A legal victory is still a financial loss for the defendant
Exclusive to Canadian HR Reporter from Rudner Law.
Imagine a scenario where your company is sued by a former employee. The case goes all the way to trial, and your company is entirely successful in defending the lawsuit. Does the employee have to pay the company back for the legal fees it was forced to incur?
In general, the answer is “yes — but only partly”. That means that a successful party can’t expect to receive an award representing all of the legal costs they incurred, and there will always be an unrecoverable portion of the legal fees. The courts in Ontario will usually award the successful party in a lawsuit a portion of their costs, to be paid by the unsuccessful party. In most cases this will be on a “partial indemnity” scale, which is usually in the range of 50% of the party’s actual fees.
The courts can also award costs on a “substantial indemnity” scale, which is 1.5 times the amount that it would be on a partial indemnity scale. Generally, costs on a substantial indemnity scale are the exception rather than the rule. However, the courts will award such costs in certain situations, including where a party makes unsuccessful allegations of fraud, where a party clearly acts unreasonably in the course of litigation, where a party acts in bad faith for the purpose of delay, or as set out below, where a party “beats” their Rule 49 offer.
The courts also have the authority to award costs on a “full indemnity” scale, meaning 100% of the costs actually incurred, however this is an extremely rare occurrence.
With that in mind, litigants should be cautious about pursuing a path that will result in extensive legal fees being incurred, even if they are confident that their position will ultimately be successful at trial. For that reason, the vast majority of cases in Ontario settle before they reach trial. Certain rules about costs awards are outlined below.
Rule 49 offers
As my colleague Nadia Zaman has written about, rule 49 of the Rules of Civil Procedure provides a strong incentive to parties to make settlement offers in advance of trial, and can have a significant impact on costs awards.
A party may make a “rule 49 offer” by making a written offer to settle the lawsuit, at least seven days before trial, which is not withdrawn and does not expire before the commencement of trial. A party is said to “beat” their rule 49 offer if they obtain a judgment at trial that is more favourable to them than the terms of their offer.
If the plaintiff beats their rule 49 offer, they will be entitled to partial indemnity costs up to the date of their offer, and substantial indemnity costs from that date forward. If the defendant beats their rule 49 offer, then the plaintiff is entitled to partial indemnity costs up to the date of their offer, and the defendant is entitled to partial indemnity costs from that date forward.
It is important to note that all of the rules regarding costs are discretionary, and the court may decide to make a different order as to costs if justified by the circumstances.
Costs of motions
The above rules refer to the costs of an entire proceeding, once the lawsuit has been finally determined by the court. However, the rules regarding costs also apply to preliminary motions that are argued before the court.
On the hearing of a contested motion, the court will generally fix the costs of the motion and order them to be paid by the unsuccessful party within 30 days.
If a party fails to pay the costs of a motion that are ordered against them, the court may dismiss or stay the party’s proceeding, strike out the party’s defence, or make any other order against them.
Cases in which a plaintiff seeks an amount of $200,000 or less (exclusive of interest and costs) are generally brought under Simplified Procedure.
The rules of Simplified Procedure provide for a maximum costs award at trial: $50,000 for costs and $25,000 for disbursements, excluding HST.
If a plaintiff does not bring their lawsuit in the Simplified Procedure and is awarded a judgment of $200,000 or less, the court will not award any costs to the plaintiff unless the court is satisfied that it was reasonable for the plaintiff to proceed in the ordinary procedure rather than the Simplified Procedure.
Small Claims Court
Cases in which a plaintiff seeks an amount of $35,000 or less are to be brought in the Small Claims Court.
The Rules of the Small Claims Court provide that if the plaintiff is successful, they will generally be awarded costs representing 15% of the amount of the Judgment. If the defendant is successful, they will generally be awarded costs representing 15% of the amount initially claimed by the plaintiff. These rules are also discretionary, and the Court can award less costs, more costs, or no costs, where appropriate.
The Rules of the Small Claims Court also contain “rule 14”, which is similar to rule 49 of the Rules of Civil Procedure, and provides for double the amount of costs in certain situations.
If a plaintiff does not bring their case in the Small Claims Court, but receives a judgment of less than $35,000, the court may order that the plaintiff will not recover any costs.
The costs awarded at trial on or on a motion can become a significant consideration when pursuing litigation or defending a lawsuit. It is important to understand the rules regarding costs, and to work with your lawyer to develop a strategy that maximizes your chances of not only being successful in the lawsuit, but also obtaining a favourable costs award to recover some of the costs you incurred.
Particularly for a defendant, their “best day in court” will still involve the expenditure of time and money which they never get back.
Alex Minkin is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].