Costs Awards and ‘Clean Hands’

The ‘Loser Pays’ Principle

In estate litigation, costs awards follow the ‘loser pays’ principle. Generally, this means the losing party has to pay a portion of the winning party’s costs. Typically, the winning party is entitled to their ‘partial indemnity costs’ (i.e., the losing party pays 30-50% of the winning party’s costs). However, in some instances, the winning party may be entitled to their ‘substantial indemnity costs’ (i.e., the losing party pays 50-75% of the winning party’s costs).  Full indemnity costs (i.e., the losing party pays 100% of the winning party’s costs) are almost never awarded.

The court may award substantial indemnity costs where the losing party has engaged in reprehensible behaviour during the course of litigation. Additionally, substantial indemnity costs may be awarded where the winning party made a settlement offer which was not accepted by the losing party, and the losing party would have done better under the settlement offer than they ultimately did at trial.

However, substantial indemnity will not be awarded where the winning party does not come to court with ‘clean hands,’ as illustrated in the recent decision, Halliday v Bromley.

Halliday v Bromley

In Halliday v Bromley, a dispute arose between two former friends concerning the ownership of 11 vacant lots of land. During a period of financial distress, the plaintiff transferred title of the lands to the defendants. The plaintiff asserted that the transfers were not genuine sales, but rather, part of an oral trust agreement whereby the defendant agreed to hold the lands in trust for the plaintiff and return the lands on request. Meanwhile, the defendants took the position that the transactions were ordinary arm’s-length purchases carried out with their own funds, and denied the existence of any trust.

After a multi-day trial, the court found that the transfers were indeed part of an arrangement under which the defendants held the lands in trust for the plaintiff. The court therefore ordered, among other things, that the lands be reconveyed to the plaintiff.

Following his success at trial, the plaintiff sought substantial indemnity costs in the amount of approximately $98,000. Before trial, the plaintiff had made a Rule 49 settlement offer (which you can read more about here), which was rejected by the defendants. The plaintiff then went on to achieve a result at trial that was more favourable than the settlement offer. Ordinarily, this would have justified the plaintiff receiving an award of substantial indemnity costs from the date of the settlement offer onwards.

However, this was not an ordinary case. The Court found that the plaintiff’s primary motivation in transferring the lands to the defendants was to place the lands beyond the reach of creditors arising from the plaintiff’s financial difficulties. The arrangement was therefore, at its core, an improper one. The fact that the plaintiff ultimately succeeded in enforcing the trust did not erase the underlying impropriety of the arrangement that gave rise to the litigation.

With that said, the defendants were also not without fault. The defendants knowingly participated in the impugned arrangement and subsequently sought to retain the lands in circumstances where they knew they held them for the plaintiff. This was therefore not a situation where an innocent party was being asked to bear the cost consequences of another’s misconduct.

In these circumstances, the Court had to weigh two competing considerations. On the one hand, the plaintiff ought not to be fully indemnified for costs arising out of an arrangement that “was, in moral terms, highly problematic.” On the other hand, the defendants should not be allowed to benefit from their attempt to take advantage of the impugned arrangement in which they willingly participated.

The appropriate remedy, said the Court, was to recognize the plaintiff’s success at trial by awarding costs, while at the same time declining to provide any enhanced recovery. In other words, the plaintiff was awarded only his partial indemnity costs (approximately $66,000), not his substantial indemnity costs (approx. $98,000).

Takeaway

Halliday v Bromley illustrates the discretionary nature of costs awards. While success at trial and the rejection of a reasonable settlement offer are important factors when it comes to receiving (or not receiving) substantial indemnity costs, these are not the only factors. Courts will also consider the broader equitable context underlying the dispute.