A-737-01
2003 FCA 119
The M.V. "African Cape", Her Owners, Bonaveria Shipping Co. Ltd., Her Manager, DIMKO International Company S.A. (Appellants) (Defendants)
v.
Francosteel Canada Inc. (Respondent) (Plaintiff)
Indexed as: Francosteel Canada Inc. v. African Cape (The) (C.A.)
Court of Appeal, Desjardins, Létourneau and Nadon JJ.A --Montréal, February 4; Ottawa, March 6, 2003.
Practice -- Costs -- Plaintiff, at arbitration, awarded much less than amount claimed, less than defendants' settlement offer -- Settlement offer, made at early stage of litigation, withdrawn during course of arbitration hearing -- Parties having reserved costs issue for F.C.T.D. -- Prothonotary, affirmed by Motions Judge, awarding successful plaintiff costs -- Federal Court Rules, 1998, r. 400 misapplied by failure to consider relevant factors in r. 400(3) -- That respondent successful as to liability not conclusive of costs issue -- Improper exercise of discretion to restrict consideration of settlement offer to quantum of costs -- R. 420(2)(a) unfair to defendants, not promoting purpose of encouraging early settlements for cost-efficient justice administration -- Rule should be reviewed -- Comparable Ontario Rule having potential of forcing early settlements.
This was an appeal from the decision of a motions judge dismissing an appeal against the decision of a prothonotary awarding respondent a lump sum of $40,000. in lieu of assessed costs. At issue is whether the Prothonotary properly applied rule 400 of the Federal Court Rules, 1998 in the exercise of his discretion to award costs.
The respondent's claim was for $5,000,000 as damages for breach of contract to carry steel from Lithuania to Montréal. This was later reduced to $485,117.99. Prior to filing their statement of defence, the appellants made an all-inclusive settlement offer of $125,000, but that was rejected. Prior to trial, the parties agreed that the matter go to arbitration with the costs issue reserved for adjudication by the Trial Division. The appellants again put forward the $125,000 settlement offer, which was again rejected and finally withdrawn during the arbitration hearing. The arbitrator's award was for $85,879.44 plus interest for a total of $108,887.75.
Held, the appeal should be allowed.
There could be no doubt that the Prothonotary had misapplied rule 400 by failing to consider two factors: (1) the amounts claimed and recovered and (2) the written settlement offer. The Prothonotary's view was that respondent was entitled to costs, having succeeded at arbitration on the issue of liability. The Prothonatory did concede that the quantum of costs should be reduced in that the amount recovered was much less than that claimed. He accordingly reduced the costs award by some $15,000. The settlement offer, made early on in the proceedings, was greater than the sum ultimately recovered. Both sides would have saved substantial amounts in costs had it been accepted. On weighing all of the relevant factors, appellants should have their costs.
Per Létourneau J.A. (concurring): Paragraph 420(2)(a) of the Rules, relied upon by appellants before the Prothonotary, has a serious potential for unfairness. If a settlement offer is revoked--even the day before judgment is rendered--the defendant loses the benefit of the rule and can rely only upon the unfettered exercise of jurisdiction under rule 400. If the offer is left open, plaintiff can accept it--even well into a lengthy trial at which the witnesses for the defence have proven convincing. Paragraph 420(2)(a) unfairly tips the scales in the plaintiff's favour and defeats the purposes of promoting early settlements thereby allowing for a cost-efficient administration of justice and the preservation of limited judicial resources. By comparison, the comparable Ontario Rule encourages early settlement as a plaintiff runs the risk of responsibility for all the subsequent costs incurred by the defendant if the offer be not accepted prior to commencement of trial. Rule 420 is in need of review.
statutes and regulations judicially
considered
Federal Court Rules, 1998, SOR/98-106, rr. 400, 420(2), Tariff B, Column III.
| Rules of Civil Procedure, R.R.O. 1990, Reg. 194, r. 49.10(2) (as am. by O. Reg. 284/-01, s. 11). |
cases judicially considered
applied:
Reza v. Canada, [1994] 2 S.C.R. 394; (1994), 116 D.L.R. (4th) 61; 21 C.R.R. (2d) 236; 24 Imm. L.R. (2d) 117; 167 N.R. 282; 72 O.A.C. 348.
