2013 ONSC 6719
COURT FILE NO.: 07-CV-339990
DATE: October 28, 2013
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Pegah Construction Ltd.
K. Bannon (Pegah), for the plaintiff
Fax: 416-368-3467
Plaintiff
- and -
Panterra Mansions Joint Venture Corp., 1221456 Ontario Limited, 1746288 Ontario Inc., Lombard General Insurance Company of Canada, Romspen Investment Corporation and Howard Kutner
D. Preger for the defendant SF Partners as receiver for Panterra Mansions
Fax: 416-865-1398
M. Steidman, Q.C. for the defendants Romspen and 1746288 Ontario Inc.
Fax: 416-360-6868
Defendants
Master C. Albert
COSTS OF TRIAL OF AN ISSUE
I. INTRODUCTION
This construction lien reference is proceeding as a bifurcated trial. The first issue to be tried and now before the court on the issue of costs, was the characterization of the relationship of Panterra Mansions Joint Venture Group (“Panterra”) and Pegah Construction Ltd. (“Pegah”). That issue is critical to determining how much of the reserve fund of $730,000.00 held by SF Partners, the receiver for Panterra, (“SFP”) is available to lien claimants and how much is available to other creditors and guarantors, including the mortgagee that caused SFP to be appointed. The second part of the bifurcated trial will focus on the individual lien claims, priorities and apportionment.
On May 31, 2013 I released my decision on the first issue, finding that the relationship of Panterra and Pegah was one of owner and general contractor. Pegah was the successful party. I ordered the exchange of written submissions on costs at the hearing for directions on July 2, 2013. All parties filed costs submissions.
Pegah asks for costs to be fixed at $167,492.92, including substantial indemnity costs from the date it served an offer to settle. Pegah’s Bill of Costs claims costs for all productions and discovery, including costs in respect of the second issue, not yet tried.
1746288 Ontario Inc. (“174”) and Romspen Investment Corporation (“Romspen”), represented by the same counsel and collectively referred to herein as the “mortgagee”, argues that costs in favour of Pegah should be fixed at no more than $35,000.00, with payment deferred until after the trial of the second issue. SFP proposes that the parties each bear their own costs, but in the alternative proposes that any costs ordered payable to Pegah should be paid out of the $730,000.00 reserve fund that SFP is holding for payment to lien claimants, pending the court’s determination of the individual lien claims.
II. RELEVANT FACTORS IN FIXING COSTS
As a general principle costs in a proceeding under the Construction Lien Act, as in an ordinary action, are in the absolute discretion of the court. In fixing costs the court must consider the facts and circumstances of the particular case; it is not a mechanical exercise: Boucher v. Public Accountants Council for the Province of Ontario[^1].
There is no reason in this case to depart from the usual practice of awarding costs to the successful party. I find that costs should be awarded to Pegah for the trial of the first issue.Tthe usual relevant factors applicable to fixing trial costs in this case include:
a. Does Pegah’s offer to settle entitle Pegah to costs on a substantial indemnity scale?
b. Should Pegah’s costs be paid out of the reserve fund that SFP is holding for distribution to construction lien claimants?
c. What, if any, proportion of the costs incurred in the pretrial stage should be apportioned to costs of the trial of the first issue in this bifurcated trial?
d. What is an appropriate quantification of costs of the trial of the first issue? Relevant factors that the court considers when fixing costs are set out in rules 57.01(1), 49 and 1.04 and section 86 of the Construction Lien Act. These factors include:
• indemnification;
• reasonable expectation of the payor;
• outcome;
• complexity;
• importance of the issues;
• conduct of the parties; and
• proportionality[^2].
e. When should costs of the trial of the first issue be payable: immediately or after disposition of the second part of the bifurcated trial?
- I have considered each of these factors in exercising my discretion to determine an appropriate costs order in this case.
III. THE SETTLEMENT OFFER
Does Pegah’s offer to settle meet the requirements of rule 49.10 and if so was it served in time?
