2005 BCSC 59 Strachan et al v. Winder et al

Before: The Honourable Mr. Justice Macaulay

Reasons for Judgment

(In Chambers)

Counsel for the Plaintiffs:	I.C. Faulkner
Counsel for the Defendants and Third Parties (by telephone): Dr. M.J. Winder and Dr. J.D. Mathews	C.E. Hinkson, Q.C.
Counsel for the Defendants and Third Parties: Nurse P. Spencer, Nurse S. Bisseseur, Nurse Robyn Wells and Nanaimo Regional General Hospital	L.N. Bakan
Date and Place of Hearing:	20041223
	Victoria, B.C.

[1] Sidney Strachan is a severely disabled child. She was born on May 19, 1997 at Nanaimo General Hospital. Sidney and her parents sued the hospital, as well as the doctors and nurses involved with Mrs. Strachan’s labour and Sidney’s delivery, for negligent medical treatment. By the time of trial, some of the defendants admitted liability. In February 2004, on the second day of a two week trial to assess damages, counsel for the plaintiffs, J.J. Arvay, Q.C. and I.C. Faulkner, reached a settlement with the hospital and some of the other defendants. The trial was adjourned pending the written comments of the Public Guardian and Trustee (the “public trustee”) pursuant to s. 40(10) of the Infants Act, R.S.B.C. 1996, c. 223 (the “Act”) respecting the proposed settlement of $4,000,000 (Cdn.).

[2] By letter dated December 10, 2004, the public trustee recommended court approval of the settlement and the proposed legal fees of the law firm that represents the plaintiffs, Arvay Finlay. The legal fees total $862,500, plus applicable taxes and disbursements and represent about 22.4 per cent of the settlement.

[3] The plaintiffs now seek court approval of the settlement and legal fees. This application is brought pursuant to s. 40(8) of the Act, Supreme Court Rule 6(14), the court’s parens patriae jurisdiction to protect the welfare of infants, and the inherent jurisdiction of the court. These require the court to review the proposed settlement from the perspective of the child’s best interests. This includes determining the fairness and reasonableness of the contingency fee agreement.

[4] I am indebted to the public trustee for the careful analysis and commentary prepared by that office and also to Ms. Faulkner, co-counsel for the plaintiffs, for her thorough submissions.

[5] Sidney is now age 7 and suffers from cerebral palsy. Her disabilities are permanent and severe. She can only speak with basic sounds. Her vision is impaired. Sidney’s feet and legs are deformed requiring special shoes and leg braces. As a result, her mobility is also impaired. Sidney also suffers from epilepsy with sporadic grand-mal seizures. Brain damage has reduced her cognitive powers. The plaintiffs contended that the defendants’ breach of the standard of care during Mrs. Strachan’s labour and the delivery of Sidney caused these injuries.

[6] The plaintiffs commenced their action on September 17, 2001. The matter was originally set for a 20 day trial commencing September 8, 2003. As is usually the case when plaintiffs allege medical negligence, the defendants contested liability. Highly experienced and capable counsel acted for the defendants.

[7] While some of the defendants admitted liability before trial, this only occurred after the completion of examinations for discovery and the plaintiffs had commissioned and served numerous expert reports. In spite of the resolution of the liability issue, counsel anticipated that the assessment of damages would require ten days. That was not unusual. Much was at stake when assessing damages.

[8] Assessing damages in medical negligence cases can be a difficult task at the best of times. The injuries suffered are frequently catastrophic. When a child suffers catastrophic injuries at birth, and given the often uncertain life expectancy of such children, the parties to ensuing lawsuits frequently and understandably can have very different views of the appropriate range of awards for future pecuniary losses. These factors are all present here.

[9] The question of damages is further complicated in this case because the Strachan family permanently moved to the state of Utah in the United States in about June 2003. That move necessitated the retaining of additional experts to address the impact of local area costs and state law on the future care claim. It also led to an adjournment of the assessment of damages so that counsel could obtain additional expert evidence. The assessment of damages was re-scheduled for hearing before me in February 2004.

[10] At the commencement of the assessment, the issue of Sidney’s life expectancy remained particularly contentious. Simply put, the longer the life expectancy, the greater the potential claim for future pecuniary losses. The risk for the plaintiffs was that the court might conclude that Sidney’s life expectancy is less than the plaintiffs’ experts predict. This likely would have translated into a lesser award for such losses than the plaintiffs sought.

[11] Plaintiffs’ counsel addressed this risk, in part, by negotiating a structured settlement that ensures a life-long stream of tax-free annuity payments for Sidney. A structured settlement offers greater protection because it offsets the risk that, in a judgment after trial, the court may prefer the defendants' expert opinions that postulated a shorter life expectancy than those of the plaintiffs’ experts.

