REASONS
FOR ORDER ON COSTS
Smith J.
I. Overview
[1]
Reasons for judgment in this appeal were issued
on April 12, 2017 (2017 TCC 59) and costs were awarded in favour of
the appellant. The parties were unable to agree on the quantum of costs and
have now made submissions to the Court.
[2]
The appellant claims substantial indemnity costs
pursuant to subsection 147(3.1) of the Tax Court of Canada Rules
(General Procedure) (the “Rules”) because it served an offer of settlement
that was as favourable as the judgment rendered. They claim $90,882,
representing 80% of their solicitor and client costs incurred after the date of
the offer.
[3]
The respondent objects to the quantum of
substantial indemnity costs requested on the basis that they were not
reasonably incurred and that, in any event, the appellant entered into a fee
arrangement with its legal counsel that limits the amount of its solicitor and
client costs to $19,432 (excluding disbursements). As a result, the appellant
should be entitled to no more than 80% of that amount.
[4]
The appellant’s entitlement to substantial
indemnity costs as a result of the offer of settlement is not disputed and the
main issue is entirely with respect to the quantity of the cost award.
II. Background and relevant facts
[5]
At the hearing of the appeal, the issue was
whether three categories of food products were zero‑rated supplies for
purposes of the Excise Tax Act, R.S.C., 1985, c. E‑15. The
total GST/HST amount in issue was $63,949.
[6]
The Court concluded that only two of the three
products were zero‑rated and the matter was referred back to the Minister
of National Revenue for reconsideration and reassessment on that basis. Subject
to that final assessment, the appellant is entitled to a refund of $38,865 plus
interest and penalties.
[7]
As part of their submissions on costs, the
parties informed the Court that the judgment rendered was as favourable as the
terms of an offer of settlement made by the appellant on June 3, 2014 that
had been rejected by the respondent. There was no suggestion of a counter‑offer
from the respondent.
[8]
The Court was also advised that the appellant’s
counsel had entered into a fee arrangement with the appellant consisting of two
stipulations that I would describe as follows:
1.
A “Variable Fixed Fee” in the amount of $7,500
for time spent on the matter, plus an additional amount of $5,000 if the matter
proceeded to trial, regardless of the outcome, plus an amount of $2,500 if the
recovery exceeded $10,000 and 50% of any recovery above $30,000; and
2.
In the event that the Court awarded costs in
excess of Tariff B (the “Enhanced Costs”), the amount so ordered, if any,
except that the Variable Fixed Fee noted-above was to be reduced by between 20%
and 90%, depending on the amount of the award.
[9]
Since the appellant was entitled to a refund of
$38,865, as noted above, this would result in a variable fixed fee of $19,433.
That amount could be reduced by up to 90% or to as little as $1,943 if the
Court awarded enhanced costs.
[10]
KPMG Law submitted a bill of costs for
272.90 hours which indicated that 229.80 of that time related to services
rendered after service of the settlement offer. The difference (43.10)
represents services rendered from the beginning of the engagement in September
2013 to the delivery of the offer on June 3, 2014.
[11]
Appellant’s counsel submitted a copy of its time
dockets and indicated that in the preparation of the bill of costs, certain
adjustments were made (i.e. travel time was excluded) and some hourly
rates were discounted. For example, Michel Bourque’s rate was reduced from
$1,065 to $800 per hour and Jacqueline Fehr’s rate was reduced from $860 to
$450 (2015) and $475 (2016). Other lawyers and law-students were involved and
greater details were provided in the submissions. In the end, the time docketed
after June 3, 2014 was as follows:
|
|
100%
|
80%
|
|
M. Meredith (ON 1985*) 1.2 hours / $950
|
$1,140
|
$912
|
|
G. Grenon (AB 1995) 2.8 hours / $800
|
$2,240
|
$1,792
|
|
M. Bourque (NB 1997*) 51.3 hours / $800
|
$41,040
|
$32,832
|
|
J. Fehr (BC 2011) 110.6 hours / various
|
$48,367
|
$38,693
|
|
W. House (BC 2014) 52.4 hours / $350
|
$18,340
|
$14,672
|
|
M. Angel (Student) 11.5 / $250
|
$2,875
|
$2,300
|
|
|
|
|
|
|
[12]
The numbers do not perfectly add up (there is a
$320 discrepancy) but in any event, it is clear that the substantial indemnity
costs claimed by the appellant are $90,882 (when applying a rate of 80% more or
less) of a total of $114,002. The appellant also seeks $525 in accordance with
Tariff B as well as out-of-pocket costs.
