Partial indemnity costs: determined objectively or subjectively?

In TMS Lighting Ltd. v. KJS Transport Inc., Mr. Justice David Price made some comments about fixing partial indemnity costs that, I think, are noteworthy. He held unequivocally that the correct approach, at least in the first instance, is an objective one: the “Information for the Profession” table that was issued by the Costs Subcommittee of the Civil Rules Committee back in July, 2005 and not some percentage of the lawyer’s actual hourly rate, as some courts have said. He went so far as to say that the actual rate is “irrelevant” to the issue of costs, except in that it sets an upper limit:

[T]he starting point in arriving at an appropriate hourly rate when fixing costs is the “Information for the Profession” table, not the actual hourly rate charged. The actual rate charged is irrelevant, except as a limiting factor, in preventing the costs awarded from exceeding the actual fees charged. The Costs Subcommittee’s rates apply to all lawyers and all cases, so everyone of the same level of experience starts at the same place.

The court adjusts the hourly rate, or the resulting fees, to reflect unique features of the case, including the complexity of the proceeding, the importance of the issues, and the other factors set out in Rule 57.01(1). If an excessive amount of time was spent, or too many lawyers worked on the file, the court reduces the resulting amount of fees accordingly. As long as the resulting amount does not exceed the amount actually charged to the client, the actual fee that the client agreed to pay is irrelevant.

In making this finding, Justice Price followed a Divisional Court decision in which Heather Williams of our office acted as counsel,  Geographic Resources Integrated Data Solutions Ltd. v. Peterson, 2013 ONSC 1041 (CanLII). (This line of cases stemmed from the Mantella case that was discussed in my previous post.)

It has always been my view that Rule 57.01 wrestles somewhat schizophrenically (and unsuccessfully) with two possible philosophies to the process of determining hourly rates for purposes of fixing partial indemnity costs. One is subjective and the other is objective.

Under the subjective approach, the starting point would be the actual rate charged by the lawyer to his or her client. Typically, some percentage of that rate, usually 60-66%,  is allowed as a partial indemnity rate. In the Moore v. Getahun case (which has attracted lots of attention for other reasons), Justice Janet Wilson used this approach. The following excerpt from her reasons is a good outline of how it usually works:

[20] Courts have held that partial indemnity costs, as a rough estimate, are 60% of full indemnity costs. See: Hanis v. University of Western Ontario, 2006 CanLII 23155 (ON SC), 53 C.C.E.L. (3d) 86, 42 C.C.L.I. (4th) 65 at para. 46; Allianz Global Risks US Insurance Co. v. Canada, 2014 ONSC 1552 (CanLII), 2014 CarswellOnt 3377 at para. 3; Lewis v. Cantertrot Investments Ltd., 2010 ONSC 5679 (CanLII), 1 C.P.C. (7th) 428 at para. 66. In one case a proportion of 55% has also been suggested: see Boyd v. Taj Mahal Stables Inc., 2009 CarswellOnt 3613 at para. 12). In my view, as the hourly rates proposed by the plaintiff in my view are very reasonable, the 55% figure suggested by the defendant’s counsel is too low. Furthermore, under s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43, using a different percentage rate is within the court’s discretion.

[21] I am of the view that a partial indemnity costs award amounting to approximately 60% of the plaintiff’s full indemnity costs, as determined by the court, is reasonable in this case, and in accordance with the case law.

Not a mention of the “Information for the Profession” table.

Under what I am calling the “subjective” approach, if two lawyers of approximately the same experience render services that are identical in every other respect, they will receive significantly different treatment with respect to partial indemnity costs if one has a much higher hourly rate than the other.

The “objective” approach, used by Justice Price, ignores the actual hourly rate charged by the lawyer and focuses on the partial indemnity rate established by the “Information for the Profession” (sometimes adjusted for inflation). The result is that the clients of lawyers who, because of expensive overhead or other reasons, are charging their clients a high hourly rate, will receive as costs a much smaller proportion of their actual legal expenditure than will lawyers with lower rates.

The reason that I have characterized Rule 57.01 as “schizophrenic” is that it attempts to use both approaches. Subrule 57.01(1) sets out a list of factors that the court “may consider”. The very first one is subjective: “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”.

The next one is objective: “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”.

How are these to be reconciled? How can a court, in any principled way base a costs finding on both the actual hourly rate of the lawyer and what is objectively reasonable? I would have thought that either the objective or the subjective factor would have to be viewed as the starting point, perhaps to be mitigated by the other one. And certainly, Justice Price seems to be saying that the objective factor (the “Information for the Profession”) is the key element. He might have gone too far in saying that actual hourly rates charged are “irrelevant”, but I say that only because R. 57.01(1)(a) expressly allows a court to take actual rates into account in the exercise of its discretion in awarding costs.

Still, it is probably fair to say that Justice Price’s decision is in step with a growing cynicism on the part of the bench with high hourly rates (see the Court of Appeal’s very pointed comments recently in Bank of Nova Scotia v. Diemer, 2014 ONCA 851 (CanLII), under the heading, “The Rise and Dominance of the Billable Hour”).

My impression is that the tide is moving in the direction of the “objective” approach.

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