Be careful when playing “hardball”: you could strike out! The risks of attempting to recover defence costs

By: Michael Blinick, Partner & Simren Dhother, Articling Student

When commencing an action, there is an obligation on a plaintiff to identify and pursue all parties that may be liable for a loss. Through further investigation and in the usual course of advancing an action, the plaintiff may learn that one or more of the named defendants is not in fact liable for the claimed losses. In such an occurrence, the plaintiff will frequently propose a dismissal or discontinuance of the action as against the specific non-liable party only and will often propose to do so on a “without costs basis” – meaning that each party swallows the litigation costs incurred in advancing the litigation to this point. Despite such an offer, defendants are often reluctant to accept a dismissal without costs and will often want to recover the costs that have been incurred.

Ontario’s Rules of Civil Procedure recognize that defendants or third parties may have incurred a substantial amount of money in defending an action that the plaintiff subsequently seeks to discontinue. In such cases, the party being let out of the action can bring a motion seeking its costs. However, just because a party requests their costs does not mean that costs will automatically be awarded. This was previously addressed in Kavanagh v the Estate of Pierrette Feihl (2016 ONSC 7886) where the Court set out that it is only appropriate to seek costs where the claim was frivolous or vexatious or pursued in bad faith.

The Court of Appeal for Ontario has recently confirmed that courts are to apply the “justified action” or “exceptional circumstances” test when determining whether compensation for the defence costs incurred by a party should be awarded. The ruling in Nesbitt v Jeffery (2022 ONCA 702) arose after a party (the Ministry of Transportation or “MTO”) was offered to be let out of the action on a without costs basis after undergoing examinations for discovery and 5 days after having answered its undertakings. The MTO was unwilling to accept the without costs discontinuance that was offered and, instead, brought a motion pursuant to Rule 23.05 seeking an Order for its incurred defence costs.

In reviewing the facts and the applicable case law, the Court found that it was not reasonable for the MTO to insist on costs when it was offered to be released from the litigation within 5 days of answering undertakings. Furthermore, the Court found that there was nothing frivolous or vexatious in the action that was initiated as against the MTO. The Court was unsatisfied with the MTO’s position that it should be awarded its costs and, instead, awarded costs as against the MTO for unsuccessfully bringing the motion to recover its costs.

The MTO’s decision to pursue its costs despite the without costs offer being viewed as reasonable was a clear factor in the lower court’s use of its discretionary authority to reject the MTO’s request for the defence costs that it had incurred. As a result, costs were awarded as against the MTO for its unsuccessful motion. In this respect, the Court of Appeal confirmed that it was within the motion judge’s discretion to award costs and the MTO’s motion for costs was unsuccessful.

The key takeaway in this decision is that a party that rejects an offer to go out without costs and maintains the litigation for the sole purpose of recovering the costs that had been incurred may ultimately find itself paying costs. Given this, it is often wise for a defendant to ‘hold its nose’ and accept the without costs dismissal. In other words, achieving the success of a single may not seem like an achievement but it is much better than playing hardball and striking out.