[13]
Although it is not entirely clear what legal
costs have to date been invoiced to the appellant, it seems clear that the
final bill has not yet been prepared.
III. The Applicable Law
[14]
The appellant claims it is entitled to
substantial indemnity costs on the basis of subsections 147(3.1) to (3.8)
that were added to the Rules effective February 7, 2014 (and these changes
reflect Practice Note No. 18 issued on January 31, 2011). Those
subsections provide as follows:
(3.1) Unless otherwise ordered by the Court, if an appellant
makes an offer of settlement and obtains a judgment as favourable as or more
favourable than the terms of the offer of settlement, the appellant is entitled
to party and party costs to the date of service of the offer and substantial
indemnity costs after that date, as determined by the Court, plus
reasonable disbursements and applicable taxes.
(3.2) Unless
otherwise ordered by the Court, if a respondent makes an offer of
settlement and obtains a judgment as favourable as or more favourable than the
terms of the offer of settlement, the appellant is entitled to party and party
costs to the date of service of the offer and substantial indemnity costs
after that date, as determined by the Court, plus reasonable
disbursements and applicable taxes.
(3.3) Subsections
(3.1) and (3.2) do not apply unless the offer of settlement
(a) is in writing;
(b) is served no earlier than 30 days after the close of
pleadings and at least 90 days before the commencement of the hearing;
(c) is not withdrawn; and
(d) does not expire earlier than 30 days before the
commencement of the hearing.
(3.4) A party who
is relying on subsection (3.1) or (3.2) has the burden of proving that
(a) there is a relationship between the terms of the offer of
settlement and the judgment; and
(b) the judgment is as favourable as or more favourable than
the terms of the offer of settlement, or as favourable or less favourable, as
the case may be.
(3.5) For the
purposes of this section, “substantial indemnity costs” means 80% of solicitor
and client costs.
…
(3.8) No
communication respecting an offer of settlement shall be made to the Court,
other than to a judge in a litigation process conference who is not the judge
at the hearing, until all of the issues, other than costs, have been
determined.
[My emphasis.]
[15]
It seems obvious that the objective of this rule
is to encourage parties to evaluate the strength of their respective cases and
to consider settlement at an early stage. It does so by establishing a default
entitlement to 80% of solicitor and client costs incurred after the date of the
offer without the need to demonstrate that a party’s conduct was somehow
malicious, vexatious, improper or unnecessary.
[16]
The purpose of substantial indemnity costs and
ultimately, the role of the Court in assessing those costs, is to provide full
indemnification for all costs, including fees and disbursements reasonably incurred
by the successful party: Scott Paper Co. v. Minnesota Mining and
Manufacturing Co., [1982] O.J. No. 917 at para 4; British
Columbia (Minister of Forests) v. Okanagan Indian Band, 2003 SCC 71
(“Okanagan”) at para 21 and Sun Life Assurance Company of Canada v. The
Queen, 2015 TCC 171) (“Sun Life”) at para 71.
[17]
I will add that while the principle of full
indemnity of costs and in particular solicitor and client costs, has
traditionally been viewed as “the paramount consideration” (Okanagan, para 23)
in awarding costs, that view has broadened over the years and costs have more
recently been recognized as a means of encouraging settlement, deterring
frivolous actions or defences, and discouraging unnecessary litigation: Fellowes,
McNeil v. Kansa International Insurance Co. (1997), 37 O.R. (3d) 464 (Gen.
