Understanding Costs and Disbursements
Clients often ask us what the definition of legal "costs" and "disbursements" are. The short answer: "Costs" are a portion of legal fees of one party that their opposing party must pay. Usually the unsuccessful party is paying the successful party. "Disbursements" are legal expenses other than the lawyer's fees. Court fees, expenses of process servers and photocopying charges are examples of disbursements.
Are legal fees completely recovered by successful litigants?
Hiring a lawyer can be expensive (but does not need to be!). Even where individuals are 100% entitled to the compensation sought, legal fees are typically only partially compensated by defendants. Successful litigants often find this infuriating, but there are good reasons for this policy. The Ontario Court of Appeal" has saidthat the purposes of modern cost awards are to: (1) indemnify successful litigants; (2) encourage early settlement negotiations where possible; and (3) discourage inappropriate behaviour during litigation. When 100% of a person's legal bill may be paid following a trial there is an increased "all-or-nothing" mindset and there is less advantage to obtaining an early settlement.
Understanding the terminology
Legal fees that must be paid by an opposing side are referred to as "costs." Cost awards are entirely at the discretion of the judge, master, assessment officer or arbitrator. There are factors to determine the costs an opposing party must pay, such as the reasonable expectations of the parties, the conduct throughout the litigation, offers between parties, and other considerations that affect how much of a legal bill will be compensated. See Rules 1.03, 49.10 and 57.01 of the Rules of Civil Procedure" for more details on factors affecting cost awards. There are terms which relate to what "scale" costs are awarded. These include:
- No Costs - none of the lawyer's fees are paid by the other side. There are a number of reasons why this could happen, for example where both sides are partially successful or where there is a novel issue before the Court.
- Partial Indemnity - Partial indemnity is the base amount a judge, master, assessment officer or arbitrator concludes is reasonable in the circumstances. The maximum hourly rate on a partial indemnity scale ranges between $255.00 per hour for lawyers with under ten years of experience to nearly $400.00 per hour for lawyers with over twenty years of experience. Typically these are roughly 60% - 65% of the lawyer's reasonable fees. This is the most common scale that costs are awarded. Prior to 2001 these were comparable to "party-and-party" costs.
- Substantial Indemnity - this refers to the amount calculated as partial indemnity multiplied by 1.5. Prior to 2001 these were comparable to "solicitor-and-client" costs. Parties should be very cautious before they allege fraud or bad faith, as these allegations can attract adverse awards on a substantial indemnity basis if they are not proven. Failure to accept an offer to settle may also trigger costs on a substantial indemnity scale (see discussion on offers to settle below).
- Full Indemnity - 100% of the lawyers fees. An award of full indemnity is extremely rare.
The process of determining costs is fairly objective in that the actual fees charged act only as a 'cap' (you cannot recover more in costs than you were actually charged by your lawyer). A recent Divisional Court decision" confirms that when determining partial indemnity costs the hourly rate is determined based on a chart of rates provided by the Law Society of Upper Canada in 2005" and adjusted for inflation. It is not based on the actual rates charged by the lawyer.
In addition to a portion of their lawyer's fees, parties typically recover eligible disbursements from unsuccessful litigants. "Disbursements" are expenses of litigation. For example disbursements can include travel expenses if a witness lives in another city, court filing fees, photocopying charges, expenses of expert witness reports, and other items described in Tariff A of the Rules of Civil Procedure. Disbursements are not always recoverable from the opposing side. For example if you pay for an expert report but do not rely upon or use the report at trial, typically the unsuccessful litigant will not have to pay for that report.
Effect of offers to settle on cost awards
Throughout a case, parties may make offers to settle. To encourage settlement, Rule 49.10 of the Rules of Civil Procedure prescribes potential penalties for refusing to accept a reasonable offer. See Rule 49" for more details, but these are the basic requirements:
- the offer must be in writing;
- the offer must be served more than seven days before the commencement of the hearing;
- the offer must not expire or be withdrawn until the commencement of the hearing; and
- the offer must contain clear terms.
The Rule only affects a cost award if one party meets or exceeds their offer. If a plaintiff offers to settle for $100,000.00 and is awarded $99,999.00 the Rule will not apply. The Rule can affect plaintiffs or defendants. There are three possible scenarios:
- Where no offers to settle are exchanged in time or where none of the offers contain more favourable terms than the final verdict, generally the plaintiff will obtain their costs on a partial indemnity scale throughout the action.
- Where the plaintiff meets or exceeds their offer, they are generally awarded their costs on a partial indemnity scale until the day their offer was served, and on a substantial indemnity scale thereafter.
- Where the defendant meets or exceeds their offer, they generally must pay the plaintiff's partial indemnity costs until the day their offer was served. The plaintiff must pay the defendant's partial indemnity costs from the day the offer was served onwards.
Potential adverse cost awards assist both sides in leveraging their arguments long before entering a courtroom. Parties must trust their lawyers to properly evaluate their case and submit an offer to settle that will be meaningful. Good offers typically are based on similar cases, account for some degree of litigation risk, contain clear terms, and are served far enough in advance of trial that if a trial becomes imminent there is a very strong possibility that a cost award will increased by 50% from the date the offer was served. Costs are usually a significant factor when parties are attempting to settle a dispute. This article is meant to gloss over very basic terminology and factors only and is not a comprehensive guide. Each case is unique and requires its own consideration based on its own facts.
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