January 15, 2009
By Robert Kennaley
McLauchlin & Associates

Robert KennaleyLitigation can be time-consuming and expensive. For this reason alone, parties will often consider settlement early in the process. To make settlement even more attractive, the Rules of Civil Procedure in Ontario are set up to ensure that even a successful party will bear a portion of its own costs. The Rules also use offers to settle in order to encourage settlement, by imposing cost consequences on a party who fails to accept an offer to settle where the other side beats that offer to settle at trial.

Where costs are awarded in favour of a party, the Rules provide that they can be paid on one of two different scales: the ‘partial indemnity’ scale or the ‘substantial indemnity’ scale. Generally, the partial indemnity scale equates to approximately 50-65 per cent of actual costs, while the substantial indemnity scale equates to approximately 75-85 per cent of actual costs. Generally speaking (and although the Court always has a discretion as to what amount to award as costs, if any), a party who is successful will be awarded its costs on the partial indemnity scale. Where, however, an offer to settle has been made and beaten, the Rules will, in some cases, call for recovery on the larger substantial indemnity scale, while in other cases the Rules will call for the unsuccessful party to be paid costs.

According to Rule 49.10 of the Rules of Civil Procedure, where a plaintiff’s written offer to settle to a defendant (made at least seven days before a hearing) is not accepted and the plaintiff obtains a judgment for an amount at least as high as the offer made (ie. the plaintiff beats his offer), the plaintiff will be entitled to partial indemnity for the legal costs incurred up to the date of the offer, followed by substantial indemnity for costs incurred afterwards. In other words, if the plaintiff beats his own offer, he will get the higher scale from the date of the offer, forward.

Paying the costs

Conversely, if the defendant makes an offer to settle at least seven days before a hearing and that offer is rejected by the plaintiff, who subsequently does not obtain judgment for at least the amount of the offer, the plaintiff will only be entitled to partial indemnity costs up to the date of the offer. The plaintiff will then have to pay the costs of the defendant, on a partial indemnity basis, from the date of the offer forward.

The rules on cost consequences exist to pressure each side of a dispute to accept reasonable offers of settlement, in order to avoid the time and expense of further litigation. If these rules did not exist, one side could be dragged through a lengthy litigation process, even though he or she was willing to pay or be paid an amount less than the claim and the side driving the matter on would not face any consequences for potentially increasing the other side’s legal fees unnecessarily. From a different perspective, a reasonable offer to settle made early in the proceeding is very useful from a strategic point of view. This is because, as expenses continue to be incurred by both sides, the other side will be forced to consider the potential costs consequences of rejecting an offer and being wrong in doing so.

Defendants are especially well advised to make reasonable offers to settle as early on in the process as possible, to protect their costs position. This is because, if they lose at trial but still beat their offer, from the date of the offer onwards, they will not have to pay the plaintiff’s costs and the plaintiff will have to pay a portion of their costs (on the substantial indemnity scale).

In considering settlement, it is also important to weigh the amount of the claim against the potential cost consequences of rejecting an offer and continuing on to trial. In relation to a multi-million dollar claim, for example, a party may sometimes commit to spend what it takes on lawyers to litigate the matter. In most cases, however, the costs of litigation (especially given that a party will never recover all of its costs) will make proceeding all the way to trial a very unattractive prospect for both sides. Given the potential cost consequences associated with Rule 49, it is wise to consider making a reasonable offer to settle early on in the process, so as to exert as much pressure on the other side as possible and to protect your costs position, as the matter proceeds. The point is that an early offer to settle is not a sign of weakness. Rather, it is a recognition of the business and economic realities of litigation, as well as a tool to manage the amount of legal expenses incurred throughout a legal proceeding.
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America.  He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.