Davies v. The Corporation of the Municipality of Clarington et al. [Indexed as: Davies v. Clarington (Municipality)]

100 O.R. (3d) 66

2009 ONCA 722

Court of Appeal for Ontario,

Goudge, Sharpe and Epstein JJ.A.

October 16, 2009

Civil procedure -- Costs -- Substantial and full indemnity -- Trial judge erring in awarding costs on full indemnity basis against appellants from date of respondent's offer to settle where offer did not fall within Rule 49 of Rules of Civil Procedure and in absence of finding that appellants engaged in reprehensible or egregious behaviour. [page67 ]

B Inc., one of several defendants, delivered an offer consenting to a dismissal of the claim and all counterclaims and cross-claims, without costs. That offer was never revoked. Prior to closing arguments at trial, settlement discussions took place, and the other defendants (the "settling defendants") settled with the plaintiff. B Inc. did not participate in the settlement. The trial judge dismissed the action against B Inc. and ordered the settling defendants to pay its costs in the amount of $509,452.18. Full indemnity costs were ordered for the period following the delivery of B Inc.'s offer to settle. The settling defendants appealed.

Held, the appeal should be allowed.

Elevated costs are warranted in only two circumstances. The first involves the operation of an offer to settle under rule 49.10 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 where substantial indemnity costs are explicitly authorized. The second involves sanction-worthy behaviour by the losing party. Rule 49 was not applicable to B Inc.'s offer, and the trial judge made no finding that the settling defendants conducted themselves in a reprehensible or egregious fashion. Nor was such a finding warranted in the circumstances of this case. The settling defendants were entitled to advance their position and were not required to settle. They did nothing to abuse the process of the court. Moreover, the costs award was not fair and reasonable. The settling defendants would not have expected that they would be faced with an award of this magnitude, particularly in light of B Inc.'s limited involvement in the proceedings.

APPEAL from the costs order of Ferguson J., [2007] O.J. No. 4474, 161 A.C.W.S. (3d) 697 (S.C.J.).

