COURT FILE NO. DC-04-071616-00
DATE: 20060421
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
DURNO R.S.J., ASTON S.J. AND WILSON J.
B E T W E E N:
CULLIGAN SPRINGS LIMITED and CULLIGAN WATER CONDITIONING (BARRIE) LIMITED Plaintiffs (Appellants)
- and -
DUNLOP LIFT TRUCK (1994) INC. Defendant (Respondent)
Annette A. Cusullo, for the Appellants Eric O. Gionet, for the Respondent
HEARD at Newmarket: March 9, 2006
BY THE COURT:
[1] This is an appeal from the decision of Weekes J. dated November 1, 2004 with respect to costs in this simplified procedure case. Weekes J. applied the cost grid and ordered costs payable to the Defendant/Respondent in the amount of $60,267.39. The issues raised in this appeal include the applicability of the principle of proportionality, as well as the reasonable expectations of the losing party.
THE DECISION APPEALED FROM
[2] The Plaintiffs/Appellants purchased a used forklift from the Defendant/Respondent for $16,000. They claimed $50,000 against the Respondent for damages for breach of an implied condition of fitness. A counterclaim was brought in respect of two outstanding invoices for repairs totaling $1003.88. The proceedings were brought and continued under the simplified procedure set out in Rule 76.
[3] The trial was estimated at the pretrial to take two days. The Appellants’ case took one and a half days to present and a further 90 minutes for reply testimony. The Respondent took six days to present its case.
[4] Weekes J. concluded that the forklift was subject to an implied condition of fitness in accordance with section 15.1 of the Sale of Goods Act, R.S.O. 1990, c. S.1, contrary to the position asserted by the defence. He concluded, however, that the Respondent was not liable for the Appellants’ damages, as the Appellants had not proved that the forklift was defective. He dismissed the claim. Had they been successful, he assessed the Appellants’ damages in the amount of $15,658.18. The Respondent was partially successful in its counterclaim and was awarded $635.88.
LEAVE TO APPEAL
[5] Shaughnessy R.S.J. reviewed the background circumstances of the case and Weekes J.’s decision. He granted leave to appeal from the decision with respect to costs. His Honour noted, at para. 12 of the decision to grant leave, that Weekes J. had attempted to distinguish the dicta in Trafalgar Industries of Canada Ltd. v. Pharmax Ltd., (2003) 2003 40313 (ON SC), 64 O.R. (3d) 288 (Sup. Ct.) with respect to the “proportionality principle”. At para. 24, Shaughnessy R.S.J. held as follows:
Therefore, I find that the Plaintiff/Applicant has identified a good arguable case, having enough merit to warrant the scrutiny of the Court as it pertains to proportionality in relation to a Simplified Procedure action. The issue in the proposed appeal has importance not only to the parties, but also in relation to the law in general, relating to costs and Simplified Procedures. A decision of the Divisional Court on the issue of proportionality will provide some degree of certainty for parties who launch or defend actions as to the potential costs consequences should their position prove unsuccessful. This proposed appeal also has a potential practical utility in that if the appeal is successful, it may substantially alter the quantum of the costs award.
STANDARD OF REVIEW
[6] In order for an appeal court to intervene with an order for costs, the appellant must demonstrate that the trial judge erred in the exercise of his or her discretion, or that the award granted was based on an erroneous principle in law: see Johnson v. Multinational Five Investments Ltd, [1999] O.J. No. 3442 at paras. 23 to 26 (Div. Ct.), Orlando Corp. v. Bothwell-Accurate Co., [2004] O.J. No. 2802 (C.A.).
[7] Armstrong J.A. in the Court of Appeal decision of Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.) confirmed that the judge of first instance is entitled to a high degree of deference. He cites with approval the principles articulated in two decisions of the Supreme Court of Canada, at p. 297:
The standard of review for interfering with the exercise of the discretion by a judge of first instance was articulated by Lamer, C.J.C. in Canadian Pacific Ltd. v. Matsqui Indian Band, 1995 145 (SCC), [1995] 1 S.C.R. 3 at p. 32:
This discretionary determination should not be taken lightly by reviewing courts. It was Joyal J.’s discretion to exercise, and unless he considered irrelevant factors, failed to consider relevant factors, or reached an unreasonable conclusion, then his decision should be respected. To quote Lord Diplock in Hadmor Productions Ltd. v. Hamilton, [1982] 1 All E.R. 1042, at p. 1046, an appellate court “must defer to the judge’s exercise of his discretion and must not interfere with it merely on the ground that the members of the appellate court would have exercised the discretion differently”.
