SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL COURT
DATE: 20130812
RE: Stetson Oil & Gas Ltd. Plaintiff
AND:
Stifel Nicolaus Canada Inc. Defendant
BEFORE: Newbould J.
COUNSEL:
William J. Burden, Arthur Hamilton and Lara Jackson, for the Plaintiff
Joseph Groia, Kellie Seaman and David Sischy, for the Defendant
ENDORSEMENT
[1] On March 1, 2013, after an eleven day trial, I awarded judgment to the plaintiff for $16,042,669 plus pre-judgment interest and costs. I have now received cost submissions. The plaintiff seeks costs of $2,143,448.21, inclusive of disbursements and taxes. The defendants contend that costs should be limited to $650,000.
Scale of costs
[2] The plaintiff seeks costs on a partial indemnity basis to the date of its offer to settle served on December 28, 2012 under rule 49 which was for $8 million, pre-judgment interest and partial indemnity costs to be agreed or assessed, much less than the judgment in its favour. The defendant takes the position that the offer was served too late to be treated as a rule 49 offer because the trial was scheduled to start of January 8, 2013, more than 7 days after the offer, but when taking into account holidays of Saturdays, Sundays and New Year’s Day, less than 7 days before.
[3] The defendant had served a rule 49 offer for $1 million plus pre-judgment interest and partial indemnity costs on December 12, 2012 and, on the day following the plaintiff’s offer of December 28, 2012, counsel for the defendant wrote to counsel for the plaintiff and said that while he had forwarded the offer to the defendant, he very much doubted that the offer would provide the basis for a meaningful discussion.
[4] The commencement of the trial was adjourned one day to January 9, 2013, which would have meant that the offer was technically served 7 days before the commencement of trial, but the adjournment on the agreement of the parties was on the basis that the it would not negatively affect the position of the defendant regarding the timing of the plaintiff’s offer. served December 28, 2012
[5] Thus it is clear that the defendant has had plenty of time to consider the plaintiff’s offer, and the objection of the defendant seems quite technical, taken that Mr. Groia made it relatively clear on the day after the offer was served that it was not going to be met with favour from his client.
[6] The court may take into account an offer that does not meet the time requirements of rule 49.03. Rule 49.03 and 49.13 state:
49.03 An offer to settle may be made at any time, but where the offer to settle is made less than seven days before the hearing commences, the costs consequences referred to in rule 49.10 do not apply.
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.
[7] In LSUC v. Mazzucco (2009), 50 E.T.R. (3d) 203, Brown J. ordered costs on a substantial indemnity basis in circumstances where the offer was not made within the time required by rule 49. He did so on the basis of his discretion under rule 57.01. He stated:
- As to the quantum of the award of costs, in my view it is appropriate to give considerable weight to the Offer to Settle, even if it does not qualify as a formal Rule 49 offer. The offer was a very reasonable one, made by one commercial party to another. In fixing costs courts should give due recognition to reasonable efforts by parties to settle a dispute. In the circumstances of this case, I find that the Financial Institutions are entitled to substantial indemnity costs incurred following the service of their April 20 offer to settle, not as the result of the operation of Rule 49, but in the exercise of my discretion under Rule 57.01.
[8] Whether the discretion is one exercised under rule 57.01 or rule 49.13 matters little. In my view the plaintiff is entitled to costs on a substantial indemnity basis from the date of its offer. The offer was made by one sophisticated commercial party to another, who clearly had time to deal with it and chose not to act on it. It was a serious offer to settle made in a reasonable attempt to settle the case.
[9] The defendant relies on Boucher v. Public Accountants Counsel for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.) for the proposition that the objective is to fix an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceeding, rather than an amount fixed by the actual costs incurred by the successful litigant. I note that Boucher involved the assessment of costs on a partial indemnity basis, and one of the problems that Armstrong J.A. had with the bill of costs was that it was too close to costs claimed on a substantial indemnity basis. The case did not purport to deal with what should occur in a case of substantial indemnity costs. The rules committee appears to have agreed with this, because the language of Boucher was later adopted in rule 57.01(1)(0.b) dealing with partial indemnity costs. Rule 57.01(4)(c) and (d) expressly provides that nothing in rule 57.01 affects the authority of a court to award costs on a substantial or full indemnity basis, which is a recognition that rule 57.01 deals with partial indemnity costs and that substantial and full indemnity costs are different.
