Canada: The Court's Discretion Regarding The Cost Consequences Of Settlement Offers: Exceptions Are Not The Rule

The settlement process promotes judicial economy and efficiency, and eliminates the high costs of proceeding to trial. As such, parties are well-advised to make reasonable offers prior to trial and to consider acceptance seriously.  This principle is entrenched in Rule 49 of the Rules of Civil Procedure.¹

In particular, Rule 49.10 is designed to incentivize settlement and discourage litigation. This rule provides that a party is entitled to costs on a partial indemnity basis to the date of the offer to settle and costs on a substantial indemnity basis from that date forward if that party receives a judgment which is as favourable or more favourable than their offer.

However, a fair offer does not always guarantee favourable cost consequences, as courts have the discretion to depart from the Rule 49.10 presumption as to costs. This discretionary exemption to the rule makes the application of the rule less predictable.

In the interest of legal certainty, the Court of Appeal in Niagara Structural Steel (St. Catharines) Ltd. v. W.D. LaFlamme Ltd.² held that a judge may only depart from the rule where the interests of justice require it, after considering the policy of the general rule and the importance of predictability.³ The Court explained that Rule 49.10 should promote its even application in order to encourage settlement.

Pursuant to Section 133 of the Courts of Justice Act,⁴ if a party wishes to appeal a costs order they must seek leave of the Ontario Court of Appeal. In the case of Carroll v. McEwen,⁵ the Court of Appeal explained that leave must not be granted lightly. It noted that leave should only be given in obvious cases where there are strong grounds for finding that the judge erred in exercising his or her discretion.⁶ The Court cited Hamilton v. Open Window Bakery Ltd., a decision of the Supreme Court of Canada which held that even where leave has been granted, a court will only interfere with a costs order if the trial judge made an error in principle or if the award is plainly wrong.⁷

Departing from the presumption

There is no defined set of circumstances as to when the court may depart from the Rule 49.10 presumption, however several factors have been repeatedly considered in case law. The court will examine the conduct of the parties and their counsel, including any deceit or bad faith dealing.⁸ The court will also look to whether the offer contained an element of compromise.⁹ If a trial judge chooses to depart from Rule 49.10, he or she must provide a basis for doing so. In the case of Holtom v. Royal LePage Real Estate Services,¹⁰ the trial judge refused to implement Rule 49.10, yet provided no reason for doing so. On appeal, the Court held that the absence of reasons permits the appellate court to "view the costs issue afresh."¹¹

In the case of Barresi v. Jones Lang Lasalle Real Estate Services Inc.,¹² a recent decision of the Ontario Court of Appeal, the Court found that the trial judge erred in departing from the Rule 49.10 presumption as to costs, holding that mixed success at trial cannot be relied upon to rebut the prima facie entitlement to costs.

In Barresi, the respondents cross-appealed the trial judge's costs decision to award them significantly less than they were entitled to pursuant to Rule 49.10, based on the fact that they obtained a judgment more favourable than their offer to settle.  The respondents argued that the trial judge should have applied Rule 49.10 to award them partial indemnity costs to the date of service of their offer and substantial indemnity costs thereafter.

The trial judge exercised her discretion to depart from the rule for two reasons: (1) success was divided, as the respondents' negligent misrepresentation claim had been dismissed; and (2) the respondents had acted unreasonably during litigation. She based this conclusion on the fact that the respondents could not recall signing the agreement at issue, had provided evidence in a confusing manner, and had been late in providing answers to undertakings.

In its decision, the Court of Appeal emphasized the high threshold required for leave to appeal a costs order. However, the Court noted that a judge's discretion to depart from the Rule 49.10 presumption is indeed an exception, and cannot be resorted to so often that the exception becomes the rule.¹³

The Court disagreed with the trial judge's costs award, noting that her reasons for departing from the presumption involved an error in principle and were plainly wrong. The Court increased the costs order from $40,000 to $111,228, a number aligned with Rule 49.10. The Court held that a judge cannot rely on mixed success to rebut the presumption in Rule 49.10 and that offers should not be reviewed on an issue-by-issue basis, since a reasonable offer to settle is necessarily a compromise.

What does this mean for insurers?

Whether the decision in Barresi has made Rule 49.10 more predictable is up for debate. The Court of Appeal by no means eliminated the discretionary exemption to the general rule. In a decision released just a few months prior, the Court maintained that "considerable deference should be given to a trial judge's discretion in awarding and fixing costs."¹⁴ However, what is known for certain is that the Court of Appeal has affirmed that the trial judge's discretion is not absolute and that the circumstances in which a judge may depart from the presumption are narrow.

The number of actions that settle significantly outweighs the number that go to trial, and settlement can come with significant cost consequences depending on the terms of the offer. In the case of Barresi, the respondents were rewarded for making a fair and reasonable offer early in the litigation process, despite divided success at trial. When faced with pending litigation, insurers would be wise to do the same with the assistance of experienced counsel. A lawyer can provide advice on the appropriateness of an offer based on the merits of the case, increasing the likelihood of avoiding a high costs order.

Footnotes

1 RRO 1990, Reg. 194.

2 1987 CanLII 4149 (ONCA).

3 Ibid at para 11.

4 RSO 1990, c C.43.

5 Carroll v. McEwen, 2018 ONCA 902 at para 80 ("Carroll").

6 Ibid at para 58.

7 Ibid citing Hamilton v. Open Window Bakery Ltd., 2004 SCC 9 at para 27.

8 Carroll, supra note 5 at para 67.

9 1401337 Ontario Ltd. v. MacIvor, 2012 ONSC 2535 at para 19.

10 2000 CarswellOnt 111.

11 Ibid at para 42.

12 Barresi v. Jones Lang Lasalle Real Estate Services Inc., 2019 ONCA 884.

13 Ibid at para 17.

14 Faiello v. Faiello, 2019 ONCA 710 at para 83.

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