Ontario – Principles applicable to awarding costs in domestic arbitrations clarified – #817

In Schickedanz v. Wagema Holdings Limited, 2023 ONSC 7219, the Court dismissed an appeal of an arbitrator’s costs award and in so doing, clarified two principles applicable to the awarding of costs in domestic arbitrations arising under the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”). First, whereas in civil litigation, leave is required for an appeal from an order as to costs, the same is not true in relation to appeals from arbitral cost awards pursuant to Section 45 of the Arbitration Act. Second, the Court confirmed that unlike the Rules of Civil Procedure, arbitrators awarding costs pursuant to the Arbitration Act may award reasonable legal fees without reference to any court scale. Therefore, partial indemnity costs are not the governing presumption in domestic arbitrations and full indemnity costs may be awarded as reasonable without establishing undue or improper conduct. 

Background – The underlying dispute involved five siblings (four brothers and the Appellant, sister), who were shareholders of Wagema Holdings Limited (“Wagema”). In the fall of 2020, the sister commenced an arbitration against her brothers, Wagema, the law firm which had acted as counsel for Wagema, and the responsible partner at the law firm. After the arbitration was discontinued in August 2021, the brothers and Wagema sought their costs of the arbitration. 

On October 8, 2021, the Arbitrator released his costs award. He held that costs were governed by Section 54 of the Arbitration Act, not the Rules of Civil Procedure. Section 54 provides that an arbitral tribunal “may award the costs of an arbitration” and such costs “consist of the parties’ legal expenses, the fees and expenses of the arbitral tribunal and any other expenses related to the arbitration.” Based on this language, the Arbitrator concluded that unlike costs in civil litigation, “[t]he practice under domestic arbitrations is to award reasonable legal fees without reference to any court scale” and “[t]here is no notion of costs in the cause or of substantial or partial indemnity costs in an arbitration under the Arbitration Act.” He held that awarding full indemnity costs was “consistent with the normal practice in commercial arbitrations.” 

The Arbitrator therefore awarded the brothers their full legal expenses and the expenses of the arbitral tribunal, and also awarded Wagema its costs for the fees of its arbitration counsel. The Arbitrator also awarded as costs to Wagema the legal fees it paid to the law firm. It was not Wagema’s arbitration counsel, but had provided corporate advice and assistance to Wagema in the arbitration, including by providing information and documents to Wagema and its arbitration counsel. The Arbitrator found that these were properly incurred expenses; otherwise, another firm would have had to do the work and would have incurred higher costs as it would not have been as familiar with the documents and information. 

The parties’ arbitration agreement contained broad rights of appeal. The Appellants appealed the costs award pursuant to Section 45 of the Arbitration Act, asking that the costs award be varied to grant Wagema only its costs for its arbitration counsel and only on a partial indemnity basis. The Court dismissed the appeal. In so doing, it emphasized the high threshold required for overturning a costs award, as it is a discretionary order and “the decision-maker at first instance is in the best position to determine the entitlement, scale and quantum of any such award.” A court should only set aside a costs award if the decision-maker erred in principle or if the costs award is plainly wrong. That high threshold was not met in this case.

First, the Court addressed whether leave to appeal was required in respect of an arbitral costs award. Previously, in June 2022, Wagema brought a motion to quash the appeal on the ground that leave to appeal was not sought pursuant to Section 133(b) of the Courts of Justice Act R.S.O. 1990, c. C. 43. The motion judge dismissed the motion to quash, expressing the view that leave was not required, but ultimately leaving the issue to be determined by the judge hearing the appeal (this decision was the subject to a prior Case Note: Ontario – Does an appeal of a costs award require leave? – #672). 

The Court confirmed the view of the motion judge. In summary, leave to appeal an arbitral  costs award was not required for the following reasons: (a) Section 133(b) of the Courts of Justice Act only applies to costs award made by a court, not by an arbitrator; (b) Section 45 of the Arbitration Act deals with appeals from an arbitral award and does not draw a distinction between an appeal regarding the substantive disposition of the award and an appeal as to costs only, i.e., it does not impose a leave requirement with respect to costs appeals; and (c) the parties negotiated and agreed on broad appeal rights and did not carve out a leave requirement for costs.