[12] Any trial award for future pecuniary loss necessarily reflects a judicial conclusion about probable life expectancy that might fall short of the child's actual lifespan. Accordingly, a key consideration regarding the appropriateness of the settlement is that it provides for an annuity, payable monthly in U.S. funds on a tax-free basis, for Sidney’s actual life, and that it is guaranteed for 35 years, even if she dies before that time.

[13] The summary of the proposed settlement of $4,000,000 (Cdn.) is as follows:

Costs	$ 150,000
Special Damages	50,000
In Trust for Parents	100,000
Non-Pecuniary	290,000
Loss of Earning Capacity	1,000,000
Future Care	2,410,000
TOTAL	$4,000,000

I observe that the non-pecuniary loss component is the maximum permitted by law in Canada for catastrophic injuries. The issues of special damages and the “in trust” claim for the parents do not appear to have been particularly contentious.

[14] The issue of life expectancy drives much of the proposed compromise on the claims for future income loss and future care costs. In part, this is because Sidney will never be competitively employable, given the extent of her disabilities. Both the number of employable years and the number of years during which Sidney will require care are determined by her compromised life expectancy. There would also have been significant issues at trial respecting the extent to which the state of Utah will cover Sidney’s present and adult care needs, thus reducing her future care costs.

[15] Taking into account the available evidence, as reviewed by counsel, and the risks associated with proceeding to final judgment, I am satisfied that the proposed settlement is in the best interests of the child. I am also satisfied that the form of settlement maximizes the advantages available to Sidney. I approve the amount of the proposed settlement.

[16] After payment of all legal fees, disbursements and the in-trust claim of the parents, the net settlement proceeds available for Sidney approximate $2,736,917 (Cdn.) or $2,039,830 (U.S.). The cost of the structured settlement is $2,000,000 (U.S.). It will provide the annuity payments of $9,170 (U.S.) per month commencing immediately for Sidney’s lifetime and, as stated above, is guaranteed for 35 years. Accordingly, the minimum that Sidney (or her estate) will recover is $3,851,400 (U.S.).

[17] If Sidney lives as long as the most optimistic life expectancy projection suggests, namely to age 62, the total annuity payments will be $6,382,320 (U.S.). This provides a further financial benefit to Sidney.

[18] The monthly annuity payments are more than required to meet Sidney’s special needs while she remains a child. The settlement addresses the means by which extra monies will be retained to assist with meeting Sidney’s future needs as an adult if the monthly annuity payments prove inadequate. This requires court approval of an out-of-province trust.

[19] The plaintiffs propose that the net settlement proceeds as well as the structured settlement payments be held by a conservator in the state of Utah. The Third Judicial District Court of Salt Lake County, State of Utah, has ordered that Western National Trust Company, an affiliate of Zions Bank, be appointed as Conservator of the property of Sidney. That court also ordered that Mr. and Mrs. Strachan be appointed as joint general guardians of Sidney’s person.

[20] Plaintiffs’ counsel received a tax opinion indicating that it is most advantageous from a tax perspective that the trust monies be held in the United States. As well, the anticipated fees for the conservator are less than those customarily charged by the public trustee in this jurisdiction. In addition, the public trustee noted the practical benefit of having the net settlement proceeds located near where costs will be incurred and that locating the trust in the United States avoids potential problems associated with volatile currency rates.

[21] I am satisfied that the Utah court order and applicable statute impose investment criteria for the conservator based on prudence: see, for example, the Uniform Probate Code, Utah Code Ann. § 75-5-425 (2004). Under Utah law, both the guardians and the conservator are required to make annual accounts to the court of their stewardship and are subject to the court's superintendence.

[22] I am persuaded that this court’s parens patriae jurisdiction permits me to make an order placing an infant’s settlement fund with a professional trust company rather than with the public trustee: see Bizovie (Guardian ad litem of) v. Cornish, 2004 BCSC 553, [2004] B.C.J. No. 827, at paras. 8 to 12, 34 and 35. I also observe that the court has previously ordered such funds to be held in trust according to the laws of another jurisdiction: see Kupper v. Jorgensen, Vancouver Registry No. M003761, October 1, 2004.

[23] I agree that it is in Sidney’s best interests that the settlement funds be transferred to the State of Utah to be held by the conservator there as outlined above.