APPEAL from the decision of a motions judge (2001 FCT 1363; [2001] F.C.J. No. 1866 (T.D.) (QL)) dismissing an appeal from the decision of a prothonotary, reported at (2001), 213 F.T.R. 130, awarding the respondent a lump sum for costs. Appeal allowed.
appearances:
Victor DeMarco for appellants (defendants).
Richard L. Desgagnés for respondent (plaintiff).
solicitors of record:
Brisset Bishop, Montréal, for appellants (defendants).
Ogilvy Renaud, Montréal, for respondent (plaintiff).
The following are the reasons for judgment rendered in English by
[1]Nadon J.A.: This is an appeal from a decision of a motions judge dated December 11, 2001 [2001 FCT 1363; [2001] F.C.J. No. 1866 (T.D.) (QL)], which dismissed the appellants' appeal of a decision of Prothonotary Richard Morneau dated November 6, 2001 [(2001), 213 F.T.R. 130 (F.C.T.D.).
[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 [SOR/98-106]. By his order, the Prothonotary awarded the respondent, in lieu of assessed costs, a lump sum of $40,000.
[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 Montréal. 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, 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 Montréal 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 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. 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:
400. (1) The Court shall have full discretionary power over the amount and allocation of costs and the determination of by whom they are to be paid.
. . .
(3) In exercising its discretion under subsection (1), the Court may consider
(a) the result of the proceeding;
(b) the amounts claimed and the amounts recovered;
. . .
(e) any written offer to settle;
[15]Subsection 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 14 factors which are listed in subsection 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 subsection 400(3), namely factors (b) and (e). After concluding that paragraph 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 subsection 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 paragraphs 17 and 18 of his reasons, the Prothonotary states:
In terms of the award of costs to either party, the other factor which merits consideration--and which in my opinion should govern the award of costs--is the result of the proceeding within the meaning of paragraph 400(3)(a).
In this connection, it seems to me that in this case it is the plaintiff who should be considered the victor. The arbitrator determined the liability factor in its favour. And liability was clearly the matter of most concern in the dispute leading up to and during the arbitration. [Underlining added.]
[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:
Furthermore, a portion of the damages the plaintiff was seeking was awarded to it. That the amount obtained by the plaintiff was much less than the amount claimed may be of some relevance as to the quantum of costs to be allowed to the plaintiff, as is the fact that there was a written offer.
[19]Although he was of the view that the respondent's costs amounted to $55,137.02, he reduced this sum to $40,000 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:
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.
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.)).
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).
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 page 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.
Desjardins J.A.: I concur.
* * *
The following are the reasons for judgment rendered in English by
[28]Létourneau J.A.: I agree with my colleague and would dispose of the appeal as he proposes. I would like to add a short comment on paragraph 420(2)(a) which was relied upon by the defendants [appellants herein] before the Prothonotary. The rule reads as follows:
420. . . .
(2) Unless otherwise ordered by the Court, where a defendant makes a written offer to settle that is not revoked,
(a) if the plaintiff obtains a judgment less favourable than the terms of the offer to settle, the plaintiff shall be entitled to party-and-party costs to the date of service of the offer and the defendant shall be entitled to double such costs, excluding disbursements, from that date to the date of judgment. . . .
[29]In his argument before the Prothonotary, counsel for the defendants submitted that paragraph 420(2)(a) should be interpreted by reading in, at least implicitly, the following prescriptions found in rule 49.10(2) [as am. by O. Reg. 284/01, s. 11] of the Ontario Rules of Civil Procedure [R.R.O. 1990, Reg. 194]:
49.10 . . .
(2) 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 partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date, unless the court orders otherwise.
The Prothonotary properly refused to follow counsel's submission and concluded that paragraph 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, paragraph 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 paragraph 420(2)(a). After nine days of trial, a plaintiff who realizes 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]Paragraph 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.