Our litigation bulletin series is designed to demystify the litigation process. This latest bulletin in the series focuses on an issue that is relevant to every piece of litigation at every stage: costs. Of course, all parties involved in litigation aim to keep their costs as low as possible and to recover as much of those costs as possible from the opposing party or parties. This bulletin will focus on the factors affecting the recovery of costs, and the following issues:
a) when and how costs are awarded by the Court;
b) why costs are awarded;
c) how the quantum of costs awarded is decided;
d) the costs ramifications of making an offer to settle; and
e) obtaining security for costs.
Costs awarded by an Ontario court can include legal fees, disbursements and Goods and Services Tax that a party has expended in the course of litigation. Costs awards are generally made by the court to the successful party on a motion, application or trial, to provide some reimbursement, or indemnification, of some of the costs expended by that party. It is also possible for costs to be awarded at a pre-trial conference or case management conference, but this is a rare occurrence, and usually involves circumstances where the manner in which one party has proceeded has caused another party to incur wasted costs (sometimes referred to as costs “thrown away”).
Costs are also sometimes awarded as part of other types of proceedings, such as administrative tribunal hearings or arbitrations, but these proceedings are governed by their own unique set of rules. This bulletin will deal only with the award of costs in judicial proceedings in Ontario (other than Small Claims Court).
When and How Costs are Awarded
An award of costs by the court is at the discretion of the judge or master hearing the motion, application or trial. Although the judge or master has discretion whether to award costs, and if so, how much to award, the usual rule in Ontario is that “costs follow the cause”, meaning that costs are typically awarded to the party who wins the motion, application or trial. Though there are limited instances where costs can be awarded to unsuccessful parties, the system is generally a “loser pays” system. It is also possible, where there is divided success on a motion (for example, the moving party obtains only part of the relief sought), that the court will not award costs to either party.
If costs are ordered they are usually ordered to be paid either “forthwith” or “in the cause”. Costs ordered payable “forthwith” must be paid without delay, failing which the other party may move to stay the proceeding (if the offending party is the plaintiff) or strike the statement of defence (if the offending party is a defendant). Costs ordered payable to a party “in the cause” are payable to that party only if they ultimately win the trial or hearing of the proceeding.
In exceptional cases, and sometimes on the consent of the parties, costs are ordered to be assessed. In such circumstances, the parties appear before an assessment officer who reviews the costs claimed by the successful party, hears the arguments of the parties about the costs claimed, and makes a ruling as to the amount payable.
Why Costs are Awarded
As set out above, Ontario has what is known as a “loser pays” costs system, in which the overarching principle with respect to the awarding of costs is that the unsuccessful party should indemnify the successful party for the costs it incurred in the proceeding. As will be discussed further below, this principle does not translate into full indemnity for a successful party, but rather provides what is typically partial indemnity. Not all legal jurisdictions have the same rules about costs that Ontario has. In some jurisdictions, parties are each expected to bear all of their own legal costs, whether pursuing judicial relief or defending against a lawsuit.
Other aims of a “loser pays” system include deterring abuse of process and waste of the court’s resources, encouraging the parties to consider settlement, and sanctioning frivolous actions and meritless defences.
How the Quantum of Costs Awarded is Decided
The Ontario Rules of Civil Procedure provide that on a motion, application or trial each party will prepare a costs outline or a bill of costs for submission to the judge or master. A costs outline or bill of costs includes details of the lawyers who worked on a matter (including their year of call and normal billable rate), a listing of the work performed by those lawyers for the matter that came before the judge or master, and the amount claimed for the work done by those lawyers. Disbursements (for copying, courier charges, the retention of experts, court filing fees, etc.) and GST are also typically included in a costs outline or bill of costs.
A claim for lawyers’ fees (as included in a costs outline or bill of costs) is made on a “partial indemnity” basis or a “substantial indemnity” basis. The maximum rates that a lawyer can claim under either of these scales of indemnity is set by legislation. Partial indemnity costs are awarded in accordance with a tariff that is set out in legislation. Substantial indemnity costs are 1.5 times the amount of partial indemnity costs. A costs award on a either a partial indemnity scale or a substantial indemnity scale is not a reimbursement of all legal fees incurred by a party. Costs are rarely awarded on a substantial indemnity basis, and are very rarely awarded on a full indemnity basis (where a party would obtain 100 percent of their actual legal costs). Most costs awards are made on a partial indemnity scale.
In addition to submitting a costs outline or bill of costs, counsel usually make oral or written submissions to explain why a client’s claim for costs is reasonable in the circumstances, or to explain why the opposing party is not entitled to the costs they claim.
In deciding whether to award costs, the court may, in exercising its discretion, consider various factors including:
a) the principle that the successful party is entitled to indemnification;
b) the amount of costs that an unsuccessful party could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed;
c) the amount claimed and the amount recoverable in the proceeding;
d) the apportionment of liability;
e) the complexity of the proceeding;
f) the importance of the issues;
g) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding;
h) whether any step in the proceeding was, (i) improper, vexatious or unnecessary, or (ii) taken through negligence, mistake or excessive caution; and
i) whether a party denied or refused to admit anything that should have been admitted.
Ultimately, judges and masters have the discretion to make awards of costs as they see fit. This discretion is only limited in circumstances where a statute contains an applicable limitation in respect of the costs that may be ordered by the court.