In a more recent case, Arbour J. said in Hamilton v. Open Window Bakery Ltd., 2004 SCC 75, [2004] S.C.J. No. 72, at para. 27:
A court should set aside a costs award on appeal only if the trial judge has made an error in principle or if the costs award is plainly wrong (Duong v. NN Life Insurance Company of Canada (2001), 2001 24151 (ON CA), 141 O.A.C. 307, at para. 14).
CONCLUSIONS CONCERNING PRINCIPLES OF LAW
[8] We respectfully conclude, for two reasons, that the learned trial judge failed to apply the correct principles of law with respect to the fixing of costs.
[9] First, he failed to apply the test of proportionality to this relatively modest case.
[10] Second, he misstated the test of the reasonable expectations of the parties, focusing on the expectations of the winning party, rather than the unsuccessful party.
PROPORTIONALITY
[11] Weekes J. concluded that although the principle of proportionality, as enunciated in Trafalgar, supra and subsequent cases, was “laudable”, it did not apply to this case. He stated:
Two things are worthy of note regarding Trafalgar. First, the plaintiff in that case recovered judgment against the defendant. Second, the judgment was given at the time when the Simplified Procedure Rule was limited to cases involving claims for $25,000.00 or less. The rule now extends to cases involving claims for $50,000.00 or less. $50,000.00 is not a sum to be treated casually, particularly when costs and interest can be tacked on top of it.
In the present case, the defendant did not have a choice as to whether to enter the legal fray. It was sued and had to defend itself. Having done so, it did no more than was necessary to ensure it succeeded. While the sentiments expressed in Trafalgar are laudable, in the context of this case, it seems unfair to me that the plaintiffs can force the defendant to defend itself and, after they have failed in their claim, then say that the costs of the defence should be arbitrarily reduced because the case proceeded as a simplified procedure trial. That type of approach would encourage plaintiffs to bring frivolous actions.
[12] Respectfully, we conclude that the learned trial judge erred.
[13] First, the principle of proportionality is relevant whether it is the plaintiff or the defendant who is successful. Second, the principle of proportionality continues to apply despite the fact that the limit in Rule 76 increased to $50,000.00. In fact, Trafalgar was decided in 2003, after the increase. The plaintiff’s recovery in Trafalgar was $26,978.84. Third, the purpose of the simplified procedure must be considered.
[14] Historically, in cases involving modest amounts, mounting costs have been a barrier to access to the courts. In its 1995 report, the Task Force of the Ontario Civil Justice Review noted that in cases involving modest amounts, costs to individual litigants often pose a significant barrier to access to justice. (Report on the Revision of Civil Justice (Ministry of the Attorney General: Toronto, 1995)).
[15] In response to that Report, the simplified procedure was introduced in 1996 in Rule 76 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. This rule was enacted to promote affordable access to justice. Streamlined procedures, a lower threshold for summary judgment, and the summary trial were incorporated to promote this goal.
[16] Since the introduction of the simplified procedure, a series of court decisions have expressed concerns about the appropriate awards for costs payable to the successful party by the losing party, in order to provide reasonable compensation while also promoting affordable access to justice. These concerns were amplified when the cost grid was introduced and a mechanical time and docket-based approach to fixing costs became prevalent. See, for example: Trafalgar, supra; Vokey v. Edwards, [1999] O.J. No. 2304 (Sup. Ct.); Glazman v. Toronto (City), [2002] O.J. No. 2767 (Sup. Ct.); Mclean v. 721244 Ontario Ltd., [2000] O.J. No. 3507 (Sup. Ct.); Neumeyer v. Wawanesa Mutual Insurance Co., [2005] O.J. No. 4004 (Sup. Ct.).
[17] In light of these growing concerns, the principle of proportionality evolved.
[18] In Vokey, supra, Killeen J. sounded the warning that costs recovered under the simplified procedure must reflect the intended purpose of r. 57.01(1). At para. 16, he stated:
I add here, that the claims for preparation and trial were unrealistic and much too high bearing in mind the nature of the case and its summary procedure scope. The Bar must come to realize that the summary procedure is a half-way house between a small claims case and an ordinary-procedure case so that, generally speaking, the costs of an ordinary action must be scaled down from those appropriate in the larger actions. After all, these cases involve $25,000 or less and probably will be tried in the Small Claims Court in the fullness of time.
[emphasis added]
[19] In Impex v. Nasr Foods Inc., [1999] O.J. No. 3360 at para. 9 (Sup. Ct.), Lamek J. confirmed that one of the objectives of the simplified procedure is “to curb the crippling cost of litigating small claims”.
