Canada: Ontario Court Of Appeal Clarifies The Scope Of A Lawyer's Duty To Advise On Damages

On February 20, 2018 the Ontario Court of Appeal released its decision in Oravital v. Aird & Berlis LLP, 2018 ONCA 164, a brief decision with important implications on the scope of a lawyer's duty to advise. The Court of Appeal held that a lawyer's duty to advise clients of the risks and benefits of pursuing litigation, including the quantum of recoverable damages, is not negated just because the client is commercially sophisticated. The decision serves as a useful reminder that litigators must advise clients (even sophisticated clients) of the costs and benefits of pursuing an action both at the outset of litigation and as circumstances change and the litigation evolves.

Background

Oravital Inc. is a privately-owned company based in Toronto. It sells customized products that treat gum disease and halitosis to dental clinics throughout North America. In 2009, Oravital entered into discussions with an investor (the "Investor") who was considering joining the company. The Investor signed a non-disclosure agreement and was given access to Oravital's proprietary scientific and financial information while he considered whether to invest.

The investment eventually fell through. Shortly thereafter, the Investor started two competing businesses which offered services nearly identical to those offered by Oravital. Accordingly, in May 2010 Oravital retained Aird & Berlis LLP to commence litigation against the Investor and others, alleging that they misappropriated Oravital's confidential information to launch the competing businesses. Aird & Berlis prepared a Statement of Claim seeking $5 million in general damages, including damages for loss of profit and loss of corporate opportunity, as well as $2 million in punitive damages.

In March 2011, a few months after Oravital commenced litigation, the Investor shut down the competing businesses. At the time Oravital was still in "start-up" mode and had yet to make any profits. The Investor advised Oravital that his competing businesses had also not made any money. Nonetheless, Aird & Berlis told Oravital that the closure of the competing businesses had "no effect" on the strategy for the litigation. It did not advise Oravital that its damages had crystallized when the competing businesses closed, or that the claim for $5 million in general damages was no longer tenable.

Instead, Aird & Berlis spent the next four years trying to move the case through discoveries (in the face of persistent delays from the defendants) and billed Oravital over $500,000 in legal fees. At no point did Aird & Berlis advise Oravital that its damages had crystallized when the competing businesses had closed, or that damages were negligible because no profit was lost.

In 2015, after Oravital terminated its retainer with Aird & Berlis, Aird & Berlis sued Oravital to recover $182,569.63 in unpaid legal fees. Oravital defended the action on the basis that Aird & Berlis was negligent in failing to advise Oravital that damages had crystallized in March 2011 and were likely negligible. Oravital also commenced a counter-claim to recover the legal fees it paid Aird & Berlis from March 2011 on, as well as profits lost from having used company funds to pursue litigation rather than invest in the business.

The Summary Judgment Decision

Aird & Berlis brought a summary judgment motion to have the counter-claimed dismissed. Oravital defended the motion and obtained an expert report from Clifford Lax, LSM, QC. Mr. Lax opined that Aird & Berlis breached the standard of care of a barrister practicing in Ontario by failing to re-assess the litigation after the competing businesses closed, and by failing to provide Oravital with any meaningful assessment of its recoverable damages.

At the hearing of the motion, Oravital agreed that the case was appropriate for summary judgment and asked that judgment be granted in its favor on the counter-claim.

The motion judge ruled in favour of Aird & Berlis. She did not determine whether Aird & Berlis met the standard of care of a barrister practicing in Ontario, but held that even if Aird & Berlis breached the standard by failing to advise Oravital as to the quantum of recoverable damages, any such breach did not cause any damage to Oravital. The reason, according to the motion judge, is that Oravital's principals are sophisticated businesspeople who were actively involved in the litigation. They therefore knew or ought to have known of the value of their claim.

Accordingly, the motion judge dismissed Oravital's counterclaim and awarded judgment to Aird & Berlis for $182,569.83 in unpaid legal fees.

The Court of Appeal Decision

Oravital appealed. It claimed that the motion judge erred in law in concluding that sophisticated businesspeople are presumed to understand their entitlement to damages in a complex commercial proceeding. Damages are a legal concept, not simply a financial one, and a lawyer has a positive obligation to advise even sophisticated commercial clients of the risks and benefits of litigation, including the quantum of recoverable damages.

The Court of Appeal agreed. In a briefly-worded decision, it held:

[6]...the motion judge erred in law in finding that the appellant's as sophisticated businesspeople were aware of the value of the damages and risks of litigation. This finding reflects a misapprehension of the solicitors' duty of care to advise the clients about the legal basis for the damages and the risks of litigation.

The Court of Appeal also held that the motion judge erred in deciding this case on a motion for summary judgment, even though both parties agreed that it was appropriate to be decided in that way, "given the highly contentious" factual issues before the motion judge. The Court of Appeal therefore remitted the case to trial.

Take-Away

There are two key take-aways from this case.

First, while courts have previously held that the standard of care for barristers is informed by the sophistication of the client, the Court of Appeal's decision makes clear that the duty to advise as to the value of damages and the risks of litigation is not negated just because the client is commercially sophisticated. Oravital's principals cannot be presumed to have understood the legal implications of the closure of the competing businesses on their entitlement to damages just because they are sophisticated in business affairs.

This also appears to the be the first time an appellate court in Canada has held that a lawyer has a duty to advise clients on the issue of damages at an early stage of the litigation. In this respect, this decision echoes the UK Court of Appeal's 2010 decision in Levicom International Holdings BV & ANR v. Linklaters, [2010] EWCA Civ 494, in which the Court held that the magic circle firm Linklaters was negligent for failing to properly advise a sophisticated commercial client on the issue of damages. The UK Court of Appeal held that without such advice, arbitration proceedings were liable to be "a step in the dark."

Taken together, these cases serve as a useful reminder for litigators of the need to provide even sophisticated clients with a meaningful assessment of recoverable damages at the outset of the litigation, and to reconsider this assessment as the litigation evolves.

Second, the decision has implications on the appropriateness of summary judgment. The Court of Appeal held that this case is not appropriate for summary judgment, even though both the motion judge and the parties agreed that it was. This case serves as a warning to counsel and judges that despite the Supreme Court's apparent enthusiasm for summary judgment in Hryniak v. Mauldin, 2014 SCC 7, a case is not amenable for summary judgment just because the parties agree that it is. The motion judge still plays an important gate-keeping role for the summary judgment procedure, and must make a reasoned decision at the outset of the motion as to whether the case can be decided summarily or not.

Case Summary

Oravital v. Aird & Berlis LLP, 2018 ONCA 164

Docket: C64038

Date of Decision: February 20, 2018

Footnote

[1] Geoff R. Hall and Anu Koshal of McCarthy Tétrault LLP served as counsel for Oravital Inc. in this case.

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