In litigation, the unsuccessful party must generally pay some of the other party’s legal costs. The amount payable and by whom is typically within a court’s discretion under section 131 of the Courts of Justice Act. The general rules governing the determination of those costs are set out in Rule 57 of the Rules of Civil Procedure.
Rule 57.01 sets out the factors to be considered by a Court in determining the amount payable in relation to legal fees, including the amount claimed in the proceeding, the apportionment of liability, the complexity of the proceeding, and the parties’ conduct.
Under Rule 57.01, one of the other factors Courts will consider in determining the amount of costs payable is whether an offer to settle has been made in relation to the proceeding. The rules around offers to settle are set out in more detail in Rule 49.
There are generally three bases on which a court will award costs: a “partial indemnity” basis, a “substantial indemnity” basis, and a “full indemnity” basis.
There is a general rule that costs are to be awarded on a “partial indemnity” basis (see Akagi v. Synergy Group (2000) Inc.). The precise meaning of this is open to some debate. The phrase is defined in the Rules of Civil Procedure as “costs awarded in accordance with Part I of Tariff A” of the Rules. Tariff A, in turn, says that fees are to be determined in accordance with the Courts of Justice Act and the various factors outlined in Rule 57.01(1). In short, no mathematical formula is prescribed for fixing partial indemnity costs. Instead, the goal is to fix a ” fair and reasonable amount for the unsuccessful party to pay” (see Boucher v. Public Accountants Council for the Province of Ontario).
Conversely, costs awarded on a “substantial indemnity” basis are to be 1.5 times what would otherwise be awarded as “partial indemnity” costs. An award of costs on a “substantial indemnity” basis is only to be made in “very narrow circumstances,” such as where there is an offer to settle an issue or “where the losing party has engaged in behaviour worthy of sanction” (see Net Connect Installation Inc. v. Mobile Zone Inc.).
“Full indemnity” costs are even higher than an award of “substantial indemnity” costs. It is rare for costs to be awarded on a “full indemnity” basis. As the Court of Appeal has pointed out, such an award would only be justified if the conduct in issue was “especially egregious” (see Net Connect Installation). The phrase has been interpreted to mean the “complete reimbursement of all amounts a client has had to pay his or her lawyer in relation to the litigation” (see Davies v. Clarington (Municipality) et al.).
Historically, “partial indemnity” costs were referred to as “party and party” costs, “substantial indemnity” costs were referred to as “solicitor-client” costs, and “full indemnity” costs were referred to as “solicitor and his own client” costs (see Bargis v. Bargis).
As the Court of Appeal has said, Rule 49 is “a self-contained scheme” that deals with how offers are made, accepted, and withdrawn (see Davies). Lawsuits are expensive and time-consuming, so the purpose of the Rule is to encourage parties to compromise by making and accepting offers to settle, thereby minimizing the need for court proceedings. In essence, it incentivizes reasonable behaviour between parties. When parties do not behave reasonably, they may face consequences that are costly.
In short, Rule 49 says that if a party has made an offer to settle in accordance with that Rule that is not accepted and obtains an outcome at trial that is at least as favourable as the terms of the party’s offer, then that party will be awarded a higher level of costs than would have been the case otherwise.
An offer to settle must be in writing, served on the other party, and accepted by that other party before it is withdrawn or expires. The terms of the offer should be specific to avoid uncertainty.
The Offer to Settle is to be compared with the outcome of the hearing rather than the remedy or amount sought by the plaintiff in their claim.
Courts sometimes have difficulty determining whether the outcome of litigation is more favourable than that contained in an offer to settle. For example, it has been held that an offer to settle that contains an apology has some value and might factor into that determination (see Hodgson v. Canadian Newspapers Co.).
Ultimately, the party claiming the benefit of Rule 49.10 must show why the outcome is more favourable.
The cost consequences of offers to settle are set out in Rule 49.10 of the Rules of Civil Procedure. To avail of this Rule, a party must serve an offer to settle on the other party at any time up to seven days “before the hearing commences.” If the hearing is a trial, this means the first day of evidence. If this timeline is not met, a Court may still take the offer into account in awarding costs, but the mandatory cost implications set out in Rule 49.10 will not apply (see König v. Hobza).
Despite Rule 49.10, Rule 49.13 of the Rules of Civil Procedure affirms a court’s discretion, in awarding costs, to “take into account any offer to settle made in writing, the date the offer was made and the terms of the offer.” Thus, where a party cannot rely on Rule 49.10, it may still argue for an increased award of costs using this Rule.
Understanding the legal implications of settlement offers is essential in Ontario litigation. Rule 49 of the Rules of Civil Procedure governs how courts consider settlement offers when determining cost awards. The litigation team at Milosevic & Associates in Toronto is available to provide practical and strategic advice on complex corporate commercial litigation and class actions. Call 416-916-1387 or contact us online for a consultation.
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