Cases referred to Apotex Inc. v. Egis Pharmaceuticals (1990), 1990 6829 (ON SC), 2 O.R. (3d) 126, [1990] O.J. No. 2187, 32 C.P.R. (3d) 559, 24 A.C.W.S. (3d) 76 (Gen. Div.); Apotex Inc. v. Egis Pharmaceuticals (1991), 1991 2729 (ON SC), 4 O.R. (3d) 321, [1991] O.J. No. 1232, 37 C.P.R. (3d) 335, 28 A.C.W.S. (3d) 26 (Gen. Div.); Beresford-Last (Litigation guardian of) v. Dworak, [2000] O.J. No. 4636, 101 A.C.W.S. (3d) 696 (S.C.J.); Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291, [2004] O.J. No. 2634, 188 O.A.C. 201, 48 C.P.C. (5th) 56, 132 A.C.W.S. (3d) 15 (C.A.); Marcella v. Integrated Management and Investments Inc., [2007] O.J. No. 1652, 157 A.C.W.S. (3d) 51 (S.C.J.); S & A Strasser Ltd. v. Richmond Hill (Town) (1990), 1990 6856 (ON CA), 1 O.R. (3d) 243, [1990] O.J. No. 2321, 45 O.A.C. 394, 49 C.P.C. (2d) 234, 24 A.C.W.S. (3d) 597 (C.A.); Scapillati v. A. Potvin Construction Ltd. (1999), 1999 1473 (ON CA), 44 O.R. (3d) 737, [1999] O.J. No. 2187, 175 D.L.R. (4th) 169, 122 O.A.C. 327, 46 C @@.C.E.L. (2d) 16, 89 A.C.W.S. (3d) 73 (C.A.), consd Other cases referred to 131843 Canada Ltd. v. Double "R" (Toronto) Ltd., [1992] O.J. No. 3879, 7 C.P.C. (3d) 15, 31 A.C.W.S. (3d) 907 (Gen. Div.); Andersen v. St. Jude Medical, Inc. 2006 85158 (ON SCDC), [2006] O.J. No. 508, 264 D.L.R. (4th) 557, 208 O.A.C. 10, 145 A.C.W.S. (3d) 786 (Div. Ct.); Coldmatic Refrigeration of Canada Ltd. v. Leveltek Processing LLC (2005), 2005 1042 (ON CA), 75 O.R. (3d) 638, [2005] O.J. No. 160, 5 C.P.C. (6th) 258, 136 A.C.W.S. (3d) 647 (C.A.); Davies v. Clarington (Municipality), 2006 10212 (ON SC), [2006] O.J. No. 1307, 266 D.L.R. (4th) 375, 147 A.C.W.S. (3d) 151, [2006] O.T.C. 320 (S.C.J.); Dyer v. Mekinda Snyder Partnership Inc. (1998), 1998 14847 (ON SC), 40 O.R. (3d) 180, [1998] O.J. No. 2204, 61 O.T.C. 390, 79 A.C.W.S. (3d) 1125 (Gen. Div.); Foulis v. Robinson (1978), 1978 1307 (ON CA), 21 O.R. (2d) 769, [1978] O.J. No. 3596, 92 D.L.R. (3d) 134, 8 C.P.C. 198, [1978] 3 A.C.W.S. 309 (C.A.); Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, 2004 SCC 9, 235 D.L.R. (4th) 193, 316 N.R. 265, J.E. 2004-470, 184 O.A.C. 209, 40 B.L.R. (3d) 1, [2004] CLLC Â210-025, 128 A.C.W.S. (3d) 1111; McBride Metal Fabricating Corp. v. H. & W. Sales Co. (2002), 2002 41899 (ON CA), 59 O.R. (3d) 97, [2002] O.J. No. 1536, 158 O.A.C. 214, 19 C.P.R. (4th) 440, 113 A.C.W.S. (3d) 257 (C.A.); Moon v. Sher, 2004 39005 (ON CA), [2004] O.J. No. 4651, 246 D.L.R. (4th) 440, 192 O.A.C. 222, 135 A.C.W.S. (3d) 202 (C.A.); [page68 ]Mortimer v. Cameron (1994), 1994 10998 (ON CA), 17 O.R. (3d) 1, [1994] O.J. No. 277, 111 D.L.R. (4th) 428, 68 O.A.C. 332, 19 M.P.L.R. (2d) 286, 45 A.C.W.S. (3d) 1311 (C.A.); Murano v. Bank of Montreal (1998), 1998 5633 (ON CA), 41 O.R. (3d) 222, [1998] O.J. No. 2897, 163 D.L.R. (4th) 21, 111 O.A.C. 242, 41 B.L.R. (2d) 10, 5 C.B.R. (4th) 57, 22 C.P.C. (4th) 235, 81 A.C.W.S. (3d) 319 (C.A.); Réno-Dépôt Inc. v. Wonderland Commercial Centre Inc., [2008] O.J. No. 4678, 2008 ONCA 786; St. Louis-Lalonde v. Carlton Condominium Corp. No. 12, [2007] O.J. No. 578, 2007 ONCA 108, 155 A.C.W.S. (3d) 479, affg [2005] O.J. No. 4164, 142 A.C.W.S . (3d) 934 (S.C.J.); Walker v. Richie, [2006] 2 S.C.R. 428, [2006] S.C.J. No. 45, 2006 SCC 45, 273 D.L.R. (4th) 240, 353 N.R. 265, J.E. 2006-1997, 217 O.A.C. 374, 43 C.C.L.I. (4th) 161, 43 C.C.L.T. (3d) 1, 33 C.P.C. (6th) 1, 151 A.C.W.S. (3d) 23, EYB 2006-110276, varg 2005 13776 (ON CA), [2005] O.J. No. 1600, 197 O.A.C. 81, 25 C.C.L.I. (4th) 60, 31 C.C.L.T. (3d) 205, 12 C.P.C. (6th) 51, 138 A.C.W.S. (3d) 1156 (C.A.); Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, [1993] S.C.J. No. 112, 108 D.L.R. (4th) 193, 160 N.R. 1, [1993] 8 W.W.R. 513, J.E. 93-1766, 34 B.C.A.C. 161, 84 B.C.L.R. (2d) 1, [1993] R.D.F. 703, 18 C.R.R. (2d) 41 p, 49 R.F.L. (3d) 117, 43 A.C.W.S. (3d) 410; Zesta Engineering Ltd. v. Cloutier, 2002 25577 (ON CA), [2002] O.J. No. 4495, 21 C.C.E.L. (3d) 161, 118 A.C.W.S. (3d) 341 (C.A.) Statutes referred to Courts of Justice Act, R.S.O. 1990, c. C.43, s. 131 [as am.] Rules and regulations referred to Rules of Civil Procedure, rules 1.03 [as am.], 1.04(5) [as am.], 49 [as am.], 49.02(1), 49.10, [as am.], (1) [as am.], (2) [as am.], 49.13, 57.01 [as am.], (1) [as am.], (4) [as am.] Authorities referred to Orkin, M., The Law of Costs, 2nd ed., looseleaf (Aurora, Ont.: Canada Law Book, 1993)

James M. Regan, for appellants. Brian J.E. Brock, Q.C., and Roseanna R. Ansell-Vaughan, for respondent.

