The expense of litigation is a top concern for all clients. So, if you are involved in a lawsuit and want to try to ensure that you have the best shot at recovering your expenses when successful, what should you do? One key option is to make a Rule 49 offer to settle.
The timing of an offer to settle is important and can have a significant impact down the road. Now you might ask why anyone would offer to settle a fight when it’s either just getting started or getting really close to the trial that you’ve spent so long preparing for. The answer is a simple one: protecting your ability to maximize the return of your legal costs.
Imagine a fight over a building contract between a builder and a homeowner. The builder quoted a price of $2 million dollars to build a house, and builds it. Afterwards, the homeowner felt the job was done so badly, that he had to tear it down and rebuild. The homeowner decides that he will not pay the builder, and the builder sues. During the litigation, the builder offers to settle the lawsuit with a Rule 49 offer to the homeowner, and says he will accept $500,000. The homeowner rejects the offer. They go to trial and the judge awards the builder $550,000 in damages. So under Rule 49, what happens with the builder’s legal costs?
Since the builder did better at trial than what he offered to settle the litigation for in his Rule 49 offer, the judge would most likely award the builder a much higher percentage of his costs – perhaps as much as 90%, compared to the costs the court would likely award without the offer, which might be closer to 50-60%. But it can get complicated.
For example, under Rule 49.10(2), if a defendant to a proceeding makes an offer to settle at least seven days before a hearing, and the plaintiff obtains a judgment as favourable as or less favourable than the terms of the offer, the defendant is entitled to partial indemnity costs from the date the offer was made. Partial indemnity costs means closer to 50-60% of actual costs.
What is important to remember however, is that the Rule also contemplates a seven-day deadline for making such offers, with the proviso that if the offer is received less than seven days before the hearing, the costs consequences (as summarized above), do not apply.1
However, and as was determined by the Court of Appeal in Konig v. Hobza2, even though the seven-day deadline is subject to the no “near-miss” policy (i.e. if you serve an offer one day late, you’re still too late even if it was just one day), discretion always rests with the trial judge when it comes to awarding costs at the end of a proceeding and the court can take any offer into consideration, even if Rule 49 is not technically complied with.
With that in mind, let’s turn to the case:
Konig v. Hobza
Trial decision I
This matter was a commercial dispute wherein the plaintiff sued the defendant corporations for oppression. Prior to trial, the defendants served their offer to settle. Despite the fact that the offer technically did not comply with the seven-day requirement, the judge found that the time of the delivery of the offer afforded the plaintiff sufficient time to properly consider the offer, and so the offer was considered under Rule 49.
In any event, the offer was rejected by the plaintiff. At the close of trial, the judge awarded the plaintiff an amount that, when all was taken into account, was greater than what was offered by the defendants. As a result, the costs consequences of the offer were not engaged.
Court of Appeal Decision I
On Appeal, the Court upheld the trial judge’s finding of oppression. However, in finding flaws with the trial judge’s calculation of certain damages, the court of appeal reduced the damages such that the new award became less than the amount that was offered to the plaintiff prior to the trial.
The Court of Appeal sent the matter back to the trial judge to reconsider the quantum of costs and the consequences of Rule 49.10 given the reduced damages award.
Trial Decision II
Back before the trial judge, who was this time tasked with making a new determination on costs, the appellant argued that the trial judge erred in finding that the seven-day service requirement was complied with. In making this argument, the appellant relied on case law that stood for the following proposition: if a party to a proceeding makes an offer to settle that comes close to meeting the ultimate quantum awarded in judgment, but not exact, there is still no entitlement to costs as if they made a successful offer.3 This has been referred to as the no “near miss” policy.
In any event, the trial judge refused to apply the no “near miss” policy to timing, as he concluded that it applied only to quantum of the offer/award. He went on to find that since the damages had been reduced, that the cost consequences of Rule 49.10 now did apply. This decision was (of course) appealed back to the Court of Appeal.
Court of Appeal Decision II
Contrary to the trial judge’s determination, Epstein J., writing for the Court of Appeal, made a finding that the no “near miss” policy applies to both quantum (as in Elbakhiet) as well as timing. Epstein J. discussed the need for certainty in assessing offers to settle, and concluded that by adhering to the strict seven-day rule, the parties are given two important pieces of information:
- Whether the time has passed to expect an offer to settle from the other side; and
- Whether whatever offer is made will be given the necessary treatment at the close of trial.
Being deprived of that information deprives the parties of certainty required for this sort of contemplation, which was Epstein J.’s reason for concluding that the no “near miss” policy applies to the seven-day rule.
However, Epstein J., and the Court of Appeal, made one point perfectly clear – that while the no “near miss” rule certainly applies to the seven-day requirement for making Rule 49 offers, costs consequences in proceedings are still ultimately, subject to the discretion of the judge, pursuant to Rule 49.13.4
As a result, the Court of Appeal, despite finding that the offer was not a valid offer under Rule 49, still upheld the Trial Judge’s discretion to take the offer into account when exercising its discretion to award costs.
Propositions of law
So, what can be learned from this case? Two propositions of law are clear:
- A Rule 49 offer must be presented to the other side at least seven-days (and not six or five, for example) before the start of a hearing, because there is a strict no “near miss” policy that applies to that timing.
- Despite the timing of an offer, the trial judge may always exercise his discretion with respect to awarding costs at the end of a proceeding.
Discretion is, by its very nature, impossible to predict, and so it cannot be relied on.As such, each case will depend on its own facts.
This case should be taken into consideration when advising clients about the benefits and timing of making a Rule 49 offer. No matter what, the courts have made it clear that they want parties to litigation to make offers to settle and that regardless of whether the strict requirements of Rule 49 are met, the court will take the offer into consideration in determining costs.
- The costs consequences apply to both plaintiffs and defendants. Above I have outlined what happens when a defendant makes an offer to settle. When a plaintiff makes an offer to settle, pursuant to Rule 49.10(1), and the plaintiff obtains a judgment as favourable as or more favourable than the terms of the offer, then the plaintiff is entitled to partial indemnity costs to the date the offer was served, and substantial costs from the date the offer was served. ↩
- Konig v. Hobza 2015 ONCA 885 (“Konig”). ↩
- This proposition is found in Elbakhiet v. Palmer, 2014 ONCA 54, 121 O.R. (3d) 616, leave to appeal refused, (2014) S.C.C.A. No. 427. ↩
- Rule 49.13 states: “Despite Rules 49.03, 49.10 and 49.11, the court, in exercising its discretion with respect to costs, may take into account any offer to settle made in writing, the date the offer was made and the terms of the offer.” ↩