Two Significant Costs Decisions: Indemnity or Reasonableness?

Schouten v. Rideau.pdf

Two members of the Superior Court bench in Ottawa have released reasons, both dated December 1, 2006, in which they have commented in detail on how costs should be fixed under Rule 57.03. There are some interesting differences in their approaches, that we discuss in this (somewhat lengthy) post. The reasons for judgment in the Schouten case are attached above as a PDF, since they are not yet available online.

Mr. Justice Charles T. Hackland decided Schouten v. Rideau (Township) (link to PDF of decision appears above), while Mr. Justice Denis J. Power decided Rodriguez Holding Corp. v. Vaughan (City). Justice Hackland, while he found that the rate allowed for partial indemnity costs “should reflect an appropriate proportionality with the substantial indemnity rate”, also held that the ratio between the two scales of costs need not be 1.5, as provided for by Rule 1.03(1). He viewed Rule 1.03(1) as a guideline only. Justice Hackland expressly agreed with Justice Corbett in Mantella v. Mantella, that so long as partial indemnity costs do not exceed the actual rates charged to the client, they can be anything up to 100% of the actual rates, so long as partial indemnity costs are fixed in accordance with the factors set out in Rule 57. He allowed partial indemnity costs that were 75% of the actual rate charged by defence counsel, even though that rate, when multiplied by 1.5, would yield a substantial indemnity rate that exceeded the actual rate.

Justice Power, in Rodriguez, said that there are now three costs scales–partial, substantial and full indemnity– and that a substantial indemnity rate must be 1.5 times the partial indemnity rate.

These two decisions highlight the tension that exists, in the law of costs, between the principles of indemnity and reasonableness.

Schouten v. Rideau

In this case, the defendant had successfully resisted at trial a claim that a volunteer fire department had been negligent in fighting a fire that had destroyed property belonging to the plaintiff. There were no Rule 49 offers, so Hackland J. ruled that the defendant was entitled to costs on a partial indemnity basis.

Counsel for the defence, described by Justice Hackland as “a senior and highly experienced civil litigation counsel (1972 call to the bar)”, had conducted the trial without assistance from a student or junior counsel. The hourly rate charged to his client (an insurer), over the life of the file, ranged from $215 to $250 per hour. He sought partial indemnity costs calculated as 75% of the actual rate. In this case, that amounted to $113,655 (75% of $151,540).

Counsel for the plaintiff argued that the fees recoverable as partial indemnity costs should be only 60% of the actual rate charged to the client. This submission was based on the fact that Rule 1.03(1) defines “substantial indemnity costs” as “1.5 times what would otherwise be awarded in accordance wtih Part I of Tariff A”. In other words, substantial indemnity costs should be 1.5 times partial indemnity costs. Thus, it was argued, an award of partial indemnity costs calculated at 75% of the actual rate would produce a substantial indemnity figure that exceeded the actual rate.

Justice Hackland rejected this argument. He began by noting that the rates charged by defence counsel were “well below market for a counsel of Mr. Parnega’s seniority and obviously reflect a special arrangement for reduced rates negotiated with or imposed by the insurance company”. Accordingly, he was prepared to find “that the substantial indemnity rate is the same as the actual rate charged to the client in the circumstances of this case”.

His Honour observed that “it is also a commonly used guideline that partial indemnity rates are in the range of 60% of the substantial indemnity rate” and that “the substantial indemnity rate is often the rate actually charged to the client…although that is not always so”. He noted that some firms in large urban centres charge “very significant rates…which are well above rates which would be awarded on a substantial indemnity scale”.

After reviewing some caselaw (including two decisions of Justice Power), Justice Hackland concluded that “fees awarded on a substantial indemnity scale must not exceed the fees actually charged to the client by the party claiming the costs” and that “partial indemnity costs must bear an appropriate relationship to the fees actually charged by the claimant in all the circumstances”. He did not say what he thought that relationship to be, but he rejected the argument that that proportion should result in the partial indemnity rate being 60% of the actual rate (at least in this case).

Interestingly, His Honour considered the definition of “substantial indemnity costs” in Rule 1.03(1), quoted above, and held that the 1.5 ratio was intended as a general guideline, “not an absolute requirement”.

