Ontario – offer by unsuccessful parties to engage in streamlined dispute resolution justifies reduced costs award – #504

In Crosslinx v. Ontario Infrastructure, 2021 ONSC 4364, Mr. Justice Markus Koehnen limited costs awarded to successful Applicants due to their failure to accept Respondents’ offer to discontinue Applicants’ court application and return to the parties’ dispute resolution process, thereby skipping certain steps.  While he acknowledged the potential difficulty in comparing non-pecuniary elements in offers to settle against eventual court orders, Koehnen J. limited cost recovery to $92,119.92 rather than the $430,000.00 sought because Respondents’ offer, if accepted, “would have led to both a negotiation and a final determination of the issues in a much faster timeframe than is possible under my order”. 

Different Ontario government agencies (“Respondents”) sought to commission construction of construction of several kilometers of an aboveground/underground light rapid transit line (“Project”).  To do so, Respondents contracted with a consortium of four (4) large construction companies (“Respondents”).  During the course of the work which employed 1,500 people, Applicants and Respondents disputed the effects which COVID-19 had on the Project.

Schedule 27 of their agreement (“Agreement”) provided for dispute resolution. Koehnen J. observed that section 10.1 of schedule 27 “embodies the concept that all litigation surrounding the project should be bundled together into a single piece of litigation following Substantial Completion”.

… all adjudication, arbitral and litigation proceedings between the Parties prior to Substantial Completion shall be stayed and consolidated into, as applicable, a single adjudication, arbitration and a single litigation proceeding, with the adjudication, arbitration and, if applicable, litigation, proceeding promptly and expeditiously after Substantial Completion”.

Section 10.1 provided certain exceptions. A key exception included resolution of those disputes which would cause irreparable harm should the parties wait to address such disputes until after the date of Substantial Completion, as defined in the Agreement.  Provided a dispute met those conditions, a party could apply to the court for interlocutory injunctive relief.

The Agreement at section 40 allowed Applicants to obtain extensions of the date of Substantial Completion.  If the parties disputed any such extension, the Agreement provided for dispute resolution according to Schedule 27. 

Faced with the impact of COVID-19 social distancing measures which maintained a safe and healthy workplace but slowed the pace of the work on the Project, Applicants sought a declaration from the court regarding Applicants’ entitlement to a Variation Enquiry which set out the parties’ respective rights and obligations in the event of an Emergency.  Both “Variation Enquiry” and “Emergency” are defined in the Agreement.

Respondents resisted Applicants’ application to the court and filed a preliminary motion seeking a stay of Applicants’ court application and invoked two (2) reasons: the Agreement provided that all litigation should be stayed until after Substantial Completion; and, Applicants failed to comply with the process leading up to the Variation Enquiry.  

Following a two (2) day hearing held February 22-23, 2021 on Respondents’ preliminary motion to stay Applicants’ application, Koehnen J. issued a May 17, 2021 decision in Crosslinx v. Ontario Infrastructure, 2021 ONSC 3567 (“Reasons”) in which, among other comments, he identified a tension in the provisions.

[14] Section 40 of the Project Agreement (the contract) expressly creates a process whereby the applicants can obtain extensions to the Substantial Completion Date during the course of construction.  Disputes surrounding that process are to be determined according to Schedule 27.  It would make no sense to interpret Schedule 27 as requiring that disputes about extensions to the Substantial Completion Date be deferred until Substantial Completion has been achieved.  To do so would deprive the applicants of the benefit of the contractual provision that allows the Substantial Completion date to be extended.

[15] To stay this application until after Substantial Completion has been achieved would subject the applicants to irreparable harm because it would deprive them of a contractual right for which they have bargained namely the right to invoke a process that could lead to the extension of the Substantial Completion Date.  Deferring that determination until after Substantial Completion has been achieved would subject the applicants to adverse consequences including payment of liquidated damages, loss of financing, termination of the contract, insolvency and loss of reputation; none of which would have arisen if the Substantial Completion date should have been extended.  As a practical matter, one cannot re-institute the contract after it has been terminated and completed by another party.  I am satisfied that both the loss of a contractual right and its potential consequences here amount, as a practical matter, to harm that is irreparable.”.

For the more ample reasons set out in his Reasons, Koehnen J. dismissed Respondents’ motion for a stay and he issued certain declarations.  See para. 105.