The judgment of the court was delivered by

[1] EPSTEIN J.A.: -- The primary issue in this appeal involves the limits of the court's discretion to award costs on either a substantial indemnity or full indemnity scale. This court is asked to consider a costs award in the amount of $509,452.18, payable by a number of defendants in this action to a defendant against which the action was dismissed. The award is notable not only for its considerable quantum, but also for the trial judge's decision to fix a large portion of the costs on a full indemnity basis absent a finding of sanction-worthy conduct on the part of the party against which the cost order was made. Specifically, full indemnity costs were ordered for the period following the [page69 ]delivery of an offer to settle the claims of the plaintiff and other defendants on a without-costs basis.

[2] For the reasons that follow, I would grant leave to appeal, allow the appeal, set aside the costs award below and substitute an award in the amount of $300,000 plus disbursements and Goods and Services Tax. I. Background Facts

[3] This action, commenced on September 5, 2000, arose out of a train derailment that took place in Bowmanville on November 23, 1999.

[4] On April 10, 2002, Blue Circle Canada Inc., one of the defendants and the respondent in this appeal, delivered a non- severable offer to settle consenting to a dismissal of the claim and all counterclaims and cross-claims, without costs. This offer remained open for acceptance for 30 days. On February 1, 2005, Blue Circle delivered a second offer on the same terms (the "February 2005 offer"). This offer was never revoked and was open for acceptance at the time of trial.

[5] The trial, on the issue of liability only, began in April 2005 and continued for almost 11 weeks [Davies v. Clarington (Municipality), 2006 10212 (ON SC), [2006] O.J. No. 1307, 266 D.L.R. (4th) 375 (S.C.J.)]. In this complex action, eight parties advanced claims, counterclaims and cross-claims in contract and in tort. Prior to closing arguments, settlement discussions took place, at the end of which the defendants/appellants in this appeal, the Corporation of the Municipality of Clarington, Via Rail Canada Inc., Canadian National Railway Company, The BLM Group Inc., Timothy Garnham, Apache Specialized Equipment Inc., Apache Transportation Services Inc. and Hydro One Networks Inc. (collectively, the "settling defendants"), settled with the plaintiff.

[6] In the course of the settlement discussions, Blue Circle offered to accept $250,000 from the settling defendants in relation to costs it incurred in defending their cross-claims. It subsequently reduced this amount to $200,000. This offer was not accepted and consequently Blue Circle did not participate in the settlement.

[7] As a result, the trial judge had to determine Blue Circle's liability, if any, for damages arising from the derailment. On April 5, 2006, after hearing final arguments, the trial judge dismissed the action against Blue Circle.

[8] Blue Circle then sought costs against the settling defendants on a partial indemnity scale from the commencement of the litigation to the February 2005 offer and on a substantial indemnity basis thereafter. [page70 ]

[9] On November 19, 2007, upon considering written argument, the trial judge ordered the settling defendants to pay Blue Circle's costs in the amount of $509,452.18 plus disbursements of $25,276.77. II. The Applicable Rules

[10] The award of costs is governed by s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43 and by rules 49 and 57.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

[11] The general source of judicial discretion to award costs is found under s. 131 of the Courts of Justice Act, as expanded by rule 57.01.

[12] Section 131 of the Courts of Justice Act says:

131(1) Subject to the provisions of an Act or rules of court, the costs of and incidental to a proceeding or a step in a proceeding are in the discretion of the court, and the court may determine by whom and to what extent the costs shall be paid.