[20] This was echoed by Hill J. in McLean, supra, where he observed, at para. 2, that “an action conducted under the simplified procedure is meant to be cost effective. As a general rule, this straightforward and streamlined process is not intended to be as expensive as trial by ordinary procedure”.
[21] Similarly, in Glazman, supra, Lane J. recognized the importance of proportionality as a factor to arrive at a fair and reasonable amount for costs, at para. 8:
In my view, the costs in a simplified rules case should be fixed in the normal way, by reference to the factors enumerated in Rule 57.01(1) and the costs grid, but bearing in mind the objectives of the simplified procedure as noted in the cases cited. Counsel must be aware that the scale of the action will have a marked impact upon what will be regarded as reasonable expenditures of time and money in preparation and presentation of the case.
[22] Cost awards under the simplified procedure have been significantly lower than they would be under the ordinary procedure. See, for example: TSP-Intl Ltd. V. Mills, [2005] O.J. No. 2325 (Sup. Ct.); Yeh v. Ng, [2000] O.J. No. 185 (Sup. Ct.); Walker v. Rosser, [1999] O.J. No. 3645 (Sup. Ct.); Bank of Nova Scotia v. Antoine (1998), 1998 14918 (ON SC), 159 D.L.R. (4th) 365 (Ont. Gen. Div.), aff’d [1999] O.J. No. 2931 (Div. Ct.).
[23] These lower cost awards serve two important functions. First, they allow cases involving smaller amounts to go to trial without disproportionate, crippling cost consequences. Second, they provide an additional incentive to all parties to settle the case. Even if the party is successful at trial, he or she will still likely have to pay a proportion of his or her own lawyer’s fees. All litigants, both winners and losers, are required and motivated to be reasonable in their conduct.
[24] Legal counsel must be cognizant of the amount in dispute, to make sure that only the essential issues are brought to trial.
[25] Neither counsel nor litigants can afford the luxury of launching a full regular trial when relatively modest amounts are in issue. All parties’ counsel must take steps available to narrow issues and shorten trials. Costs payable by the losing party must be reasonable and proportionate to the amount in dispute.
[26] In November 2004 when Weekes J. issued his decision, the original cost grid was in effect. The cost grid was subsequently revoked effective July 1st, 2005. It appears that the cost grid promoted requests for large costs awards based upon a time and docket approach, without any regard to the amount realistically in dispute. This trend extended to the requests for costs under the simplified procedure. When it was still in effect, a mechanical application of the cost grid was of limited use under the simplified procedure.
[27] The principle of proportionality, at least in simplified procedure cases, is still relevant in the face of an Offer to Settle.
[28] In Glenny v. Del Management Solutions Inc., [2004] O.J. No. 3904 (Sup. Ct.), Lederman J. considered a successful defendant’s request for costs and reduced it by half, despite the fact that the defendant had made an Offer to Settle that engaged Rule 49. Lederman J. stated as follows, at para. 7:
Such costs must be in proportion to the nature of the type of action brought as opposed to the formal amount sought in the statement of claim. Furthermore, the costs should not be so crushing as to create a sense of injustice to the unsuccessful litigant by being out of proportion to the relatively simple issues before the court.
[29] Thus, an offer to settle under Rule 49 is an important factor but is not determinative in the fixing of costs. In circumstances such as those in the case at bar, costs should be fixed with reference to the factors in Rule 57.01(1) and with reference to the objective of the simplified procedure, of promoting affordable access to justice.
[30] In this case, the Respondent made a walk away Offer to Settle, nine days before trial. The Appellants would abandon their claim – if the Respondent would abandon its counterclaim, and each party would be responsible for its own costs. Then, after four days of trial, the Respondent made a substantive Offer that was open for acceptance for a period of less than a day.
[31] Although they were unsuccessful, there is no evidence that the Appellants brought a frivolous action with respect to the used forklift. This is not a case where there was egregious conduct by the losing party, requiring censure by the court. The costs award granted, if not revised, will have a chilling effect upon parties contemplating modest claims in the future.
[32] The trial was estimated to take two days. The Respondent, however, took six days to present its argument. The Respondent was largely responsible for the unanticipated length of the trial. We reiterate the comments of Killeen J. in Pagnotta v. Brown, [2002] O.J. No. 3033 (Sup. Ct.), at para. 25, where he stated:
Judges and assessment officers have a duty to fix or assess costs at reasonable amounts and, in this process, they have a duty to make sure that the hours spent can be reasonably justified. The losing party is not to be treated as a money tree to be plucked, willy nilly, by the winner of the contest.
