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Lauren Cullen, a personal injury lawyer with Siskinds LLP, was recently published in Law360.

This article was originally published by Law360™ Canada, part of LexisNexis Canada Inc.

Read the full article below.

In Ontario, typically “costs follow the event” in civil litigation. This means that, at the conclusion of trial, the successful party can expect the judge to order the unsuccessful party to pay some or most of the winner’s legal costs. The unsuccessful party is then responsible for their own legal costs plus at least some of the winner’s.

What are costs?

The term “legal costs” generally refers to the following:

  1. Lawyers’ fees; and
  2. Other costs associated with litigation (“disbursements”).

These two figures combined are a party’s legal costs (lawyers’ fees + disbursements = costs).

Disbursements are expenses that a lawyer pays on behalf of their client to facilitate the litigation. These costs can include things such as expert fees, filing fees, office expenses and travel costs.

How are costs awarded?

While costs are usually awarded to the successful party, the courts will also consider factors such as the behaviour of the parties, the offers to settle made before trial, and the total amount claimed and recovered in the lawsuit amongst other issues.

After considering these factors, courts in Ontario will generally award costs on one of the following bases:

  • Partial Indemnity: Partial indemnity costs are not specifically defined, but in most cases, costs awarded on this basis result in compensation between 40-60 per cent of the reasonable costs of the winning party. Costs awarded on a partial indemnity basis are considered standard.
  • Substantial Indemnity: Substantial indemnity costs are defined as 1.5 times partial indemnity costs. This means that, if partial indemnity costs are 60 per cent, substantial indemnity costs would be 90 per cent of the winning party’s reasonable legal fees. Substantial indemnity costs are awarded primarily when the winning party does better at trial than the settlement offer they made prior to trial. Substantial indemnity costs may also be awarded where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties.
  • Full Indemnity: Costs awarded on a full indemnity basis means that 100 per cent of the winning party’s reasonable fees are compensated for. Costs are rarely awarded on this basis. Mainly full indemnity costs are only 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.

The courts have the ultimate discretion as to whether and how much to award for costs. Depending on the circumstances, it is possible for the losing party to be awarded costs against the winning party. Many things affect a cost award but offers to settle and the successful party’s behaviour during the litigation are two key factors.

How does an offer to settle impact costs?

Rule 49 of the Ontario Rules of Civil Procedure governs offers to settle in civil litigation. The purpose of the rule is to encourage parties to make offers to settle, and to make them early. If the party making the offer obtains a trial judgment that is more favour than the offer, they will be rewarded with costs.

As an example:

  • The plaintiff makes an offer, and the defendant fails to accept it.
  • The plaintiff obtains a more favourable outcome than the offer at trial.
  • The plaintiff is entitled to partial indemnity costs to the date of the offer, and substantial indemnity costs thereafter.

An alternative is:

  • The defendant makes an offer to settle and, at trial, the plaintiff is awarded less than the defendant’s offer.
  • The plaintiff is only entitled to partial indemnity costs to the date of the offer.
  • The defendant is entitled to partial indemnity costs thereafter.

Because of these significant cost consequences, each party has an incentive to make a reasonable offer early in the process, and to give serious consideration to offers made by the other party.

The second situation is what many clients may have a concern about when they commence litigation, as it would mean they owe money to the defendant. For this reason, may firms offer clients “after the event insurance” (ATE insurance). ATE insurance provides coverage for legal costs and expenses that they may be ordered to pay in the event that they are unsuccessful in the lawsuit.

Conclusion

Fairness, access to justice, reasonableness, judicial efficiency and resource management must all be taken into account when assessing legal costs. Legal cost awards can encourage those in the right to pursue litigation and ensure that their victory will not come at an excessive cost. However, each party must keep in mind the implications of an offer to settle and how an offer could impact their ultimate overall benefit or cost.

Given the importance of cost awards, it is important that a lawyer explains to their client what the consequences of settlement offers are. This is particularly true for personal injury clients who have been severely injured and may not be working as a result of their injuries. It is important they understand the nature of how settlement offers can impact final cost awards so that they can be active participants in their litigation matter and make informed decisions.