IN THE SUPREME COURT OF BRITISH COLUMBIA

Date: 20100226

Docket: S096204

Registry: Vancouver

Between:

Greenhouse Studios Inc.

Appellant

And

Daniel M. Harlos and

Richard C. Robinson dba Beck Robinson & Company

Respondents

Before: The Honourable Mr. Justice N. Smith

On appeal from the Provincial Court of British Columbia (Small Claims)
File No. 0716173, Vancouver Registry

Reasons for Judgment

[1] Greenhouse Studios Inc. (“Greenhouse”) appeals from a decision of the Provincial Court dismissing a small claims action in which it sought to recover $17,100 from the respondent, Daniel Harlos, a lawyer, and his firm.

[2] Greenhouse operates a recording studio and the amount claimed relates to the outstanding balance of an account for studio time and equipment used by a musician named Jason Martin. Mr. Harlos was counsel for Mr. Martin in a personal injury action and Greenhouse understood that its account was to be paid out of the settlement funds. That payment was not made in the amount Greenhouse expected and Greenhouse sought to hold Mr. Harlos and the law firm liable for the outstanding debt.

[3] The claim was dismissed in Reasons for Judgment dated June 30, 2009. The Provincial Court judge held that Greenhouse likely had a good claim against Mr. Martin (who was not a party to this action and whose current whereabouts are apparently unknown), but that the defendant lawyers were not liable in tort or contract for the unpaid debts of their former client. Greenhouse appeals that result pursuant to s. 5 of the Small Claims Act, R.S.B.C. 1996, c. 430.

[4] The communication between these parties began when Mr. Harlos, at Mr. Martin’s request, confirmed to Greenhouse that he acted for Mr. Martin in a personal injury action and that, in his view, the claim had merit. Mr. Harlos said that if Greenhouse wanted Mr. Martin to sign a direction to pay monies owing from the eventual settlement funds, he would seek instructions.

[5] On March 25, 2005, Mr. Martin signed a direction, which had been drafted by Mr. Harlos, instructing Mr. Harlos to pay $10,000 to Greenhouse.

[6] Mr. Martin subsequently signed a further direction to pay dated November 16, 2005. That second direction was not drafted by Mr. Harlos. It was drafted by Greenhouse and/or Mr. Martin as part of a Greenhouse “studio invoice”. That invoice included a handwritten note stating:

DIRECTION TO PAY

Jason Martin has instructed Dan Harlos to Directly pay Greenhouse Studios an additional $20,000 (over the March 21, 2005 direction to pay $10,000)

[7] The trial judge found that neither Greenhouse nor Mr. Martin gave Mr. Harlos a copy of that second direction to pay and that Mr. Harlos never saw that document until after the commencement of this litigation.

[8] As Mr. Martin’s personal injury case progressed, Mr. Harlos forwarded to Greenhouse a payment in the amount of $3,424 and another in the amount of $700. These payments had come from counsel for the defendants in the personal injury action in response to specific invoices that had been provided.

[9] On June 22, 2006, while preparing for a mediation in the personal injury action, Mr. Harlos sent an e-mail to Greenhouse confirming that Mr. Martin owed $30,000 plus GST and asking for a copy of the invoice so that he could include the amount in the injury claim. Greenhouse provided a statement of account or an invoice in the amount of $32,100. The personal injury claim was settled on June 27, 2006.

[10] On August 1, 2006, as Mr. Harlos was preparing to pay out settlement funds, he advised Bruce Levens of Greenhouse that he would be paying $10,000 to Greenhouse in accordance with Mr. Martin’s direction to pay. When Mr. Levens said there was a direction to pay a further $20,000, Mr. Harlos said he had no such instructions. He told Mr. Levens that he was expecting to pay out settlement funds later that week and if Mr. Levens had such a document it should be faxed to him as soon as possible.Mr. Levens testified that Greenhouse was in the process of moving and he was unable to find the second direction at that time.

[11] On August 3, 2006, Mr. Harlos again told Mr. Levens that he had only one direction to pay for $10,000, but he had received instructions to pay another $5,000 on a without prejudice basis. A total of $15,000 was in fact paid to Greenhouse the next day.

[12] During their August 3 conversation, Mr. Levens told Mr. Harlos that he had an e-mail in which Mr. Harlos had said he would pay out an additional $20,000. Mr. Harlos asked for a copy of that document. No such e-mail was sent and the trial judge found that it did not exist. The trial judge found that Mr. Levens was referring to the e-mail of June 22, 2006, in which Mr. Harlos confirmed that Mr. Martin owed $30,000, and that Mr. Levens mistakenly interpreted that statement as a commitment by Mr. Harlos to pay the additional $20,000 out of the settlement funds.