Div.) (“Fellowes”) at para 10 and Acsis EHR (Electronic Health Record)
Inc. v. The Queen, 2016 TCC 50 (“Acsis”) at para 26.
A. The Court’s discretion
[18]
The opening words “unless otherwise ordered by
the Court” and the expression “substantial indemnity costs … as
determined by the Court” in subsections 147(3.1) and (3.2) suggest that
the Court retains a broad discretion to assess and determine the quantum of substantial
indemnity costs, despite the clear definition of “substantial indemnity costs”
contained in subsection 147(3.5).
[19]
Several recent decisions of this Court have
confirmed that even where it can be said that a party has obtained “a judgment
as favourable as or more favourable than the terms of the offer of settlement”,
as set out in subsections 147(3.1) or (3.2), the Court still retains a
broad discretion in assessing solicitor and client costs for the purpose of
determining the appropriate quantum of substantial indemnity costs: Golini
v. the Queen, 2016 TCC 247, para 5; Standard Life Assurance Company
of Canada v. The Queen, 2015 TCC 138, para 4, and Sun Life, supra,
para 9. Indeed, if the Court finds that a party has engaged in
“questionable” or “egregious behaviour” that tended to unduly lengthen the
proceedings, the Court may award substantial indemnity costs of more than 80%
(though this should be done cautiously”): Repsol Canada Ltd. v. The Queen,
2015 TCC 154, para 10.
B. Fee arrangements
[20]
In the exercise of its discretion over costs,
the Court may have to consider the impact of a fee arrangement as between a
successful party and his or her counsel and in doing so must determine whether
it is a contingency fee arrangement based on the results obtained at trial or
whether it is an arrangement that limits a successful party’s obligation for
solicitor and client costs.
[21]
A contingency fee arrangement typically includes
a risk premium and the “contingency” or triggering event is normally linked to
the success or results obtained at trial. The successful party’s counsel will
be entitled to a fee based on an agreed upon percentage of the results obtained
(as regulated by the various Provincial law societies). As will be seen below,
such a fee arrangement will likely not be relevant to an assessment of
solicitor and client costs.
[22]
In Walker v. Ritchie, 2006 SCC 45, [2006]
2 S.C.R. 428 (“Walker v. Ritchie”) the Supreme Court of Canada considered a
contingency fee arrangement and, in the context of an award of costs, concluded
that (para 28):
(…) Unsuccessful
defendants should expect to pay similar amounts by way of costs across similar
pieces of litigation involving similar conduct and counsel, regardless of
what arrangements the particular plaintiff may have concluded with counsel.
[My emphasis.]
[23]
That decision was applied by this Court in Sun
Life, where the successful appellant sought substantial indemnity costs, having
served an offer of settlement that was more favourable than the judgment
obtained. The appellant submitted a bill of costs while acknowledging that the
actual fee charged by counsel was much higher and calculated at approximately
25% of the tax recovered at the hearing. Owen J. indicated that the role
of the Court was to determine whether solicitor and client costs were
reasonably incurred without regard to the contingency fee arrangement which he
described as “a special arrangement negotiated between the parties” which the
respondent could not be expected to reimburse: Sun Life, supra,
para 26.
[24]
However, as noted above, different
considerations may arise if a fee arrangement limits a successful party’s
obligation for solicitor and client costs. This occurs as a result of the
principle that a litigant must have actually incurred a legal obligation to pay
for services rendered by counsel: W. H. Brady Co. v. Letraset Canada Ltd.
(C.A.) (1991), 2 F.C. 226, para 9.
