More costs confusion

I’ve come across a couple of decisions recently that make it even more challenging for an “Elgin Street hack” (to paraphrase John Mortimer) to figure out the law of costs.

My attention was drawn to the first one by Debra Rolph of LawPRO. Having pronounced in a recent post on this blog, the death of the Mantella approach to costs, it now seems that I might have spoken too soon. That post said that in 790668 Ontario Inc. v. D’Andrea Management Inc., 2015 ONCA 557, the Court of Appeal appeared to have disapproved of the Mantella approach to costs, whereby partial indemnity costs could be recovered at an amount up to but not more than the actual hourly rate of the lawyer in question, where that lawyer is charging a discounted rate.

However, Ms. Rolph noted that that same Court of Appeal recently upheld an award of costs by Justice Frederick Myers in Mirkais Investments Inc. v. Klotz, 2015 ONCA 632 (CanLII), affirming 2014 ONSC 6907 (CanLII). In that case, one of the factors that Justice Myers expressly relied upon in making his costs ruling was that in this lawyer’s negligence case, “[the defendant lawyer’s counsel’s] rates are heavily discounted for the defendant’s insurer”. The Court of Appeal said that Justice Myers had “instructed himself properly as to the relevant principles” but did not refer to the discounted hourly rates.

Thus, it remains a bit unclear whether that is or is not a valid factor for a court to weigh and, if so, how it is to be taken into account.

The other case that I saw was not a costs decision as such, but has, I think, some implications for the law of costs. It was a ruling of Justice Frank Newbould in Fairfield Sentry Limited et al v PricewaterhouseCoopers LLP et al., 2015 ONSC 4961 (CanLII) on a motion for security for costs.

It must be said, to begin with, that the amount at stake in that action is very substantial: $5 billion. (The plaintiffs invested with Bernie Madoff and their liquidator is suing their auditors.)

On the motion for security for costs, the plaintiff objected to the hourly rates upon which the defendants had based their demand for security, saying that “these rates are too high and do not reflect the rates recommended in the practice direction of the Costs Subcommittee of the Civil Rules Committee”.

As has been the case in the past, Justice Newbould used fairly strong language in expressing his views about the Costs Subcommittee’s “costs guidance”. However, after his comments have been parsed carefully, it would seem that his only dissatisfaction is that the rates set out in the practice direction are “completely outdated and unrealistic”. (In the quoted passage though, he went on to say, “…for an action fought by two major downtown Toronto law firms”, so it is not clear whether His Honour considers the practice direction to be suitable for more garden-variety litigation (or lawyers!))

He claimed that the Court of Appeal has “now said the same thing” in Inter-Leasing Inc. v. Ontario (Minister of Revenue) 2014 ONCA 683 (CanLII), where Weiler J.A. said:

I agree with the appellant that the cost rates set out in the Information for the Profession set out in the preamble to Rule 57 of the Rules of Civil Procedure are now out of date, and that amounts calculated at 55%-60% of a reasonable actual rate might more appropriately reflect partial indemnity, particularly in the context of two sophisticated litigants well aware of the stakes.

On that basis, Justice Newbould said of the hourly rates being used in the motion for security for costs:

I see no problem in the actual rates being charged in this case by counsel for the defendants. If anything, taking into account the size of this litigation, they are modest. The rate for example for Mr. Ranking, at $750 per hour, is much less than rates charged by many other senior counsel in Toronto in large cases, and calculating partial indemnity costs at 60% of his rate is reasonable. I have no doubt that the rates being charged by counsel for the plaintiffs are at least as high, and probably higher. To order security for costs on the basis of an outdated recommendation made over 15 years ago would not be realistic at all. I accept the rates and the estimate of costs being 60% of those rates.

However, not all of Justice Newbould’s colleagues share his views about the Inter-Leasing case. In a case decided only a few months earlier, Goldsmith v National Bank of Canada, 2015 ONSC 4581 (CanLII), Justice Edward Belobaba was dealing with the same issue, except that he was actually fixing costs in a proposed class action. The defendant in that case (a bank) also argued that the Costs Subcommittee’s practice direction is “out of date” and it submitted “that 60 per cent of a lawyer’s actual rate should be the new partial indemnity measure”.

That argument did not even get out of the starting blocks. Justice Belobaba said:

[T]he defendant’s costs request, based on a “60 per cent of actual” measure, is not tenable. I know that some judges have suggested that the $350 maximum set out in the Grid, indeed the entire Grid, is out of date. For my part, I do not agree. But even if this were so, this should be a matter for the careful review of the Civil Rules Committee rather than ad hoc judicial comment.

But he went on to discuss the Inter-Leasing case and his interpretation of that decision was very different from that of Justice Newbould:

Recall that the objective of the costs award is to fix an amount that is “fair and reasonable” to the unsuccessful party “rather than an amount fixed by the actual costs incurred by the successful litigant.” Actual legal costs incurred are irrelevant and all the more so in an era where the legal profession continues to enjoy protection from market forces and where access to justice for most litigants remains illusory mainly because of the high hourly rates charged by lawyers. The Grid coupled with the judicial admonition in Boucher may be the only way to signal to the legal profession and its self-regulator what “reasonable” legal fees should look like.

[9] In the cost endorsement in Inter-Leasing Inc. v. Ontario, a panel of the Court of Appeal agreed with the appellant that the Grid rates were out of date and suggested that 55 to 60 per cent of “a reasonable actual rate” might more appropriately reflect partial indemnity. This was a more sensible suggestion: 60 per cent of a “reasonable actual rate.” But what is a reasonable actual hourly rate for a senior Toronto litigator. It is certainly not $900 or $1,000 per hour. This is obviously not market-pricing. What about $500 to $600? Is this more reasonable? No doubt – but if so, the Grid rates are actually up to date (i.e. the $350 maximum is pretty much in line with the Court of Appeal’s suggested 60 per cent measure.)

[10] The real question is this: how does one go about deciding what constitutes a “reasonable actual rate” in the context of a self-regulated profession that continues to enjoy the benefits of a monopoly, including monopoly-pricing? That is why the Rules Committee (or someone even more objective) should continue to set the Grid rates and should do so with one eye always on the public interest.

[11] In any event, I will continue to apply the current Grid until it is changed (by the Rules Committee.) And I will apply the revised rates thereafter but only if they are “fair and reasonable” not just for lawyers but for the public they serve.

And that defines very well the issue that I have commented on repeatedly in this blog: is an award of costs supposed to be a subjective (percentage of actual hourly rates) or an objective (external measure of reasonableness) exercise? The cases are all over the map. How in the world are lawyers supposed to advise their clients about costs when such dramatically different approaches are being taken, depending on who the judge happens to be?

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