Costly Errors

Following release of the October 17, 2013 Hearing Panel decision in the prosecution of Torys LLP lawyers Elizabeth DeMerchant and Darren Sukonick, I raised the question here of why the Law Society continued with the prosecution for as long as it did. Those views were based on information contained in the reasons of the Hearing Panel. Now that the parties have exchanged cost submissions, a fuller review of the evidence is available.

In their lengthy submission, Philip Campbell and Ian Smith, counsel for Ms. DeMerchant and Mr. Sukonick, take the position that the Law Society should pay much of the $3,600,000 in fees expended to answer the charges. They disclose they each spent 4,000 hours of time and 130 hearing days dealing with the matter.

The claim for costs is governed by the Rules of Practice and Procedure, former Rule 14.03 of which provides that costs can be awarded against the Society “where it appears that the proceedings were unwarranted.” Rule 14.05(1) allows a Tribunal to make an order for costs “Where a party or non-party participant has caused costs to be incurred without reasonable excuse or to be wasted by undue delay, negligence or other default.”

This elevated standard requires that the lawyers make out a strong case that the proceedings were unwarranted from the outset, or became so at some point during the proceeding. Case law in this context has defined unwarranted to mean “without reasonable justification, patently unreasonable, malicious, taken in bad faith or for a collateral purpose.”

Faced with this heavy burden, Mr. Campbell and Mr. Smith go through deficiencies in the investigation and the efforts they undertook to convince the Law Society not to commence the proceedings and, once commenced, to withdraw them. A particularly critical moment came at the close of the Law Society’s case in April 2011, two- and-a-half years before the Hearing Panel’s decision. In a lengthy and measured correspondence sent to Law Society counsel, Mr. Campbell and Mr. Smith laid out the case for the Law Society to take a step back and revisit the matter. It seems likely that, had the charges been withdrawn at that point, it could have been done on a without costs basis, and certainly without the stress attendant upon continuation of the proceedings. The letter included the following:

We would like to invite you and your client to meet with us to discuss an alternative means to resolve this matter in a way that is fair to our clients and respects the mandate of yours… We are of the opinion that, viewed objectively, the state of the evidence to this point demonstrates that this prosecution has no reasonable prospect of success… You have no evidence to respond to our experts and, it seems to us, no reasonable basis to expect they will be disbelieved… We think you will agree that an objective review of Mr. Marschdorf’s evidence exposes serious weaknesses in the prosecution case and significant areas of agreement between the defence and your only witness… You are dependent on a theory advanced by Mr. Osborne which misconceives the law. He took the view-woven into your opening address-that acting for clients with opposed economic interests in a matter creates a disqualifying conflict, despite the needs and expectations of those clients and the mandate they have provided to counsel. That is not the law and there is no appreciable chance that it will be held to be… With the insight now available, and months of punishing litigation still to come, it is in our clients’ interests to ask you to reconsider the decision to prosecute. We hope you will believe it is in your client’s interest to do so.

Counsel made clear they were not proposing an admission of professional misconduct by their clients, but rather a dialogue on alternative means, other than the blunt instrument of the disciplinary process, to address the Law Society’s concerns.

Further letters raising similar points were sent during the period from May to October, 2012. In one such letter dated June 25, 2012, counsel stated:

We note that you have called no expert evidence to contradict the evidence given by Mr. Jewett (and corroborated by every witness we have called) as to how corporate lawyers identify and manage conflict issues as professionals and approach judgments they must make as counsel in situations comparable to those at issue in our case having regard to, among other things, the important role performed by independent directors deliberating separately and by in-house counsel. For these reasons, we think it very unlikely that yourtheory of the law, whatever its details may be, will be accepted.

In his responding submissions, Law Society counsel Paul Stern makes the point that the issues involved in the hearing were difficult and complex, that the Law Society considered there was a reasonable prospect of success at all times and that the elevated standard for an award of costs has not been met. He indicates that opinions were obtained from former Associate Chief Justice Coulter Osborne in November 2008 and again in September 2010, to the effect that Ms. DeMerchant and Mr. Sukonick had not adequately managed the potential conflict they were presented with arising out of their representation of corporations and principals benefitting from the transactions in issue. An opinion was also obtained from Gar Emerson, a respected authority on corporate governance.