[10] Be that as it may, in awarding costs on a substantial indemnity basis, I think it fair to say that those costs should be fixed in an amount that is fair and reasonable for the unsuccessful party to pay on a substantial indemnity basis. The basic principle of substantial indemnity costs cannot however be ignored. In Eccles v. Eccles (2003), 2003 29639 (ON CA), 47 R.F.L. (5th) 4 (Ont. C.A.) the Court stated “Substantial indemnity is comparable to the former solicitor/client scale of costs.” Traditionally, solicitor and client costs were intended to provide complete indemnification for all costs reasonably incurred. See Apotex Inc. v. Egis Pharmaceuticals (1991), 1991 2729 (ON SC), 4 O.R. (3d) 321 per Henry J. and the authorities referred to by him. I do not think however that complete or full indemnification is permissible under the rubric of substantial indemnity costs since the reference in rule 57.01(4) to both substantial and full indemnity costs indicates a difference between the two. Substantially indemnity costs must be reasonably incurred. Also, substantial indemnity costs are defined in the rules to mean costs awarded that are 1.5 times an award made on a partial indemnity basis, again indicating that such costs are not to provide for complete indemnification.
[11] The plaintiff is also claiming substantial indemnity cost for the fees relating to an allegation of the defendant that the plaintiff manipulated trading by creating an artificial trading price for its stock. This allegation was abandoned two days before the start of the trial and formally continued as part of the record until the defendant removed it on the third day of the trial on its motion to amend its defence. The allegation was tantamount to fraudulent conduct and constitutes a ground for substantial indemnity costs for the work involved in defending it.
[12] In sum, the plaintiff is entitled to its costs on a substantial indemnity basis from the date of its offer and also on the work prior to that in defence of the manipulative trading allegation. Otherwise, the plaintiff is entitled to its costs on a partial indemnity basis, to be fixed taking into account the factors in rule 57.01, including what a party in the position of the defendant could reasonably expect to pay if the case were lost.
Quantum of Costs
[13] The plaintiff claims fees to the date of the offer to settle at $756,554 on a partial indemnity basis and claims fees after the offer on a substantial indemnity basis for trial preparation and the trial of $1,018,296[^1], for a total of $1,774,851. With taxes, it comes to $1,951,635.
[14] The defendant takes the position that the amount claimed by the plaintiff is grossly excessive. A draft bill of costs for the defendant has been submitted which provides for total fees of $590,779 calculated on the basis of partial indemnity to the offer of December 28, 2012 and substantial indemnity thereafter. That is approximately 33% of the amount claimed by the plaintiff.
[15] The difference in the two bills can be explained by a few factors. One is the hourly rates. For example, Mr. Groia, called in 1981, has used actual rates charged between $700 at the outset and $800 for most of his work after July, 2010. These are less than the rate of $880 used throughout by Mr. Burden, called in 1976. Another is that the partial indemnity rates used by the plaintiff are in excess of the scale in the practice note, whereas the defendant used those scale rates. Another is that the plaintiff has used more senior lawyers in general. The lawyers helping Mr. Groia for the most part were called in 2003 and 2009, with much lower rates. The lawyers mainly helping Mr. Burden were called in 1997, 1999, 2004 and 2011. Another is that the hours claimed by the plaintiff total 4573.2, including 1165.2 hours for trial preparation and 1365.9 hours for the trial, which lasted 11 days, whereas the hours claimed by the defendant in its draft bill of costs total 2861.6, including trial preparation of 718.5 and 805.9 hours for the trial. The result of these differences is that the total fees claimed by the plaintiff on a partial indemnity basis to the offer of December 28, 2012 and substantial indemnity thereafter are $1,774,851 and the comparable fees claimed by the defendant are $590,779.
[16] The defendant contends that the plaintiff took a “money is no object” approach to the litigation and the amount claimed should be substantially reduced. I realize that it is hard after the fact for a judge to be sanguine as to the amount of work that should have been done by a successful party. Indeed there is authority that in fixing substantial indemnity costs, it is not appropriate to look in hindsight as to the work done. See Apotex Inc. v. Egis Pharmaceuticals, supra, in which Henry J. stated:
For the sake of clarity I add a postscript. Whether a service is performed or engaged in contemplation of adversarial proceedings in court is essentially a matter of judgment. I have looked for the exercise of judgment, together with prudence, foresight and imagination, in assigning services to the motion in this case as the test of fairness, reasonableness and necessity in applying the guiding principles. It is not appropriate to apply the test of hindsight (20/20 vision) to determine whether a service charged for was an extra service or frill not reasonably necessary to defend the client's position. The time to view the decision to commit services to the project is before the hearing or trial -- not on the basis of hindsight which might indicate that as it turned out, the service was unnecessary. In the case at bar, I did not even call on counsel for the defendants yet it was essential that they be fully prepared in case I had done so.
