Why You Should Consider Settlement
Litigating disputes is costly. In addition to the potential of a damages award, the losing party is presumed to be liable to pay part of the winner's costs, as well as its own legal expenses. Rules have been drafted in both the Federal and Provincial Courts to encourage the settling of cases. The resulting cost consequences create a powerful incentive for parties to both make and consider reasonable offers to settle.
Ontario Court – Rule 49
Rule 49 of the Rules of Civil Procedure operates to encourage parties to settle their disputes. Generally speaking, where an offer: (1) is made at least seven days before the commencement of a trial; and (2) does not expire or is not withdrawn prior to the trial the offering party will be rewarded with a more favourable costs order if it obtains a judgment as least as favourable as the offer.
The rule contemplates two possible scenarios.
In the first, the plaintiff makes an offer which is declined and then obtains a judgment as or more favourable than the offer. In hindsight, the defendant ought to have accepted the offer. Rule 49.10(1) operates to penalize the defendant for its losing gamble by requiring that it pay the plaintiff's costs on a partial indemnity basis up to the offer, and on a substantial indemnity basis from the date of the offer.
In a second scenario, the defendant makes an offer which is declined, and then the plaintiff obtains a judgment as favourable, or less favourable, than the offer. In hindsight, the plaintiff ought to have accepted the offer. Thus, Rule 49.10(2) penalizes the plaintiff for its unwillingness to settle by requiring that it pay the defendant's costs on a partial indemnity basis from the date of the offer. If this Rule is engaged, the plaintiff may wind up paying a portion of the defendant's costs, even though it won the case.
Federal Court – Rule 420
Like the Superior Courts of the provinces, the Federal Court also attaches cost consequences to offers to settle which are declined provided that certain criteria are met. In particular, the Federal Courts Rules stipulate that cost consequences follow where a settlement offer is made: (1) in writing; (2) at least 14 days before the commencement of trial; and (3) is not withdrawn or does not expire before trial.
Here, the relevant rule contemplates three possible scenarios.
The first two scenarios are set out in Rules 420(1) and 420(2)(a) and mirror those cost consequences contemplated by Rules 49.10(1) and (2) of the Ontario Rules of Civil Procedure, respectively. However, rather than referring to partial or substantial indemnity costs, the Federal Courts Rules use a tariff-based method of calculating the fee component of a costs award. If the Rule is engaged, the penalized party must pay the offering party double what the fee component of an award would otherwise be from the date of the offer forward.
Also, under the Federal Courts Rules, a third scenario exists whereby the defendant makes an offer which the plaintiff refuses, and, subsequently the plaintiff fails to obtain a judgment. Here, pursuant to Rule 420(2)(b) the plaintiff will be required to pay the fee component of the defendant's costs until the date of the offer, and fees calculated at double the Tariff rate from the date of the offer to the date of the judgment. All reasonable and necessary disbursements are also recoverable.
Close is Not Good Enough
In PreMD Inc. v. Ogilvy Renaud LLP, a recent decision of the Ontario Superior Court, Justice Hoy was required to consider the cost consequences of a legal proceeding which saw the plaintiff awarded damages for negligence and breach of contract.
Throughout the proceedings, and in accordance with Rule 49, the defendant had made an offer to settle for $1.2 million. The plaintiff declined the offer and went on to win a judgment totaling just $16,955 more than the settlement amount. This difference represented a mere 1.4 percent of the offer.
Technically speaking, the plaintiff was justified in not settling as it was awarded more than the offer amount. However, the defendant argued that the difference between the settlement offer and the damages award was so little that the Court ought to exercise its discretion and apply the cost consequences of Rule 49.10(2).
In spite of the defendant's argument, Justice Hoy agreed with the plaintiff's submission that the rule should be strictly applied. It would otherwise trigger confusion if the cost consequences contained in Rule 49 were imposed by the Court where offers were not strictly within the terms of its provisions.
The cost consequences which result from making settlement offers mean that a relatively small difference between an offer and a judgment can give rise to a very large difference in the cost exposure of a party. Therefore, parties making or declining settlement offers ought to do so with the full knowledge that 'close will not be good enough'. The Court will not exercise its discretion to adjust a costs award where a judgment approximates the settlement offer by even the smallest of margins where there is no basis to do so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.