Koehnen J. invited submissions on costs.  Following receipt of those submissions, Koehnen J. released his June 17, 2021 decision on costs in Crosslinx v. Ontario Infrastructure, 2021 ONSC 4364 (“Costs Reasons”).

Applicants sought $430,000.00 in costs.  Respondents resisted that claim, arguing that they had submitted a settlement offer which “disentitles” Applicants from costs awarded after the date Respondents made their settlement offer.  Respondents also disputed the disbursement for legal research conducted through an online legal database.

Settlement offers – Applicants relied on the effect stipulated by Rule 49.01(2) of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194.  Prior to the first hearing before Koehnen J., Respondents made an offer to Applicants on December 16, 2020 (“Offer”) which consisted of the following: if Applicants discontinued their application, Respondents offered to withdraw their request for information/production, engage in senior officer negotiations, waive the Independent Certifier procedure, waive the stay of determination of the dispute until after Substantial Completion and consent to an expedited determination of the dispute before a sole arbitrator selected by the Agreement’s process.

As defendants to Applicants’ application for a declaration, Respondents’ Offer qualified under Rule 49.10(2) as a defendants’ offer to settle.

Rule 49.10(2) Where an offer to settle,

(a) is made by a defendant at least seven days before the commencement of the hearing;

(b) is not withdrawn and does not expire before the commencement of the hearing; and

(c) is not accepted by the plaintiff,

and the plaintiff obtains a judgment as favourable as or less favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date, unless the court orders otherwise”.

Koehnen J. underlined that understanding Respondents’ settlement offer required that he place it in its context.

[4] The dispute arises out of a long, complex agreement for the construction of the Eglinton Crosstown Light Rapid Transit line in Toronto.  The agreement contains a tiered dispute resolution mechanism.  After one party notifies the other of a dispute,  each party is required to give the other disclosure of relevant facts, information and documents; that is followed by tiered negotiations, culminating in negotiations between senior officers.  If the senior officers cannot resolve the dispute, it is referred to an Independent Certifier  for resolution.   If either party disagrees with the decision of the Independent Certifier, it can proceed to litigation or, if the parties agree, arbitration.  The Independent Certifier’s decision must, however,  be complied with unless and until it is overturned in a subsequent proceeding.  In addition, subject to certain exceptions, any litigation or arbitration is postponed until after the project has been substantially completed.

[5] Here, the parties never got to the negotiation between senior officers because the respondents made a long list of information and production demands as a pre-condition to negotiating.  The respondents took the position that the dispute could not proceed to the Independent Certifier because the requirements for disclosure and negotiation had not been met.  In response to the application, the respondents took the position that the application should be stayed because of the provisions that deferred litigation until after substantial completion”.

Respondents did not seek their own costs after the date of their Offer but did seek to limit Applicants to those claimed prior to their Offer. 

Koehnen J. agreed that Respondents’ Offer was fixed, certain and understandable.  Koehnen J. further held that Respondents had met their burden to prove that the result obtained by Applicants in the initial Reasons was as favourable or less favourable to the terms of their Offer.  Despite the absence of a monetary measure, Koehnen J. held that comparison of the Offer against the results in the Reasons did not prove “overly difficult”.

[13] In this case, access to the negotiation procedure was stymied because the respondents took the position that they could not proceed to negotiation before the applicants satisfied a long list of information and production requests from the respondents.  The applicants sought declarations that would initiate the negotiations and the Independent Certifier procedure.  It is important to note in this regard that what the applicants sought and what I granted was merely initiation of the process.  I did not grant any substantive underlying relief”.

Having identified what Applicants sought and compared that relief against what he had granted, Koehnen J. concluded readily that Respondents’ Offer “went further that what the applicants requested or than what I granted”. In making that determination, Koehnen J. pointed out that Respondents had eliminated a step in the dispute resolution process and offered to move directly to expedited arbitration.

Koehnen J. acknowledged that Respondents had been unsuccessful in the initial application but added that “all the court order does is initiate negotiation” which, failing agreement, would lead to a determination by the Independent Certifier which Koehnen J. noted was not a final determination. “The respondents’ offer would have led to both a negotiation and a final determination of the issues in a much faster timeframe than is possible under my order”. 