[17] I also realize that it is normal that the work to be done by a plaintiff to build a case is far more than the work needed to be done by a defendant to defend the case. This case is no different in that regard. The case was hard fought, as could be expected, and the defendant had to know that the case would be vigorously be pursued by the plaintiff, just as the defence was vigorously put forward.
[18] However, I have come to the conclusion that the amount of hours claimed by the plaintiff is excessive and not reasonable, even for a substantial indemnity bill of costs.
[19] For example, 1365 hours claimed for an 11 day trial seems excessive. Time for 10 lawyers is claimed. I do not fault the fact that there were three or four gowned lawyers in court for the plaintiff. There were three for the defendant. But I note that substantial time is claimed for five lawyers who never appeared at the trial. No doubt some work was required during the trial by others who did not appear, and the defendant in its draft bill has claimed for two such lawyers. However 244 hours are claimed for Mr. Hamilton and 241.9 for Ms. Jackson, both of whom were at the trial, which means that they spent a great deal of time working in the office during the 11 day trial. Why all of the other lawyers were needed is not apparent.
[20] I also have some difficulty with the amount of time spent on trial preparation, some of which is to be charged on a partial indemnity basis and some on a substantial indemnity basis. 1165.2 hours for trial preparation amounts to approximately 106 hours of trial preparation for each of the 11 days of trial. It is hard to comprehend why that much work was required.
[21] The plaintiff has calculated its costs by taking the hourly rates charged by the various lawyers and applying 60% to those hours for the partial indemnity period and 90% for the substantial indemnity period. I note that the actual hourly rates charged throughout remained constant. For example, Mr. Burden has used an actual hourly rate of $880 for the period from the commencement of the case to the end of the trial in March, 2013. This is the case for all of the plaintiff’s lawyers. As the case commenced in October 2008, I think it highly unlikely that the hourly rates charged were the same throughout. That is not how downtown Toronto law firms have operated, and without evidence to the contrary, some reduction from these rates must be considered in fixing the costs, particularly for the work done prior to the offer to settle.
[22] Regarding the use of the rates recommended in the practice direction of the Costs Subcommittee of the Civil Rules Committee, I have considerable difficulty with the rates in that practice direction. They were the rates contained in the cost grid introduced in January, 2002. When the cost grid was abolished on July 1, 2005, they were continued in the practice direction. These rates are completely outdated and unrealistic for an action fought by two major downtown Toronto law firms.
[23] The practice direction is not a binding rule enacted as a regulation. It states that it “may provide some guidance to the profession as these changes are implemented”. It is apparent that other courts agree that the rates are not realistic. I agree with R.J. Smith in First Capital (Canholdings) Corp. v. North American Property Group 2012 ONSC 1359, [2012] O.J. No. 885 that the rates should be adjusted to account for inflation, but I would go further.
[24] In Canadian National Railway v. Royal & Sun Alliance Insurance Co. of Canada, 2007 ONCA 531, the Court of Appeal awarded trial costs on a partial indemnity basis of 65% of the fees charged to the client. In Eastern Power v. Ontario Electricity Financial Corporation, 2012 ONCA 366, the Court of Appeal awarded trial costs on a partial indemnity basis at 60% of actual rates charged the client. The trial judge had included a substantial indemnity cost award as a result of an offer at 90% of actual rates charged, and while this was set aside as the offer was not better than the results of the appeal, the Court of Appeal made no suggestion that the 90% figure would not have been appropriate if the costs were awarded on a substantial indemnity basis.
[25] I think it appropriate to award costs at 60% of the time charged for partial indemnity costs and 90% for substantial indemnity costs for the work after the offer to settle. The rates charged, however, must be reduced because the rates have been claimed throughout at the 2013 rates.
[26] The defendant contends that the costs should be reduced because the issues were of general importance and important to the industry as a whole. I would not exercise my discretion to reduce costs on this ground. This case was not defended out of any concern for the general importance to the industry. It was a straight contest over money. It was not a case such as Mahar v. Rogers Cablesystems Ltd. (1995), 1995 7129 (ON SC), 25 O.R. (3d) 690 relied on by the defendant in which the evidence indicated that the action was brought in pursuit of what the applicant perceived to be the public interest rather than for any personal gain.
