Legal Blog
Costs & Interest
An action progresses through pre-trial procedures all the way to trial and judgment. You might think that the matter is finally over, but think again. The judge still has to fix costs payable to the successful litigant and, if the plaintiff is successful, the judge has to set the interest on the judgment amount. Sometimes, the fight for the icing on the cake is more intense than the fight for the cake and, in some cases, the icing is thicker than the cake. This was demonstrated in 1157391 Ontario Inc. v. Ortiz, a 2020 decision of the Ontario Superior Court of Justice, appealed unsuccessfully to the Ontario Divisional Court. The Divisional Court’s 2021 decision made no mention of interest and costs; accordingly, we assume that this aspect of the judgment had not been in issue on the appeal.
Merits
The owners terminated a contract after the contractor had achieved the first construction milestone set out in the prime contract. The contractor registered a claim for lien and commenced an action to enforce it. It claimed $124,000 for money that had been due under the contract for the first milestone draw plus $6,000 for extras and $35,000 for lost profit arising from the early termination of the contract.
The owners claimed that the contractor had fundamentally breached the contract and that this breach allowed them to terminate the contract with impunity. After a 13-day trial, the trial judge awarded judgment in favour of the contractor for $144,000, comprised of $124,000 for the first milestone draw, $1,000 in extras, and $19,000 for lost profit.
Costs
The owners lost – big time. To make matters worse for them, the contractor had made three offers to settle at various times during the litigation in which it had offered to accept $135,000, then $105,000 plus costs, then $95,000 plus costs. The results at trial exceeded all three offers to settle. This meant that, under the Rules of Civil Procedure, the costs that would be awarded to the contractor would be increased from a partial indemnity calculation to a substantial indemnity calculation. In effect, subject to other issues that we will discuss, the contractor was to be substantially reimbursed at 90% of the costs it was to pay to its own lawyers rather than the partial indemnity amount of 60%.
The trial judge agreed that the $385 hourly rate of the contractor’s lawyer was reasonable and that he devoted the hours set out in the bill of costs to the prosecution, preparation, and trial of the action. Given that the contractor’s lawyer was called to the bar in 1976, we suggest his hourly rate was more than reasonable; it was incredibly low. The contractor claimed costs of $243,000: $200,000 in fees plus HST and $17,000 in disbursements.
The judge referred to factors, additional to the offers to settle, set out in the Rules. He noted that the contractor received an award for most of its claim; the proceeding was modestly complex, with hundreds of pages of documents and testimony of multiple witnesses, including experts; the issues were important to both parties; the contractor’s counsel was efficient; and the owners “tenaciously but unreasonably resisted even the simplest and most straightforward of suggestions made to them during cross-examination.” The judge also noted that the owners, who were paying their own counsel $325 per hour, must have appreciated the costs that the contractor was incurring.
Proportionality
In the good old days, the setting of costs involved a review of the factors that we have listed above and, mostly, making a mathematical calculation. The Ontario Court of Appeal changed that in 2004 and added the concept of proportionality. In effect, it stated that costs should be proportionate to the result and that the overall objective of the process should be to fix “an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceedings, rather than an amount fixed by the actual costs incurred by the successful litigant.”
The owners’ lawyer claimed that he would have sought only $104,000 had the owners been successful and that, accordingly, the contractor should only receive $80,000 in costs. The logic in these numbers escapes us.
The judge acknowledged that proportionality should remain at the forefront when fixing costs, but relied on a line of cases, which indicated that the principle should not be rigidly applied to reduce costs for defendants mounting a wholly unmeritorious defence to a legitimate claim. To do so might under-compensate litigants for costs legitimately incurred and impose an unfair result on wronged litigants.
In this case, the judge held that it would be manifestly unfair to under-compensate the contractor for costs. He stated:
“The evidence made it clear that the Plaintiff covered a good share of the front-end costs of the project by purchasing supplies and paying sub-trades. The Plaintiff has been out of pocket for those costs for more than three and half years. It would be an absurd result if the Plaintiff was forced to relinquish more than half of a hard-won judgment to its own lawyer because the principle of proportionality served to rescue the Defendants from their own folly. It would be equally absurd to expect the Plaintiff’s lawyer to significantly reduce the fees he would charge his client because the Defendants have been largely spared of their obligation to pay the legitimate costs of the action.”
The judge then fixed costs at $145,000 in fees plus HST plus disbursements of $16,889.70 for a total of $180,739.70. In essence, he used proportionality to reduce the claimed fees of $200,000 by $55,000 and then added HST and disbursements. The total costs award was still $36,000 more than the amount awarded in damages at trial. The icing exceeded the cake.
Interest
The contract set out a contractual interest rate at “12% per annum, calculated daily, not in advance, until paid.” Had the contract not set out a rate at all, interest would have been awarded at the rate set out in the Courts of Justice Act, which, at that time, was 0.8% per year simple interest.
The courts will apply the contractual interest rate, rather than the pre-judgment rate, unless there is a good reason not to do so. The judge saw no such reason. He noted that the owners had the use of the funds that they owed to the contractor from the date of the first milestone. He also held that “a contractual rate of interest is meant to encourage prompt payment. The Defendants could have alleviated some of their exposure to the contractual interest by paying the disputed funds into an interest-bearing account.”
The owners did not do that; they obtained their draw from their mortgagee based on the milestone having been completed and then used that draw to pay another contractor to complete the construction.
The judge also interpreted the contractual rate clause to entitle the contractor to receive compound interest. We have problems with a set annual rate being compounded because compounding actually changes the effective rate. Unfortunately, the reasons for decision do not set out the calculations and, accordingly, we cannot comment further.
The judge applied the contractual rate to the first milestone draw, but used the regular pre-judgment rate for the remaining $20,000 of extras and lost profit. He noted that, at the time of the project’s termination, the contractor made no demand for breach of contract damages and provided no calculation of lost profit until much later in the litigation.
The judge calculated total prejudgment interest at $20,275.03.
Image courtesy of albertoadan.
Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices. |