Liability for Legal Fees in Estate Matters

The Welton Estate Case

It is said that there are two certainties in life: death and taxes. For those involved in litigation, there is a third: legal fees. Who should bear the often-exorbitant cost of these fees at the conclusion of litigation? Although legal costs have traditionally been paid out of the Estate, modern Ontario courts follow the “loser pays” rule in estates matters. A recent ruling from the Court of Appeal for Ontario¹ demonstrates that the court has flexibility even when operating within this rule. Specifically, the court can apportion costs between the litigants in a way that respects the importance of giving effect to valid wills while also discouraging parties from taking unreasonable positions.

Background – From the Estate to the Person

Historically, judges hearing contested estates matters tended to order that legal costs were to be paid out of the Estate on a partial indemnity basis.² In fact, for a time this tendency was “virtually automatic.”³ The court reasoned that where estate litigation arises out of some fault on the part of the testator (poor estate planning, incapacity, ambiguous testamentary document), it would be unfair to assign the burdensome cost of interpreting a testamentary document to a blameless party.⁴ An improperly executed Will or a Will drafted under undue influence should not be administered simply because the risk of having to pay legal costs outweighs the interests of justice.

However, a litigant who knows that he is free from the restraints of legal fees may initiate frivolous claims or maintain unreasonable positions and effectively drain the assets of the Estate. Recognizing this problem, modern courts moved away from the traditional approach of ordering all costs payable out of the Estate, and instead adopted civil litigation principles, or the “loser pays” approach. In 2005, the Court of Appeal specifically addressed this transition, and confirmed that the traditional approach has been “displaced” by the modern approach. The modern approach requires courts to engage in a careful scrutiny of the litigation, and apply civil litigation cost principles unless one or more public policy consideration applies.⁵

In Practice

How does this modern approach play out in the courtroom?

Facts: The Ontario Court of Appeal recently made an instructive ruling on costs in the context of estate litigation. Let us first examine the facts in the case of the Estate of David Munro Welton: the Deceased made two Wills, the second of which concerned his shares in Davwel Investments Inc. The Will instructed his trustees to redeem 150 Class D shares from Davwel, resulting in net proceeds of $2 million. The Will further directed the trustees to advance $1 million from these proceeds to his son, David Jr., and hold the remaining $1 million in trust for his daughter, Kym. ⁶

There were two problems with the Deceased’s bequests. First, the Deceased never owned any Class D shares. In fact, all 300 Class D shares were owned by his third child, Catherine Haugrud. The Deceased did, however, own 1,200 Class E shares, which were similar in nature to the Class D shares. This brings us to the second problem. Redemption of 150 shares from either Class D or Class E would only generate net profits of $1 million, which was clearly insufficient to satisfy the bequest of $2 million.

From the outset, the drafting solicitor unequivocally acknowledged mistakenly referring to the Deceased as owning Class D shares, and misreading his notes to put the figure of 150 shares total to be redeemed, rather than 150 shares for each of his two children. The Trustee could not administer the Estate on these terms, and it brought an application to rectify the Will.

The Deceased’s widow was the only party to oppose the motion. In truth, she did not really disagree that the Will should be rectified; she did not challenge it and in fact elected to take under the Will. Instead, she argued that the rectification issue should be decided within her separate negligence proceeding against the drafting solicitor in which she claims to be a “disappointed beneficiary” as a result of his errors.

Ruling: The motion judge disagreed, and rectified the Will based on the drafting lawyer’s admissions. Not surprisingly, the court declined to award the widow her costs. Instead, it granted full indemnity to the other parties, with the Estate ordered to pay the first 50-60%, representing partial indemnity, and the widow personally contributing to the difference up to 100%.

The widow appealed to the Court of Appeal for Ontario on both the rectification issue and the costs award.⁷ In a 4-page decision, the court dismissed the widow’s rectification arguments. On the issue of costs, the court maintained that the other parties should be fully indemnified. This time, however, the widow was ordered to pay the partial indemnity costs of the parties, with the Estate “topping up” the difference to 100%. The practical effect for the widow is as follows:

• The estate trustee was entitled to its full indemnity costs of $16,410.99, payable as follows:
  • $9,625.34 personally by the widow (representing 58.65% of full indemnity)
  • $6,785.65 balance by the Estate
• The Children’s Lawyer was entitled to its full indemnity costs of $10,000, payable as follows:
  • $7,000 personally by the widow (representing 70%)
  • $3,000 balance by the Estate
• Catherine Haugrud was entitled to her full indemnity costs of $49,206.26, payable as follows:
  • $28,856.25 personally by the widow (representing 58.64%)
  • $20,305.01 balance by the Estate

The non-party lawyer was only awarded his partial indemnity fees of $33,957.89, which were to be paid entirely by the widow. Presumably, this award reflects his proportion of fault with respect to the drafting errors.

Lessons Learned

The courts have broad discretion, accompanied by a high level of deference, to make orders as to costs.⁸ Such discretion enabled the court in this case to achieve the twin aim of deterring frivolous litigation and allowing an inquisitorial process to determine the testator’s true intentions. The ruling is both punitive and redemptive. What does it mean for litigants or potential litigants?

First, full indemnity costs are the exception rather than the rule, and litigants should not expect that 100% of their legal costs will be covered. In civil litigation, costs are generally awarded on a partial indemnity basis unless justice can only be done by full or substantial indemnification. Full indemnity costs have been reserved for “reprehensible, scandalous, or outrageous” conduct,⁹ and are designed to chastise improper conduct and deter others.¹⁰ Parties who are forced to participate in protracted and fruitless litigation should not expect to bear their own legal costs, and while they may ask the court for full indemnity, it is only likely to be awarded in particularly egregious cases.

Second, litigants will face personal cost consequences if they are found to maintain unreasonable positions. The widow in this case did not actually intend to get the relief she was seeking: she did not oppose the rectification of the Will; she simply wanted the matter decided on her terms. The appeal court clearly found no merit to the widow’s arguments, and took a dim view of her attempt at a “re-hearing” of the issues in the hope that they would be decided differently. The costs order is illustrative of how a court deals with a litigant it perceives to be wasting the court’s time and resources. (It is worth noting, however, that the Estate was ordered to contribute to the parties’ costs, which reflects the court’s long-held conviction that the burdensome cost of interpreting a testamentary document should not fall on the parties.)

Third, litigants in estate matters should not limit themselves to simply seeking boilerplate “costs” awards. The court is equipped with the tools not just to apportion costs between parties, but also to structure the proportion of costs that these parties will pay. In seeking more specific costs awards, litigants can help determine who will bear the costs and for what reasons.

A final warning to litigants and potential litigants relates to appealing an adverse costs award. As the appeal court stated in this case, leave to appeal a costs award is granted sparingly, and the court will only intervene where there has been an error in principle, or where the result is plainly wrong. Litigants should ensure that they have reasonable grounds for seeking to appeal a costs award, or, like the widow in this case, they will face increasingly severe cost consequences.