[33] The principles of proportionality and the reasonable expectations of the parties are, to a degree, intertwined. The principle of proportionality engages a more objective analysis given the issue and the amount in dispute, whereas the reasonable expectation principle requires the judge to examine the particular facts of the case and the subjective expectations of the parties.
[34] The appropriate reduction in the costs will be considered after reviewing the law and the facts with respect to the second principle.
THE REASONABLE EXPECTATIONS OF THE PARTIES
[35] Weekes J. found that costs in the amount of $60,267.39 were fair and reasonable, from the perspective of the Respondent, given “the expense incurred by the defendant, the amount in dispute and the defendant’s complete success”.
[36] Respectfully, he failed to address what the losing parties’ reasonable expectations would have been in accordance with the principles outlined in the case law, and now included in rule 57.01(1)O.b. of the Rules of Civil Procedure.
[37] In a recent “trilogy” of cases, the Ontario Court of Appeal has emphasized that there is an “overriding principle of reasonableness” that must govern the judicial exercise in fixing costs: see Boucher, supra, Moon v. Sher (2004), 2004 39005 (ON CA), 246 D.L.R. (4th) 440 (C.A.), and Coldmatic Refrigeration of Canada Ltd. v. Leveltek Processing LLC (2005), 2005 1042 (ON CA), 75 O.R. (3d) 638 (C.A.).
[38] These cases confirm that there is no rigid rule or formula that a judge must adhere to when he or she is fixing costs. The exercise of judicially fixing costs is not simply a mathematical calculation, but is an assessment by the judge of what is fair and reasonable in all the circumstances of that case. Rigid application of grids or formulae must be avoided.
[39] The Court of Appeal has confirmed that in deciding what is fair and reasonable, the court should consider what each party would have anticipated would be the costs award they would reasonably be expected to pay if they lost the lawsuit: see Boucher, supra, at para 38, Moon, supra, at para 35, Gratton-Masuy Environmental Technologies Inc. (c.o.b. Ecoflo Ontario) v. Building Materials Evaluation Commission, 2003 8279 (ON SCDC), [2003] O.J. No. 1658 at para. 24 (Div. Ct.).
[40] The reasonableness of a costs award is closely linked to the fundamental objective of access to justice. Armstrong J.A., at paras 37 and 38 of Boucher, makes this clear. This passage is cited with approval by Borins J.A. in Moon, at para. 28:
The 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. The costs system is incorporated into the Rules of Civil Procedure, which exist to facilitate access to justice. There are obviously cases where the prospect of an award of costs against the losing party will operate as a reality check for the litigant and assist in discouraging frivolous or unnecessary litigation. However, in my view, the chilling effect of a costs award of the magnitude of the award in this case generally exceeds any fair and reasonable expectation of the parties.
In deciding what is fair and reasonable, as suggested above, the expectation of the parties concerning the quantum of a costs award is a relevant factor.
[emphasis added]
[41] This principle of reasonable expectations was codified as a statutory consideration in rule 57.01(1)(O.b), effective July 1, 2005 when the issue of costs is considered:
57.01(1) Factors in discretion – 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,
(O.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,
[emphasis added]
[42] This amendment was enacted after Weekes J. rendered his decision.
[43] To assess the factor of the reasonable expectation of the losing party, a review of the facts is helpful. From this history two undisputed facts emerge, both relevant to the reasonable expectations of the Appellants regarding their responsibility to pay costs if they were not successful in this lawsuit: (1) the anticipated length of the trial, based upon the list of the defence witnesses outlined in the Affidavit of Documents, and (2) the second Offer to Settle made by the Respondent to the Appellants, part way through the trial. This offer included an allocation for substantial indemnity costs payable by the Respondent to the Appellant, up to that point in time in the proceedings.
[44] Counsel for the Respondent sent a junior lawyer who did not have carriage of the trial to the pretrial. She confirmed, as did counsel for the Appellants, that the anticipated length of trial was two days. Neither party requested that this matter proceed by way of summary trial, given that the trial was anticipated to take two days.
[45] Clearly, going into the trial, the Appellants’ reasonable expectations were that if they lost, they would be responsible for reasonable costs associated with a two-day trial.
[46] At the trial, Weekes J. permitted the Respondent to produce documents and call witnesses that were not included in the Respondent’s Affidavit of Documents.
[47] Rule 76.03(2) is clear that a party’s Affidavit of Documents must include all documents relied upon and a list of persons who might reasonably be expected to have knowledge of matters in issue in the action, unless the court orders otherwise. Rule 76.03(3) provides that leave of the court is required for a party to call a witness who has not been disclosed in that list:
Effect of Failure to Disclose
(3) At the trial of the action, a party may not call as a witness a person whose name has not been disclosed in the party’s affidavit of documents or any supplementary affidavit of documents, unless the court orders otherwise.