However, neither Mr. Osborne nor Mr. Emerson testified at the hearing, Mr. Osborne because his opinion went to the ultimate issue of what the Hearing Panel itself had to decide, and Mr. Emerson because it was discovered he had a conflict arising out of his firm’s representation of Hollinger International in related litigation. The end result was that the Society was left having called only one witness, Hans Marschdorf, and his opinion, according to the Hearing Panel, was based on incomplete facts. At para. 237 of its cost submissions, the Law Society acknowledges that the lawyers scored major points in their cross-examination of Mr. Marschdorf:

While indeed the Lawyers counsel did successfully challenge and change some of Mr. Marschdorf’s initial views, the factual backdrop was illuminated by Mr. Marschdorf, to the extent that the Panel and counsel had an understanding of the facts. However, quite apart from Mr. Marschdorf’s assistance with the facts, the central legal issues remained for the Panel to determine.

This point seems to me to overlook the fact that “the central legal issues” could only be determined in the Law Society’s favour if there was an evidentiary basis to support the legal position the Law Society was advancing. It seems clear that the evidentiary basis wasn’t there, at least as of the close of the Law Society’s case. The reasons ultimately given by the Hearing Panel highlight the difficulty faced by the Law Society arising out of the absence of evidence:

[59] It is unfortunate that no one who was involved with any of the six particulars testified for the applicant, the Law Society.

[60] What we have is an abundance of documents which show, in part, what went on in the six transactions. These documents mostly come from the files that were in Torys’ possession and formed the Law Society’s basic evidence in this proceeding.

[61] The problem with the applicant’s evidence and documents is that they are incomplete. We have no knowledge of the many negotiations that went on between the officers of the respondents’ clients and the opposite side. For example, it was suggested that in the CanWest transaction Messrs. Atkinson and Boutlbee put themselves forward as persons from whom CanWest required non-competition agreements. This was based solely on the evidence that Mr. Atkinson told Torys to add himself and Mr. Boultbee tothe non-competition providers.

[62] Based on the above, it was submitted that counsel, namely Ms. DeMerchant and Mr. Sukonick, preferred the interests of the two individuals to the interests of HII, the main vendor.

[63] Mr. Leipsic, general counsel for CanWest, was quite clear that CanWest wanted Mr.Atkinson and Mr. Boultbee added as non-competition providers and that this was done in negotiations between the senior officers of each side and became part of the completed sale agreement.

[64] Furthermore, with respect to the evidence, for the most part we are left to speculate as to what went on between Mark Kipnis (Mr. Kipnis), general counsel for HII, and HII’s Audit Committee, who were required to perform the regulatory requirement of determining whether a proposed related party transaction was in the best interests of the minority shareholders.

The Law Society’s cost submissions raise a more fundamental point. In the submissions, Mr. Stern says the Law Society’s position was that the lawyers should have obtained a waiver of conflict of interest from an independent director before continuing to act on the matters. If the complaint against the lawyers was indeed that narrow, it is difficult to see the public interest that would have justified the extraordinary effort and expense associated with the prosecution. That is particularly the case having regard to the acknowledged facts that: (a) the lawyers had nothing to do with negotiating the transactions in issue; (b) the transactions were submitted for approval to an independent committee of the Board of Directors; (c) the lawyers did nothing to influence the deliberations of the independent committee; (d) the actions of the lawyers were in accordance with established corporate practice; (e) the clients were of the utmost sophistication.

All of which brings us back to the close of the Law Society’s case in April 2011. The Law Society’s only witness had made significant admissions in cross-examination, the Society was in possession of the favourable expert reports obtained on behalf of the lawyers and key witnesses expected to be called by the lawyers had not been interviewed. It seems to me at the very least at that point in time, it can be said the proceedings became “unwarranted” in the sense that there was no longer any reasonable justification for the prosecution to proceed.

Whether this conclusion, or some variation of it, is in fact the case is the issue the Hearing Panel will now have to decide. No matter what the outcome, it is apparent that costly errors have been made with significant consequence for all concerned.


  1. Superb piece Allan.