Justice Hackland said that partial indemnity costs are to be determined by reference to the factors enumerated in Rule 57, “not by extrapolating from whatever private agreement may exist between the party claiming costs and its counsel as to the fee to be charged”. In this respect, his reasons are reminiscent of the approach taken by Corbett J. in Mantella v. Mantella, about which we have written in previous posts. And in fact, Hackland J. expressly referred to Mantella, saying that he was in agreement with the observations of Justice Corbett in that case.

In the result, Hackland J. allowed, as partial indemnity costs, the rates claimed by defence counsel, which amounted to 75% of rates actually billed to the client, even though using the 1.5 multiplier provided for in Rule 1.03(1) would then produce a substantial indemnity rate that exceeded counsel’s actual rate by 12.5 percent. Justice Hackland made it clear that his decision was based on the facts of this particular case, including the fact that counsel for the defendant had undertaken the case alone, without a junior counsel, student or law clerk, that the defendant had been entirely successful and the action had been one of moderate complexity.

Given that Mantella held that partial indemnity costs are to be fixed in accordance with the factors contained in Rule 57 and can be “50% of actual fees, 75% of actual fees, or even 100% of actual fees”, it would appear that the Mantella approach could see a 1:1 ratio between partial indemnity rates and actual rates. This being so, we wonder how Justice Hackland’s requirement, that the rate chosen for partial indemnity costs, “should reflect an appropriate proportionality with the substantial indemnity rate”, can be reconciled with Mantella. Perhaps the answer is that the “appropriate proportionality” between the two scales of costs will vary from case to case. It may be implicit in the reasons of Hackland J., that in some cases, that ratio can be 1:1. (This would also assume that substantial indemnity costs, in some cases at least, can equal actual rates charged and that the 1.5 multiplier in Rule 1.03(1) is, as Justice Hackland said, only a “guideline”.)

Although it seems to us that Justice Hackland’s decision placed greater emphasis on “reasonableness”, he did make it clear, in his reasons, that “the principle of indemnity is always an operative consideration in awarding costs”.

Rodriguez v. Vaughan

This case, decided by Justice Power, required His Honour to fix costs of a successful defence motion for summary judgment. In the circumstances of the case, Justice Power concluded that the defendant was entitled to costs on a substantial indemnity scale.

The defendant had claimed an amount for fees which, as Power J. observed, was “just short of full indemnity”. Counsel for the defendant, in form 57B, filed at the hearing, had claimed an hourly rate of $305 on a partial indemnity scale. This was also counsel’s actual rate charged to the client.

Justice Power said that “neither counsel on the motion correctly completed his form 57B”. As the defendant’s claim was for almost 100% of full indemnity, “it does not represent a proper substantial indemnity claim. Substantial indemnity is not full indemnity nor is it an amount just under 100% of full indemnity.” [Emphasis added]

His Honour then observed that “there seems to be some confusion with regard to the inter-relationship between the various scales of costs”. He proceeded to set out his view of the law in this area. His findings are summarized below.

  1. There are now three scales of costs: partial indemnity, substantial indemnity and full indemnity. In this, Power J. expressly disagreed with Lax J. who, in Manning v. Epp, had held that there are now only two scales of costs: partial and substantial indemnity.
  2. Decisions concerning costs must be made having regard to the factors in Rule 57.01(1).
  3. It would be “a mistake to simply disregard the actual rates charged by counsel or to view those rates simply as a cap or ceiling when fixing costs”.
  4. Partial indemnity costs are to be fixed in accordance with Part I of Tariff A (which require the court to follow s. 131 of the Courts of Justice Act and Rule 57.01(1). An award of costs on a substantial indemnity basis requires that the court first fix costs on a partial indemnity scale and then multiply the result by 1.5. Unlike Hackland J. in Schouten, Power J. felt that the court has no discretion to depart from the 1.5 ratio set out in Rule 1.03(1).
  5. Fixing costs on a full indemnity basis excludes any consideration of partial or substantial indemnity scales.
  6. The court should be guided by the practice direction issued by the Civil Rules Committee, setting out maximum partial indemnity rates for counsel of various levels of experience.
  7. His Honour referred to his decision in Hanis v. The University of Western Ontario, where he had established a “rule of thumb” proportionality among the three scales of costs (partial, substantial and full indemnity) of 60%, 90% and 100 percent.