Koehnen J. limited costs awarded to the $92,119.92 incurred before the Offer and not the $430,000.00 claimed.

Research – At paras. 20-28, Koehnen J. considered and dismissed Applicants’ claim for $4,060.18 for online legal research obtained through a monthly subscription accessible following payment of a flat rate.

[27] A flat rate would fall into general overhead rather than a recoverable disbursement.  In that respect, use of online searches for which the law firm pays a flat fee is no different than a lawyer or student referring to a text book or a hard copy law reporter in the firm’s library.  The firm absorbs those costs as general overhead and does not attempt to recover use of the text as a disbursement from opposing parties to litigation”.

urbitral notes – First, for a discussion of the role and contents of an offer in advance of a stay application, see the recent Arbitration Matters note “Ontario – offer to settle in advance of stay application must contain real compromise to justify higher costs – #482” regarding Kore Meals LLC v. Freshii Development LLC, 2021 ONSC 3736. Mr. Justice Edward M. Morgan provided guidance on how to make an offer to settle in advance of an application to stay which would qualify for the increased costs eligible under Rule 49.10(2) of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194.  Morgan J. observed that advising that “Defendants were right and the Plaintiff was wrong” and that defendants would apply for a stay contains no real compromise.  Defendants’ offer to refrain from defending or seeking a stay of proceedings if plaintiff would walk away from the claim is not an offer which attracts increased costs.   Morgan J. nonetheless granted costs on a partial indemnity scale, qualifying them as reasonable.  He determined that the motion required “considerable legal research”, counsel “did what it to took to win the motion” and he was “not inclined to second guess [FD]’s counsel’s investment of time and effort” regarding an amount of fees which would not surprise “a sophisticated corporate party”.

Second, for offers which include a dispute resolution process resisted by the other party, see the earlier Arbitration Matters note “Federal – successful offer in all-or-nothing final offer arbitration can include agreement to arbitrate – #392” regarding Canadian National Railway Company v. Gibraltar Mines Ltd., 2020 FC 1034. Mr. Justice Michael D. Manson held that, in final offer arbitration, the absence of reasons in a decision qualified the decision as reasonable and correct.  Though one party objected to the other’s final offer including an agreement to arbitrate, Manson J. held that the arbitrator had to accept either offer “in its entirety” based on which offer the arbitrator considered more reasonable.  Final offer arbitration’s “all-or-nothing” approach prevents an arbitrator from extracting reasonable terms from one offer for inclusion in the other and the Canada Transportation Act, SC 1996, c 10 prohibited the arbitrator from explaining the choice made.

Third, for the role of settlement offers in arbitration and their impact on costs and allegations of bias, see the earlier Arbitration Matters note “Alberta – communication of privileged offers after award but before clarification/costs insufficient to raise bias – #328” regarding Clark v. Unterschultz, 2020 ABQB 338. Madam Justice June M. Ross dismissed a challenge to an award on the merits, holding that one party’s communication of privileged settlement offers after the award and before the costs award were insufficient to meet the high threshold required to find real or perceived bias.  Ross J. determined that a reasonable person, viewing the matter realistically and practically, and knowing that the hearing had concluded and the substantive award had issued, would be unlikely to conclude that the arbitrator would not decide the remaining matters fairly.

Fourth, the more on offers to engage in dispute resolution as sufficient to qualify as a significant advance in litigation, see the earlier Arbitration Matters note “Alberta – unilateral offers to mediate/arbitrate fail to resist dismissal of litigation under “drop dead rule” – #304” regarding McKay v. Prowse, 2020 ABCA 131. Alberta’s Court of Appeal upheld the dismissal of Plaintiff’s litigation despite Plaintiff’s genuine but unilateral invitations to mediate or arbitrate, holding that unrequited overtures do not qualify as significant advances in a litigation.  Using jurisdiction confirmed by the Alberta Rules of Court, Alta Reg 124/2010, the Court determined that Plaintiff had failed to take a significant step in three (3) years prior to the application made by Defendant.  The Court cautioned that, absent a standstill agreement or a defendant’s tactics to obstruct, stall or delay, if a defendant fails to accept invitations to engage in alternate dispute resolution mechanisms, plaintiff continues to bear the onus to advance its action or risk having it struck.