Executive Summary: Key Legal and Evidentiary Issues

• Richard Keith Watson, a lawyer, faced a conduct application by the Law Society of Ontario (LSO) that was ultimately dismissed in its entirety after 56 hearing days.
• Central to this appeal is the proper interpretation and application of Rule 25.01(1)(a)(ii), which permits costs awards against the LSO where it caused costs to be wasted by undue delay, negligence, or other default.
• Courts at every level disagreed on whether the LSO's investigation and prosecution were one-sided, and whether that conduct met the threshold for wasted costs.
• Multiple disclosure failures — including late production of the investigative file, banker's boxes of undisclosed emails, and delayed QuickBooks records — formed the core of Mr. Watson's costs claim.
• The Hearing Division erred by conducting a piecemeal, rather than holistic, analysis of the LSO's conduct and by applying a higher standard of fault than the rule requires.
• Procedural fairness doctrine, while referenced by the Divisional Court, was found by the Court of Appeal to be an unnecessary and confusing lens for the costs analysis under Rule 25.01.

Facts of the case

On October 27, 2008, the LSO received a complaint from Sylvia Sweeney alleging that Richard Keith Watson, while acting as her lawyer, failed to follow her instructions regarding the disbursement of trust funds, misappropriated some of those funds, and improperly altered corporate records. The complaint arose from a project operated by Ms. Sweeney's production company to stage a concert series for the Beijing Olympic and Paralympic Games in 2008. Mr. Watson denied any wrongdoing, maintaining that he was not acting as a lawyer but as a business executive for Ms. Sweeney's company. Following an investigation, the Proceedings Authorization Committee authorized a conduct application on August 25, 2009, and a Notice of Application was issued on September 11, 2009, alleging four instances of professional misconduct, including improperly withdrawing funds, misappropriation of funds, and failing to act with integrity by, among other things, fabricating certain corporate documents.

Procedural background

The conduct hearing proceeded before a three-member panel of the Tribunal's Hearing Division over 56 hearing days between 2011 and 2013. After the close of Ms. Sweeney's cross-examination, the LSO sought to withdraw the application. On April 1, 2013, the panel declined to permit withdrawal and instead dismissed all charges against Mr. Watson. Mr. Watson then sought costs against the LSO. The costs proceeding unfolded in two stages. In the second costs hearing, a newly constituted three-member Hearing Panel denied Mr. Watson's motion for costs of both the conduct proceeding and the first costs hearing, concluding that the proceeding was not unwarranted and that the LSO had not caused wasted costs within the meaning of Rule 25.01. In separate reasons, the Hearing Panel awarded the LSO $52,000 in costs, comprising $12,000 relating to the PAC Memorandum disclosure motion and $40,000 relating to the costs hearing. The Appeal Division dismissed Mr. Watson's appeal in its entirety and awarded the LSO an additional $31,500 in costs of the appeal. The Divisional Court partially allowed Mr. Watson's appeal, set aside the $40,000 costs award for the second costs hearing, upheld the $12,000 PAC motion costs award, directed that Mr. Watson receive costs before the Appeal Division, and awarded Mr. Watson $17,500 all-inclusive costs of the Divisional Court appeal. The LSO then appealed to the Court of Appeal for Ontario.

Rule 25.01 and the costs framework at issue

The central provision at issue is Rule 25.01(1)(a) of the Ontario Law Society Tribunal Hearing Division Rules of Practice and Procedure, which provides that costs may only be awarded against the LSO in a conduct proceeding where: (i) the proceeding was unwarranted (the first branch); or (ii) the LSO caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence, or other default (the second branch). The burden of establishing either branch rests with the party seeking costs, and the LSO's conduct must be analyzed at the time decisions were made, without overly relying on hindsight. The Court of Appeal noted that Rule 25.01(1)(a)(ii) mirrors the language of Rule 57.07(1) of the Rules of Civil Procedure, which allows costs to be imposed personally against a party's lawyer, and that a holistic examination of the entire course of proceedings — rather than an isolated review of each step — is required under both provisions.

Court's reasoning and analysis

The Court of Appeal, per Sossin J.A., agreed with the Divisional Court that the Tribunal's decision on the second branch of Rule 25.01 could not stand, but reached that conclusion by a different route. The court rejected the Divisional Court's use of the procedural fairness framework under Baker v. Canada, finding it an unnecessary and confusing lens for a costs analysis. The proper standard of review on this statutory appeal, the court held, is the appellate standard set out in Housen v. Nikolaisen — correctness for questions of law, and palpable and overriding error for findings of fact and mixed fact and law.

On the substantive question, the court identified two key errors by the Hearing Division. First, the Hearing Division conducted a piecemeal analysis, examining each alleged misstep by the LSO in isolation rather than holistically. Second, it applied a higher standard of fault than Rule 25.01 requires, effectively demanding proof of indefensible legal positions rather than asking whether the LSO's conduct — viewed as a whole — amounted to negligence or other default causing wasted costs.

The court found several indicators of a one-sided investigation. LSO counsel's own submissions stated that the LSO's duty of inquiry was to make reasonable efforts to obtain evidence supporting the allegations it was advancing — language the court found strongly suggestive of a prosecution-only mindset. The LSO's investigator, Joseph DiPietro, completed his final investigative report on March 6, 2009, almost a month before his final interview with Mr. Watson on April 1, 2009, and many of the negative conclusions in the report were never put to Mr. Watson for his explanation. Additionally, the LSO never conducted a corporate search despite one of the key allegations being that Mr. Watson had fabricated corporate documents — a search that would have revealed that the amended articles of incorporation had been filed with the Ministry in January 2007, long before Ms. Sweeney ever met Mr. Watson.

On disclosure, the court identified at least five disclosure-related incidents during the hearing: the failure to disclose the complete investigative file until July 2010, causing the hearing to be adjourned until November 2010; the production in October 2010 of four banker's boxes of emails that the LSO characterized as not "pertinent," despite many corroborating Mr. Watson's position; the LSO's resistance to producing QuickBooks accounting records on the basis of irrelevance, records that ultimately assisted Mr. Watson in showing that Ms. Sweeney had budgeted to pay him a salary; a missing signed contract during the summer of 2011 that differed significantly from the draft that had been provided; and a further production motion in spring 2012. The court held that a pattern of taking defensible but unsuccessful positions on disclosure issues, rooted in a misunderstanding of the LSO's role or reflecting a one-sided investigation, could well meet the threshold for wasted costs. The court also rejected the LSO's argument that the extreme caution principle applicable under Rule 57.07(1) should be imported into the Rule 25.01 framework, noting that the LSO has a dual mandate to both protect the public and deal fairly with members whose livelihood and reputation are at stake.

Ruling and overall outcome

The Court of Appeal dismissed the LSO's appeal. The court affirmed the Divisional Court's decision to remit the wasted costs question to a newly constituted hearing panel, with directions to conduct a holistic analysis of the LSO's conduct from the outset of the investigation, apply the correct standard of fault under Rule 25.01(1)(a)(ii), and consider whether a partial costs award is appropriate if a full award is not warranted. The new panel is also directed to revisit whether Mr. Watson is entitled to costs of the abortive first costs hearing should any costs of the conduct proceeding be awarded. The successful party in this appeal was Mr. Watson (the respondent), and costs of both the appeal and the motion for leave to appeal were awarded to him in the agreed amount of $17,500, all-inclusive.