C.A. rejects Mantella approach on costs

In a decision rendered today, the Court of Appeal has made it clear that partial indemnity costs should not be awarded in an amount that is equivalent to substantial indemnity. The case is 790668 Ontario Inc. v. D’Andrea Management Inc., 2015 ONCA 557. It also has, I think, some broader implications for the law of costs.

Beginning with Mantella v. Mantella, 2006 CanLII 17337 (ON SC) and culminating in the Divisional Court’s decision in Geographic Resources Integrated Data Solutions Ltd. v. Peterson, 2013 ONSC 1041 (CanLII), a number of cases have held that where counsel has negotiated a retainer with a client whereby he or she is charging a reduced hourly rate, an award of partial indemnity costs can be made that is equivalent to full indemnity, so long as the factors set out in Rule 57.01 are taken into account.

No more. In 790668, the Court of Appeal disapproved of that approach. The motions judge in the case had followed Mantella and Geographic Resources in awarding partial indemnity costs “in the full amount of the actual rates charged by counsel to LawPRO”. Her rationale for doing so was the one that Mantella and succeeding cases had endorsed, that “the LawPRO hourly rates were ‘roughly two thirds of those charged by lawyers practising in this area with comparable experience'” and that she “declined…to apply a ‘double discount'”.

However, the Court of Appeal said that that was an error. Justice Lauwers, writing for himself and Justices MacFarland and Huscroft, said:

In my view, it was an error in principle for the motion judge to award partial indemnity costs in the full amount of the actual costs paid. While a court has discretion to determine the size of the discount to a party’s actual costs when awarding partial indemnity costs, with due consideration of the factors set out in rule 57.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, I am unable to see, on the facts in this record, a basis to depart from the ordinary rule of thumb that partial indemnity costs should be about one-third less than substantial indemnity costs.

This whole issue is another example of the dichotomy between an approach to costs that tries to be both objective and subjective. I wrote about this problem last December in a post entitled Partial indemnity costs: determined objectively or subjectively?

So, where are we left following today’s decision?

Well, the Court of Appeal says that there is an “ordinary rule of thumb” whereby partial indemnity costs are to be “about one-third less than substantial indemnity costs”. No mention was made in the decision, of the definitions of either term in Rule 1.03, nor of the “Information for the Profession” table created by the Costs Subcommittee of the Civil Rules Committee. That table (now ten years old) sets out maximum partial indemnity hourly rates for lawyers, clerks and students, based largely on year of call.

Is the “Information for the Profession” table now of no effect? Given that the Court of Appeal, in today’s decision, said that “[t]he applicability of Mantella and Geographic Resources is an issue of general importance”, it is unfortunate that more clarification was not provided.

In 790668 itself, Justice Lauwers applied “a discount of one third against the actual hourly rate charged to [sic] the third parties’ counsel in fixing partial indemnity costs”. Based on his earlier comments about “the ordinary rule of thumb (quoted above), this would suggest that he was treating “substantial indemnity” costs as equivalent to actual fees charged. But that is not what the Rules say. In fairness though, when we look at what they do say, the picture does not become a lot clearer.

Rule 1.03 defines both “partial indemnity costs” and “substantial indemnity costs”. The definition of the former is: “costs awarded in accordance with Part I of Tariff A”.

“Substantial indemnity costs” are defined as “costs awarded in an amount that is 1.5 times what would otherwise be awarded in accordance with Part I of Tariff A”.

Part I of Tariff A then directs us to the Courts of Justice Act and Rule 57.01:

The fee for any step in a proceeding authorized by the Rules of Civil Procedure and the counsel fee for motions, applications, trials, references and appeals shall be determined in accordance with subsection 131 of the Courts of Justice Act and the factors set out in subrule 57.01(1).

Section 131 of the Courts of Justice Act says little more than that costs are in the discretion of the court:

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.