[13] Rule 57.01 reads as follows:

57.01(1) In exercising its discretion under section 131 of the Courts of Justice Act to award costs, the court may consider, in addition to the result in the proceeding and any offer to settle or to contribute made in writing, (0.a) the principle of indemnity, including, where applicable, the experience of the lawyer for the party entitled to the costs as well as the rates charged and the hours spent by that lawyer; (0.b) the amount of costs that an unsuccessful party could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed; . . . . . (c) the complexity of the proceeding; . . . . . (e) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding. (Emphasis added)

[14] Rule 57.01(4) allows for elevated levels of costs:

57.01(4) Nothing in this rule or rules 57.02 to 57.07 affects the authority of the court under section 131 of the Courts of Justice Act, . . . . . (c) to award all or part of the costs on a substantial indemnity basis; (d) to award costs in an amount that represents full indemnity

[15] "Substantial indemnity costs" is defined in rule 1.03 as "costs awarded in an amount that is 1.5 times what would [page71 ]otherwise be awarded in accordance with Part I of Tariff A". This part of Tariff A was once the prescribed grid for "partial indemnity costs", but is no longer in effect. "Full indemnity costs" is not a defined term but is generally considered to be complete reimbursement of all amounts a client has had to pay to his or her lawyer in relation to the litigation: see M. Orkin, The Law of Costs, 2nd ed., looseleaf (Aurora, Ont.: Canada Law Book, 1993) at para. 219.05.

[16] Rule 49 deals with a specific aspect of costs: it is a self-contained scheme that addresses the manner in which offers to settle are brought into play. Its objective is to promote an offer of compromise and visit a cost consequence upon an offeree who rejects an offer that turns out to be as favourable as or more favourable than the judgment awarded to a plaintiff at trial. The parts of Rule 49 relevant to this analysis are:

49.02(1) A party to a proceeding may serve on any other party an offer to settle any one or more of the claims in the proceeding on the terms specified in the offer to settle . . . . . . . .

COSTS CONSEQUENCES OF FAILURE TO ACCEPT

Plaintiff's Offer

49.10(1) Where an offer to settle, (a) is made by a plaintiff at least seven days before the commencement of the hearing; (b) is not withdrawn and does not expire before the commencement of the hearing; and (c) is not accepted by the defendant,

and the plaintiff obtains a judgment as favourable as or more favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer to settle was served and substantial indemnity costs from that date, unless the court orders otherwise.

Defendant's Offer

(2) Where an offer to settle, (a) is made by a defendant at least seven days before the commencement of the hearing; (b) is not withdrawn and does not expire before the commencement of the hearing; and (c) is not accepted by the plaintiff,

and the plaintiff obtains a judgment as favourable as or less favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date, unless the court orders otherwise. [page72 ] . . . . .

49.13 Despite rules 49.03, 49.10 and 49.11, the court, in exercising its discretion with respect to costs, may take into account any offer to settle made in writing, the date the offer was made and the terms of the offer. III. Reasons of the Trial Judge Regarding Blue Circle's Costs

[17] In her endorsement relating to Blue Circle's costs, the trial judge briefly set out the nature and history of the proceedings.

[18] After completing her assessment of Blue Circle's disbursements that were in issue, the trial judge turned to Blue Circle's submissions concerning fees. She noted Blue Circle's two offers to consent to a dismissal of the claims and cross-claims on a without-costs basis and its offers made to the settling defendants during the course of the settlement discussions.

[19] The trial judge identified the principles and authorities upon which Blue Circle relied in support of its claim for partial indemnity costs to the date of the February 2005 offer and substantial indemnity costs thereafter. Blue Circle relied upon the wide discretionary power in s. 131 of the Courts of Justice Act and rules 49.13 and 57.01(1) and (4) of the Rules of Civil Procedure, as well as this court's decisions in S & A Strasser Ltd. v. Richmond Hill (Town) (1990), 1990 6856 (ON CA), 1 O.R. (3d) 243, [1990] O.J. No. 2321 (C.A.) and the Ontario Court (General Division) decision in Apotex Inc. v. Egis Pharmaceuticals, (1990), 1990 6829 (ON SC), 2 O.R. (3d) 126, [1990] O.J. No. 2187 (Gen. Div.).

[20] In her analysis, the trial judge identified the principles established in the two well-known cases of Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291, [2004] O.J. No. 2634 (C.A.) and Moon v. Sher, 2004 39005 (ON CA), [2004] O.J. No. 4651, 246 D.L.R. (4th) 440 (C.A.). The principles are that the fixing of costs is not merely a mechanical exercise; that the result of applying the costs grid must be considered, in particular whether in all the circumstances the result is fair and reasonable; [See Note 1 below] and that in deciding what is fair and reasonable, the expectation of the parties is a relevant factor.

[21] At para. 22 of her reasons, the trial judge analyzed the factors set out in rule 57.01(1) that she considered relevant to her determination as to costs:

I am now going to look at the 57.01(1) factors applicable to this case: [page73 ]

(0.a) The lawyers were all senior experienced members of the bar -- no doubt the best in this area of law. The rates charged and the hours expended are reasonable. There is no reason why there should not be full indemnity following the service of the offer and partial indemnity of the earlier fees.

