Report on
Costs Awards in Civil Litigation

Executive Summary

A. Introduction

In February of 2004, the Court of Queen's Bench Statutory Rules Committee invited the Manitoba Law Reform Commission to undertake a study of the law relating to costs orders in civil proceedings. This Report is the result of that invitation. The Report's focus is relatively narrow: it considers the fundamental basis of the existing costs regime in Manitoba, and compares it with regimes in other jurisdictions, to assess whether reform is necessary to ensure that the rules best achieve the purposes for which they are intended. As well, it reviews the common law rules relating to costs awards to self-represented litigants in order to determine whether a legislated regime with respect to such costs is desirable.

B. Purposes of Costs

The basic "costs" rule in Manitoba, as in all other Canadian jurisdictions, is that a successful litigant is entitled to be reimbursed by the unsuccessful party for some portion of the expenses he or she incurred in vindicating his or her position in court. Although the rule itself is relatively well understood, there is not a clear rationale for it – or, to be more precise, there are a number of possible explanations offered for the rule that are not consistent with each other. In general, however, it is considered fair that a successful party should be "made whole" by the party whose position has been shown to be unmeritorious, and it is also believed that the rule will discourage frivolous and unmeritorious litigation.

The Commission's position is that there are six broad goals – not all mutually compatible – that costs rules ought to strive to achieve. The first goal is indemnification: successful litigants ought to be at least partially indemnified against their legal costs. The second is deterrence: potential litigants should be encouraged to think carefully before engaging the civil justice system to achieve their goals and should also be encouraged to refrain from taking unnecessary steps within that system.

The third goal is to make costs rules easy to understand and simple to apply. The fourth is to encourage early settlement of disputes, and the fifth is to facilitate access to justice. The sixth and final goal the Commission considers important is flexibility: the rules must allow judges to ensure that justice is done in particular cases.

In this Report, the Commission has attempted to balance these various goals and to achieve as many of them as realistically possible while still obtaining the best overall result.

C. Existing Costs Regime

In Manitoba, The Court of Queen's Bench Act provides that costs are in the discretion of the court. The Queen's Bench Rules deal with the award and fixing of costs and set out the factors that the court may consider in the fixing of costs. These include the amount in issue, the complexity of the litigation, the importance of the issues, the conduct of the parties, and so forth. Generally speaking, a successful party will be entitled to an order of costs against an unsuccessful party, but costs are always in the discretion of the court.

Tariff A to the Court of Queen's Bench Rules governs the amounts of the costs to be awarded as between party and party, which are almost always substantially less than the actual amount of expenses incurred. In addition, the Rules provide for an award of double the tariff amounts (or for an award to an otherwise unsuccessful party) in situations where a party has made a settlement offer that is more generous than the result actually obtained at trial.

Tariff A divides all proceedings into four classes (Class I, Class II, Class III, and Class IV), generally according to the amount in issue, and then block fees are awarded under each step in the proceeding. The amount payable with respect to any given step varies depending on the amount in issue in the proceeding; these amounts have remained essentially unchanged since 1989. Where what is in issue is not an amount of money, the court may award costs based on whichever class is, in the court's discretion, "just".

While there is no data available on what proportion of actual costs are typically defrayed by a costs award based on the Tariff, it is variously estimated that the proportion is less than 50%, no more than 25%, and even on occasion as little as 10% of actual costs.

The Rules do not attempt to define awards of costs on a "solicitor and client" basis, which in essence require a party to pay approximately the actual amount of the fees that the other party has had to pay. Such awards are generally made only in rare and exceptional circumstances, such as in order to condemn scandalous conduct by a litigant.

Historically, a person who represented himself or herself successfully in court was not entitled to an award of costs, other than disbursements that had been properly incurred. That rule has been questioned in the appellate courts of several Canadian jurisdictions in recent years, and is no longer generally applicable. However, the law in Manitoba remains unsettled.

D. Other Jurisdictions

The Commission has considered the costs rules that are employed in Ontario, British Columbia, New Brunswick and Nova Scotia. The courts in Ontario and British Columbia have, in recent years, undertaken significant reforms of their costs regimes. The changes have not been without controversy, and change continues to occur in response to some of the sharper criticisms. The reforms have not, however, altered the fundamental "loser pays" principle. New Brunswick and, later, Nova Scotia adopted a costs regime that is different in some significant ways from those of the other Canadian jurisdictions examined, but one still based on "loser pays".

We have also looked abroad to the examples offered by other jurisdictions, particularly those that have undergone or considered reform in recent years. England dramatically revised its costs system, which is similar in principle to the Canadian system, to penalize parties who incur unnecessary or excessive costs in pursuing litigation. Australia's civil costs rules, and New Zealand's, offer some lessons as well. Germany is an example of a civil law jurisdiction that employs a more complete "loser pays" system than any common law jurisdiction.

Although the "loser pays" system tends to seem obvious and just to lawyers trained in the Canadian system, it is far from being the only one considered to be such. Our neighbours to the south, in the United States, take as their starting point the proposition that "fee shifting" (their term for costs awards) should only take place under exceptional circumstances, and the "normal" rule is that all parties bear their own costs.

