Section 6.03(8) of the Rules of Professional Conduct deals with lawyers' undertakings. That Rule says that a lawyer shall not give an undertaking that cannot be fulfilled and shall fulfill every undertaking given. In real estate transactions using the system for electronic registration of title documents ("e-reg"), the lawyers acting for parties (with their consent) will sign and be bound by a Document Registration Agreement that will contain undertakings. The commentary under the Rule once again reminds lawyers that they must never give an undertaking that they cannot fulfill.
The LAWPRO® Professional Liability policy contains several exclusions to coverage and one of these exclusions deals with the issues of undertakings. Part III (f) says that the policy does not apply:
How does this exclusion apply to undertakings given in the context of e-reg?
The exclusion is interpreted in the context of Rule 6.03(8). Whether a claim arising out of a failure to fulfill an undertaking is covered will depend on whether or not the lawyer was in a position to fulfil the undertaking when it was given. For example, a lawyer has $10,000 in his or her trust account to be used to pay tax arrears, and on closing of the transaction gives a personal undertaking to transfer those funds to the Municipality. After closing, there is a bookkeeping error and inadvertently the funds are released to the client, the taxes are not paid and the client then leaves the country. There will be a claim from the vendor against the lawyer based on his or her personal undertaking. That claim would be covered because at the time the lawyer granted the undertaking he or she was in a position to fulfill it. The reason that he or she did not fulfill it was that the lawyer or someone in the office was negligent and mistakenly released the funds to the wrong party.
If, however, a lawyer gave that same undertaking when he or she did not have the client funds in the trust account, the claim would not be covered. The lawyer has given a personal undertaking and agreed to pay someone else's debt. He or she has taken a personal risk, hoping that ultimately the client would come forward and pay the $10,000. If the client does not pay and a claim is made it would be excluded under the policy because the insured assumed responsibility for another's performance of an undertaking or payment of a debt.
Lawyers' undertakings are now, and always have been essential to the practice of law and as long as they are given in good faith, the policy will respond to claims arising out of the giving of those undertakings. Therefore, as long as lawyers continue to heed the Rules and do not give undertakings that cannot be fulfilled, any claim arising out of the undertaking will be covered under the policy.
TM e-reg and the e-reg logo are trademarks of Teranet Inc.
LAWPRO Insurance Protection
However, any Innocent Party Coverage that you may have in place WILL NOT protect YOUR client if the other lawyer (or his/her staff member) acts dishonestly and your client suffers a loss as a result. (For example, you may have provided the purchase funds in escrow to another law firm, and the lawyer absconds with the funds without releasing the transfer for registration.)
Therefore, as an added measure of service, you may want to ensure that Innocent Party protection is carried by opposing counsel for the protection of your clients in an e-regTM transaction. Evidence that this coverage is in place can come from several avenues: The Declarations Page that details the professional liability coverage provided to counsel by LAWPRO is one source; you can also ask counsel to certify in writing the level of Innocent Party Coverage in place, or obtain from them a direction authorizing LAWPRO to disclose to you the level of Innocent Party Coverage in place.
Note that this coverage is provided on a claims-made basis only, and therefore is the coverage in place only at the date on which the Declarations page is issued or when LAWPRO makes the disclosure. So you may want to verify at least annually that counsel with whom you are transacting business continue to have in place Innocent Party Coverage, and the amount of the coverage.
Impact of Acknowledgment & Direction
The introduction of electronic registration across Ontario has raised numerous questions from lawyers on how LAWPRO will deal the payment of deductibles on claims arising out of escrow closings.
In various presentations made recently, LAWPRO has confirmed the following position on lawyers' liability for deductibles on claims arising out of e-reg transactions.
Liability arising from the Document Registration Agreement (DRA)
LAWPRO 's position
To access the Document Registration Agreement, as approved by the OBA-LSUC Joint Committee on Electronic Registration of Title Documents on the LSUC website, click here.
Liability arising from compliance with law statements
LAWPRO 's position
LAWPRO therefore will waive any deductible and claims history levy surcharge in situations where a negligence claim is brought against a lawyer who innocently relied on the compliance with law statement made by the lawyer representing the other party(ies).
Liability arising from e-reg signatures
LAWPRO 's position
LAWPRO believes the following two measures help to "bullet-proof" lawyers on this issue:
Please ensure that your clients sign the Acknowledgments, as recommended by the Joint Committee. If the Acknowledgment generated by the software does not cover any parties who would traditionally have signed the document, please consider alternate ways to evidence the party's consent.