Litigation is often lengthy, stressful, and expensive for all involved. Added to that, the COVID-19 pandemic has caused a significant backlog to court dockets. These factors contribute to why most parties (at some point) consider the possibility of a voluntary settlement. Ontario court rules actively encourage parties to settle and punish those who ignore reasonable offers. This is done by way of costs awards.

Settlement offers, legal fees, and costs awards

Ontario has a loser-contribution rule for reimbursement of legal fees incurred during litigation. In other words, a successful party can claim not only damages won (if any) but also a portion of the costs it incurred to obtain a positive result. Costs are typically awarded at one of two tiers: partial indemnity (roughly 55-60% of actual costs); and substantial indemnity (roughly 85-90% of actual costs). The default presumption is that the winning side will be entitled to their costs on a partial indemnity basis. To recover costs at a substantial indemnity rate, something more is required.

Perhaps the most common way to receive substantial indemnity costs is through making a formal settlement offer (pursuant to Rule 49 of the Rules of Civil Procedure) and beating that offer at trial.

Take a simple example: a plaintiff employee offers to settle their wrongful dismissal lawsuit for an all-in payment of $50,000.00 early in litigation. The offer is not accepted and, at trial, the employee wins damages of $60,000.00. Accordingly, the plaintiff has beat their settlement offer by $10,000.00 and is presumptively entitled to a substantial indemnity costs award. If the employee’s actual costs were $30,000.00 (incurred after the settlement offer was made), then the net gain to the employee is an additional $9,000.00 (or $27,000.00 total at a substantial indemnity rate) in costs reimbursement beyond what would normally be ordered ($18,000.00 at a partial indemnity rate).

Rule 49 offers are quite flexible and can also be effectively used by parties who face poor odds at trial. For instance, if a defendant loses on the merits of the case but still manages to beat their Rule 49 offer, then they are nonetheless entitled to reimbursement for their costs incurred after the settlement offer was made (on a partial indemnity basis).

A Rule 49 offer done right

Lake v. La Presse (2018) Inc., 2021 ONSC 4459 (“La Presse”), is a recent example of an employer effectively using Rule 49 to its advantage. The case centered on a 52-year-old general manager of a French language newspaper who was fired after 5.5 years’ service. Following her dismissal, the employee sued and obtained damages for wrongful dismissal in the amount of $97,500.00.

On its face, this looked like a win for the employee – then came the costs award. It soon became clear that the employer had made a very early Rule 49 offer to settle for $107,000.00. The employer thereby beat its settlement offer by $9,500.00.

From the cost decision, we know that the employee in La Presse incurred about $40,000.00 in legal fees (on a partial indemnity scale). Had the employer not made and beaten its Rule 49 offer, the employee would have had a presumptive entitlement to this amount in costs, plus wrongful dismissal damages. But for the Rule 49 offer, the total cost to the employer would have been at least $137,500.00 (and that does not even account for its own legal fees).

Instead, due to the Rule 49 offer, the employee ended up having to contribute to the employer’s legal costs. To that end, the employer was awarded $27,000.00 in partial indemnity costs, thus reducing its overall liability to the worker.

Takeaway

The La Presse decision demonstrates how an employer can make the best of a bad situation. It lost the litigation on the merits and wrongful dismissal damages were ordered. However, through the effective (and early) use of a Rule 49 settlement offer, the employer saved itself a significant sum. The math tells the tale: without its Rule 49 settlement offer, the employer would have had to pay at least $137,500.00. By beating its Rule 49 offer, the employer only had to pay $70,500.00. That is nearly a 50% savings.

Justice Akbarali, who decided the La Presse case, noted this poor outcome for the worker and provided the following commentary:

The policy behind encouraging parties to consider seriously offers to settle has application in this case. The plaintiff had a better offer in hand at a time when she had spent far, far, less in costs than she has today. Her net recovery had she taken the offer would have been significantly better than it is at the end of the litigation. The parties’ and the court’s resources would have been put to better use. The plaintiff’s position on settlement was rigid. She was entitled to make the decisions she made, but decisions have consequences. [emphasis added]

Rule 49 settlement offers are but one litigation tool available to employers. Given their power, they should be carefully canvassed whenever employment litigation is contemplated. Moreover, as was demonstrated in La Presse, the earlier a Rule 49 offer is made, the greater its possible impact. Employers should plan accordingly.