Subrule 57.01 sets out the factors that courts are to consider in awarding costs:

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  or which costs are being fixed;
(a) the amount claimed and the amount recovered in the proceeding;
(b) the apportionment of liability;
(c) the complexity of the proceeding;
(d) the importance of the issues;
(e) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding;
(f) whether any step in the proceeding was,
(i) improper, vexatious or unnecessary, or
(ii) taken through negligence, mistake or excessive caution;
(g) a party’s denial of or refusal to admit anything that should have been admitted;
(h) whether it is appropriate to award any costs or more than one set of costs where a party,
(i) commenced separate proceedings for claims that should have been made in one proceeding, or
(ii) in defending a proceeding separated unnecessarily from another party in the same interest or defended by a different lawyer; and
(i) any other matter relevant to the question of costs.

This isn’t very helpful.

Justice Denis Power tried, during his judicial career, to bring some clarity to the subject. In an often-quoted passage from Hanis v. University of Western Ontario, 2006 CanLII 23155 (ON SC), he differentiated among partial, substantial, and “full” indemnity and assigned percentages to each:

Rule 1 defines substantial indemnity costs as meaning “costs awarded in an amount that is 1.5 times what would otherwise be allowable in accordance with Part I of Tariff A” – i.e., 1.5 times the partial indemnity rate. Costs calculated on a substantial indemnity scale, obviously, represent something less than full indemnity. By way of example: – if the actual fees billed by a lawyer to his or her client are, for instance, $300 per hour, and if $300 is acceptable as an appropriate hourly billing rate in the circumstances, the partial indemnity rate should be something in the range of 60% of that amount, or $180 per hour. Therefore, the substantial indemnity rate, using the 1.5  formula, would be $270 per hour. This equates to something in the range of 90% of the fees actually being charged to the client, i.e. full indemnity. These numbers, needless to say, are simply rough estimates of the relationship between the three levels of costs – i.e., 60%, 90% and 100%. I quite often employ these percentages as a rough rule of thumb.

(Working backwards, if substantial indemnity costs are 1.5 times partial indemnity costs, that means that the latter are two-thirds (1 ÷ 1.5) of the former.)

Justice Power’s approach was implicitly a subjective one, in that his point of departure was the actual hourly rate charged. From that, he derived the appropriate partial indemnity rate by discounting it by 40 percent. But Rule 1.03 does not define partial indemnity costs in terms of either “actual” or “substantial” indemnity. Rather, “substantial indemnity costs” are defined to be a function of “partial indemnity costs”.

And the use of 60% of actual fees as a basis for calculating partial indemnity fees has no warrant in the Rules, the Courts of Justice Act or Tariff A.

The whole point of the “Information for the Profession” table was (I assume) to provide courts with guidance as to appropriate partial indemnity rates that do not depend on actual rates. From there, if necessary, substantial indemnity costs could be calculated. That would be an objective approach.

All of which brings me back to today’s decision in 790668 Ontario Inc. v. D’Andrea Management Inc. The Court of Appeal seems to have adopted what I have called the “subjective” approach (i.e., one that takes as its starting point the actual hourly rate charged). It then derives a partial indemnity rate by discounting the actual rate by one-third (a bit less of a reduction than Power J.’s sixty percent).

Justice Lauwers’ “rule of thumb” was that “partial indemnity costs should be about one-third less than substantial indemnity costs”, but his calculation in this case was based on a one-third discount of actual fees. It would appear therefore, that he was treating “substantial indemnity” and “full indemnity” as equivalents. (If partial indemnity is to be calculated as two-thirds of actual fees, then substantial indemnity must be equal to actual fees: (0.667 [partial indemnity per 790668] × 1.5 [“substantial indemnity costs” definition in subrule 1.03] = 1)

Quite apart from how we are to calculate partial indemnity costs (and I do not see much further use for the “Information for the Profession” table), we are still left with the question of whether a litigant who is required to pay costs should be at the mercy of the opposing party’s choice of counsel. If that lawyer or law firm happens to have very high hourly rate(s), is the losing party stuck with having to pay 66% of that high rate?

The Mantella approach to costs was an example of the objective approach: what is a “reasonable” amount of costs, based on some objective measure (the “Information for the Profession” table)? That approach has now been sent packing.

My own view is that it is time for the Rules Committee to look again at the issue of costs and whether there is still a place for its “Information for the Profession” table.

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