[48] Weekes J. allowed the Respondent to call the undisclosed witnesses, including an expert witness, who was called regarding the mechanical problems with the forklift. Weekes J. allowed these witnesses to be called due to what he described as the “shifting focus of the plaintiffs’ case”.
[49] This allegation of a “shifting focus” does not appear to accord with the pleadings. The pleadings shows that the Appellants alleged that they experienced mechanical problems with the used forklift immediately after its acquisition, and that it was not capable of performing the 20-hour shift required. The forklift caught fire and was returned to the Respondent six months after its acquisition.
[50] The problems and mechanical defects, particularly with the battery, were also raised squarely in the Respondent’s statement of defence:
Dunlop states that any problems and/or mechanical defects with the 1981 Forklift were caused by the Plaintiffs’ failure to operate and maintain the forklift and accessories properly and in accordance with the advice and instructions provided by Dunlop.
Dunlop states that the Plaintiffs failed or refused to properly re-charge the forklift batteries. The low battery voltage caused the forklift to run at very high temperatures, thereby creating problems for the proper operation of the forklift and ultimately causing physical damage to the forklift.
Despite repeated warnings and proper instructions from Dunlop, the Plaintiffs failed or refused to properly maintain and re-charge the forklift batteries as required. Dunlop states that the Plaintiffs are solely responsible for the damage caused to the 1981 Forklift.
[51] Given the allegations and issues raised in the pleadings, it is not clear why the Respondent did not prepare an expert report prior to the trial to focus on a key matter in dispute, that is whether the forklift was defective.
[52] The Appellants served a Request to Admit, and the Respondent responded.
[53] The Respondent did not serve a Request to Admit raising facts and issues in an attempt to focus this trial.
[54] The second undisputed fact relevant to determining the reasonable expectations of the parties is that, as noted above, in the substantive Offer to Settle made by the Respondent on the fourth day of trial, the Respondent provided an allocation for substantial indemnity costs in the amount of $18,000.00.
[55] Unfortunately for the Appellants, they refused the time limited offer, and continued with the trial.
[56] Upon reviewing the bill of costs prepared by the Respondent, it appears that Weekes J. allowed costs to the fourth day for approximately $34,000. This amount grossly exceeds the Respondent’s Offer of $18,000.
[57] In this case, a fair indication of the reasonable expectations of the losing party as to costs up to that point in time was the Respondent’s Offer of $18,000.00. The amount allowed by Weekes J. is twice what the Respondent offered as being reasonable.
[58] We note that Weekes J. reminded the parties about the mounting costs further along in the trial, and the parties agreed that at that point in the trial, partial indemnity costs applying the cost grid could be between $30,000.00 and $35,000.00.
[59] We conclude that although this commentary is a factor to consider, it is not determinative with respect to the reasonable expectations of the losing party to pay costs. As noted, the Respondent’s case was much longer than predicted, and included calling witnesses that had not been disclosed in the Affidavit of Documents. Second, the cost grid should not be mechanically applied to determine costs, particularly in a simplified procedure case.
CONCLUSION
[60] We conclude that Weekes J., in fixing costs, failed to properly consider the principle of proportionality and failed to apply the appropriate test as to the reasonable expectations of the losing party. We conclude that when the facts are reviewed from the perspective of the losing party, the award granted by Weekes J. is excessive.
[61] Taking into account the principles enunciated in Rule 57 of the Rules of Civil Procedure, including the Offers to Settle that were made, the principles of proportionality and the reasonable expectation of the parties, we conclude that the costs should be reduced to the amount of $40,000 inclusive of disbursements and GST.
[62] We understand that the parties have an agreement with respect to the costs payable by the losing party with respect to this appeal, and the motion for leave to appeal. If the parties are unable to resolve the issue, concise written submissions may be provided within 14 days of the release of these reasons.
DURNO R.S.J.
ASTON S.J.
WILSON J.
Released: April 21, 2006
COURT FILE NO. DC-04-071616-00
DATE: 20060421
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT (Newmarket)
DURNO R.S.J., ASTON S.J. and WILSON J.
B E T W E E N:
CULLIGAN SPRINGS LIMITED and CULLIGAN WATER CONDITIONING (BARRIE) LIMITED Plaintiffs (Appellants)
- and -
DUNLOP LIFT TRUCK (1994) INC. Defendant (Respondent)
REASONS FOR JUDGMENT
Durno R.S.J., Aston S.J. and Wilson J.
Released: April 21, 2006