African Cape (Ship) v. Francosteel Canada Inc., 2003 FCA 119

Date: 20030306

Docket: A-737-01

Neutral citation: 2003 FCA 119

CORAM:        DESJARDINS J.A.

LÉTOURNEAU J.A.

NADON J.A.

ACTION IN REM AGAINST THE SHIP "AFRICAN CAPE" AND IN PERSONAM AGAINST THE OWNERS, BONAVERIA SHIPPING CO. LTD. ("BS"), DIMKO INTERNATIONAL COMPANY S.A. AND ALL OTHER PARTIES INTERESTED IN THE SHIP "AFRICAN CAPE"

BETWEEN:

                                                        THE M.V. "AFRICAN CAPE",

                                  HER OWNERS, BONAVERIA SHIPPING CO. LTD.,

                       HER MANAGERS, DIMKO INTERNATIONAL COMPANY S.A.

                                                                                                                                                     Appellants

                                                                                                                   (Defendants in Trial Division)

                                                                                 and

                                                    FRANCOSTEEL CANADA INC.

                                                                                                                                                   Respondent

                                                                                                                          (Plaintiff in Trial Division)

                                           Heard at Montreal, Quebec, on February 4, 2003.

                                    Judgment delivered at Ottawa, Ontario, on March 6, 2003.

REASONS FOR JUDGMENT BY:                                                                                      NADON J.A.

CONCURRED IN BY:                                                                                                 DESJARDINS J.A.

CONCURRING REASONS BY:                                                                             LÉTOURNEAU J.A.

Date: 20030306

Docket: A-737-01

Neutral citation: 2003 FCA 119

CORAM:        DESJARDINS J.A.

LÉTOURNEAU J.A.

NADON J.A.

ACTION IN REM AGAINST THE SHIP "AFRICAN CAPE" AND IN PERSONAM AGAINST THE OWNERS, BONAVERIA SHIPPING CO. LTD. ("BS"), DIMKO INTERNATIONAL COMPANY S.A. AND ALL OTHER PARTIES INTERESTED IN THE SHIP "AFRICAN CAPE"

BETWEEN:

                                                        THE M.V. "AFRICAN CAPE",

                                  HER OWNERS, BONAVERIA SHIPPING CO. LTD.,

                       HER MANAGERS, DIMKO INTERNATIONAL COMPANY S.A.

                                                                                                                                                     Appellants

                                                                                                                   (Defendants in Trial Division)

                                                                                 and

                                                    FRANCOSTEEL CANADA INC.

                                                                                                                                                   Respondent

                                                                                                                          (Plaintiff in Trial Division)

                                                        REASONS FOR JUDGMENT

NADON J.A.

[1]                 This is an appeal from a decision of a Motions Judge dated December 11, 2001, which dismissed the appellants' appeal of a decision of Prothonotary Richard Morneau dated November 6, 2001.

[2]                 Before the Prothonotary was a joint motion presented by the parties for an Order for costs pursuant to Rule 400 of the Federal Court Rules, 1998. By his Order, the Prothonotary awarded the respondent, in lieu of assessed costs, a lump sum of $40,000.00.

[3]                 At issue before us is whether the Motions Judge erred in concluding that the Prothonotary had properly applied Rule 400 in the exercise of his discretion to award costs to the respondent.

[4]                 A brief summary of the facts will place this appeal in its proper context.

[5]                 On April 4, 1997, the respondent commenced legal proceedings in this Court against the appellants seeking damages for breach of a contract of carriage to carry sheets of steel from Lithuania to Montreal. In its statement of claim, the respondent claimed a sum in excess of $5,000,000. In due course, this sum was reduced to $485,117.99.

[6]                 By a letter dated September 29, 1997, prior to filing their Statement of Defence, the appellants made an offer to the respondent to settle the claim for the all-inclusive sum of $125,000. On October 17, 1997, the respondent rejected the appellants' offer to settle.

[7]                 Before the matter reached trial, the parties agreed to have their dispute resolved by a sole arbitrator, who was to decide both liability and quantum. The parties further agreed that the issue of costs would be withheld from the arbitrator and would, following his decision, be brought before the Trial Division for adjudication.

[8]                 I should point out, before going any further, that in March 2000, the appellants reiterated their all-inclusive offer of $125,000.00, which offer was again rejected by the respondent. Ultimately, on November 9, 2000, at the commencement of the fourth day of the arbitration hearing, the appellants withdrew their offer.

