For defendants, success is often bittersweet due to the costs of mounting a defence and the reputational harm caused by the plaintiff’s allegations. This reputational harm is amplified when the allegations include fraudulent, criminal, unethical or unprofessional conduct. To help compensate for this elevated reputational harm and deter against unfounded accusations of dishonest conduct, plaintiffs that fail to prove such claims may be ordered to pay costs on the substantial indemnity scale to defendants.

Given that reputational harm is further amplified in the class actions context, one might expect that substantial indemnity awards could be made if representative plaintiffs fail to prove allegations of dishonest or fraudulent conduct. However, in Hodge v. Neinstein, Justice Perell held that, in such cases, substantial indemnity awards are not available to defendants that defeat motions for certification.

“If it is vindication a defendant wants, then he or she should consent to certification and prove that the representative plaintiff’s claim is without merit.” -  Justice Perell in Hodge v. Neinstein.

Background

As discussed in our previous blog post on the Hodge v. Neinstein proceedings, the representative plaintiff alleged the defendants had systematically breached the contingency fee provisions in the Solicitors Act in a manner that was fraudulent, illegal, unethical and unprofessional. Justice Perell dismissed the motion for certification because the action lacked common issues and was not the preferable procedure. Nonetheless, the representative plaintiff continued to attack the defendants’ integrity during the motion for costs.

No Substantial Indemnity Costs

In Justice Perell’s view, the defendants’ success at certification offered no vindication with respect to the plaintiff’s allegations. The merits of the case were not decided at the certification motion – neither the facts, their legal implications nor the availability of affirmative defences. To the extent that findings were made, they were only made for the purposes of certification. Moreover, the alleged illegal contingency fees could be the subject of individual civil actions brought by class members (or complaints to the law society). Therefore, there was no basis on which to award costs on the substantial indemnity scale.

Lessons

In cases where a defendant’s integrity is at issue, the nature of the allegations becomes another factor influencing the defendant’s litigation strategy. When subjected to false allegations of dishonest or fraudulent conduct in a class proceeding, defendants are left with deciding if “vindication” is worth agreeing to certification and spending the additional time and money required to disprove the allegations at trial.