C.A. Sends Mixed Messages on Substantial Indemnity Costs for Defendants

In the course of the last week, separate panels of the Court of Appeal have addressed the issue of whether a defendant’s offer to settle can produce an award of substantial indemnity costs when the plaintiff’s action has been dismissed. The cases are: St. Elizabeth Home Society v. Hamilton (City) and Schwark v. Cutting.

Unfortunately, the two panels came to opposite conclusions.

St. Elizabeth Home Society v. Hamilton

In St. Elizabeth, the trial judge had awarded costs totalling $4,262,000 to two defendants (the City of Hamilton and the Regional Municipality of Hamilton-Wentworth). One issue in the case was whether ordering two sets of costs was appropriate, given that the two defendants had amalgamated years before the trial was held.

Much of the decision deals with the law of misfeasance in public office and this commentary will not get into that issue. We are looking only at the award of costs, the discussion of which begins at paragraph 71 of the reasons.

At trial, the action had been dismissed. The respondents (the City and the Region) had made an offer to settle for $153,200 plus interest and costs. (The plaintiff had offered to settle for $1.299 million.) The trial judge awarded costs to the respondents on a partial indemnity basis up to the date of the offer and on a substantial indemnity basis thereafter. As noted above, he ordered that costs be payable to each defendant: $2,317,000 to the City and $1,945,000 to the Region.

The Court of Appeal held that the trial judge ought to have treated the two defendants as one after the date of their amalgamation (which took place after the claim was issued but long before the trial). We are not going to focus on that issue here either.

Instead, what we’re interested in is how the Court dealt with the plaintiff’s argument that the award of substantial indemnity costs should be set aside because the trial judge had been wrong to use the defence offer to settle as a basis for such an award.

In both St. Elizabeth and Schward, the defendants sought to support their substantial indemnity costs by relying on the Court of Appeal’s decision in S & A Strasser v. Richmond Hill (Town) (1990), 1 O.R. (3d) 243 (C.A.). In that case (not yet online), the Court found that award of substantial indemnity costs from the date of the defendant’s offer to settle was warranted.

In St. Elizabeth, the panel was Justices Laskin, Rouleau and Epstein. They unequivocally rejected the decision of Justice David Crane, to award substantial indemnity costs from the date of the defence offer to settle, saying that the award was “inconsistent with the Rules and is not supported by the case law”.

The St. Elizabeth panel emphasized that Strasser “should be applied narrowly” as a case where egregious conduct by the plaintiff was the warrant for a higher scale of costs. It said that trial judge in St. Elizabeth had erred in taking the offers to settle (both the plaintiff’s, which the trial judge thought inordinately high, and the defendants’, which he considered very reasonable) into account, because neither offer fell within the provisions of r. 49.10(1).

(Although the Court did not point this out explicitly, it obviously had in mind that R. 49 is not triggered when an action is dismissed, even in the face of a defence offer to pay something or to consent to a dismissal without costs. That is because the costs consequences of R. 49 are engaged only when “the plaintiff obtains judgment”. When an action is dismissed, the plaintiff does not obtain a judgment.)

In the result, the Court ordered partial indemnity costs throughout and reduced the costs of each defendant by a further 25 percent, to reflect the fact that there should not have been two sets of costs.

Schwark v. Cutting

The panel in this case was made up of Justices Gillese, Blair and MacFarland. (The decision is dated January 7, 2010, but only appeared on the Court of Appeal’s website on April 28, 2010. It is possible that the date is a typographical error and should read, “April 27, 2010”.  Thus, it is not clear whether this decision preceded St. Elizabeth or vice versa.)

The defendant ended up being successful in having the action dismissed (on appeal, not at trial) and sought partial indemnity costs to the date of their offer to settle and substantial indemnity costs thereafter.

This panel did expressly advert to the non-applicability of Rule 49 when an action is dismissed. It then went on to say that notwithstanding that fact, Rule 49.13 and s. 131 of the Courts of Justice Act allow the court to take into account any offer to settle in exercising its discretion in awarding costs.

And that is exactly what they did. This Court said that the defendants had made a “most reasonable offer” to settle. This, combined with “egregious” conduct on the part of the plaintiffs was held to justify an award of partial indemnity costs to the date of the defendants’ offer and substantial indemnity costs thereafter.

It is difficult to reconcile these two decisions. The St. Elizabeth panel said, “In our view, therefore, the trial judge erred in relying on the offers to settle for his award of substantial indemnity costs.” The Schwark panel pointed to conduct on the part of the plaintiffs that warranted chastisement, but then added, “All this in the face of a most reasonable offer by the defendants that would have permitted the plaintiffs continued use of the beach front property.” And, most tellingly, the substantial indemnity costs were awarded from the date of the offer forward, making it clear that that had been the determinative factor in the award.

So, one case would appear to stand for the proposition that it is an error for a trial judge to award substantial indemnity costs to a defendant on the strength of an offer to settle while the other decision says the opposite.

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