Second, the Court addressed the Appellants’ argument that the Arbitrator erred in finding that full indemnity costs were the normal practice in commercial arbitrations and in awarding such costs without finding any undue conduct on their part. 

The Court first reviewed the language of Section 54 of the Arbitration Act and noted that this provision does not refer to the Rules of Civil Procedure or the concept of a scale of costs. The Court found the principle relied upon by the Arbitrator that the practice in most domestic arbitrations is to award reasonable legal fees without reference to any court scale, absent the agreement of the parties or specific legislation, was consistent with the language of Section 54. The Court also noted this was consistent with jurisprudence in other provinces that have recognized that full indemnity costs are the norm in commercial arbitrations.

The Court then considered the jurisprudence relied upon by the Appellants to argue that the costs of a commercial arbitration must be granted on a partial indemnity scale except where the losing party’s conduct was reprehensible, scandalous or outrageous. The Court found each of the cases relied upon could be distinguished and did not stand for such a principle.

The Court concluded that the Arbitrator did not make an error in principle and was not plainly wrong when awarding Wagema its full legal expenses as costs of the arbitration. 

Third, the Court also dismissed the Appellants’ arguments that the quantum awarded was too high or that the costs of the law firm should not have been awarded. The Court emphasized that the decision-maker at first instance is in the best position to determine what costs are appropriate and reasonable in the circumstances.

Contributor’s Notes:

This decision provides clarity to the principles that will apply and govern the awarding of costs in arbitrations pursuant to the Arbitration Act, particularly given the lack of certainty that was previously introduced by Electek Power Services Inc. v. Greenfield Energy Centre Limited Partnership, 2022 ONSC 2437, in respect of whether the concept of a scale of costs applied in arbitrations (see the prior Case Note on this decision: Ontario – Costs in both arbitration and court guided by same principles – #630).

First, the Court clarified that pursuant to Section 45 of the Arbitration Act, leave to appeal a costs award is not required. This clarification was required because, as the Court noted, there are two lines of conflicting authority on this issue of whether leave is required. It may be that Ontario Court of Appeal authority is needed to truly resolve the conflicting authorities by the Ontario Superior Court of Justice on this issue, but this case has attempted to provide better clarity going forward.

Second, the Court has also set out clear, supportable principles that govern costs awards under the Arbitration Act, namely that these are not proceedings pursuant to the Rules of Civil Procedure and the same concepts of scale of costs do not automatically apply. In other words, the default principle applicable under the Rules that partial indemnity costs applies, and full indemnity is not to be awarded absent undue conduct, is not what governs in an arbitration under the Arbitration Act. The Court explained why the Electek decision did not stand for a different proposition, although it recognized that there was “vagueness and uncertainty in the authorities” and the absence of a clear rule on this issue. What we have now is guidance by the Court that arbitrators are to award reasonable legal fees in an arbitration, which is a discretionary assessment to be made judicially but without the presumption of any applicable scale of costs.

This decision helps to provide some clarity to arbitration practitioners on what principles apply when seeking costs in an arbitration under the Arbitration Act. However, given the confidential nature of arbitrations, there is not a lot of transparency about what scale of costs is most typically ordered or what should be expected by parties as a rate of recovery in their arbitrations. Because of this lack of transparency, the Young Arbitration Practitioners (YCAP) and Secretariat Advisors undertook a survey to collect and share data from a broad range of arbitrations seated in Canada to provide more information on this issue. A copy of the Costs Survey can be found here. One of the conclusions reached was that claimants (on average) recover around three-quarters of claimed costs when the main claim succeeded in full whereas respondents who successfully defended claims in full recover just over half of their claimed costs on average. Overall, however, where there is a clear ‘winner’ and a costs award is made, the successful party tends to recover around 80% of its claimed costs on average. This is much higher than the partial indemnity rate typically seen in civil litigation, which is typically around 60% of legal fees.