[24] I turn now to my review of the fairness of the original contingency fee agreement and the reasonableness of the proposed fee, keeping in mind that liability was resolved shortly before trial and settlement was reached on damages after only one day of trial. My consideration of these issues is guided by the following cases referred to by counsel: MacLeod v. Harrington (Public Trustee of), [1995] B.C.J. No. 2717 (C.A.) sub nom: Harrington (Guardian ad litem of) v. Royal Inland Hospital (1995), 14 B.C.L.R. (3d) 201 (B.C.C.A.); Commonwealth Investors Syndicate Ltd. v. Laxton, [1990] B.C.J. No. 2147; 50 B.C.L.R. (2d) 186 (C.A.); Adams (Guardian ad litem of) v. Emmott, [1997] B.C.J. No. 2473 (S.C.); Renaerts (Guardian ad litem of) v. Korn, [1999] 9 W.W.R. 499, [1998] B.C.J. No. 3223 (S.C.); Bizovie (Guardian ad litem of) v. Cornish, 2003 BCSC 1615, [2003] B.C.J. No. 2432 (S.C.); Duchene (Guardian ad litem of) v. Woolley, 2002 BCSC 1878, [2002] B.C.J. No. 3232 (S.C.); Audet (Guardian ad litem of) v. Bates, (1998), 18 C.P.C. (4th) 357 (B.C.S.C.); and Chong (Guardian ad litem of) v. Royal Columbian Hospital (1997), 31 B.C.L.R. (3d) 303 (B.C.S.C.).

[25] The first step in the review process is to determine whether the agreement was fair on its face and fairly obtained. This requires an investigation of the mode of obtaining the contract and whether the client understood and appreciated its content. See Commonwealth and Audet. The parents entered into the contingency fee agreement with Arvay Finlay in April 2001 after receiving an explanation of the various alternatives for funding the anticipated lawsuit. They told the firm that they could not afford to pay a fee for legal services and instead, chose to proceed by way of contingency fee agreement. The parents obtained independent legal advice before the terms of the agreement were finalized. The agreement provided that the law firm would fully fund the lawsuit, including assuming the full risk for funds expended on disbursements and time expended by the lawyers in investigating and prosecuting the matter. Mr. and Mrs. Strachan are educated and intelligent people. They both provided affidavits confirming their agreement with the fee arrangement. I am satisfied they fully understood the nature and effect of the agreement they entered into. I find that the agreement was fair on its face and fairly obtained.

[26] The second step in the review process is to determine whether the contingency fee is reasonable in the circumstances. Before considering the factors set out in Harrington, I make the following observations. As is frequently the case in contingency fee agreements, where successful prosecution of the claim can result in extremely large awards, the agreement provided for gradations of recovery depending on both the amount obtained for damages and the stage of the proceedings at which resolution is accomplished. For example, the agreement provided that fees would be 20 per cent of any settlement or award between $1,000,001 and $2,000,000 if achieved on or after examinations for discovery increasing to 30 per cent if achieved within 60 days, or less, preceding trial, or upon proceeding to trial. If the settlement or award exceeded $2,000,000, as was the case here, the agreement provided for fees of 15 and 25 per cent respectively at those two stages.

[27] The authorities cited above recognize that the court should not choose a particular percentage, but rather set a reasonable dollar fee, after taking into account all the factors referred to in Harrington set out below. Largely, this is because the court must set a fee that reflects all the circumstances of the particular case rather than impose a one-size fits all solution.

[28] I believe the case law also counters the danger lurking in the beguiling simplicity of percentage fees, particularly when the fees are gradated as is the case here. Without directing any undue criticism of the drafters of the contingency fee agreement here, I observe, for example, that the fees calculated on an award of $1,999,999 at trial would be $599,999, yet fees calculated on a trial award of $2,000,001 would be only $500,000. If the second amount is fair and reasonable, it would be very difficult to argue that the first could also be so.

[29] Counsel for the plaintiffs advised that the law firm does not seek to rely directly on the provision in the agreement for a 25 per cent fee here. Instead, the firm voluntarily proposed to reduce its fees to 22.4 per cent of the settlement proceeds of $3,850,000 ($4 million less $150,000 costs), which amounts to $862,500. That fee would, in turn, be apportioned between the parents, whose claims totalled $150,000, and Sidney, on the same basis, as follows:

The Parents	$ 33,600
Sidney	828,900
TOTAL	$862,500

The public trustee has recommended approval of the fees. Nonetheless, the question before me is whether the proposed fee of $828,900 is reasonable in the circumstances and, if not, what other fee is. The analysis requires a consideration of all the factors identified in Harrington.

[30] In Harrington, the court identified the factors to be taken into account when assessing the reasonableness of a contingency fee. These included the following ten factors:

(1) the financial circumstances of the client;

(2) whether the law firm carried the disbursements;

(3) the complexity and difficulty of the issues;

(4) the experience and competence of defence counsel;

(5) the degree of risk assumed by plaintiff’s counsel;

(6) the experience and competence of plaintiff’s counsel;

(7) the time expended by plaintiffs’ counsel;

(8) the timing of the settlement;

(9) the importance of the case to the plaintiffs; and

(10) whether the settlement was a good one.

