Canada – Offer to Settle in Advance of Stay Application Must Contain Real Compromise to Justify Higher Costs

May 2021

This article first appeared on Urbas Arbitral, here.

In Kore Meals LLC v. Freshii Development LLC, 2021 ONSC 3736, Mr. Justice M. Morgan provided guidance on how to make an offer to settle in advance of an application to stay which would qualify for the increased costs eligible under Rule 49.10(2) of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194.  Morgan J. observed that advising that “Defendants were right and the Plaintiff was wrong” and that defendants would apply for a stay contains no real compromise.  Defendants’ offer to refrain from defending or seeking a stay of proceedings if plaintiff would walk away from the claim is not an offer which attracts increased costs.   Morgan J. nonetheless granted costs on a partial indemnity scale, qualifying them as reasonable.  He determined that the motion required “considerable legal research”, counsel “did what it to took to win the motion” and he was “not inclined to second guess [FD]’s counsel’s investment of time and effort” regarding an amount of fees which would not surprise “a sophisticated corporate party”.

Freshii Development LLC (“FD”) as defendant had successfully applied for a stay of arbitration in regard to litigation instituted by Kore Meals, LLC (“KM”) in Ontario Superior Court.  For the earlier Arbitration Matters note on Morgan J.’s decision in Kore Meals LLC v. Freshii Development LLC, 2021 ONSC 2896 granting the stay in favour of arbitration in the U.S., see “Ontario – court all but drafts pandemic obituary for forum non conveniens as factor in fairness of arbitration venue – #469”.

FD sought costs on a substantial indemnity scale in the amount of $62,392.86 or, in the alternative, on a partial indemnity scale in the amount of $43,805.72, both amounts inclusive of taxes and disbursements. FD argued that it had made an offer to settle its application for a stay and that its offer qualified under Rule 49 of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194 (“Rules”).  KM objected, arguing that the offer did not justify awarding the costs sought and that their own costs of $25,109.17 were a better measure for an award of partial indemnity costs.

[4] [FD] take the position that very early in the litigation they offered the equivalent of a Rule 49 offer which [KM] refused to take up. As [FD’s] counsel explains it, shortly after the Statement of Claim was served [FD’s] counsel wrote to [KM]’s counsel and explained the arbitration clause in their clients’ agreement and “provide[d] the [KM] an opportunity to abide by the DAA and agree to discontinue the action in favour of arbitration, failing which [FD] would bring a motion to stay the action and seek its costs…” [KM] did not accept this offer”.

FD argued that its offer triggered the costs consequences set out in Rule 49.10.

Rule 49.10(2) (2) Where an offer to settle,

(a) is made by a defendant at least seven days before the commencement of the hearing;

(b) is not withdrawn and does not expire before the commencement of the hearing; and

(c) is not accepted by the plaintiff,

and the plaintiff obtains a judgment as favourable as or less favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date, unless the court orders otherwise”.

FD also referred to Crawford v. Mori, 2017 ONSC 1630 paras 13-14, arguing that the fact that FD made its offer by way of letter should not preclude application of Rule 49.10(2).

Morgan J. disagreed.

[6] With respect, it is not the form of the Offer that concerns me here, it is the content. Defendants’ counsel did what every defendant’s counsel does in one way or another – he told Plaintiff’s counsel that the Defendants were right and the Plaintiff was wrong. He then said that the Defendant would seek the relevant remedy, which it was entitled to do and in fact did. But there was no offer to settle on any terms but the ones that go without saying; that is, if the Plaintiff would withdraw its case and not cause it to be defended, the matter would be at an end.

[7] An offer to settle that is rejected, but that turns out to have been more advantageous than the result of the action or motion, attracts substantial indemnity costs under the Rule 49.10 in order to encourage compromise on the part of litigating parties. But there was no real compromise in the Defendants’ “offer” in this case. The Defendant offered to refrain from defending or seeking a stay of proceedings if the Plaintiff would walk away from the claim. If that is an offer that attracts substantial indemnity costs, then every proceeding attracts substantial indemnity costs.

[8] In short, for one party to say that it is right and the other is wrong and to insist that the other party agree, failing which it will seek a remedy, is to conduct litigation. It is not an offer that qualifies for special costs treatment under Rule 49.10”.