Applying this approach here, His Honour concluded that the actual rates charged by defence counsel were reasonable. Those rates produced full indemnity fees of $54,000. Justice Power calculated partial indemnity costs by taking 60% of that sum ($32,000) and then derived the substantial indemnity figure that he intended to award by multiplying the partial indemnity sum by 1.5. The end result was a substantial indemnity award of $48,000. (Some rounding was done here, but the approach followed by Power J. would have produced a substantial indemnity figure that was 90% of the actual fees billed to the client.)

Power J. said in his reasons that he had read and carefully considered Mantella v. Mantella, however he did not comment on that decision of Corbett J.  It would certainly appear though, that Justice Power does not agree that partial indemnity costs can ever be 100% of actual fees charged to the client. Power J.’s method of determining an appropriate partial indemnity rate is very much related to the actual rate charged by counsel. Given his statement in Hanis, that “costs calculated on a substantial indemnity scale, obviously, represent something less than full indemnity” and his view that the 1.5 ratio between partial and substantial indemnity costs is one from which the court cannot depart, it is plain that in the opinion of Power J., costs on a partial indemnity scale can never exceed two-thirds of actual rates charged to the client. Two-thirds of the actual rate would produce a substantial indemnity rate (after multiplying the partial indemnity rate by 1.5) equal to the actual rate. So, it is probable that even applying a fraction of two-thirds to the actual rate would result in too high a figure for substantial indemnity costs, in the view of Justice Power, meaning that partial indemnity costs would always have to be at least somewhat less than two-thirds of the actual rate.

To take an example, if the actual rate charged were $300, then multiplying that rate by two-thirds (66.67%) would produce a rate of $200. Multiplying that rate by 1.5 (Rule 1.03(1)) gives us $300. This would be full indemnity, in Justice Power’s opinion. Since his approach seems to contemplate full indemnity always being something more than substantial indemnity, it would seem that the partial indemnity rate must always be something less than two-thirds of the full indemnity rate, no matter what the latter rate might be.


These two cases illustrate the tension and what we view as the irreconcilability of the first two factors enumerated in Rule 57.01(1):

  1. 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.
  2. 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.

Inevitably, a court must choose to give greater weight to one factor instead of the other. Justice Hackland in Schouten and Justice Corbett in Mantella placed greater emphasis on the second factor: the amount that an unsuccessful party could reasonably expect to pay. When this criterion is paramount, the actual rate charged by counsel for the successful party is de-emphasized, because the test is an objective one: reasonableness. If a particular lawyer and client have negotiated a very low hourly rate, this would either not be a factor in the analysis or would be one of very minor importance. (Likewise, if the lawyer were charging a very high fee, this too would be of minimal consequence to the partial indemnity costs analysis.)

Justice Power in Rodriguez and Hanis elected to place greater emphasis on the “principle of indemnity”. According to this approach, the actual rate charged takes on a much more important role, because the extent to which a party is being “indemnified” is entirely a function of what he or she actually has to pay to his or her counsel.

(It should be noted though, that Justice Power’s method of assessing costs includes one further step, which does reflect the “reasonableness” factor. As a first step, he will consider whether the actual hourly rate charged by the lawyer is a reasonable one, having regard to the factors set out in Rule 57. If he considers that rate to be too high, he will reduce the actual rate to what he considers an appropriate one and will then do his 60-90-100% analysis from there. In Rodriguez, he felt that counsel’s actual rate was reasonable, but in his address at the Montebello Civil Litigation Conference, he indicated that in some cases, he would begin by reducing the actual rate to what he considered reasonable. From that point forward though, the assessment would be driven primarily by the “principle of indemnity”. We are uncertain as to the basis on which His Honour would adjust the actual rate.)

