138 Day Hearing Gets $1.335 Million Costs Award Against Law Society

An award of $1.335 million in costs was ordered by the Law Society of Upper Canada Tribunal Appeal Division against the Law Society for its losing prosecution of two attorneys on conflicts of interest charges.

After 138 days of hearing, a hearing panel dismissed the Law Society’s applications alleging that Beth DeMerchant and Darren Sukonick (the “Lawyers”) committed professional misconduct by acting while in a conflict of interest. The Law Society appealed and we dismissed the appeal: see Law Society of Upper Canada v. DeMerchant, 2015 ONLSTA 6 (CanLII) (the “appeal reasons”).

We must now decide whether the Law Society must pay costs of the hearing and/or the appeal and if so, how much. Each lawyer claims costs of $1.8 million. The hearing panel awarded them $250,000 each: see Law Society of Upper Canada v. Sukonick, 2014 ONLSTH 90 (CanLII) and Law Society of Upper Canada v. DeMerchant, 2014 ONLSTH 91 (CanLII). The Law Society appealed and the Lawyers cross-appealed.

As to the costs award

This hearing should never have taken nearly 140 hearing days. The Law Society bears the lion’s share of the responsibility for that. Its definition of the issues, its approach to cross-examination, and its lack of focus on the legal test for conflicts of interest were the largest factors in a hearing whose time and cost were grossly disproportionate to the issues at stake. We award each lawyer $650,000 in costs of the hearing, representing approximately 110 hearing days that should not have been necessary.

The appeal was warranted because of the hearing panel’s errors of law, and there was no unreasonableness in the conduct of the appeal itself. It was, however, more complicated and expensive because of the Law Society’s unreasonable approach to the hearing. We award each lawyer $17,500 in costs of the appeal, because the Law Society’s conduct at the hearing led to these wasted costs.

These reasons have taken longer than intended or expected. I felt it important to review the entire transcript of the proceedings before the hearing panel, given that our decision turns on how the Law Society conducted the hearing. Because of the length of the initial hearing, that took considerable time.

The case

The Law Society first learned of an issue between the Lawyers’ law firm, Torys LLP, and Hollinger International Inc. (“HII”) from a Globe and Mail article in November 2005, reporting on a tentative settlement between them about related party transactions involving HII and its former managers. This prompted an inquiry by the Law Society’s intake department to the Managing Partner of Torys, Les Viner. Mr. Viner responded in writing that there were potential claims relating to the work done by the firm, which he said was led by Ms. DeMerchant and Mr. Sukonick. According to Mr. Viner, HII had advised Torys that if the matter could not be resolved, an action would be commenced including allegations of professional negligence, conflict of interest and breach of fiduciary duty.

On December 6, 2005, Torys and HII reached a publicly disclosed settlement agreement that included a large payment by Torys, which did not admit liability or wrongdoing. On December 15, 2005, the Law Society’s Director of Professional Regulation instructed that an investigation be conducted into the Lawyers’ professional conduct in relation to HII and CanWest. The allegations included that the Lawyers may have acted in a conflict of interest. The Law Society later expanded the investigation to include consideration of other transactions involving the Hollinger Group.

The investigation was conducted by external counsel together with an internal investigator. As part of it, the Law Society posed written questions to the Lawyers, to which they provided written answers.

In November of 2008, the investigators completed a 132-page report that examined the six transactions in detail and concluded that there had been a conflict of interest on each, primarily because of a conflict in commercial interests that the investigators concluded impacted the Lawyers’ ability to represent the legal interests of their clients. PAC then authorized the application.

The law was evolving in the conflicts area and the facts in dispute

There were multiple issues that, both individually and combined, warranted PAC’s decision to commence the application. There is no evidence of any bad faith nor was the application doomed to fail. The law was not certain, and there were factual issues that merited being explored through oral evidence. The factual issues included the background commercial context and the nature of the Lawyers’ retainers, given in particular the lack of clear documentation and the complex factual background. The hearing panel’s decision that the commencement of the proceedings was warranted was both reasonable and correct.

But the manner in which the case had been presented was problematic

Some numbers give a sense of the hearing. There were six transactions at issue. The hearing started on April 26, 2010 and concluded on December 13, 2012, after nearly 140 days of hearing.

Counsel for the Law Society delivered an opening statement that took about four days. The Law Society’s accountant expert witness was examined in-chief for about five days, cross-examined for about 10 days (which included the need to correct various misconceptions, including a fundamental misunderstanding of the NP Holdings transaction), and then re-examined for four days. His evidence eventually proved to be insignificant to the analysis. Ms. DeMerchant was examined in-chief for about 8½ days. Law Society counsel cross-examined her for about 23 days. She was re-examined for four days. Mr. Sukonick was examined in-chief for about 10 days and cross-examined for about 19½ days.

The Lawyers and their counsel raised concerns multiple times about the way the hearing was proceeding and its chances of success, both through letters and submissions. Indeed, during the cross-examination of Mr. Sukonick, after Law Society counsel repeatedly took longer than his estimates, they brought a request that his time for cross-examination be limited. Law Society Counsel opposed this request, which was denied by the hearing panel…

The time taken by the Law Society to present its case in this hearing is unprecedented in the history of Law Society discipline proceedings, before or since. It began with a four-day opening statement, conducted total cross-examination of the lawyers for more than 40 hearing days, and placed at issue multiple and detailed aspects of the Lawyers’ work on complex files. The Law Society spent much time trying to obtain admissions in cross-examination. Its overall approach to this hearing and failure to ensure that the hearing was reasonably expeditious was outside the bounds of reasonableness, and significantly different from how such cases are typically prosecuted…

We recognize that the Lawyers too contributed to the length of the hearing. Their counsel cross-examined the expert for a total of 10 days. The Lawyers testified in chief for a total of 23 days. They placed emphasis on general practice and on the quality of the Lawyers’ legal work that, like the Law Society’s theories, was largely irrelevant to the legal issue of whether there was conflict. It is, however, the Law Society that began and continued the expansion of the issues through its long opening statement, its examination of Mr. Marschdorf and, in particular, its multi-week cross-examination of Ms. DeMerchant and Mr. Sukonick.

The appeal was properly taken

In our view, the Law Society’s appeal was not unwarranted. There were serious errors of law made by the hearing panel and reasonable arguments available in support of the position that, on mostly undisputed facts, there was a conflict of interest. On appeal, the Law Society largely moved away from its improper focus on the details of the Lawyers’ work into an analysis of whether there was a risk of impaired representation in taking on and continuing the retainers. The Law Society’s legal submissions as to the test to be applied were largely accepted on appeal. While we understand that the appeal prolonged the uncertainty that hung over the Lawyers’ careers, it was not unreasonable to bring it.

I must say that I find discipline decisions in Canada to be as a rule well-reasoned and well-written (as here) and that their web pages –  Law Society of Upper Canada in particular -have a commitment to transparency that would put many American state jurisdictions to shame. (Mike Frisch)