[9]                 The arbitrator rendered his award on December 21, 2000. He held that the respondent was entitled to compensation in the sum of $85,879.44 with simple interest at 7% from April 3, 1997 to the date of payment. On January 30, 1998, the appellants paid to the respondent the sum of $108,887.75, inclusive of capital and interest, thereby satisfying in full the arbitration award.

[10]            By an Order dated March 2, 2001, the Prothonotary homologated the arbitration award. In April 2001, the parties filed a joint motion requesting a special hearing on costs and by Order dated May 3, 2001, the Prothonotary directed that the issue of costs be dealt with at a special hearing in Montreal on September 26, 2001.

[11]            At the hearing of the joint motion for costs, the respondent argued that as it had succeeded before the arbitrator on the issue of liability, it was thus entitled to its costs. The appellants took a different view and argued that they were entitled to their costs, primarily on the ground that the sum of $125,000.00 which they had offered in settlement of the respondent's action exceeded the amount of the award obtained by the respondent.

[12]            The Prothonotary held in favour of the respondent and awarded it costs in the sum of $40,000.00. By way of a motion dated November 16, 2001, the appellants appealed the Prothonotary's Order to the Trial Division. Because of her view that the Prothonotary had not misapplied Rule 400, the Motions Judge dismissed the appeal.

[13]            The thrust of the appellants' argument is that the Prothonotary was clearly wrong in applying Rule 400 as he did and hence, that the Motions Judge erred in concluding that the Prothonotary had not misapplied the Rule. In my view, that submission is well founded.

[14]            The relevant parts of Rule 400 are as follows:

[15]            Rule 400(1) provides that the Court is to have full discretion with respect to the amount and allocation of costs and the determination of by whom such costs are to be paid. In exercising this discretion, a judge or prothonotary may consider any of the fourteen factors which are listed in Rule 400(3). Thus, for the purpose of making a determination under the Rule, the Court will have regard to all of the relevant factors.

[16]            There can be no doubt whatsoever that the Prothonotary misapplied Rule 400, in that he failed to consider two of the relevant factors listed in Rule 400(3), namely factors (b) and (e). After concluding that Rule 420(2)(a) could not be considered because the appellants' offer had been revoked during the course of the arbitration hearing, he turned his mind to Rule 400. He stated his view that only factor (a) of Rule 400(3), i.e. the result of the proceeding, was relevant for the purpose of determining which of the parties should bear the costs of the proceeding. At paragraph 17 and 18 of his Reasons, the Prothonotary states:

[17]         Au niveau de l'octroi des dépens à l'une ou l'autre des parties, l'autre facteur qui mérite d'être envisagé - et qui doit selon moi gouverner l'octroi des dépens - est le résultat des procédures au sens de la règle 400(3)a). (Emphasis added).

[18]         Sous cet aspect, il m'apparaît que l'on doit considérer que c'est la demanderesse qui doit ici être vue comme victorieuse. En effet, l'arbitre a tranché l'élément de responsabilité en sa faveur. Il est indéniable que l'aspect responsabilité fut l'élément le plus préoccupant du débat lors de la préparation de l'arbitrage et lors de celui-ci.

[17]            Because the respondent had succeeded before the arbitrator on the issue of liability, which issue in his view was crucial, the Prothonotary concluded that the respondent had won and thus, factor (a) favoured the respondent. Consequently, the respondent was entitled to its costs.

[18]            Although he did not consider factors (b) and (e) in determining which of the parties had to pay costs, the Prothonotary did consider those factors in determining the quantum payable by the appellants. This appears quite clearly from paragraph 19 of his Reasons, where he states:

[19]     De plus, une partie des dommages que la demanderesse réclamait lui fut octroyée. Le fait que la somme obtenue par la demanderesse soit fortement moindre que la somme réclamée pourra, tout comme le fait qu'il y ait eu une offre écrite, porter quant au quantum des dépends à accorder à la demanderesse.

[19]            Although he was of the view that the respondent's costs amounted to $55,137.02, he reduced this sum to $40,000.00 because the appellants had made a written offer of settlement and because the amount recovered by the respondent was inferior to the amount claimed.