[25]
This issue was recently dealt with by Roy J. in Hervé
Pomerleau Ont. Inc. v. The City of Ottawa, 2014 ONSC 1496) (“Hervé
Pomerleau”) where the successful party’s counsel had agreed to a “blended rate
of $171 per hour” (para 6). In a claim for substantial indemnity costs,
the unsuccessful party argued that it should not be responsible for more than
that amount:
[9] In fact, it
appears quite clear from the case law that a successful party is not entitled
to costs over and above its obligation to his client. In Clark v. Nash,
[1990] B.C.J. No. 727, the British Columbia Court of Appeal said and I
quote:
In the end counsel are not in
disagreement about the law. They agree that the entitlement to costs depends
upon there being an obligation on the part of the client to pay the solicitor.
The award of costs is an indemnification in relation to that obligation. The
costs cannot exceed the amount of the obligation.
That principle
has been approved by our Courts including the Court of Appeal (…)
[My emphasis.]
[26]
Roy J. fixed the solicitor and client costs at
$250,000 and then reduced them to $188,000, which was determined to be “the
Defendant’s obligation to their counsel” (para 15).
[27]
There is no reason to doubt that this principle
applies to this Court. However, the Court must be satisfied that the fee
arrangement actually limits the client’s obligation for costs. If it does not
clearly do so, then the Court should certainly be loath to limiting an award of
solicitor and client costs on this basis.
[28]
For example, in Zeleny v. Zeleny, 69 O.R.
287, (2004) O.J. No. 138, (“Zeleny”) counsel in a matrimonial dispute had
entered into a financial arrangement pursuant to which he would charge for all
legal services rendered “at an hourly rate of $90 per hour… or actual costs
recovered, whichever is greater” (para 4).
[29]
The client in Zeleny was ultimately successful
and counsel requested an award of costs at an hourly rate of $195. The Court
found that amount to be an acceptable hourly rate and held further that “(…) in
order to satisfy the fundamental purpose of encouraging settlements, the Fee
Arrangement should not be interpreted as forming an upper limit on the party/party
costs otherwise payable to the successful party” (para 18). I would view
these comments as being consistent with the views expressed in Okanagan,
Fellowes and Acsis, noted above.
IV. Analysis and conclusion
A. What was the nature of the fee arrangement?
[30]
As indicated above, the respondent argues that
the fee arrangement between the appellant and his counsel, limits the solicitor
and client costs for which the appellant can be responsible and that as a
result, they cannot be responsible for more than 80% of that amount. I do not
agree with this interpretation.
[31]
I find that the fee arrangement was not intended
to limit the appellant’s liability for solicitor and client costs if the appeal
was successful, as it ultimately was.
[32]
I instead interpret the fee arrangement to mean
that the appellant would be responsible for solicitor and costs over and above
the variable fixed fee, provided the appeal was successful and provided those
costs were in fact incurred as supported by time dockets and as further
confirmed by the Court in the process of assessing costs.
[33]
The respondent has suggested that solicitor and
client costs over and above the variable fixed fee (and disbursements) did not
exist absent an award of costs by the Court. I do not agree and find that this
is too simplistic an analysis. The appellant is not simply coming forward cap
in hand and asking for an award of costs. They have submitted a bill of costs
supported by time dockets and have requested substantial indemnity costs, as they
are entitled to do on the basis of the offer of settlement.
[34]
In my view, the Court must take into
consideration the commercial reality of the solicitor‑client relationship
within which services are rendered, all time is docketed and a final bill is
prepared and adjusted based on a host of factors such as the results obtained,
the amount at issue and the importance of the matter for the client. There
might be other considerations, but in the end, the final bill will constitute
the solicitor and client costs as between the lawyer and his or her client.
[35]
The final bill described above will give rise to
an actual legal obligation to pay. If a client is unhappy with the quantum of
the final bill, he or she might choose to challenge it by having it assessed by
an assessment officer appointed by the appropriate superior court. A lawyer
might also, out of an abundance of fairness or to resolve a dispute, volunteer
to have the final bill assessed in this fashion and to be bound by the results.
But the process by which a legal bill might be assessed does not alter the
fundamental nature of the solicitor‑client relationship.
