In Stratton Electric Limited v. Guarantee Company of North America et al., Mr. Justice G. Dennis Lane of the Ontario Superior Court was required to fix costs of the successful defendant, Guarantee Company of North America, in an action that had proceeded to a summary trial under simplified procedure. In the course of so doing, he made some interesting comments about costs awards. In particular, he found that the principle of “reasonableness” applies to costs awarded on a substantial indemnity basis, just as it does to costs on a partial indemnity scale. After finding that Guarantee was entitled to costs on a substantial indemnity basis, he awarded only $20,000 for legal fees instead of the $52,152 that had been claimed.
The plaintiff was an electrical subcontractor who had not been paid for work done. The subcontractor sued the contractor and Guarantee, which had issued a surety bond. Guarantee settled with the plaintiff and proceeded to trial against the contractor and its principals (“the Indemnitors”), seeking to be indemnified for the payment to the unpaid subcontractor. Guarantee relied on an Indemnity Agreement that it had with the Indemnitors. The indemnity payment was only $16,262. What was really in issue in this case was legal costs.
Following a three-day summary trial under Rule 76, Justice Lane gave judgment against the Indemnitors in favour of Guarantee, in the amount of $44,014.55. He was then required to fix costs.
Costs Entitlement
Guarantee sought costs on a substantial indemnity basis, relying on a provision in the Indemnity Agreement with the Indemnitors, whereby they had agreed “[t]o indemnify and save GCNA harmless from and against every claim, demand, liability, expense, loss, cost, charge, adjusters’ and consultants’ fees, fees of attorneys retained by GCNA on a solicitor and own client basis, bills of costs for claimants’ attorneys, judgments and any and all liability therefor, sustained or incurred by GCNA by reason of having executed or procured the execution of Bonds on behalf of Carosi [the Indemnitor]”. The Indemnitors argued that the court should exercise its discretion to award costs on the lower scale of “partial indemnity” rather than on the “substantial indemnity” scale. However, after reviewing the jurisprudence, Justice Lane said that “it appears to me that a contractual provision for the recovery of costs on a specified scale ought to be enforced unless there are special circumstances, such as improper conduct by the claiming party, which persuade the court to order otherwise. Where there are no such circumstances, the court nevertheless has the obligation to police the amount claimed, to ensure that it is no more than is appropriate and properly recoverable.”
An issue that was not canvassed in the decision, evidently because it was not raised, was whether “substantial indemnity costs” is indeed the contemporary equivalent of costs “on a solicitor and own client basis”, which was the scale referred to in the Indemnity Agreement. A number of cases have equated “costs as between a solicitor and his/her own client” with the current phraseology, costs on a “full indemnity” basis: see Antorisa Investments Ltd. v. 172965 Canada Limited, for example. In the present case though, counsel for Guarantee claimed only costs on a substantial indemnity basis, a scale that has been held by at least some judges (see Power J.’s decision in Rodriguez Holding Corp. v. Vaughan (City)) to be something less than full indemnity. Thus, Lane J. was not required to decide whether, because the Indemnity Agreement had provided, in effect, for costs on a “full indemnity” basis, there was any obligation on him to consider the reasonableness of the costs claimed. Instead, he dealt with costs payable on a “substantial indemnity” scale. However, he did advert to the distinction at one point in his decision and suggested that even the “full indemnity” scale would have been subject to review and adjustment by the court:
While the Agreement might be construed as authorizing a claim for full indemnity, that would make little practical difference since the court in either case is bound to review the amount to ensure “that the solicitor, as an officer of the court, is remunerated properly and no more, for the work he does as a solicitor.” [quoting from Orkin: The Law of Costs 2nd ed. paragraph 301 and cases cited, esp. footnote 10.]
Costs Quantum
His Honour then turned to a consideration of the amount properly payable in this case as “substantial indemnity” costs. He noted that Guarantee “seeks costs of $59,915, based on preparation of some 140 hours ($46,152); counsel fee for three days ($6,000); GST ($3,650) and disbursements ($4,112), all on a substantial indemnity costs basis”. Counsel for Guarantee was called to the bar in 1992. Justice Lane calculated that the hourly rates being charged were “at the high end of the rates recommended by the Costs Subcommittee for partial indemnity costs”. There is no prescribed scale for costs on a substantial indemnity scale, but Justice Lane observed that the partial indemnity rates would have to be increased by 50% to derive the corresponding rates on a substantial indemnity basis.
His Honour referred to an observation that has repeatedly been made in the caselaw, dealing with the grid of maximum hourly rates for partial indemnity costs: that “the recommended rates were the maximum rates for partial indemnity costs and would be expected to ‘apply only to the more complicated matters and to the more experienced counsel within each category’.”
His Honour ruled that “this warning applies to substantial indemnity costs as well as to partial indemnity costs”.
Because the case was not, in the opinion of Lane J., a particularly complicated one and counsel for Guarantee was not “among the most experienced practitioners in her rate group”, he held that the both the rates charged and the hours claimed needed to be reduced significantly.
In arriving at his conclusion, Justice Lane emphasized the importance of the “proportionality” principle in cases under Simplified Procedure: costs awards for such cases will be lower than those conducted under the “ordinary procedure”, to reflect the smaller sums in issue. His Honour expressed the principle using rather colourful language:
Counsel simply cannot expect the costs regime for Simplified Rules cases to produce costs awards like the regular cases. Small cases cannot carry big fees any more than you can make a winter coat out of a small scrap of cloth.
Turning to the amount that was properly recoverable by Guarantee in this case, without speciifically referring to it, His Honour based his analysis on the “reasonable expectations” provision of subrule 57.01(1)(0.b):
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.b) 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.
In strong language, Lane J. held that the amount being claimed as costs by Guarantee was far too high in the circumstances:
[27] In my view, the award of costs in the case before me in the amount proposed by GCNA would be subversive of the basis on which the Simplified Rules are intended to operate. The amount claimed is so disproportionate to the amount in issue as to create a justifiable sense of injustice in those called upon to pay. If these costs were awarded as claimed, there would be a chilling effect on persons contemplating litigation over modest claims.
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