[13] The trial judge found that there was no solicitor-client relationship between Greenhouse and the defendants and that Greenhouse should have known that it could not rely on Mr. Harlos to act in accordance with its wishes. At para. 25 he said as follows:

Mr. Harlos was obliged to act in accordance with the instructions he received from Mr. Martin. The first direction to pay was, in effect, written instructions to pay $10,000 to the Claimant. Mr. Harlos later received verbal instructions from his client to pay an additional $5,000 to the Claimant. If Mr. Harlos had [paid] out additional funds to the Claimant without Mr. Martin’s instructions he would have been exposed to legal action by Mr. Martin and to disciplinary proceedings by the Law Society of B.C.

[14] The trial judge said the second direction to pay would only have created an obligation to pay out an additional $20,000 if a copy was provided to Mr. Harlos before he distributed the settlement funds. He also found that there was no representation to Greenhouse that the law firm would be liable for Mr. Martin’s debts at paras. 26 and 29:

…While Mr. Harlos sent an e-mail (Exhibit 5) confirming that $30,000 plus taxes was owing by Mr. Martin to the Claimant that was to use as support for Mr. Martin’s claim for damages and it was not an agreement or acknowledgement of any responsibility on his or his firm’s part for Mr. Martin’s debt. It appears           that the Claimant views that e-mail as giving rise to some contractual liability on the part of Mr. Harlos and that is simply not the result in law.

…

In the end result, the Defendants are not liable in tort nor in contract for the unpaid debts of their former client. The Defendants did no more than acknowledge that a debt was owing by their former client to the Claimants. That did not amount to an assumption of liability or responsibility on their part for the debts of their client. There is no question that Mr. Harlos knew that the Claimant was owed more than the amount Mr. Martin paid to them from the settlement proceeds and I believe that he encouraged Mr. Martin to pay the amount owing. However, in the end result, Mr. Harlos did not have the necessary authority from his client to make the payments sought by the Claimant.

[15] In hearing an appeal under the Small Claims Act, I am bound to apply the same standard of review that the Court of Appeal must apply when reviewing a decision of this Court. That standard is set out by the Supreme Court of Canada in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235:  pure questions of law are reviewed on a standard of correctness but findings of fact, inferences of fact, and questions of mixed fact and law cannot be reversed unless the trial judge has made a palpable and overriding error.

[16] In explaining why appeal courts must defer to the trial judge’s findings of fact, the majority of the Supreme Court of Canada in Housen adopted the following statement at para. 14:

The trial judge is said to have an expertise in assessing and weighing the facts developed at trial. Similarly, the trial judge has also been exposed to the entire case. The trial judge has sat through the entire case and his ultimate judgment reflects this total familiarity with the evidence. The insight gained by the trial judge who has lived with the case for several days, weeks or even months may be far deeper than that of the Court of Appeal whose view of the case is much more limited and narrow, often being shaped and distorted by the various orders or rulings being challenged.

The Court added at para. 14:

The corollary to this recognized advantage of trial courts and judges is that appellate courts are not in a favourable position to assess and determine factual matters. Appellate court judges are restricted to reviewing written transcripts of testimony. As well, appeals are unsuited to reviewing voluminous amounts of evidence. Finally, appeals are telescopic in nature, focussing narrowly on particular issues as opposed to viewing the case as a whole. [Emphasis in original.]

[17] In Aruthavamalar v. Terhorst, 2009 BCSC 1232, and Petrick v. Lakeview Credit Union, 2002 BCSC 672, this Court said that deference to the trial judge’s findings is of particular importance in appeals from decisions under the Small Claims Act, the purpose of which is to allow claims to be resolved and enforcement proceedings concluded in a just, speedy, inexpensive, and simple manner.

[18] I find no palpable and overriding error in any of the trial judge’s factual findings summarized above. All findings were supported by the evidence before him. Some of the submissions made by Greenhouse on this appeal relate to findings of credibility. That is precisely the area in which the trial judge, having heard all of the evidence and seen all of the witnesses, is entitled to the greatest deference by an appellate court. The majority of the Supreme Court of Canada said in Housen at para. 23:

… The appellate court is not free to interfere with a factual conclusion that it disagrees with where such disagreement stems from a difference of opinion over the weight to be assigned to the underlying facts.