[20]            It is clear from Rule 400 that all of the relevant factors must be considered in deciding, not only the quantum of costs, but also their allocation and the determination of by whom such costs should be paid. Thus, in restricting his consideration of the relevant factors to factor (a) in his determination of which party should pay the costs, the Prothonotary misapplied Rule 400.

[21]               There can be no doubt that factors (b) and (e) were highly relevant considerations in the circumstances of this case and, more particularly, factor (e), the offer to settle made by the appellants. These factors had to be considered by the Prothonotary in the exercise of his discretion as to whether the respondent or the appellants ought to bear the costs. This, the Prothonotary clearly failed to do.

[22]            In holding that the Prothonotary had not misapplied Rule 400, the Motions Judge was clearly wrong. The Judge, like the Prothonotary, was of the view that it was a proper exercise of discretion under Rule 400 to restrict consideration of the appellants' offer to settle to the quantum of the costs. In my respectful view, the Motions Judge made the same error as the Prothonotary, and thus she misapplied Rule 400. This error is clearly apparent from a reading of paragraphs 8 to 11 of her Reasons, which I now reproduce:

[8] The general rule is that costs are normally awarded to the successful party, (Merck & Co. v. Novopharm Ltd. (1998), 152 F.T.R. 74 (F.C.T.D.); Ticketnet Corp. v. Canada (1999), 99 D.T.C. 5429). In the case at bar, Prothonotary Morneau determined that the plaintiff was the successful party and thus awarded it costs.

[9] Rule 400 gives a wide discretion to the Court in relation to costs. Rule 400(3) lists a number of factors that the Court may wish to consider in the exercise of its discretion. However, I also note that it is not restrictive and that the Court may consider any other matter that it considers relevant (Rule 400(3)(o)). The amount of the award of damages is only one factor in consideration of costs. (Doyle v. Sparrow (1979), 106 D.L.R. (3d) 551 (Ontario C.A.)).

[10] Furthermore, the Prothonotary did not state that an out-of-court settlement offer had no bearing on the determination as to entitlement of costs. Rather, he said that it had no bearing on his discretionary consideration of the "result of the proceeding". In fact, Prothonotary Morneau took into consideration the offer to settle in determining the quantum of costs (see paragraphs 16, 19 and 28 of his order).

[11] For these reasons, I reject the defendants' submission that the Prothonotary misapplied Rule 400 and consequently, the appeal is dismissed.

[23]            As the Prothonotary failed to give sufficient weight to all of the relevant considerations, the Motions Judge ought to have reviewed his decision (See Reza v. Canada, [1994] 2 S.C.R. 394 at 404).

[24]            I am satisfied that had the Prothonotary given proper consideration, as he ought to have, to factors (b) and (e), he would have come to a different conclusion as to which of the parties should bear the costs of the proceedings.

[25]            Firstly, as he himself noted in regard to his determination of the amount of costs to which the respondent was entitled, the amount of damages obtained by the respondent as a result of the arbitration award falls dramatically short of the amount claimed in the Statement of Claim. Secondly, the offer of settlement made by the appellants was in excess of the amount ultimately recovered by the respondent. That offer was unequivocal and was made early on in the proceedings; had it been accepted by the respondent, the parties would not have incurred the substantial costs which were ultimately incurred. Thirdly, bearing in mind that the offer of settlement exceeded the arbitrator's award, it cannot be said that the respondent improved its position by proceeding to the arbitration hearing. In the end, the respondent would have been better off had it accepted the settlement offer.

[26]            I am therefore of the view that on a proper consideration and weighing of all of the relevant factors, the appellants ought to have their costs. I might add that the effect of depriving the appellants of their costs, in the circumstances of this case, would render the offer to settle meaningless.

[27]            For these reasons, I would allow the appeal with costs in this Court and in the Trial Division, set aside the Order made by the Motions Judge on December 11, 2001 and, rendering the judgment that the Motions Judge ought to have rendered, I would allow the appellants' appeal from the Prothonotary's Order and award the appellants their costs, to be assessed in accordance with Column III of Tariff B.

                                                                                                "M. Nadon"

                                                                                                              J.A.

"I concur.

Alice Desjardins J.A."

LÉTOURNEAU J.A. (Concurring)

[28]            I would like to add a short comment on Rule 420.(2)(a) which was relied upon by the defendants before the Prothonotary. The Rule reads as follows:

[29]            In his argument before the Prothonotary, counsel for the defendants submitted that Rule 420.(2)(a) should be interpreted by reading in, at least implicitly, the following prescriptions found in Rule 49.10(2) of the Ontario Rules of Civil Procedure:

49.10(2) Defendant's offer - 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 party and party costs to the date the offer was served and the defendant is entitled to party and party costs from that date, unless the court orders otherwise.

