information provided, non-availability of defense subsequently invoked and quality of settlement.

Second, the preliminary skirmishing over whether to arbitrate in Ottawa or Toronto incurred delays and costs.  Para. 27 sets out the risks created by inserting procedural options into an agreement to arbitrate which can be triggered merely by how a party frames its action.  In the circumstances, the lex arbitri did not change and the differences between Ottawa or Toronto existed independent of any change in the lex arbitri.  A more complex situation could have arisen if the options gave rise to two (2) cities which had different lex arbitri (Toronto/Chicago or Ottawa/Montréal).  Care must be exercised when electing to include such options.

Third, despite its new vintage, Petersen J.’s decision has already been cited with approval and followed in Peel Condominium Corporation No. 223 v. Tung, 2020 ONSC 4705.  In that case, Mr. Justice David E. Harris declined to engage in a summary judgment process due to issues of credibility. Harris J. determined that the “the issue is one purely of credibility”.  Faced with competing versions of the key facts, Harris J. resisted the request to proceed on paper alone. “Documentary evidence is inadequate to resolve the question. Oral evidence is required. It would be unfair and unjust to resolve the dispute by way of summary judgment”.

Relying on HQIC and Circlemed Inc. v. Hamdani, Harris J. also resisted proceeding by summary judgment when credibility was central to the determinations he would have to make.

[9] The issue in this case cannot be determined without oral evidence, in my view. There is insufficient confirmation on either side to give me any confidence to rule for one side or the other on the key issue of the damage to the roof and the responsibility for it. Nor does logic point compellingly in one direction sufficiently to make a finding of which I would have confidence. If I made credibility findings on the current record favouring one side or the other, I believe the other side would have a justified feeling of grievance that they were denied procedural fairness”.

Parties to arbitration can, on agreement of the parties and in discussion with the arbitrator, proceed to a hearing on the merits by undertaking to produce ‘will say’ statements/written declarations/affidavits as evidence-in-chief, subject to cross-examination if requested by the other party.  The decision to cross-examine rests with the other party and is made prior to the hearing in order to ensure witnesses remain present or are relieved from remaining available.  The party entitled to cross-examine may waive its opportunity to do so and elect to allow the allegations of fact to form part of the record as is.  Those facts might, variously (i) not require challenge, (ii) resist cross-examination, (iii) be contradicted/completed by more persuasive evidence filed by the other party, and/or (iv) already be challenged by pre-hearing cross-examinations for which the transcripts, in whole or in part, have been filed in the record for the hearing. 

Parties can/do sometimes elect to reserve the right to have their witness still appear at the merits hearing to briefly introduce themselves and present their ‘will say’ statements/written declarations/affidavits before having them be filed into the record.  The witness introduction varies. For example, the witness introduction can be reduced, again by agreement/discussion with arbitrator, to the witness appearing and, after having introduced themselves to give the arbitrators an appreciation of their evidence and having adopted as current the balance of their ‘will say’ statements/written declarations/affidavits.

In such a manner, the parties and the arbitrator are able to address the concerns raised by Petersen J. and Harris J. in their decisions.