In Smithies Holdings Inc. v. RCV Holdings Ltd., 2017 BCCA 177, the BC Court of Appeal considered whether special costs can be awarded based on pre-litigation conduct. The Court reviewed the conflicting jurisprudence and unanimously concluded that a bright line should be drawn: pre-litigation conduct should not be considered in determining whether to award special costs.
This case involved the termination of a joint venture agreement related to the development of a parcel of land. The respondent withdrew from the joint venture, triggering an option for the appellants to purchase the respondent’s interest in the land based on the fair market value to be determined by an appraiser.
While the appraisal process was ongoing, the appellants received an offer to purchase the land for $40 million. The appellants did not disclose the offer to the respondent, and purposefully delayed the negotiations for the sale in an attempt to settle the buyout of the respondent’s interest first. The appellants and respondent could not agree on the fair market value of the land. The $40 million offer fell by the wayside. The appellants brought an action to attempt to re-start the failed appraisal process. The respondent discovered the $40 million offer, and counterclaimed for damages for loss of opportunity.
At trial, the respondent was the successful party. Among other things, the trial judge found that the appellants’ failure to disclose the $40 million offer was a breach of their fiduciary obligation to the respondent. In a separate costs decision, the trial judge ordered the appellants to pay the respondents special costs on account of the appellants’ pre-litigation conduct. The costs award was in excess of $450,000. The appellants successfully appealed from the costs decision.
The Court considered the law in relation to special costs, including the general principles, the role of other mechanisms such as punitive damages and how pre-litigation conduct has been treated by the Court of Appeal, the BC Supreme Court and appellate courts in other jurisdictions. It found that there was no consensus in the cases with respect to whether special costs can be ordered for pre-litigation conduct. It also found that there was no sound policy reason to consider pre-litigation conduct in awarding special costs.
Ultimately, the Court concluded that a bright-line rule should be adopted, and special costs should not be awarded for pre-litigation conduct. As a result, trial judges in British Columbia may no longer account for pre-litigation conduct in exercising their discretion regarding whether to award special costs. It remains to be seen whether other jurisdictions will adopt the same bright line rule.