The principle underlying rule 49.10 is that a party who takes reasonable steps to resolve the matter and avoid trial is entitled to be reimbursed for most of the costs incurred thereafter if that party is ultimately more successful at trial. Had SFP and the mortgagee accepted Pegah’s offer to settle then Pegah would not have incurred any of the post-offer costs claimed on the trial of the first issue.
Rule 49 creates a presumption in favour of a successful litigant that the court will award substantial indemnity costs from and after the date of a qualifying settlement offer. The cost consequences are explained in sub-rule 49.10: where an offer to settle is made and not withdrawn or accepted, and where the party serving the offer achieves a result at trial that is as good or better, that party is entitled to partial indemnity costs up to the date the offer was served and substantial indemnity costs thereafter unless the court orders otherwise.
Pegah offered to settle the trial of an issue on the basis that:
a. SFP and the mortgagee concede that Panterra and Pegah were in the relationship of owner and general contractor, and
b. the defendants pay Pegah’s costs on a partial indemnity scale.
Pegah served the offer on SFP and the mortgagee on May 7, 2013 after 4:00 p.m. The fixed date for the commencement of trial was May 14, 2013 at 10:00am.
The trial proceeded and Pegah was successful, the court finding that Panterra and Pegah were in the relationship of owner and general contractor. This is the same result that would have been achieved had SFP and the mortgagee accepted Pegah’s offer.
The mortgagee argues that the offer fails to qualify because it is vague in respect of costs. Both defendants argue that the offer was served out of time to attract the rule’s cost consequences.
The vagueness that the mortgagee speaks of is that the offer fails to specify a timeframe for calculating costs. It reads:
“The Defendants pay Pegah’s costs on a partial indemnity basis at an amount to be agreed upon or as assessed by Master Albert”
An offer to settle that provides for costs on a partial indemnity scale to be fixed by the reference Master is not vague. It parallels rule 49.07(5) which provides that where an accepted offer to settle is silent as to costs the plaintiff is entitled to costs to the date of acceptance. Had SFP and the mortgagee accepted Pegah's offer and conceded that Pegah was a general contractor, trial of the first issue could have been avoided and the parties could have asked the court to fix costs on a partial indemnity scale. I find that the offer was not so vague as to disqualify Pegah from the benefits of rule 49.10.
On the issue of timing, rule 49 provides that to qualify an offer must be served at least seven days before trial. In this case the offer, served after 4:00pm on May 7, 2013, is deemed to have been served on May 8, 2013 (rule 16.05(d)). The fixed date trial was to commence on May 14, 2013 at 10:00am. Pegah argues that the trial did not actually commence until May 16, 2013 because the preliminary issue raised by SFP and the mortgagee at the opening of trial on May 14, 2013 (admissibility of extrinsic evidence) consumed the first two days set aside for trial. The evidentiary portion of the trial did not commence until May 16, 2013.
Notwithstanding that the first witness was not called until May 16, 2013, I find that the trial commenced on May 14, 2013. The issue as to admissibility of extrinsic evidence was raised as a preliminary issue at trial. The offer to settle served on May 8, 2013 was not served at least seven days before trial and does not attract the cost consequences of an offer to settle made pursuant to rule 49.
IV. THE SFP RESERVE FUND AND LIABILITY TO PAY COSTS
SFP argues that each party should bear its own costs but in the alternative Pegah’s costs should be paid out of the reserve fund that SFP holds for the benefit of the lien claimants. SFP’s rationale is that the trial was necessary because SFP could not accept Pegah’s settlement offer as to do so would benefit some creditors and guarantors at the expense of others. I reject SFP’s rationale. By going to trial SFP asserted a position that favours the mortgagee at the expense of the lien claimants. The parties competing for the insolvent party’s remaining assets are the ones to properly advance the opposing positions at trial.
SFP relies on the order of Justice Morawetz dated September 24, 2007 at paragraphs 16 and 3(m):
THIS COURT ORDERS that the Receiver shall incur no liability or obligation as a result of its appointment or the carrying out the provisions of this order, save and except for any gross negligence or willful misconduct on its part. Nothing in this order shall derogate from the protections afforded the receiver by section 14.06 of the BIA or by any other applicable legislation.