(0.b) The amount of costs being sought by Blue Circle would have been reasonably expected by the parties.

(c) The case was very complex. Even the sole issue which had to be determined in the end was very complex.

(e) The conduct of Blue Circle -- I agree that counsel for Blue Circle often played a mediating role. Difficult issues erupted at the trial and usually Mr. Brock, who was not involved in the "erupting" issue, offered some practical and helpful thoughts. I was not present in the settlement discussions but have no doubt that he was an integral part in arriving at the settlement.

[22] Then, in paras. 23 and 24, the trial judge fixed Blue Circle's costs as follows: (1) "Partial indemnity costs" from the commencement of the action to February 1, 2005, in the amount of $53,867.10; and (2) "Substantial indemnity costs" from February 1, 2005 to the date of the costs decision, in the amount of $455,585.08.

[23] In her reasons, the trial judge used the terms "substantial" and "full" interchangeably with respect to the scale of costs. However, the $455,585.08 awarded is the aggregate of all of the invoices Blue Circle paid its counsel for fees incurred after February 2005. Thus, while the trial judge appears to have intended to order Blue Circle its costs on a substantial indemnity basis, the amount awarded was on a full indemnity scale. Although this amounts to an error, it has no bearing on my analysis or the outcome of this appeal. For simplicity, throughout the rest of my reasons I will refer to both full and substantial indemnity costs generically as "elevated costs". IV. The Issues

[24] The settling defendants appeal on a narrow basis. They take the position that Blue Circle is entitled to its costs throughout, on a partial indemnity basis, and to the disbursements awarded by the trial judge. Their complaint lies in the trial judge's having awarded Blue Circle elevated costs from the February 2005 offer to the date of judgment as well as in the overall amount of the award. [page74 ]

[25] The settling defendants submit that the trial judge erred in the exercise of her discretion in awarding elevated costs for this period, in two respects: (a) in effectively treating Blue Circle's February 2005 offer to settle as though it were a rule 49.10 offer; and, (b) in relying on Strasser in support of her conclusion that Blue Circle was entitled to elevated costs from the February 2005 offer forward.

[26] The settling defendants further argue that the trial judge erred in ordering costs in an amount that is not "fair and reasonable" according to the principles set out in Boucher. V. Analysis

[27] The parties take no issue with the general principles applicable to appellate review of costs decisions. The Supreme Court has made it clear that a costs award should be set aside on appeal only if the trial judge erred in principle or if the award was plainly wrong: see Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, at para. 27. (1) The costs award on an elevated scale

The jurisprudential framework

[28] The first issue is whether the trial judge erred in relying on the February 2005 offer as justification for an elevated costs award. This court, following the principle established by the Supreme Court, has repeatedly said that elevated costs are warranted in only two circumstances. The first involves the operation of an offer to settle under rule 49.10, where substantial indemnity costs are explicitly authorized. The second is where the losing party has engaged in behaviour worthy of sanction.

[29] In Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, [1993] S.C.J. No. 112, at p. 134 S.C.R., McLachlin J. described the circumstances when elevated costs are warranted as "only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties".

[30] The same principle was expanded upon in Mortimer v. Cameron (1994), 1994 10998 (ON CA), 17 O.R. (3d) 1, [1994] O.J. No. 277 (C.A.), at p. 23 O.R., where Robins J.A., speaking for the court, set out the restricted circumstances in which a higher costs scale is appropriate with reference to Orkin, at para. 219. [page75 ]

An award of costs on the solicitor-and-client scale, it has been said, is ordered only in rare and exceptional cases to mark the court's disapproval of the conduct of a party in the litigation. The principle guiding the decision to award solicitor-and-client costs has been enunciated thus:

[S]olicitor-and-client costs should not be awarded unless there is some form of reprehensible conduct, either in the circumstances giving rise to the cause of action, or in the proceedings, which makes such costs desirable as a form of chastisement. [See Note 2 below]

[31] The narrow grounds justifying a higher costs scale were further reinforced by Abella J.A. in McBride Metal Fabricating Corp. v. H. & W. Sales Co. (2002), 2002 41899 (ON CA), 59 O.R. (3d) 97, [2002] O.J. No. 1536 (C.A.) where, at para. 39, she said:

Apart from the operation of rule 49.10 (introduced to promote settlement offers), only conduct of a reprehensible nature has been held to give rise to an award of solicitor and client costs. In the cases in which they were awarded there were specific acts or a series of acts that clearly indicated an abuse of process, thus warranting costs as a form of chastisement. See, also, Walker v. Ritchie, 2005 13776 (ON CA), [2005] O.J. No. 1600, 197 O.A.C. 81 (C.A.), at para. 105, vard 2006 SCC 45, [2006] 2 S.C.R. 428, [2006] S.C.J. No. 45.