It seems to us that Rule 57 is inherently schizophrenic. The “indemnity” and the “reasonableness” criteria pull the court’s analysis in opposite directions. We expect that at some point, the Court of Appeal will have to explicitly choose which factor is to be given greater weight.

(Some would say that in its 2004 decision in Boucher v. Public Accountants Council for the Province of Ontario, the Court of Appeal has already determined that the principle of reasonableness is “overriding”. It observed 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.” But the court also said in that case that “the granting of an award of costs said to be on a partial indemnity basis that is virtually the same as an award on a substantial indemnity basis constitutes an error in principle in the exercise of the motions judge’s discretion, particularly when the judge rejected a claim for a substantial indemnity award”, suggesting that there is supposed to be some proportionality between partial indemnity and substantial indemnity costs. This, in turn, suggests that partial indemnity costs must be determined having regard to the actual rate charged, no matter what that might be.)

It should also be noted that the actual hourly rate charged can cause problems in two different ways; sometimes it is because the rate is too high and other times, because it is too low.

Some Ontario lawyers charge rates in excess of $600 or even $700. If the court fixing costs determines that that rate is too high in a given case, it can adjust it in one of two ways. It can reduce the actual rate as a starting point (as Power J. would do) and then determine an appropriate partial or substantial indemnity rate, using the “discounted” actual rate (perhaps employing Justice Power’s 60-90-100% “rule of thumb”). The result would be a costs award that falls well short of “full indemnity”, even if the scale used is substantial indemnity.

The second way to adjust for a very high actual rate is to use a “reasonableness” approach, giving full weight to the maximum rates set out in the Practice Direction referred to by Power J. in Rodriguez.

So for example, if the actual rate is $600, Power J. might reduce this by 50%, to $300 in a given case. (He did so in the example fact situation that he discussed at the Montebello conference.) Applying his 60-90-100% rule of thumb to the adjusted actual rate, the partial indemnity rate would become $180 (25.71% of the undiscounted actual rate) and the substantial indemnity rate would be $270 (38.57% of the undiscounted actual rate). In this example, even an award of substantial indemnity costs would be a long way from full indemnity, suggesting that greater weight is being given to the “reasonableness” factor.

A court might come to the same result by simply choosing a partial indemnity rate that it considers reasonable. Again, the successful party will not be indemnified for a large part of its legal fees.

If a court chooses to place greater emphasis on the indemnity principle, it will allow a higher amount for partial or substantial indemnity costs in the case of a high actual rate than it would do in otherwise identical circumstances but a lower hourly rate. Such an approach represents a departure from an objective “reasonableness” test and becomes a more subjective attempt to ensure that the party whose lawyer is charging a high hourly rate nevertheless receives a large measure of indemnity.

The other way in which actual rates can cause problems is in the Mantella and Schouten situations: the successful lawyer has negotiated a relatively low hourly rate with his or her client. Should the opposing party benefit from this? If the court fixing costs gives priority to the indemnity principle, the answer will be “Yes”, because the court ensures that the winning party only receives costs representing some part of the fees actually charged to it, no matter how low those might be. In this situation, it might be argued that the Boucher principle and subrule 57.01(1)(0.b) are not being followed, because the costs are significantly less than “an unsuccessful party could reasonably expect to pay”.

It was in recognition of this issue that Justice Corbett in Mantella and Justice Hackland in Schouten acknowledged that low hourly rates could give rise to partial indemnity rates that approached or even equalled the actual rates. Such a result, though, would see clients who are being charged low rates receiving a much greater indemnity than those being charged high rates.

In our view, the “reasonableness” criterion should trump the indemnity principle. There is no reason to award costs in a higher amount, simply because a particular lawyer has negotiated a high hourly rate with his or her client. Likewise, the unsuccessful party should not benefit from the fact that counsel for the successful party is charging a low rate to his or her client.

Despite Power J.’s rejection of actual hourly rates as a “cap or ceiling”, it seems to us that that is indeed an appropriate use of actual rates. Subject to that cap, the assessment of what is “reasonable” should be driven more by the circumstances of the particular case than the actual hourly rates.

However, the Schouten and Rodriguez cases make it clear that some important questions remain unsettled in the law of costs.


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