Archive for February, 2009

Just Call Me BigSolo

Wednesday, February 18th, 2009

I was reading an interesting article by a well known U.S. legal computer consultant named Ross Kodner.  The legal community has not been immune to the economic problems and layoffs have occurred at some of the largest law firms in the U.S.  In fact, just last Thursday, February 12, it is reported that six U.S. law firms laid off at least 225 lawyers and over 385 support staff in what is already being called the “St. Valentine’s Day Massacre”.  From this, Mr. Kodner believes that many of the laid off lawyers will turn to opening their own law offices and practising on their own.

In the U.S. the affectionate nickname for the large law firms is “BigLaw”.  Taking a twist on that name, Mr. Kodner has coined the term “BigSolo” which means someone who is trained at a large law firm who leaves or is no longer with the bigger firm who goes out on his/her own and is now a sole practitioner – or solo lawyer.  I’m not sure how many people will opt for this method of practice as people in large firms tend to get used to having accounting departments, marketing departments, kitchen staff, overnight word processing and document assembly people, etc., etc. whereas when you go on your own it is generally just you – but wearing different hats.  I know that one of my old bosses would make a heck of a lot more money if he ever went out on his own, but he would last all of a month (if that) without the various support people to handle teh administrative matters.  However, I do think that it’s probably safe to say that somewhere around 5 or 10 percent of lawyers from large firms will become BigSolos.

While I did not anticipate that the economy would go down the tubes back in 2005 when I was planning to go out on my own, I did foresee a contraction among the large law firms for a variety of other reasons and so I jumped to start my own firm while the timing was right and so that I could be “ahead of the pack”.  What I didn’t know was that I’d eventually have the label to go with it.  BigSolo.  I kinda like it.  Maybe I’ll have to add that to my business card, eh?

CALC

The High Cost of Protracted Litigation

Tuesday, February 17th, 2009

I have often said that litigation is a bit of a “mug’s game” in that the results are often far from a certainty and that sometimes you are just better off to take your money to the closest casino and try your luck there instead.  Two examples recently showed just how high these costs can go.

Last week the Supreme Court of Canada handed down a decision regarding a dispute between an Alberta Indian band and the federal government regarding oil and gas royalties.  The decision is not as interesting to me for its facts or its legal ruling as it is for the fact that this now bring to an end a lawsuit that has gone on since 1989 and has cost an estimated $100,000,000 (that’s right, 100 million dollars) in legal fees for both sides.

Similarly, the Toronto Star is running a series about a lawsuit taken on by the Ontario government in which the government ultimately obtained a $3.5 Million judgment against a land developer, but it cost the government $23.4 Million in legal fees paid to outside law firms – who didn’t even take the case to trial – that was handled by the government’s own lawyers. 

Extreme examples admittedly.  But I give these as an example that you should think long and hard about litigation before you start.  Is the ultimate cost worthwhile?  Moreover, what are the chances that you will receive payment of what you are after – let alone your costs – or is the other side going to go bankrupt if he/she/it loses the case?  Sometimes you have no choice – usually if you are the one being sued or if there is some matter of true principle at stake.  But principle or defending yourself comes at a price tag.

Meanwhile, I’m going to spend the rest of the day trying to figure out how I can land myself some legal work from either the federal or provincial governments ;-)

CALC

Enforcing Foreign Judgments in Canada

Friday, February 13th, 2009

Until not all that long ago it was quite common for a Canadian defendant in a foreign lawsuit (usually one in the U.S.) to not defend the lawsuit and wait for the plaintiff to then come to Canada to try and have the foreign judgment recognized and enforced by the Canadian courts.  At that point the defendant would say “please don’t recognize it because I have a very good defence and here it is, so let’s have a trial here to determine if it’s a good defence and, if it is, then you shouldn’t recognize or enforce the foreign judgment.”

This approach fell out of favour with the Supreme Court back in 2003 when the Court established a new rule that foreign judgments are to be generally recognized unless the defendant could show that there was (a) some fraud on the foreign court (eg. false evidence that led to the judgment); (b) that there was a lack of natural justice (eg. no right to respond); or (c) that public policy would not enforce such an award (eg. a judgment requiring a child to be given over for slavery as a result of the breach of a contract).  Unless one of these three situations exists, which is not likely to happen, then the Canadian defendant has no choice but to go to the foreign court and fight the lawsuit there and if he/she/it doesn’t do so, then it will be too late to complain when the plaintiff comes to Canada seeking to have the judgment recognized and enforced here.