Having made the above observations, Morgan J. nonetheless held that FD’s position on costs was reasonable.  He found that the motion required “considerable legal research” and FD’s partial indemnity costs amount “do not strike me as unusually high for this kind of proceeding”.  Morgan J. concluded that FD’s counsel “did what it to took to win the motion” and the amount sought would not surprise a “sophisticated corporate party” like KM. Commenting that he was “not inclined to second guess [FD]’s counsel’s investment of time and effort”, Morgan J. awarded $43,805.72 as costs.

urbitral notes – First, for a decision involving security for costs in the context of a recognition and enforcement application, see the recent Arbitration Matters note “Ontario – security for costs order in recognition application appealable “because it speaks to the response of Canadian courts to international comity” – #479” regarding China Yantai Friction Co. Ltd. v. Novalex Inc., 2021 ONSC 3571. Ontario’s Divisional Court granted leave to appeal (i) a decision dismissing an application to order that the award debtor deposit the award amount pending opposition to recognition of the award and (ii) a decision granting an order for security for costs against the non-resident award creditor seeking recognition.  The award debtor had not applied to set aside or suspend the award in Beijing where the award was made and had not argued any of the grounds listed in article 36(1)(a) of the International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 to resist recognition.  The Divisional Court held there was “reason to doubt the correctness of the decision”.  Though the matter involved recognition of an arbitral award issued outside of Canada rather than a court decision, the Divisional Court considered the appeal “important because it speaks to the response of Canadian courts to international comity and our relationship to the courts of other countries”.

Second, for a decision involving the role of costs in arbitration, see the recent Arbitration Matters note “B.C. – authority to award actual reasonable legal costs a “desirable feature” not a “chilling effect” – #442” regarding Allard v. The University of British Columbia, 2021 BCSC 60. Relying on provisions of the Arbitration Act, RSBC 1996, c 55 and the British Columbia International Commercial Arbitration Centre’s rules, Madam Justice Karen F. Douglas held that the “normal rule” in arbitration is successful parties are entitled to indemnification costs unless special circumstances warrant some other type of costs. When a party is “wholly successful” an arbitrator is not required to make a finding of misconduct against the other party as a prerequisite to awarding actual reasonable legal costs.  Douglas J. excerpted comments made in the legislature when B.C. introduced amendments to its Arbitration Act, RSBC 1996, c 55 to clarify an arbitrator’s authority to award actual reasonable legal fees. B.C. anticipated that authority would “preserve a desirable feature of arbitration: namely, the ability of a party to recover its actual costs”. Douglas J. observed that the legislature’s stated intent “undermines” concern for any alleged unintended “chilling effect” of awarding indemnity costs because “parties are more likely to pursue commercial arbitration precisely because doing so permits them to recover their actual costs”.

Third, for three (3) decisions addressing the interplay of costs in court and in arbitration, see the earlier Arbitration Matters notes:

(i) “Ontario – court declines to defer costs determination but orders information sent to non-party/arbitrator in related arbitration – #255” regarding G.E.X.R. v. Shantz Station and Parrish & Heimbecker, 2019 ONSC 5192. In her post-trial costs decision, Madam Justice Catrina D. Braid declined to defer determination of court costs in litigation involving GEXR and P&H until a related, ongoing arbitration between GEXR and CN was complete.  Ostensibly to pre-empt any potential for double recovery of costs once the arbitration concluded and determined its costs, she also directed that P&H’s cost submissions filed in the court litigation and her reasons on costs be given (i) to CN which was not a party to the court litigation and (ii) to the arbitrator.

(ii) “Ontario – costs of arbitration not recoverable as damages in litigation over breach of settlement arrived at during arbitration – #247” regarding Arista Homes (Kleinburg) Inc. v. Sarah Igbinedion, 2019 ONSC 7086. Madam Justice Margaret Eberhard held that the costs of an earlier arbitration could not be recovered in subsequent litigation involving breach of a settlement negotiated during that arbitration. Eberhard J. held that such costs had been spoken to by the parties in their settlement and were also not within the discretion of the court to award as costs of the court proceeding alleging breach of the settlement.

(iii) “Ontario – court defers to arbitrator court’s discretion to release statutory deposit of court costs for lien litigation – #119” regarding Man-Shield Construction Inc. et al. v. 1876030 Ontario Inc. et al., 2018 ONSC 5231. Mr. Justice F. Bruce Fitzpatrick deferred to an arbitrator the exercise of the court’s discretion to release monies deposited into court as security for costs in lien litigation under Ontario’s Construction Act, RSO 1990, c C.30.  In light of the parties’ submission to arbitration, Fitzpatrick J. held that the discretion to determine the amount of those costs and their release now rested with an arbitrator, despite that the Construction Act expressly granted that discretion to the court.

author

Daniel Urbas

Daniel Urbas is an experienced litigator, arbitrator and mediator with over 25 years of dispute resolution experience. He has earned a variety of repeat, annual peer recognitions including “Leading Lawyer” in “Commercial Arbitration” in the 2019 edition of the Lexpert ® / American Lawyer Guide to the Leading 500 Lawyers…

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