Cost awards were traditionally awarded to compensate victorious litigants for the expenses they incurred prosecuting or defending a legal dispute. In Canada, courts typically order the losing party to pay costs to the winning party, though these awards rarely cover the successful litigant’s total costs.

While Canadian courts ultimately have complete discretion regarding cost awards, they tend to award costs on a ‘party-and- party’ — a partial indemnity — basis, in accordance with set tariffs or court practice. Party-and-party costs, referred to by different names in various jurisdictions, only partially reimburse a recipient for expenses incurred during litigation, as the courts attempt to strike a balance between the victor’s right to compensation and the losing party’s right to access the court system.

‘Solicitor-client costs’ (or ‘substantial indemnity costs,’ as they are aptly called in Ontario) are cost awards that come closer to providing complete indemnification. They are awarded primarily "where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties." Although theoretically aimed at close to full indemnity, these rare awards of a punitive nature still only cover those costs that are reasonably necessary for the prosecution of the litigant’s case — what a lawyer could charge a resisting client for representation — and therefore fall short of complete compensation.

In the case of both partial and substantial indemnity costs, the underlying principle of indemnification must be balanced against general principles of reasonableness and fairness. Ontario, for example, has recently abandoned its costs grid system for an approach that is, in the words of Justice Howden in Moss v. Hutchinson, "a more flexible, principled one targeted at fair value for the work reasonably required and the legitimate expectations of the losing party."

The Ontario Rules of Civil Procedure set out several factors that courts should consider when fixing costs. These include the reasonable expectations of the paying party, the amounts claimed and recovered in the proceeding, the apportionment of liability, the complexity of the proceeding, the importance of the issues raised and the conduct of the parties

As the Ontario Court of Appeal has stressed, adhering to an overriding principle of reasonableness in determining costs ensures access to justice. Therefore, even substantial indemnity cost awards are a reflection of what the court views as fair and reasonable, rather than a measure of actual expenses.

Similarly, the traditional definition of costs as ‘an indemnity to the person entitled to them’ has become outdated as courts use cost awards as policy instruments. Many provinces award costs on a higher scale where a party does not recover a judgment greater than a settlement offer it rejected, penalizing the loser for refusing a reasonable offer and increasing the duration of the litigation. Cost awards may also overcompensate in important cases of public interest. Furthermore, they may not match actual disbursements in cases of self-representation. In unusual circumstances, costs may even be awarded against a successful litigant.

By contrast, Québec courts do not increase cost awards to sanction reprehensible behaviour, nor do they look to overarching principles in making cost determinations. Under Québec civil law, costs are determined almost exclusively by reference to codified tariffs of judicial fees, which generally represent only a small fraction of actual expenditures. Only in highly exceptional cases of great importance and complexity will cost awards exceed the amounts outlined in the legislation.

McCarthy Tétrault Notes:

In determining the extent of cost awards, the law often strikes a balance between competing factors. Unlike the starting assumption in the U.S. that parties will pay their own costs, the ordinary rule across Canada is that the successful litigant is entitled to his or her costs. The implication is that unsuccessful litigation is itself the source of a duty to compensate.

Cost awards can encourage those in the right to pursue litigation and ensure that their victory will not come at an excessive cost, but they must not discourage legitimate litigation. Principles such as fairness, access to justice and reasonableness must be taken into account when assessing costs, as well as considerations regarding judicial efficiency and resource management.