Commercial Litigation and Dispute Resolution Blog

One of the most exasperating aspects of civil litigation for clients is the issue of court ordered costs. Ordinarily, the party that wins a case is entitled to have their “costs” paid by the other side. The court’s ability to award costs is discretionary and, as a result, often difficult to predict.

There are, generally speaking, two types of costs awards: “party and party costs” and “special costs”. “Party and party costs” are calculated based on a tariff in the Supreme Court Civil Rules which provides various ranges of “units” for various steps in litigation.  Once the number of “units” is established, that figure is multiplied by one of three possible unit values (Scale A, B or C), to reach a total. That amount, plus legitimate disbursements and taxes, equals the ultimate costs award. This amount is generally about 30% to 40% of the actual legal costs incurred.

“Special costs” are different and are intended to reflect an award of between 80% and 100% of the successful litigant’s actual legal expense. Special Costs are supposed to reflect the fees that a reasonable client would pay a reasonably competent solicitor for performing the work needed to win the case. They are usually awarded where the losing party has behaved particularly badly (thus increasing expense) or has made serious allegations (such as fraud or breach of fiduciary duty) that are ultimately unproven.

Awarding and assessing the amount of costs is usually the last step in litigation. It can be a frustrating experience for litigants because, while the case is effectively over, this residual issue lingers and can be time consuming and expensive.  Unless the parties agree on costs, they must be assessed by the court, a process generally undertaken by the Registrar. The process can itself become a lengthy form of trial. Frequently, successful litigants are exhausted by the process at this point. Unsuccessful litigants often use the costs aspect of a case as a last effort to inflict expense and retribution on their victorious opponent.

For this reason, judges of the Supreme Court will often exercise the discretion allowed them under the Supreme Court Civil Rules (Rule 14-1) to summarily quantify costs awards, thus finalizing all aspects of the dispute they have just resolved by judgment. For example, a recent case involving a strata and two objectionable owners resulted in such an award. After protracted litigation, the strata had finally won but had spent in excess of $173,000 in legal fees to get there. None of the previous cost awards had been paid. The strata owners, “people of modest means”, could “not understand how it is that one recalcitrant couple can abuse the court system with such impunity, while the owners bleed financially.”  In order to bring some relief, the court awarded special costs and summarily quantified them, reasoning this necessary to “minimize any further legal costs” in dealing with costs.

Unfortunately, a recent decision of the Court of Appeal may well make this type of outcome more difficult and less frequent. It will encourage intransigent litigants to continue the fight in a protracted costs dispute.

In Gichuru v. Smith, the successful defendant was awarded special costs as a result of unproven allegations of fraud and breach of fiduciary duty made by the plaintiff. The trial judge also summarily quantified the “special costs” at the rate of $5,000 per half day of trial for a total of $90,000. This “rough and ready approach” was one often resorted to by the court to end bitter and contested cases. This result avoided the necessity of a lengthy costs assessment before a Registrar against a plaintiff, Mr. Gichuru, who was unable to pay in any event and who would likely seek to protract the litigation and increase the expense to Mr. Smith.

While the Court of Appeal dismissed Mr. Gichuru’s main appeal, they allowed the appeal on the summary assessment of special costs. The Court of Appeal embarked on a detailed review of the authority to award costs in litigation, including special costs. In doing so, they concluded that, unlike in the past, the court presently has no “inherent jurisdiction” to deal with costs because the present Rules provide a complete code on when and how to award costs. The Rules provide that “parties are only entitled to their objectively reasonable legal costs determined according to the particular costs scale that they were awarded.” The court may award “only those costs proper and reasonably necessary to conduct the proceeding may be allowed.” That principle applies to both party and party costs and “special costs.” What this means is that in cases of dispute, there must be a detailed and objective review of costs claims. As the Court of Appeal noted:

Absent consent, natural justice requires a certain level of procedural fairness. In the typical case, this means providing an opportunity for the party against whom costs are being awarded to test the reasonableness of the fees underlying the award, which reflects the basic costs principle that cost awards are meant to be an indemnity for fees incurred rather than to provide a windfall.

One of the problems for a successful party awarded “special costs” is that such a review requires disclosure of their lawyer’s file to the opponent and the consequent waiver of solicitor/client privilege. This is because:

. . . it is difficult to conceive that a proper examination of a party’s incurred legal costs can take place without disclosure of the other side’s file and an examination of the other side’s lawyers in respect of the file and the matters arising therefrom.

The fact that a lawyer has billed a certain sum does not necessarily make the fee reasonable.

The Court of Appeal recognized the tension at play but came down on the side of natural justice and fairness. They reasoned:

A related concern is that the party who might have to pay the costs will prolong any assessment by requiring microscopic review of the services undertaken by counsel for the successful party: . . . This concern must be weighed against the right of a party to challenge the reasonableness of the opposing party’s proposed costs. This right derives from the rules of natural justice: . . .

It is true that a more detailed review may be tedious and expensive. That does not mean such a review is unfair to the successful litigant, particularly given that significant amounts may be in issue. While R. 1-3(1) sets out that the object of the Rules is to secure the just, speedy and inexpensive determination of every proceeding on the merits, R. 1-3(2) mandates that the proceedings be conducted in a way that is proportionate to the amounts involved in the proceeding, the importance of the issue in dispute and the complexity of the proceeding.

In the end, the Court of Appeal concluded that the “rough and ready approach” previously relied on to quantify special costs “should not be used”. Further, a summary assessment of costs, including special costs, “should be sparingly exercised”. The Court concluded:

When assessing special costs, summarily or otherwise, a judge must only allow those fees that are objectively reasonable in the circumstances. This is because the purpose of a special costs award is to provide an indemnity to the successful party, not a windfall.  . . . [A] judge must conduct an inquiry into whether the fees claimed by the successful litigant were proper and reasonably necessary for the conduct of the proceeding . . . , taking into account all of the relevant circumstances of the case and with particular attention to the non-exhaustive list of factors in R. 14-1(3)(b).

A special costs assessment . . . cannot proceed in absence of evidence of the amount of legal fees incurred.  Usually this will be provided in the same form as a bill between a solicitor and client . . .  This is necessary to allow a court to inquire as to the objective reasonableness of the fees claimed by a litigant, as the fact that a solicitor has billed a certain sum does not necessarily make the fee reasonable.

The consequence of this appellate decision is likely to be that more unsuccessful litigants will prolong the costs aspects of litigation, particularly where special costs are at issue.  Further, anyone seeking or awarded special costs will probably be faced with the choice of the loss of solicitor-client privilege or electing to preserve privilege by having their special costs assessed after all appeals are exhausted or not seeking special costs at all.  Regrettably, this makes “the just, speedy and inexpensive determination of every proceeding on its merits”, as mandated in Rule 1-3(1), that much more unlikely. The pernickety issue of costs awards and their assessment is going to prolong many cases.  That will be a real frustration for litigants.