Ramifications on Costs of Making an Offer to Settle
One of the Rules of Civil Procedure in Ontario (Rule 49) uses costs to provide an incentive to encourage parties to consider making a reasonable settlement offer as early as possible in litigation. To attract the benefit of the rule, a party must make a settlement offer that complies with the provisions of the rule. Such an offer (often called a “Rule 49 offer”) must be made at least seven days before the hearing of the motion, application or trial. In addition, it must not be withdrawn or expire before the commencement of the hearing. If these stipulations are not followed, the settlement offer will not attract the costs consequences described below. The fact that a party has made a “Rule 49 offer” is not made known to the court before the court rules on the merits of the hearing. After there is a ruling, parties can notify the court of a Rule 49 offer so that the court can take it into account in making its decision on costs.
Generally speaking, if a plaintiff makes a Rule 49 offer and then obtains a better result at the hearing than was contained in his or her offer, the plaintiff will receive partial indemnity costs up to the date the offer was made, and substantial indemnity costs from the date of the offer to the date of the hearing. If a defendant makes a Rule 49 offer and the plaintiff recovers equal to or less than the amount of the offer, the plaintiff will receive partial indemnity costs up to the date the offer was served, and the defendant will receive partial indemnity costs from the date the offer was served to the date of the hearing.
The difference between receiving costs on a partial indemnity basis and on a substantial indemnity basis can be significant. In some hearings and trials, the costs claimed can exceed the amount in issue. The net result of these costs rules is that it is in many parties’ interests to make a Rule 49 offer as early in a proceeding as possible. That offer can always be withdrawn and replaced by another Rule 49 offer (thereby establishing a new start date for the calculation of the costs consequences of the offer), but the existence of a Rule 49 offer can often put pressure on an opposing party to reach a reasonable settlement. That pressure steadily increases as the date of the hearing approaches and further costs are incurred.
Even if a party finds itself unable to comply with the formal rule regarding offers to settle (for example, the hearing is less than seven days away and therefore the requirement for the offer to be made in advance of that timeframe cannot be met), it is still prudent to consider making a reasonable settlement offer. Even though such an offer may not attract the formal benefits of Rule 49, judges or masters often take into account such offers in calculating the quantum of costs to be awarded.
Obtaining Security for Costs
A defendant or respondent who is concerned that it may not be able to collect a costs award after a hearing may consider bringing a motion to obtain an order for security for costs. An order for “security for costs” requires a plaintiff or applicant to pay security for any costs that may be ordered against it in the proceeding. Usually, security for costs is posted in the form of money or a bond that is either paid into Court or held in trust by the party’s lawyer. An example of a situation in which a defendant may be concerned about security for costs is a circumstance where the plaintiff is an out-ofprovince corporation with no assets in Ontario. In the absence of assets in Ontario, the defendant may not be able to recover costs if a court orders costs payable by the plaintiff at the end of the proceeding.
The Rules of Civil Procedure provide that the Court may make an order requiring the posting of security for costs where it appears that:
a) the plaintiff or applicant is ordinarily resident outside Ontario;
b) the plaintiff or applicant has another proceeding for the same relief pending in Ontario or elsewhere;
c) the defendant or respondent has an order against the plaintiff or applicant for costs in the same or another proceeding that remain unpaid in whole or in part;
d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;
e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent; or
f) a statute entitles the defendant or respondent to security for costs.
Once a defendant or respondent can establish that the plaintiff or applicant falls into one of these enumerated categories the onus is on the plaintiff or applicant to establish that they do in fact have sufficient assets to pay the costs of the opposing party, or that they should be allowed to continue to trial despite their inability to pay costs should they fail at trial. The court will not order security for costs as against a plaintiff or applicant who can establish that they are impecunious and that such an order would stop the proceeding “in its tracks”, unless the claim is obviously devoid of merit.
If the court does order that security for costs is to be posted, then the amount and form of the security and the time for posting it is left to the court’s discretion. Quite often, the court will order that security for costs be posted up to a particular stage in the litigation (for example, to cover costs through to the conclusion of examinations for discovery). If the matter proceeds past this point, the defendant or respondent can then seek to have additional security for costs posted to cover the anticipated costs of the next major step or steps in the litigation.
From a strategic standpoint, it is always advisable for a defendant or applicant to consider whether an order for security for costs is appropriate in the circumstances. Being required to post security may act as a serious deterrent to a plaintiff or applicant, particularly in circumstances where the plaintiff or applicant’s claim has a low likelihood of success or is frivolous. Furthermore, the Rules of Civil Procedure provide that a party that has been ordered to post security for costs cannot take any step in a proceeding, aside from an appeal of the order for security for costs, until the security has been posted. Ultimately, where a plaintiff or applicant defaults entirely in posting security for costs, the opposing party may bring a motion to have the entire proceeding dismissed.
Security for costs is only available to defendants or respondents. This type of motion cannot be pursued by a plaintiff or applicant.
Costs play a vital and important role in every piece of litigation, and a party’s exposure to paying costs or a party’s ability to recover costs should be considered in tandem with its legal position on the merits of the case at every stage of a proceeding. By including costs in this analysis, a party can reduce its risk of paying costs, or put pressure on the opposite party to settle the matter on reasonable terms.