E. Proposed Reforms

With respect to the six goals identified by the Commission that costs rules should attempt to achieve, it appears that Manitoba's existing costs rules are notably inadequate.

Regarding indemnification, it seems clear that the existing Tariff does an inadequate job of defraying the actual costs of successful litigants. The Commission also believes that reform is necessary to ensure that the costs rules provide a greater deterrent to frivolous actions and defences, and recommends reform to discourage, improper or unnecessary steps in litigation more effectively. Helping parties to appreciate the actual costs of litigation will assist in this respect and will also encourage settlement which is not always achieved under the present rules.

On the other hand, the Commission considers the existing costs rules to be relatively easy to understand and simple to apply – that is, in fact, one of their greatest strengths and a highly desirable feature of the current rules. As well, in the Commission's opinion the costs rules do not impede access to the courts inappropriately. On this point, the Commission considers it important to note that costs rules can only ever be a part of the solution to the problem of access to justice and must be considered as complementary to procedural controls, case management systems and other initiatives.

The judges of the Court of Queen's Bench have a reasonable amount of flexibility within the current system; the Commission does not believe that that flexibility needs to be significantly expanded or constricted, although it believes that the framework within which it is exercised does need reform.

Specific Recommendations

The threshold question for the Commission was whether there is any reason to change the basis of the present costs regime, i.e., the presumption that a successful litigant is entitled to have some portion, but not all, of their expenses (including legal fees) defrayed by the unsuccessful party or parties. On balance, the Commission sees no need to change this default rule.

The next fundamental issue for the Commission was how to determine the level of counsel fees to be awarded under the costs rules. The alternative to a tariff system is to base the award on the actual costs incurred by the successful party, as is done in Ontario, England and the United States. While there would be an increase in the accuracy of the level of indemnification in individual cases, the Commission considers that the loss of simplicity and clarity of a tariff system would be too great a price to pay. It is apparent from the experience of England and Ontario that Manitoba could expect an increase of litigation on costs and considerable demands on scarce judicial resources.

If indemnity is to be something less than complete indemnity, what is an appropriate level of indemnity? This again varies among jurisdictions, from as little as 30% to as high as 90% of actual expenses incurred. The Commission considers that indemnification of approximately 60% of reasonable costs is adequate and appropriate.

The Commission considered the design of the tariff system and decided that the number of classes should be increased from four to six, and that the classes should be based on the relative importance and difficulty of cases rather than simply the dollar amount involved. In order to minimize the uncertainty that this latter change could introduce, the Commission recommends that cases be assigned to a class at a very early stage, either by agreement of the parties or, if there is no agreement, by the court.

The probability of the court awarding an appropriate amount of costs in each case would be improved by the adoption of one of the recent Ontario reforms: requiring parties to make submissions on costs before they know who has been successful.

The current Rules permit judges to make costs awards on interlocutory matters that are payable forthwith but, in practice, such orders are made only rarely. The Commission recommends that such orders be made the norm to provide an additional incentive to settlement and to discourage frivolous or unmeritorious interlocutory applications.

It has traditionally been considered an important principle that parties should not be "over-compensated". That is, an award of costs should not (except in very special circumstances) be greater than the actual expenses incurred by the party receiving the award. Over the past decade or two, however, the courts have recognized that costs serve a number of functions and the restrictions on over-compensation are loosening. There are two areas in particular where these restrictions, in the Commission's opinion, ought to be dispensed with.

The first area is that of self-represented litigants who are seen more and more often in the courts. Historically, such litigants were not entitled to any award of costs since they had, by definition, not incurred any legal expenses. The courts in other provinces have awarded costs to self-represented litigants and the Commission recommends that their entitlement be expressly recognized by the Manitoba Rules.

The second area in which over-compensation has arisen as an issue is pro bono litigation, where a lawyer acts on behalf of a client without charging a fee. The Commission recommends that The Court of Queen's Bench Act be amended to stipulate that a party is not disentitled to costs merely because his or her lawyer is acting on a pro bono basis.

A significant disadvantage of using a tariff system to determine the amount of costs payable is that, over time, it tends to become disconnected from the real costs of litigation. In order to prevent such a fate overtaking the revised Tariff, the Commission recommends that the Statutory Rules Committee be required to report to the Minister of Justice annually as to whether adjustments of the Tariff amounts are necessary.

The final matter considered by the Commission is "solicitor and client" costs, which are awarded by the court to express disapproval of "reprehensible, scandalous, or outrageous conduct" in the course of litigation. The Commission sees no need to codify the jurisdiction to award such costs, which is undoubted, nor does it consider it necessary to codify the basis on which they ought to be awarded. It does see merit, however, in simplifying the assessment of such costs by stipulating that they shall simply be double the otherwise applicable tariff amount. In such cases, the goal of preventing over-compensation may legitimately give way to the goal of punishing the type of behaviour that calls for an award of such costs.

Report #111,
September, 2005