[32] At para. 14 of the [supplementary] reasons [[2007] O.J. No. 4474 (S.C.J.)], the trial judge acknowledges the parties' agreement that Rule 49 was not applicable to Blue Circle's February offer.

[33] This leaves egregious conduct, specifically the question whether in the circumstances of this case the settling defendants engaged in conduct worthy of sanction.

Strasser

[34] This takes me to Strasser, the case upon which the trial judge relied in awarding an elevated scale of costs following the February 2005 offer to settle and upon which Blue Circle heavily relies in this appeal.

[35] In Strasser, the plaintiff had originally claimed $1 million. After discovery, the defendant offered to pay $30,000. The plaintiff then reduced the claim to $70,000. The action was ultimately dismissed. In those circumstances, the trial judge awarded the defendant solicitor-and-client costs, throughout. [page76 ]

[36] In the plaintiff's appeal of the costs award, Carthy J.A., for the court, noted that although the defendant's offer was not a rule 49.10 offer, the language of rules 49.13 and 57.01 gives the trial judge discretion with respect to costs, and rule 49.13 specifically invites the judge exercising discretion to take into account any offer to settle made in writing. Carthy J.A. went on, however, to hold that the offer in Strasser could not, standing on its own, justify an award of solicitor-and-client costs. While the trial judge did not identify any evidence of reprehensible conduct, Carthy J.A., in upholding the award, was careful to note that during the costs submissions the trial judge did say "I think this case, in these circumstances, screams for solicitor-and-client costs": p. 246 O.R.

[37] This court sought to clarify Strasser in Scapillati v. A. Potvin Construction Ltd. (1999), 1999 1473 (ON CA), 44 O.R. (3d) 737, [1999] O.J. No. 2187 (C.A.), a case in which the defendant had served an offer to settle on the basis that the action be dismissed without costs and the trial judge subsequently dismissed the plaintiff's claim. Purportedly following Strasser, the trial judge awarded party-and-party costs to the date of the offer and solicitor-and-client costs thereafter.

[38] On appeal, this court started its analysis of the defendant's appeal of the costs award by observing, once again, that as the plaintiff's claim had failed, rule 49.10 had no application. Then, at p. 750 O.R., turning to Strasser, Austin J.A. had this to say:

[T]he principle upon which solicitor and client costs were awarded in Strasser is a very narrow one. The plaintiff had made a claim for $1 million, the defendant made an offer after discovery of $30,000 and the action was dismissed at trial. In the instant case, no similar offer was made. While the trial judge in the instant case made an award of solicitor and client costs, it does not appear from the record that she felt as strongly about it as the trial judge in Strasser who said "I think this case, in these circumstances, screams for solicitor and client costs."

[39] Thus interpreting Strasser as a case where egregious conduct was implicitly found, this court allowed the appeal as to costs, set aside the original costs award and substituted an award of costs on a party-and-party basis. For other cases in which comments have been made on the limited application of Strasser, see St. Louis-Lalonde v. Carlton Condominium Corp. No. 12, [2005] O.J. No. 4164, 142 A.C.W.S. (3d) 934 (S.C.J.), at para. 15, affd 2007 ONCA 108, [2007] O.J. No. 578, 155 A.C.W.S. (3d) 479 (C.A.); Dyer v. Mekinda Snyder Partnership Inc. (1998), 1998 14847 (ON SC), 40 O.R. (3d) 180, [1998] O.J. No. 2204 (Gen. Div.).

[40] In summary, while fixing costs is a discretionary exercise, attracting a high level of deference, it must be on a principled basis. The judicial discretion under rules 49.13 and 57.01 is not [page77 ]so broad as to permit a fundamental change to the law that governs the award of an elevated level of costs. Apart from the operation of rule 49.10, elevated costs should only be awarded on a clear finding of reprehensible conduct on the part of the party against which the cost award is being made. As Austin J.A. established in Scapillati, Strasser should be interpreted to fit within this framework -- as a case where the trial judge implicitly found such egregious behaviour, deserving of sanction.