[36]
In this instance, appellant’s counsel had
agreed, on a prospective basis (i.e. at the beginning of the engagement),
to have its solicitor and clients costs assessed by this Court, likely because
it anticipated that the appellant might be entitled to an award of costs beyond
Tariff B ‑ as indeed they were. The fact that this Court is now
engaged in the process of determining substantially indemnity costs does not
somehow suggest that the costs are wholly disconnected from the appellant’s
obligation or liability for solicitor and client costs.
[37]
In other words, it is clear to this Court that
irrespective of the amount that might be assessed as substantial indemnity
costs, appellant’s counsel has agreed to be bound by that assessment and to
invoice the appellant accordingly. I would view this as the common
understanding of the parties.
[38]
Much like the situation in Zeleny noted above,
the purpose of the fee arrangement (and notably the fixed fee component), was
to limit the amount of solicitor and client costs the appellant would be liable
for if the appeal was dismissed, while guaranteeing a minimum amount of fees
for counsel. It did so by providing that the appellant would only be
responsible for costs of $12,500 ($7,500 plus $5,000).
[39]
The fee arrangement also provided that if the
appeal was successful, the variable fixed fee would to be adjusted upwards
based on the amount of the tax recovered (which is not disputed by the respondent).
Counsel would also seek an award of costs from the Court and the amount so
awarded, if any, would constitute the “enhanced fee” for which the appellant
would be invoiced. In my view, this does not offend the principle of
indemnification for costs actually incurred.
[40]
Contrary to the position taken by the
respondent, I do not view the enhanced costs as “notional” or “hypothetical” as
the appellant will be invoiced for the amount of the costs awarded by the
Court. This is to be distinguished from the situation in Sun Life, supra,
where the successful party had already agreed to pay a percentage of the tax
recovered leading Owen J. to conclude that the hourly rates were
“hypothetical rates” (para 26). That is not the case here.
[41]
For much the same reasons, I do not agree with
the respondent that the Court should simply ignore the provision for enhanced
costs on the basis that costs belong to the appellant and that only counsel,
and not the appellant, will somehow profit from the award of substantial
indemnity costs beyond the variable fixed fee.
[42]
In the end, I accept the appellant’s submission
that the fee arrangement was not intended to alter the appellant’s legal
obligation to pay for legal services rendered if the appeal was successful. It
was intended to ensure that the appellant was able to obtain proper legal
representation and was structured so as to limit the appellant’s exposure to
legal costs if the appeal was ultimately dismissed. I have to assume that
appellant’s counsel was prepared to accept the risk that a substantial portion
of its docketed time would have to be written-off if the appeal was in fact
ultimately dismissed. That was the deal agreed upon as between the two parties.
[43]
I will only add that fee arrangements and
particularly contingency fee arrangements are generally regulated by the
various law societies. Since this matter was heard in British Columbia, I have
to assume that the Legal Profession Act, SBC 1998, c. 9, would
apply. In accordance with this legislation, there are various limits and
restrictions and in some instances the agreement is subject to approval by the Superior
Court, though, the Court has not received any submissions on this latter issue
nor have any been sought. It is raised simply to clarify that the Court
expresses no view on whether the fee arrangement in question is compliant or
not. In any event, I am of the view that these considerations are not directly
relevant to the task of assessing solicitor and client costs on the basis of
the bill of costs and time dockets submitted.
[44]
To conclude on this issue, I am satisfied that
the fee arrangement, notably the variable fixed fee, does not limit to the
appellant’s obligation for legal costs vis-à-vis its counsel if the appeal is
ultimately successful, as it was, and that the enhanced costs as described in
the fee arrangement are neither notional nor hypothetical as there is a clear
nexus with the solicitor and client costs actually incurred. The remaining
issue is whether these costs were reasonably incurred.
B. Were the costs reasonably incurred?
[45]
Since I have already concluded that the fee
arrangement does not limit the appellant’s solicitor and client costs if the
appeal is successful, there is no need to consider the various arguments put
forward by the respondent that an award of costs over and above $21,000 would
be in the nature of “punitive damages” and could only be awarded if the Court
concluded that “there has been reprehensible, scandalous or outrageous conduct
on the part of one of the parties” (para 28 and 30 of the respondent’s
submissions). Those considerations are not relevant.
