Cost Awards in Litigation: Three Things You Should Know

Litigation can be expensive, especially for individuals who are not successful at trial. This is because if an individual (or organization) proceeds to trial and loses, not only do they not receive compensation for any legal fees already spent, but they are also at significant risk of having to pay at least a part of the costs of the other (winning) side.

In Ontario and other jurisdictions across Canada, the general rule is that the successful (or winning) party, can recover at least part of the legal fees and disbursements they have incurred and that these costs are to be paid (at least in part) by the unsuccessful party.

Specifically, in Ontario, the Rules of Civil Procedure (the “Rules”) encourage settlement by creating a cost consequence for any party that loses a lawsuit or engages in what a judge believes is vexatious, frivolous and unreasonable conduct, including failure to accept a reasonable settlement offer.

Given this, it is strongly advisable for individuals who are considering suing a person (or organization) to both properly assess the case, and, by extension, the potential costs associated with a loss. This can help substantially in reducing the chance of an unanticipated outcome, including ensuring that one is comfortable with the potential outcomes and consequences of litigation, as one can never have absolute certainty about the outcome of a trial.

Given the importance of cost consequences, we have prepared a list of the top three (3) things we believe individuals and organizations should keep in mind when considering and/or planning for litigation. These principles are particularly important for employees and former employees who are considering bringing claims such as constructive dismissal, wrongful dismissal, or claims for severance pay.

1. Rule 49 is designed to incentivize settlement and discourage litigation.

The Rules control the steps in a civil procedure and encourage parties to settle before going to trial.

A major component of this process is known as “Rule 49”. This rule imposes cost consequences on a party when it is determined they have failed to accept a reasonable offer. This effectively facilitates settlement because the parties are discouraged from unnecessarily prolonging the litigation process because they may face financial repercussions if the judge determines that the issue should have been settled earlier.

Specifically, Rule 49.10 provides that a party is entitled to costs on a partial indemnity basis (more on this below) to the date of the offer to settle, and costs on a substantial indemnity basis (see below) from that date forward if the party who made the offer receives a judgment that is as favourable or more favourable than the offer.

Offers to settle under Rule 49 may be served by a Plaintiff, Defendant, Applicant or Respondent, and apply to actions, applications, counterclaims, third-party claims, cross-claims and motions. Any party wishing to make an offer to settle that is compliant with Rule 49 must ensure that:

• The offer is made at least seven (7) days prior to the commencement of the hearing; and
• The offer is not withdrawn or does not expire prior to the commencement of the hearing.

Offers to settle are commonly made throughout the various stages of the litigation process, and therefore we encourage you to consult a lawyer to balance the interests of a reasonable offer against potential cost consequences of continuing with litigation.

2. A fair offer does not guarantee favourable cost consequences.

Courts have considerable discretion to depart from the presumption of costs and therefore, a fair or reasonable offer does not guarantee favourable cost consequences will be awarded.

A court can decide to depart from the Rule 49 presumption of costs if they feel it is appropriate in consideration of the following:

• The conduct of the parties and their legal counsel, including any deceit or bad faith dealings; and
• The offer itself, including whether it contained an element of compromise.

If a court chooses to depart from the costs presumption under Rule 49, it must not only provide a basis for doing so that aligns with the interests of justice. 

3. Costs may be awarded on a partial, substantial or full indemnity basis.

Costs may be awarded on either a partial, substantial or full indemnity basis.

While partial indemnity costs amounts are not specifically defined, in most cases when a court awards costs on this basis it results in compensation of between half and two-thirds of the reasonable (to be determined by the court) costs of the other winning party.

If a judge feels that one of the parties unnecessarily lengthened or complicated the proceeding, generally through what is deemed to have been unreasonable conduct, or where a reasonable settlement offer was refused, then costs can be awarded on a substantial indemnity basis.

Substantial indemnity costs are defined as 1.5 times partial indemnity costs. This means that if, for example, partial indemnity costs are 60% of the legal fees, then the substantial indemnity costs would likely be 90% of the winning party’s reasonable legal fees.

Substantial indemnity costs may be awarded only if all the following criteria is satisfied:

• The successful party made an offer to settle at least seven (7) days prior to the commencement of trial;
• The offer was not withdrawn and did not expire prior to the commencement of trial;
• The offer was not accepted; and
• The successful party received a judgment as favourable or more favourable than the offer.

Successful parties are entitled to partial indemnity costs up to the date the offer was made and substantial indemnity costs from that date forward.

Costs may also be awarded on a full indemnity basis, meaning at a rate of 100% of the fees incurred by the opposing party. However, costs are rarely awarded on a full indemnity basis.  Full-indemnity costs are mostly awarded in situations where a contract is broken and the contract itself specifies that in this circumstance the parties agree that costs are to be awarded on a full indemnity basis.

Given that a successful party is unlikely to recover all their legal fees, it is important to consider, amongst other things, the cost consequences when contemplating litigation. An experienced lawyer can provide an overview of a case in advance and advise a party as to their likelihood of success and the potential cost consequences of moving forward. If you have any specific questions in relation to cost consequences, whether in relation to wrongful dismissal, termination, severance entitlements, or otherwise, please contact Toronto employment lawyers, Sultan Lawyers, at (416) 214-5111 or here.