Application to the facts

[41] Here, the circumstances are similar to those found in Scapillati. There was no rule 49.10 offer and no finding by the trial judge that the settling defendants conducted themselves in a reprehensible or egregious fashion.

[42] Blue Circle submits that notwithstanding the trial judge's failure to make such a finding in her reasons as to costs, her reasons dismissing the claim against it demonstrate that the settling defendants' conduct in relentlessly pursuing their claims against Blue Circle, in the face of the apparent weakness of their position, is conduct that justifiably attracted an elevated scale of costs.

[43] I have considerable difficulty with this argument.

[44] Blue Circle's submission in this respect is contrary to the principle Dubin J.A. expressed in Foulis v. Robinson (1978), 1978 1307 (ON CA), 21 O.R. (2d) 769, [1978] O.J. No. 3596 (C.A.), at p. 776 O.R., that "Under our system defendants are entitled to put the plaintiff to the proof, and there is no obligation to settle an action."

[45] Of course, a distinction must be made between hard- fought litigation that turns out to have been misguided, on the one hand, and malicious counter-productive conduct, on the other. The former, the thrust and parry of the adversary system, does not warrant sanction: the latter well may. In Apotex v. Egis Pharmaceuticals (1991), 1991 2729 (ON SC), 4 O.R. (3d) 321, [1991] O.J. No. 1232 (Gen. Div.), substantial indemnity costs were justified as a means [at para. 8] "to discourage harassment of another party by the pursuit of fruitless litigation . . . particularly where a party has conducted itself improperly in the view of the court". For other examples of abuses of process leading to elevated costs, see Dyer, at pp. 184-85 O.R.

[46] Here, there is no finding or evidence in the record of "harassment . . . by the pursuit of fruitless litigation". The settling defendants were entitled to advance their position; they were not required to settle. In the end, the trial judge did not agree with their position but the settling defendants did nothing to abuse the process of the court. In short, there was no wrongdoing on the part of the settling defendants that warranted a rebuke from the court. [page78 ]

[47] Apotex (1990) does not assist Blue Circle in trying to make out a case for misconduct on the part of the settling defendants. That case involved meritless claims of fraud, deceit and dishonesty based on pure speculation. First, the trial judge did not make such a link between this case and Apotex (1990) on this basis. Second, unsubstantiated allegations of the nature advanced in Apotex (1990) represent a form of egregious conduct commonly accepted as a basis for attracting a higher costs award: see 131843 Canada Ltd. v. Double "R" (Toronto) Ltd., [1992] O.J. No. 3879, 7 C.P.C. (3d) 15 (Gen. Div.); Réno-Dépôt Inc. v. Wonderland Commercial Centre Inc., [2008] O.J. No. 4678, 2008 ONCA 786 (award of costs on a substantial indemnity basis warranted only from the point in time when allegations of fraud and dishonesty were made). This is not the nature of the allegations made against the settling defendants.

[48] Before turning to the settling defendants' second argument, I make one final comment. In cases such as Beresford- Last (Litigation guardian of) v. Dworak, [2000] O.J. No. 4636, 101 A.C.W.S. (3d) 696 (S.C.J.) and Marcella v. Integrated Management and Investments Inc., [2007] O.J. No. 1652, 157 A.C.W.S. (3d) 51 (S.C.J.), trial judges have expressed the view that denying elevated costs to defendants who submit an offer to settle, which is later revealed to be more favourable than the result at trial, acts as a disincentive to defendants to make reasonable offers to settle. This view, while understandable, is contrary to the wording, spirit and intent of Rule 49. Rules cannot be incrementally changed through jurisprudence. Any change in the rules to take into account the position of defendants who legitimately try to curtail what turns out to be unnecessary litigation is a matter for the Rules Committee.

[49] In my view, there is no basis to justify anything other than a partial indemnity costs award in favour of Blue Circle. (2) Whether the costs award is "fair and reasonable"

[50] While this conclusion is sufficient to set aside the costs award, I would add that, in my view, the award was otherwise not fair and reasonable.