I considered all these factors. Some are more important in the circumstances here than others.

[31] In considering the factors, I also kept in mind the particular context for the inquiry in medical negligence cases, as stated at para. 210k of Harrington, that is:

11. A solicitor who undertakes the prosecution of a difficult case, the prospects of which are uncertain due to various issues such as liability, causation or damages, is entitled to be well compensated in the event the case is brought to a successful conclusion. Such remuneration must be substantial, but not exorbitant, in order to make up for those cases taken by the solicitor on a contingency fee basis which do not result in success.

In addition, I recognise that determining a reasonable fee requires a consideration of all the circumstances existing up to the conclusion of the retainer.

[32] Before setting out my conclusions, I wish to comment on the question of time expended by counsel, one of the factors set out above. I caution that courts should avoid the trap of relying too heavily on such records.

[33] The law recognizes the dangers to both the client and the law firm in placing undue weight on recorded hours. While I agree with other judicial comments that recorded hours provide useful information, I also agree equally with comments that hours recorded do not necessarily reflect the skill, judgment and experience of the particular lawyer. There are some highly capable and experienced members of the bar who accomplish more and obtain better results in significantly less time than their peers.

[34] Equally, in the case of the less experienced or talented lawyer, the recording of hours may tell little of the necessity for or the quality of the time spent. Having said that, I hasten to add that there is nothing in the recorded hours disclosed by the evidence that leads me to conclude that is the case here. The recorded time in the case at bar is valued at about $484,000. The firm, as a whole, enjoys an excellent reputation and has significant experience in claims of this type.

[35] I am satisfied that one of the principal reasons, if not the principal reason, that Mr. and Mrs. Strachan and Sidney were able to gain access to the court, with the assistance of properly qualified and experienced counsel, was because the law firm agreed to act on a contingency fee basis with the law firm assuming full responsibility for paying all necessary disbursements, without any recourse to the clients in the event of failure. By entering into the particular contingency fee agreement, the parents, acting on behalf of Sidney, had the considerable comfort of knowing their personal financial resources were not being placed at risk in prosecuting the claim. They also had the advantage of knowing the maximum fees potentially payable.

[36] There are only a limited number of lawyers in the province with the necessary expertise to act in medical negligence claims and not all of those lawyers have the financial ability to pay for disbursements and accept the risk of not being reimbursed. The law firm here paid or incurred disbursements of $168,103.29. The risk of non-reimbursement arose, of course, on top of the ever-present risk that an unsuccessful conclusion would also have meant no recovery at all for the legal time expended.

[37] Settlement of the litigation is of great importance to the family, provided it is a good settlement. I have already indicated that the settlement is a good one and adopt the following comments of the public trustee:

The proposed settlement was agreed to on the second day of the trial for damages. Plaintiff’s Counsel had spent a significant amount of time preparing for trial and faced risks on the issue of damages, particularly given the diminished life expectancy of Sidney. The proposed settlement ensures that Sidney will have the necessary resources to cover the future costs pertaining to her care, treatment and equipment for the rest of her life.

The result might have been better if the plaintiffs had continued the trial, but that does not reflect adversely on the quality of the settlement. I say that because compromise is the essence of all settlement. In exchange for the benefit of a certain outcome, claimants necessarily forego aspects of claims that might have exceeded the agreed upon amounts. Similarly, defendants compromise for certainty. By doing so, they give up the opportunity to resist claims in exchange for the certainty of a result they can accept. In the result, counsel may bring just as much skill to the negotiation process as to the actual trial.

[38] Of course, settlement also brought certainty for the plaintiffs’ law firm. The law firm’s reasonable fees and disbursements will now be paid. As well, some lawyer time was freed up as a result of the trial not proceeding past the second day. In my view, these are additional factors that must also be reflected in the final fee. A similar result achieved only by way of judgment at the end of trial would have justified a greater fee than I propose to approve in the present circumstances.

[39] Finally, I recognise that the fees in relation to Sidney’s settlement will come out of the settlement proceeds otherwise available for her future needs. In all the circumstances, I consider a reasonable fee in relation to Sidney’s settlement to be $800,000. Taken together with the proposed fee payable by the parents of $33,600, the total fees payable, before taxes and disbursements, will be $833,600.

[40] Counsel may submit a revised form of settlement order reflecting the approval as well as payment of the law firm fees in accordance with the above. In the meantime, I have endorsed the two consent dismissal orders respecting the claims against Dr. Vreede and the third party claims against Nurse Mowbray and returned them to the court registry for entry.

“M.D. Macaulay, J.”
The Honourable Mr. Justice M.D. Macaulay

Citation:	*Strachan et al v. Winder et al,*
	2005 BCSC 59