[19] The only basis on which I could allow this appeal would be a pure error of law. Such matters are to be reviewed by appellate courts on a standard of correctness.

[20] The legal question before the trial judge was whether the defendant lawyers owed a duty to someone other than their own client. The existence of such a duty is a question of law, but the duty arises from the facts of the relationship between the parties:  Young v. Borzoni, 2007 BCCA 16 at paras. 52 and 53.

[21] The trial judge correctly concluded that the facts, as he found them, could not give rise to a contractual relationship between these parties. The existence of a legally binding contract requires, at its most basic level, an agreement between the parties involving an exchange of benefits or promises (consideration) between them.

[22] In this case, there was an agreement under which Mr. Martin received services from Greenhouse in exchange for his promise to instruct Mr. Harlos to pay a further $20,000 out of the eventual recovery in the personal injury case. The trial judge found that Mr. Harlos was not a party to that agreement and knew nothing about it. From those facts, the trial judge drew the unassailable conclusion of law that there could be no contractual obligation between Greenhouse and the defendants.

[23] Mr. Martin was apparently in breach of his contract with Greenhouse when he failed to provide the promised instructions to Mr. Harlos, but that does not make Mr. Harlos liable on a contract to which he was never a party. Even if the instructions had been provided, Mr. Harlos’ duty to forward the funds to Greenhouse would have arisen from his obligation to follow his client’s instructions, not from any contractual obligation owed directly to Greenhouse.

[24] In the absence of a contract, the trial judge considered whether any duty could arise in tort law. There are circumstances where a lawyer can owe a duty to someone other than his or her client, but that liability can only arise where the lawyer acts with knowledge that he or she is being relied upon by the non-client and the non-client in fact relies on the lawyer:  Kamahap Enterprises Ltd. v. Chu’s Central Market Ltd. (1989), 64 D.L.R. (4th) 167, 40 B.C.L.R. (2d) 288 (C.A.). It is trite law that such reliance must also be reasonable in the circumstances.

[25] Such a duty might have arisen in this case if Mr. Harlos had not only confirmed the amount Mr. Martin owed to Greenhouse, as he did, but specifically represented that he had received instructions to pay the amount out of the settlement funds. But that is not what happened.

[26] The trial judge found that Mr. Harlos’ statement confirming the full amount of Mr. Martin’s debt was not intended as a representation that he would assume responsibility for payment of the full amount and that Greenhouse could not reasonably have relied upon it as such. In coming to that finding, the trial judge noted that Greenhouse was aware that Mr. Harlos could be asked to draft a further direction to pay for Mr. Martin’s signature, as had happened with the first direction for $10,000, but chose to draft the second direction itself and not send it to Mr. Harlos. He found that it “should have been clear to the claimant that it could not rely on Mr. Harlos to act in accordance with its wishes and that Mr. Harlos’ marching orders came from Mr. Martin” (at para. 24).

[27] I would add that, on the facts found by the trial judge, Greenhouse was relying on Mr. Martin to provide the necessary instructions to Mr. Harlos. It may be that Mr. Levens assumed those instructions had been given and, on the basis of that assumption, read too much into Mr. Harlos’ confirmation of the total debt. But a duty in law cannot be created merely on the basis of one party’s subjective understanding when that understanding is based on facts unknown to the other party.

[28] The trial judge found that Mr. Harlos did not make any representation that he would be responsible for a further payment of his client’s debt to Greenhouse, that he did not know Greenhouse would be relying on him for that purpose, and any reliance by Greenhouse was not reasonable in the circumstances. Those are findings of fact, supported by the evidence, with which an appellate court cannot interfere unless the trial judge has made a palpable and overriding error; I have found that there was no such error made. On the basis of those facts, the trial judge concluded that Mr. Harlos could not and did not owe any duty of care to Greenhouse, which was not his client. That conclusion is correct in law and there is no basis for this Court to interfere with the result.

[29] Greenhouse also argued that Mr. Harlos was Mr. Martin’s agent for the purpose of dealing with Greenhouse. The trial judge found that there was no evidence from which it could be concluded that Mr. Harlos had either actual or apparent authority to pay any of Mr. Martin’s money to Greenhouse except in accordance with the specific instructions of his client. Once again, that is a finding of fact with which this Court cannot interfere; the conclusion that no agency could arise on those facts is correct in law.

[30] The appeal must therefore be dismissed.

“N. Smith J.”