THIS COURT ORDERS that the Receiver is hereby empowered and authorized, but not obligated, to act at once in respect of the Property and, without in any way limiting the generality of the foregoing, the Receiver is hereby expressly empowered and authorized to do any of the following where the Receiver considers it necessary or desirable:…
(m) to initiate, prosecute and continue the prosecution of any and all proceedings and to defend all proceedings now pending or hereafter instituted with respect to the Debtor (Panterra), the Property or the Receiver, and to settle or compromise any such proceedings. The authority hereby conveyed shall extend to such appeals or applications for judicial review in respect of any order or judgment pronounced in any such proceeding.
emphasis added
- The endorsement of Justice Patillo of August 5, 2010 in the insolvency proceedings authorizes and directs the receiver to set aside a reserve fund of $730,000.00 to be distributed to the lien claimants once the court determines Panterra's liability to the various lien claimants. The endorsement, silent on costs of the construction lien litigation, provides as follows:
The requested distribution will leave $1,250,000 undistributed of which $730,000.00 (10% of value [of] work done) is for holdback regarding the lien claimants. There are 11 lien claimants with claims totaling approximately $2,043,000.00.
The lien claimants oppose the proposed full payment to the mortgagees. It is submitted on their behalf that s. 78(2) of the Construction Lien Act (“CLA”) creates a priority in respect of their claims by the operation of s. 24(2) of the CLA and the fact they provided written notice of the liens, such that the entire amount of their claims must be held back and not just the 10% holdback amount proposed. (…discussion regarding notice holdback…)
In my view, therefore, while the Receiver must hold back the basic holdback of 10% (which it proposes to do), there is no requirement that it hold back the full amount of the lien claims. I am advised that the lien claimants have sued the mortgagees in their lien claims. My decision today is without prejudice to the lien claimants advancing their priority argument against the mortgagees in those proceedings. I simply say that, based on the material before me, I am not satisfied the lien claimants have established a priority such that they are entitled to have the full amount of their claims held back.
On the basis of the material filed I am prepared to authorize the payments proposed and approve the activities of the Receiver as detailed in the 8th report.
Order signed by me.
A receivership order that provides for the receiver's costs (including costs the receiver may be required to pay as an unsuccessful litigant) to be paid out of funds held for the benefit of unpaid creditors does not give the receiver carte blanche to incur litigation costs unreasonably.
The receivership order imposes a test of necessity and desirability, in the receiver's sole discretion. That discretion must be exercised reasonably. The issue is whether it was reasonable for SFP to take such an active role in this construction lien reference.
The mortgagee advanced its position at trial very ably through experienced and well-prepared counsel. SFP's position at trial of the first issue was identical to that of the mortgagee. SFP duplicated the efforts of the mortgagee, incurred costs unnecessarily and caused Pegah to incur increased costs unnecessarily. It was not reasonable or necessary for SFP to take an active role in this litigation. As such, costs should not be payable out of the reserve fund.
In conclusion I find that the mortgagee is the party liable to pay Pegah’s costs of the trial of the first issue.
V. COSTS FOR PRETRIAL PROCEDURES
The issue is whether Pegah is entitled to recover costs at this stage for pretrial proceedings, including hearings for directions, production and discovery.
Pegah claims that half of the costs of preparation to date (production and discovery) should be included in costs fixed for the trial of the first issue because roughly half of the time and expense incurred pertains to the first trial issue, and the balance is attributable to the remaining issues yet to be tried. The mortgagee argues that none of these costs should be included in the costs fixed for the trial of the first issue but rather should be left to the end of the entire reference.