The Prothonotary properly refused to follow counsel's submission and concluded that Rule 420.(2)(a), as it reads, did not apply in the circumstances because the written offer made by the defendants was revoked on the fourth day of the hearing before the arbitrator. The defendants decided to withdraw their firm offer a third of the way through the hearing for a number of reasons. First, the offer had been made early in the process to avoid a trial. Second, the defendants had already incurred enormous costs in defending the claim to that point. Third, as the evidence was evolving, the defendants thought that their offer was too generous: they were afraid that it might be accepted at the end of the arbitration hearing, leaving them with irretrievable significant costs.

[30]            As drafted, Rule 420.(2)(a) has a serious potential for unfairness. As the present instance shows, if the offer is revoked, even if only a day before the case is taken under advisement or before judgment is rendered, a defendant loses the benefit of the Rule and is left to rely upon an almost unfettered exercise of jurisdiction under Rule 400. As I can see in the case at bar, there is no guarantee that, even with the best of intents, the discretion will be exercised judicially. In addition, a respondent bears the heavy and difficult burden of proving an improper exercise of jurisdiction.

[31]            The situation for a defendant is not any better if he leaves the offer open as requested by Rule 420.(2)(a). After nine days of trial, a plaintiff who realises that the defence witnesses have been convincing and, therefore, that the prospect of winning is not as bright as it once was may move to accept the unrevoked offer. A defendant then finds itself in an invidious position. On the one hand, he cannot claim double costs as allowed by the Rule because no judgment will be rendered. He will never know if the offer would have been equal or superior to what would have been allowed. He might be doubly penalized if his offer was inclusive of costs to the plaintiff that he might not have had to pay if a judgment had been rendered. On the other hand, because of a late acceptance of the offer, he then incurs substantial defence costs although his offer, as in the present case, may have been made long before the hearing started. Such hearing costs generated by a plaintiff's failure to accept the offer in a timely fashion cannot then be recovered by a defendant.

[32]            Rule 420.(2)(a), as it exists, unfairly tips the scale in favour of a plaintiff and against a defendant who bears all the risks of an unrevoked offer. It fails to achieve, indeed it defeats, the very purpose of achieving early settlements of cases for a proper and cost-efficient administration of justice and of limited judicial resources. In comparison, the Ontario Rule has the potential and advantage of forcing an early settlement of a case pursuant to an offer: a plaintiff has to make a decision before the beginning of the hearing, otherwise he bears the risk of all subsequent costs incurred by a defendant if he fails to accept the offer when he should have. In addition, the Ontario Rule appears to be better and more fairly structures the exercise of discretion in the best and efficient interest of justice.

[33]            In conclusion, the present case which has generated extensive and costly litigation on the sole issue of costs, in my opinion, illustrates the need for a review of Rule 420.

                                                                                                              J.A.

                          FEDERAL COURT OF APPEAL

    NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:       A-737-01

STYLE OF CAUSE: THE M.V. "AFRICAN CAPE" et al v. FRANCOSTEEL CANADA INC.

PLACE OF HEARING:         MONTREAL, QUEBEC

DATE OF HEARING:           February 4, 2003

CORAM:        DESJARDINS J.A.

LÉTOURNEAU J.A.

NADON J.A.

REASONS FOR

JUDGMENT :           NADON J.A.

CONCURRED IN BY:          DESJARDINS J.A.

CONCURRING

REASONS BY:           LÉTOURNEAU J.A.

DATED:          March 6, 2003

APPEARANCES:

Mr. Victor DeMarco                                      FOR THE APPELLANTS

                                               (DEFENDANTS IN TRIAL DIVISION)

Mr. Richard L. Desgagnés                           FOR THE RESPONDENT

                                                    (PLAINTIFF IN TRIAL DIVISION)

SOLICITORS OF RECORD:

BRISSET BISHOP                                        FOR THE APPELLANTS

Montreal, Quebec                   (DEFENDANTS IN TRIAL DIVISION)

OGILVY RENAULT                                   FOR THE RESPONDENT

Montreal, Quebec                         (PLAINTIFF IN TRIAL DIVISION)