In Drabinsky the defendants were sued in the U.S. but were also charged criminally in the U.S. and in Canada (in fact, the decision on the Canadian criminal proceedings is due any day now).  The defendants tried to argue that if they went down to the U.S. to dispute the civil lawsuit against them they’d be arrested and forced to face the U.S. criminal charges.  In addition, various protections afforded to them in the Canadian criminal proceedings that would prevent any evidence given by them in the criminal matter from being used in the civil litigation did not exist under U.S. law.  Thus, if they went and fought the U.S. civil lawsuit, whatever they said might have been used against them in either the Canadian criminal proceedings or in the subsequent civil proceeding to enforce the U.S. civil lawsuit.  The trial court judge, the Ontario Court of Appeal and, yesterday, the Supreme Court of Canada all ruled against the defendants and the U.S. judgment was recognized and can be enforced here in Canada.

The decision doesn’t make any new law per se.  Rather, it defeats an attempt to expand the list of exceptions to the general rule that foreign judgments will be recognized and enforced here.  But it does serve as a reminder as many of my clients have taken a “wait and see” approach and have paid attention to foreign lawsuits only when the problem comes to their front door – ie. once there is a request to recognize the judgment and, if that happens, then suddenly the chance that their business / house / whatever could be seized and sold to pay the judgment, they suddenly care.  Anyone who has done this in recent years, or in the future, will do so at their own peril.  It is clear that the Ontario courts and the Supreme Court of Canada are unlikely to change their view on this situation anytime soon.  So make sure you retain a good lawyer wherever you are being sued, because I or any other good lawyer in Ontario will not be able to do much for you later on if the plaintiff wins and then tries to enforce the judgment here.

CALC

Transferring Shares by Will

Monday, February 9th, 2009

The Supreme Court of Canada dismissed an application for leave to appeal last week in the case of Frye v. Sylvestre.  This upholds, then, a decision this past September of the Ontario Court of Appeal.

In this case, the father built up his business and decided to leave the shares of the company equally to his five children.  One of the children later decided to sell his shares back to the company with the result that the remaining four children held 25% of the shares each.  Another child subsequently died and left his shares to his sister.  This would result in the sister holding 50% of the shares and the other two brothers holding 25% each.  The wrinkle, however, came from the fact that the articles of incorporation (known in those days as “letters patent”) and a shareholders agreement that had been signed by the deceased brother both restricted the right to transfer shares in the corporation and required the approval of the Board of Directors and a majority of the other shareholders before the transfer was valid.  The brother argued that the proposed disposition of the shares in the will from the deceased brother to the sister was null and void.

The Ontario Court of Appeal held that the disposition of the shares was not null and void.  Rather, there was a two-step process to be completed.  Section 67 of the Business Corporations Act (Ontario) provides that where a shareholder dies, his/her executor takes over holding the shares.  The result in this case was that the deceased brother’s shares were held by his executors.  However, since the will had indicated that the shares were to go to the sister, the executors were required to either transfer the shares to the sister – if this could be done in accordance with the requirements of the articles and the shareholders’ agreement – OR the executors were to hold the shares until such time as they could be properly transferred to the sister and in the meantime to act as directed by the sister (who was the beneficiary of the shares).  The result was that either the sister would get outright 50% control over the company if the transfer could be effected in accordance with the articles and the shareholders agreement, or she would remain with direct 25% control from her personal shareholding and indirect 25% control from her ability to direct that the executors do as she wished.

By dismissing the application for leave to appeal, the Supreme Court has upheld the Court of Appeal’s decision.  The result is that where there are restrictions on share transfers, one way around this may be to give the shares to the transferee through a bequest in your will.  As our population ages, this may become a more interesting option.  However, it should be remembered, though, that in doing this you need to ensure that whomever is your executor is capable of handling such shareholding duties (for example, what if you want to leave the shares to a child who is incapable of deciding how to vote his/her shares) or to ensure that the will provides sufficient instructions to the executor so that there is less of a chance of a dispute between the executor and the beneficiary as to how the shares are to be voted.  As well, the fact that the shares form a part of the estate through this option could also lead to estate taxes or probate fees for the value of the shares – which might not be optimal.  That said, it does provide for an interesting option to avoid restrictions on share transfers.