I prefer Pegah’s approach. The trial of the first issue required several days of trial evidence with six affidavits of evidence in chief, many with multiple exhibits attached, plus a document brief. To get to this stage hearings for direction on the reference, production and discovery were required. As the successful party Pegah is entitled to have those costs fixed at this stage. A reasonable approach in the circumstances of this reference is to apportion half of the costs of preparation to the trial of the first issue and the balance to the trial of the remaining issues, which will follow in due course. On that basis, I have considered only half of the time claimed for steps 1 and 2 in Pegah’s Bill of Costs as costs of the trial of the first issue.
VI. QUANTIFYING COSTS: OTHER RELEVANT FACTORS
a. Indemnity
Scale of costs: The court must consider whether costs on a substantial indemnity scale are warranted. For reasons already given the settlement offer does not attract an award of substantial indemnity costs. Nor does the conduct of the defendants, despite their taking Pegah and the court by surprise in failing to raise the issue of extrinsic evidence in any of the pretrial hearings for directions, or giving notice of this issue before trial. While such conduct cannot be condoned and the time claimed for responding to the issue is reflected in the costs award, it is not conduct so egregious as to invite an award of substantial indemnity costs for some or all of the proceeding. I find that the appropriate scale of costs is partial indemnity.
Quantification: While fixing costs is not a mechanical exercise of multiplying hours spent by hourly rates, the amount of time devoted to preparing the case and attending at trial and the cost of doing so to the client is a relevant factor.
In Pegah’s Bill of Costs the actual rates and substantial indemnity rates are identical for some time keepers. The general practice is that substantial indemnity rates should be lower than actual rates charged to the client, and partial indemnity rates should be lower still. There is no rule about the percentage of actual rates allowable for partial indemnity costs. The rule of thumb is that it is generally in the range of fifty percent.
I find that Pegah’s Bill of Costs reflects inflated amounts for partial indemnity costs. In quantifying costs I have reduced the amounts claimed accordingly to reflect an appropriate discount for partial indemnity costs.
I find that given the years of experience of the lawyers who worked on the case the hourly rates reported as charged are reasonable for lawyers practicing in metropolitan Toronto who specialize in construction lien matters. However, not all time reported and claimed by Pegah in the Bill of Costs is accepted for the purpose of fixing costs.
b. Reasonable expectation
- The court must be fair and reasonable in exercising its discretion to award costs. As noted by the Court of Appeal in Boucher v. Public Accountants Council for the Province of Ontario[^3]:
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…The notions of fairness and reasonableness are embedded in the common law. Judges have been applying these notions for centuries to the factual matrix of particular cases.
Access to justice requires that a costs award must be in the reasonable expectation of the unsuccessful party. Consequently reasonable expectation of the unsuccessful party is a relevant factor in exercising discretion when fixing costs. The key concept is reasonableness.
The costs provisions of the Construction Lien Act and the Rules should reasonably have informed the defendants to expect to pay costs if unsuccessful. The mortgagee filed a Bill of Costs with its submissions, after knowing the disposition of the trial. I find that a party’s reasonable expectation of costs is more realistic if their Bill of Costs or Costs Outline is filed before they know the disposition of the case.
The mortgagee’s Bill of Costs excludes production and discovery. As to hourly rates claimed, the mortgagee’s Bill of Costs provides evidence that the hourly rates upon which Pegah’s Bill of Costs is based were or ought to have been within the reasonable expectation of the mortgagee.
The mortgagee’s Bill of Costs reports costs of $35,492.00 for the trial of the first issue, excluding costs for production and discovery and all but one hearing for directions. SFP did not file a Costs Outline or a Bill of Costs. The two defendants “double teamed”, with SFP and the mortgagee arguing the same position at trial.
For these reasons the defendants’ reasonable expectation as to Pegah’s costs ought to be significantly higher than the amount shown in the mortgagee’s Bill of Costs.
c. Claim and Outcome
- The issue at trial was the relationship of the parties. Pegah was entirely successful on the issue.
d. Complexity
The issue at trial was moderately complex, requiring the court to examine the contract documents, the conduct of the parties in carrying out the contract and analyze the many cases where the relationship of the parties in a construction project was in issue.