[51] In Andersen v. St. Jude Medical, Inc., 2006 85158 (ON SCDC), [2006] O.J. No. 508, 264 D.L.R. (4th) 557 (Div. Ct.), the Divisional Court set out several principles that must be considered when awarding costs [at para. 22]: (1) The discretion of the court must be exercised in light of the specific facts and circumstances of the case in relation to the factors set out in rule 57.01(1): Boucher, Moon and [page79 ]Coldmatic Refrigeration of Canada Ltd. v. Leveltek Processing LLC (2005), 2005 1042 (ON CA), 75 O.R. (3d) 638, [2005] O.J. No. 160 (C.A.). (2) A consideration of experience, rates charged and hours spent is appropriate, but is subject to the overriding principle of reasonableness as applied to the factual matrix of the particular case: Boucher. The quantum should reflect an amount the court considers to be fair and reasonable rather than any exact measure of the actual costs to the successful litigant: Zesta Engineering Ltd. v. Cloutier, 2002 25577 (ON CA), [2002] O.J. No. 4495, 118 A.C.W.S. (3d) 341 (C.A.), at para. 4. (3) The reasonable expectation of the unsuccessful party is one of the factors to be considered in determining an amount that is fair and reasonable: rule 57.01(1)(0.b). (4) The court should seek to avoid inconsistency with comparable awards in other cases. "Like cases, [if they can be found], should conclude with like substantive results": Murano v. Bank of Montreal (1998), 1998 5633 (ON CA), 41 O.R. (3d) 222, [1998] O.J. No. 2897 (C.A.), at p. 249 O.R. (5) The court should seek to balance the indemnity principle with the fundamental objective of access to justice: Boucher.

[52] As can be seen, the overriding principle is reasonableness. If the judge fails to consider the reasonableness of the costs award, then the result can be contrary to the fundamental objective of access to justice. Rather than engage in a purely mathematical exercise, the judge awarding costs should reflect on what the court views as a reasonable amount that should be paid by the unsuccessful party rather than any exact measure of the actual costs of the successful litigant. In Boucher, this court emphasized the importance of fixing costs in an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceeding, at para. 37, where Armstrong J.A. said "[t]he failure to refer, in assessing costs, to the overriding principle of reasonableness, can produce a result that is contrary to the fundamental objective of access to justice".

[53] Here, while the trial judge identified the importance of a reasonableness assessment, with respect, in arriving at a costs award of $509,452.18 her reasons do not indicate that she conducted an assessment, or at least a sufficient one, in accordance the requirements set out in Boucher. Furthermore, although the trial judge did find that the parties would have reasonably expected Blue Circle to have claimed costs of this magnitude, [page80 ]she was, according to Boucher, at para. 38, obliged to consider the expectations of the parties concerning the quantum of the costs award.

[54] It is difficult to accept that the settling defendants would have expected that they would be faced with an award against them of this magnitude particularly in the light of Blue Circle's limited involvement in the proceedings. Blue Circle did not participate in the examination or cross-examination of any witnesses. In Blue Circle's own costs submissions, it is acknowledged that their case took two hours in total to put in. The parties could not have expected that the trial judge would treat the costs incurred after the February 2005 offer in the manner she did. They could not have expected that, through an elevated costs award, the trial judge would effectively reward Blue Circle for the assistance its counsel provided during the settlement discussions. [See Note 3 below] Further, in considering the expectations of the parties, it is appropriate to compare the costs claimed by and awarded to the various parties. The trial judge awarded Blue Circle an amount in legal fees that was almost double those that were received by the plaintiffs. The settling defendants could not have anticipated a disparity of this nature.

[55] The results of this "fair and reasonable" analysis demonstrate that appellate intervention is warranted.

[56] Turning to quantum, taking into consideration the circumstances of this case and applying to them the relevant factors set out in rule 57.01, and the fair and reasonable test expressed in Boucher, in my view the amount of $300,000 would be appropriate. VI. Disposition

[57] I would therefore allow the appeal and set aside the trial judge's cost award in relation to fees only and in its place substitute the amount of $300,000.

[58] Upon the agreement of the parties, the settling defendants are entitled to their costs of this appeal and the motion for leave to appeal, fixed in the amount of $10,000, including disbursements and Goods and Services Tax.

Appeal allowed.

Notes

Note 1: The costs grid has since been removed from the rules, but the general point is clear; the result of a cost award formula must be scrutinized for fairness and reasonableness.

Note 2: Note the discrepancy in language between the former terminology, "solicitor and client costs", and the newer terminology of "substantial indemnity". The two terms indicate the same costs scale. Rule 1.04(5) identifies the two terms as follows: "If a statute, regulation or other document refers to solicitor and client costs, these rules apply as if the reference were to substantial indemnity costs."

Note 3: While the assistance of counsel for Blue Circle in the discussions that led to the settlement among all but Blue Circle is commendable, it is not, in my view, a basis upon which to make the settling defendants pay Blue Circle's costs on an elevated basis.