[46]
The respondent also argues that the total amount
in issue was relatively small (a potential tax refund of $63,949.00), and that “no
unsuccessful party could reasonably expect to face costs of 180% of the amount
at issue”. While that would appear to reflect the principle that “unsuccessful
defendants should expect to pay similar amounts by way of costs across similar
pieces of litigation involving similar conduct and counsel…” (Walker v. Ritchie,
para 28), I am of the view that the words “across similar pieces of
litigation” should not be limited to the amount in issue. Different taxpayers
will be motivated by different considerations.
[47]
If the only consideration was the quantum of a
potential tax refund, the respondent could reject all offers of settlement with
impunity, deploy its vast resources where it felt that policy considerations
were at play and then, if unsuccessful, argue that it should not be expected to
pay substantial indemnity costs for such a small amount.
[48]
While the Court does not quibble with the notion
that the quantum of costs is to be determined in relation to “the reasonable
expectation of the unsuccessful party” (Hervé Pomerleau, para 12), what a
reasonable expectation would be in this case must first be established by the
Court?
[49]
The respondent knew that the appellant was
represented by a national law firm and was necessarily involved in every step
of the litigation process. Without any specific representations, I have to
assume that the respondent’s time dockets are much the same as the appellant.
And while the hourly rates may differ significantly, I have concluded that the
hourly rates charged by appellant’s counsel are not inconsistent with that of
comparable senior counsel.
[50]
Since the substantial indemnity costs rule
already includes an automatic 20% discount, it is appropriate to start with the
premise that all costs were reasonably incurred and that the Court should
resist the temptation to second‑guess the judgment of counsel regarding
the amount of time spent on an appeal. Moreover, the Court’s discretion to
override the entitlement to substantial indemnity costs should only be used
sparingly and on a purely principled basis (Sun Life, supra, para 22,
23 and 10).
[51]
As noted above, subsections 147(3.1) and (3.2)
and the provision for substantial indemnity costs, subsection 147(3.5) seeks to
encourage parties to assess the strength of their respective positions and to
consider a settlement at an early stage in the proceedings. It follows that a
party who rejects an offer of settlement must assume the risks and bears the
full consequences of that decision.
[52]
In this instance, the Court views the offer of
settlement in question as both thorough and comprehensive. It contains a
compelling rational and fulsome review and analysis of the facts and legal
issues over 5 pages and represents a serious attempt to settle at an early
stage in the proceedings.
C. The substantial indemnity costs
[53]
Assessing costs is not an exact science but the Court
will generally look to the various considerations set out in subsections 147(3)(a)
to (j) of the Rules, in order to see if there is any reason to adjust the
solicitor and client costs being claimed. Having reviewed those provisions, the
Court concludes that there is no principled basis to reduce the solicitor and
client claimed in any material respect.
[54]
In view of the Court’s overriding discretion, as
noted above, and taking into consideration the comprehensive nature of the
offer of settlement, the fact that it was delivered shortly after the close of
pleadings and more than 24 months before the hearing date, I would assess
the solicitor and client costs at $112,500 resulting in substantial indemnity
costs of $90,000 (80%), pursuant to subsections 147(3.1) and (3.5) of the
Rules.
[55]
The appellant is also entitled to Tariff B costs
and disbursements including an additional amount of $3,500 for the preparation
of the cost submissions.
[56]
To conclude, the appellant is entitled to costs
calculated as follows:
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1.
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Tariff B – paragraph 1(1)(a)
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2.
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Filing Fee
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3.
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Examiner’s fee (examination for discovery)
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4.
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Substantial indemnity costs
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5.
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Costs with respect to the costs submissions
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Signed at Ottawa,
Canada, this 25th day of August 2017.
“Guy Smith”
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