The defendants’ surprise motion to exclude extrinsic evidence, raised at the opening of trial, added procedural and substantive complexity.
e. Importance of the issues
- The issue of the relationship of the parties is extremely important to all parties. By determining this issue the parties can focus the balance of the trial on the lien claims and apportionment of the $730,000.00 reserve fund.
f. Conduct of the parties
- The conduct of the parties is a neutral factor in fixing costs.
h. Proportionality
- Even before the principle of proportionality was explicitly incorporated into section 1.04 of the Rules it was an intrinsic component of the Construction Lien Act. Sections 67(1) and 86(2) of the Act provide:
67(1). Summary Procedure: The procedure in an action shall be as far as possible of a summary character, having regard to the amount and nature of the liens in question.
86(2). Where the least expensive course not taken: Where the least expensive course is not taken by a party, the costs allowed to the party shall not exceed what would have been incurred had the least expensive course been taken.
Read together these provisions express the expectation that lien proceedings will be streamlined and proportionate to the matters in issue.
The Rules apply except where inconsistent with the Construction Lien Act. Rule 1.04, as recently amended, provides:
1.04(1.1) In applying these rules, the court shall make orders and give directions that are proportionate to the importance and complexity of the issues, and to the amount involved, in the proceeding.
- I have taken into account proportionality and the time and cost savings to all parties that will result from bifurcating the trial and adjudicating the nature of the relationship of the parties in the first trial.
VII. TIMING: WHEN SHOULD COSTS BE PAID?
The practice in civil actions is to “pay as you go”. That principle must be balanced against the concern that parties ought not be encouraged to bifurcate trials so that the trial of the first issue is relied upon to fund the second issue.
In my view it is most appropriate in circumstances of a bifurcated trail to order costs payable to Pegah in any event of the costs, but not payable until the balance of the reference trial has been completed.
VIII. CONCLUSION
- Taking all of these factors into account I find that Pegah’s reasonable costs of the trial of the first issue, including one half of the time for pretrial preparation including production and discovery and one half of the disbursement for discovery transcripts is $68,421.97, broken down as follows:
Affidavit of documents: $ 3,000.00
Discovery: $15,000.00
Preparation Trial of an Issue[^4]: $16,000.00
Preparation and Trial[^5]: $17,000.00
(and 6) Costs: $ 1,900.00_
$53,000.00
HST on fees: $ 6,890.00
Disbursements[^6]: $ 7,550.42
HST on disbursements: $ 981.55_
TOTAL: $68,421.97_
In conclusion on the issue of costs of the trial of the first issue, THIS COURT ORDERS that the defendants 1746288 Ontario Inc. and Romspen Investment Corporation jointly and severally pay costs of the trial of the first issue to Pegah Construction Ltd. fixed at $68,421.97, payable in any event of the cause.
This costs disposition is incorporated into the interim report on the trial of the first issue.
Master C. Albert .
Released: October 28, 2013
2013 ONSC 6719
COURT FILE NO.: 07-CV-339990
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Pegah Construction Ltd.
Plaintiff
- and -
Panterra Mansions Joint Venture Corp., 1221456 Ontario Limited, 1746288 Ontario Inc., Lombard General Insurance Company of Canada, Romspen Investment Corporation and Howard Kutner
Defendants
COSTS OF TRIAL OF AN ISSUE
Master C. Albert
Released: October 28, 2013
[^1]: 2004 14579 (ON CA), [2004] O.J. No. 2634 per Armstrong, J.A. at paras. 24 and 26, cited by D.G.Price, J. in Blankers.v.Stewart 2010 ONSC 3978 per at paras 39 and 40 [^2]: Rule 1.04 [^3]: 2004 14579 (ON CA), [2004] O.J. No. 2634 per Armstrong, J.A. at paras. 24 and 26, cited by D.G.Price, J. in Blankers.v.Stewart 2010 ONSC 3978 per at paras 39 and 40 [^4]: Prior to settlement offer, partial indemnity [^5]: Subsequent to settlement offer, partial indemnity [^6]: Includes only 50% of transcript disbursement