Want Litigation Reform in Ontario? Ditch the Adverse Costs Rule - Sotos Class Actions
June 7, 2024

Want Litigation Reform in Ontario? Ditch the Adverse Costs Rule

By David Sterns

As the Ontario government embarks on a significant overhaul of the Rules of Civil Procedure, this is a good time to reconsider the entrenched presumption of adverse costs in our legal system. For centuries, the "loser pays" rule has been a cornerstone of civil litigation in Ontario and other common law jurisdictions, seen as a deterrent against frivolous lawsuits and a means to ensure that the winning party is not left out of pocket. However, this principle, often regarded as sacrosanct, merits critical examination in light of its impact on access to justice.

The Disadvantages of the Adverse Costs Rule

The adverse costs rule effectively punishes a party simply for seeking judicial resolution. Even when a party has acted reasonably and in good faith, losing a case or motion automatically results in a significant financial penalty. This is particularly problematic when the decision hinges on complex or ambiguous points of law where either party could have prevailed. The punitive nature of adverse costs raises the question: why should there be a penalty for simply exercising one's right to access the courts?

The Myth of Deterring Frivolous Litigation

Proponents of the adverse costs rule often argue that it serves to deter frivolous litigation and allows the courts to focus on meritorious cases. In my experience, this is a myth. The cost of litigating any civil case in Ontario has grown beyond the reach of most ordinary people and small businesses. No one sues for the fun of it; parties genuinely believe they are right. The rules already provide many tools to dispense with frivolous cases and vexatious litigants. Imposing a default adverse costs/loser pays rule on all parties, regardless of the merit of their case, is a blunt instrument that has a chilling effect on litigation generally.

To truly assess the strength of this argument, one would expect there to be empirical studies comparing the volume of litigation, especially frivolous litigation, in non-adverse cost jurisdictions like the United States to Ontario or other cost-shifting jurisdictions. I am not aware of any that has been done, and yet this often harsh and punishing rule owes its existence in part to this rationale.

Comparative Jurisdictions

In jurisdictions such as British Columbia and Manitoba, the adverse costs rule is notably absent in class actions. The Federal Court of Canada offers another instructive example. Here, adverse costs in class actions are not awarded by default. Instead, costs are only imposed under Rule 334.39 of the Federal Court Rules when a party has (i) unnecessarily lengthened the duration of the proceeding, (ii) taken a step that was improper, vexatious or unnecessary or a step was taken through negligence, mistake or excessive caution or (iii) “exceptional circumstances” make it unjust to deprive the successful party of costs. This nuanced approach balances the need to deter frivolous actions and bad litigation conduct with the imperative to maintain access to justice.

This approach is rooted in the belief that such costs are contrary to the principles of access to justice. The Law Commission of Ontario, in its 2019 Report on Class Actions, also considered the barrier to justice posed by “ever increasing” adverse costs in class actions in Ontario. After extensively reviewing the arguments for and against, it recommended a modified no-cost rule for class actions. Unfortunately, the Ontario government did not follow this recommendation. If class actions in British Columbia, Manitoba and the Federal Court can exist without the automatic imposition of adverse costs, why should Ontario persist in applying this rule uniformly across all civil matters, including class actions?

The Weaponization of Adverse Costs

In practice, the adverse costs rule is often weaponized by well-resourced parties to stifle litigation. The threat of a crippling cost award can deter individuals and small businesses from pursuing meritorious but financially risky cases. The threat of a security for costs motions is another tool to prevent cases from seeing the inside of a courtroom.

Why does the adverse costs rule work to the advantage of well-resourced parties? Because, just like speeding tickets, adverse costs are asymmetrical and regressive. A $100,000 cost award can be debilitating for an individual or a small business, whereas the same amount is negligible for a major corporation. Similarly, a large corporation with a team of lawyers will be entitled to a much higher adverse costs award if it prevails than an average person who can only afford to hire a single lawyer. The current system disproportionately punishes those who may most need judicial protection, exacerbating inequalities and discouraging legitimate claims from being brought before the courts.

The Escalation of Cost Awards

Over the past quarter-century, adverse cost awards have skyrocketed. When I began practicing, adverse costs for motions were typically in the hundreds of dollars, if not low thousands. Higher cost awards were typically reserved for battles of titans. In class actions, high cost awards were rare. Cost awards were based on a reasonable tariff, providing a small additional sting to a loss without delivering a knockout punch. However, as courts began factoring in the escalating hourly rates charged by large law firms into the cost rule, cost exposure in complex cases has reached millions of dollars. Litigants now often have to seek cost indemnity insurance, spawning an industry that charges hefty fees for such coverage. These fees, which diminish the recovery of litigants themselves, represent an added tax on the justice system borne entirely by those seeking — and often obtaining — justice.

Justice Morgan highlighted this concern in Kirsh v. Bristol-Myers Squibb, 2020 ONSC 1499, noting, "costs of litigation are often so steep that they threaten to impede access to justice.” Similarly, Justice Perell noted in Hughes v. LCBO, 2018 ONSC 4862, that “costs in class actions have gotten out of control” before proceeding to award approximately $2.2 million against the plaintiff for a failed summary judgment motion. In light of these quantums, it is easy to see how the mere spectre of a large adverse costs award can dissuade parties from pursuing legitimate claims or defences.

Impact on Access to Justice

The overarching impact of the adverse costs rule on access to justice cannot be overstated. Many potential litigants, aware of the financial risks, choose not to pursue their cases at all. This chilling effect is antithetical to fundamental principles of justice. Courts exist to adjudicate disputes and uphold rights, but the fear of adverse costs can render them inaccessible to those who cannot afford to lose.

A Call for Reform

Given the government's commitment to overhauling the Rules of Civil Procedure, now is the time to question the sacred status of the adverse costs rule. I advocate for a reform modelled after the Federal Court's approach in class actions, where the presumption is against awarding costs. Costs should only be imposed when a party has acted unreasonably or caused unnecessary expenses. Moreover, any costs awarded should be proportionate to the ability of the party to pay, ensuring that justice is not only accessible but also fair.

Such a reform would align Ontario with progressive jurisdictions and reaffirm our commitment to equitable access to justice. It would mitigate the punitive nature of the current rule, prevent its weaponization, and encourage the resolution of legitimate disputes in the courts.