[27] The defendant also contends that because the plaintiff abandoned its claim for specific performance only at the trial, some reduction of costs should be made based on amounts thrown away on defending that claim. I would not make any deduction for that. There is no evidence as to what work was done that can be said to have been thrown away. The defendant tried to have its defence amended at the trial to plead issues that it wished to call expert evidence on, and there is no evidence that the expert evidence would not have been necessary if the claim for specific performance had not been made originally. The experts were to be called by the defendant on the issue of whether the plaintiff had mitigated its damages to the point that there were no damages, as contended by the defendant. The effect of reducing the cost award because of the withdrawal of the claim for specific performance would amount to making a distributive costs award, which is to be restricted to the rarest of cases, this case not being one of them. See Oakville Storage & Forwarders Ltd. v. Canadian National Railway (1991), 1991 7060 (ON CA), 5 O.R. (3d) 1 (C.A.) and Murphy v. Alexander (2004), 2004 15493 (ON CA), 236 D.L.R. (4th) 302 (Ont. C.A.)
[28] Taking into account all of the foregoing, and setting a fee that I think fair and appropriate on a partial and substantial indemnity basis, I set the fees at $1,400,000, inclusive of taxes. Disbursements of $191,813 are allowed, for a total of $1,591,813 to be paid to the plaintiff by the defendant.
Interest
[29] The plaintiff has claimed prejudgment interest of $2,426,574.55 using the prescribed prejudgment interest rate of 3.3% per annum for the third quarter of 2008, the quarter prior to the action being commenced. Interest has been claimed from July 31, 2008, the closing date for the engagement letter, to March 1, 2013.
[30] The defendant asserts that the interest should run only from January, 2013, arguing that it was only then that the plaintiff elected to seek damages and not pursue its specific performance claim. This argument is in part a repeat performance of an argument made by the defendant during the trial on its unsuccessful motion to amend the defence and at trial. It was argued that if there was a breach of the agreement by the defendant, the date of the assessment of damages arising from the breach must be taken to be the date of trial, because it was only then that the plaintiff elected not to pursue its claim for specific performance. I did not accept that argument. I held that the appropriate measure of damages was the amount per share that Stetson would have received from the defendant had the engagement letter closed on July 31, 2008 less the amount per share received by Stetson from the Canaccord transaction.
[31] In any event, under section 128(1) of the Courts of Justice Act, interest is to run from the date the cause of action arose, and that was July 31, 2008 when the defendant refused to close the engagement letter. There is no basis to contend that interest should only run from the date of the trial. That would provide the defendant with a windfall because it has had the use of the money it failed to pay to the plaintiff on July 31, 2008, and as it is a commercial enterprise, one can presume that it has made full use of the money.
[32] The defendant also contends that the rate of interest should be 1.3%, the pre-judgment interest rate for the first quarter of 2013, during which the plaintiff elected not to pursue its specific performance claim. For the same reason, this is inappropriate. Alternatively, the defendant argues for the same rate of 1.3% as it is approximately the geometric average of the prescribed prejudgment interest rates for the period 2008-2013. Using this rate would result in prejudgment interest of $967,350.
[33] Section 127 of the CJA provides for a prejudgment interest rate at the rate in the quarter before the proceeding was commenced. This is a presumptive rate to which a successful plaintiff has a prima facie entitlement, and the onus is on a defendant to justify a departure from this rate. See Andani Estate v. Peel, [1993] O.J. No. 1604 (C.A.) and Graham v. Rourke, (1990), 1990 7005 (ON CA), 75 O.R. (2d) 622 (C.A.). Section 130 of the CJA gives a court discretion to vary the s.128 rate.
[34] Interest is to compensate a plaintiff for the loss of use and the time value of money. See Andani Estate v. Peel, supra, and Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601. The plaintiff, a commercial enterprise, is out of the use of the money and the preferred shareholders, to whom some of the proceeds of the judgment may be paid, are investors who have invested in the shares of the plaintiff and are out the money. The defendant is a commercial enterprise which has made use of the money. Both sides no doubt make compounded interest on their money. See Bank of America Canada v. Mutual Trust Co. The plaintiff has not sought compound interest, but I see no reason to depart from the presumed rate of interest provided for in section 128(1) of the CJA.
[35] The possibility that a judge would award pre-judgment interest at the section 128(1) rate was a risk that the defendants chose to run in this case. Pre-judgment interest is intended to encourage early settlements. The comments of Cronk J.A. in Kinbauri Gold Corp. v. IAMGOLD Internatinal African Mining Gold Corp. (2004), 2004 36051 (ON CA), 49 B.L.R. (3d) 275 are apt.
[36] The plaintiff is entitled to prejudgment interest of $2,426,574.55.
Newbould J.
Date: August 12, 2013
[^1]: This includes fees of $2,531 for working with a trading expert for the trading manipulation defence.