CALC

A Dent in the Arbitration Armour

Monday, February 9th, 2009

The courts in Canada and the U.S. have shown a very definite preference to let matters go to arbitration rather than litigation.  The advantages for the parties include the fact that it is often cheaper and faster to proceed with arbitration than a protracted lawsuit.  Of course, this also serves to benefit the courts as well as their swelled lists of lawsuits get relieved (if only slightly).

Matters can go to arbitration one of two ways.  After the dispute arises, the parties can voluntarily agree to go to arbitration.  While this can occur in some instances, often one party has more money or other interests at stake and want to proceed with litigation.  The other, more common, way that arbitration arises is through a clause in the contract that requires arbitration.  Given its benefits, I almost always insist that my clients have arbitration clauses in their contrats.  However, the benefits from arbitration do not come without a price.  One of the costs has been in recent years the loss of class action litigation.  Is this truly a cost?  That depends on who you ask.  One person will applaud the existence of class action lawsuits because it allows companies to be held accountable for their wrongdoing.  If all I have suffered is a $500 loss, then I’m not likely to sue over it.  However, if the company has taken $500 from 1,000 people, it has improperly made $500,000 and now we’re talking about serious money.  If I’m out $500, I won’t do anything about it nor will most people except write a letter or lodge a complaint somewhere but that’s it.  Without class actions, the argument goes, the company will not be made to account for its wrongdoing.  The flip side, though, argues that while this is true, class action lawsuits end up being excuses for unscrupulous lawyers and litigants to take runs at companies with the goal of extorting large settlements from those companies because it is cheaper to pay out the settlements than to fight the class action litigation.  From my experience, I see that there is merit in both arguments.

In any event, the result has been that corporations have attempted to use arbitration clauses to avoid class action lawsuits.  One such company was American Express.  In its agreements with merchants, the merchants were required to agree that any disputes they had with American Express would not only not be litigated, but that the merchants would agree not to start any class action lawsuits.  The merchants eventually sued and American Express brought a motion to dismiss the lawsuit on the basis that it should be arbitrated individually rather than a class action.  The U.S. District Court for the Southern District of New York granted the motion, dismissed the action and the merchants appealed.  The U.S. Court of Appeals, Second Circuit, in a decision released a week ago, allowed the appeal, reversed the District Court’s decision and sent the matter back down for further consideration.

In essence, the Court held that where it can be shown that the costs of forcing the complainants to individual arbitrations would significantly outweigh the benefits of pursuing the arbitration, the benefits of class action litigation to enforce rights enacted by law (that is “statutory rights”) will outweigh the benefits of arbitration.  In this particular case, the merchants complained that American Express’ actions were anti-competitive and thus breached the Sherman Act.  I should note that, of course, these are merely allegations and have not in any way been proven.  The evidence put before the court was that in order for the merchants to prove their claims would require experts to assemble further evidence which would cost between hundreds of thousands and millions of dollars.  The benefits of such efforts, if done on only an individual basis, would be tens of thousands of dollars at best.  Ultimately, the Court decided that the policy in favour of permitting class actions – especially to support statutory rights – should outweigh the policy in favour of upholding arbitration clauses.  In essence, the Court performed a rationally explained toss of the coin between two equally positive policies.

It should be noted that this case can be easily restricted to its facts and is not to be seen as suddenly opening the floodgates to litigants trying to get around arbitration clauses.  Private claims (that is, those based on contract disputes or other wrongdoing that cannot be said to run afoul of any legislative provisions) are clearly not included in the Court’s reasoning.  Moreover, the Court goes to great lengths to state on a few occasions that it is expressly notruling on whether such clauses are generally unenforceable.  However, this decision makes it clear that there is now a dent in the once almost impenetrable armour given to arbitration clauses and the preference of the courts to let matters go to arbitration without any sort of interference.  It will be interesting to see if this is the start of further “exceptions” being made in future cases.  I, myself, would not necessarily welcome such a result since I would have tossed the coin in favour of arbitration (as have many other U.S. courts outside of New York).  But the progeny of this decision will be interesting to watch as either the Amex decision will be quickly restricted to its own facts and “left to die on the vine” so to speak or else it will be quickly followed by other courts that will use it to fashion new exceptions.  Time will tell.

CALC