By Lee Akazaki

Synopsis:

In 2005, a proposal for amendment of the rule which governs offers to settle in the Ontario Rules of Civil Procedure, has brought to a head a simmering controversy over a perceived disparity of outcome in the design of Rule 49.10. Under subrule 49.10(1), a plaintiff who achieves a monetary judgment equal to or better than a pre-trial plaintiff’s offer of settlement is entitled to costs on a partial indemnity scale to the date of the offer, and to substantial indemnity costs thereafter. Subrule 49.10(2), however, provides that if the recovery at trial is equal to or less than a defendant’s pre-trial offer, the plaintiff recovers partial indemnity costs to the date of the offer, and the defendant is entitled to partial indemnity costs thereafter. The introduction to the Ontario Rules Secretariat’s’ Consultation Paper stated:

In 2002 and 2003, the Civil Rules Committee directed its Secretariat to consult with the bench, bar, and the public about the desirability of amending the offer to settle rule to address the use of "escalating costs provisions" in offers to settle. As a result of the responses received, the Civil Rules Committee decided that no amendments should be made on account of escalating costs provisions. However, the responses revealed that there may be a problem in the operation of the offer to settle rule. The problem is the asymmetrical operation of the rule.

The authors of the Consultation Paper argued forcefully that this régime favours defendants, in that defendants under subrule 49.10(2) obtain both a “costs holiday,” in not having to pay costs, and a bonus in recovering costs from a plaintiff who, nevertheless, had won at trial. In other words, plaintiffs are afforded one cost-shifting, and defendants two.
The position that the current design of Rule 49 favours defendants derives its logic from an incomplete view of the range of post-trial outcomes. Rule 49 altogether excludes any cost-shifting consequence in the event the defendant is successful in the action. The logical source of the asymmetry is that subrule 49.10(2) is not a proper analogue to subrule 49.10(1), in that no costs-shifting benefit is provided to a defendant who submitted a bona fide pre-trial offer and goes on to succeed at trial. When all potential litigation outcomes are lined up in a continuum, it is evident that the current design favours plaintiffs. This is the asymmetry in the rule. Indeed, in the response of the Ontario Bar Association’s Civil Litigation Section to the Consultation Paper, it was pointed out that there is some evidence of judicial exercise of discretion to “redress” this very “anomaly” (although later held to apply only to extreme cases).
As with many anomalous provisions in rules governing parties’ economic behaviour, there can be undesired consequences. Here, the problem with the current design of Rule 49.10 lies in the absence of an incentive to the defendant where liability is strongly in doubt. The lack of a true analogue to subrule 49.10(1) can discourage some defendants from submitting a bona fide offer of settlement. This “market” distortion ultimately is to the detriment of plaintiffs because fewer cases weak on liability will settle.
The debate over the fairness of post-trial outcomes in the current design of Rule 49 has largely focused on manipulating the range of outcomes. The Civil Rules Committee has been urged either to make subrule 49.10(1) more rewarding for plaintiffs or to reduce costs-shifting for defendants under subrule 49.10(2) to only a “costs holiday” (viz. simply that plaintiffs recover no costs from the date of the defendant’s successful offer). The approach is pathological in that it only views the effect of “dead” offers, i.e. which failed to lead to a negotiated settlement. The intent of Rule 49.10 was not to distribute an add-on recovery at trial. That is the purpose of Rule 57, which governs the costs of proceedings. Rule 49 is not a rule about costs but about offers to settle, and costs remedies are enlisted as a means of encouraging offers and acceptance of offers. As living instruments affecting litigants’ behaviour, the costs remedies under Rule 49 must be evaluated in relation to goals such as encouragement of settlement, access to justice, and righting economic imbalances while the result still has not been decided. The economic incentive or disincentive to make offers of settlement depends not so much on membership in a class of litigants (plaintiff or defendant, individual or institutional), but more so on factors that could affect either side, such as disparity in anticipated first-party litigation expenses.

Assumptions made by the Consultation Paper
The Consultation Paper made crucial assumptions about the civil litigation process in Ontario. In order to understand the broader perspective informing the discussion in that document, it is worth setting out these assumptions here:
1. Current incentives under Rule 49 are asymmetrical, in that the current design favours defendants.

2. The analysis is based on a general fact scenario in which the plaintiff wins the case.

3. As a class, plaintiffs are more risk adverse than defendants, many of whom are institutions positioned to take risks.

4. Each party has spent the same amount of time on the matter and therefore faces the same legal expenses.

Asymmetry
The Consultation Paper assumed that there is asymmetry in the cost consequences of Rule 49. In fact, the analysis leading to this conclusion can be logically considered only if one restricts the inquiry to cases in which the plaintiff succeeds in recovering at least one dollar in the judgment: “the plaintiff … who, keep in mind, won the case.” This is a skewed vision of the judicial process as one devoted solely to compensate aggrieved plaintiffs. Courts must first decide whether plaintiffs have suffered any damages, and then whether the defendant is liable. The element of disputed liability adds a level of complexity to the economic analysis which has not been adequately undertaken by legal scholars.
At present, there is no cost sanction to a plaintiff or incentive to a defendant provided by Rule 49 in the event that the defendant succeeds to have the action dismissed. If the trial judge or jury dismisses the action altogether, whether because no wrong or breach has been committed, or because no damages were suffered by the plaintiff, a Rule 49 offer made by a defendant has no effect. This may deservedly be inconsequential if the defendant’s Rule 49 offer were for “nuisance value” or an offer simply to waive costs. But equally inconsequential is a serious offer made by a defendant. In both such instances, no cost consequences follow, as the plaintiff will be ordered to pay costs on a partial indemnity scale, as if no offer were made.
Thus, the view that the current rule favours plaintiffs fails to address the absence of reward (or penalty to the plaintiff for failure to accept an offer) for a bona fide offer made by a defendant to compromise the case where the outcome is dismissal of the action. For example, if the plaintiff’s damages are assessed at trial in the amount of $100,000, there are cost advantages to a plaintiff who made a Rule 49 offer in the amount of $90,000, in that partial indemnity costs are awarded to the date of the offer, and substantial indemnity costs are awarded from the date of the offer to the conclusion of trial. If the defendant wins on liability, he or she is awarded partial indemnity costs. If the defendant made an offer of $50,000 and the plaintiff lost at trial, the same result of partial indemnity costs arises, as if no offer were made by the defendant. Clearly the costs of trial amount to unnecessary costs if the plaintiff gave up a bona fide opportunity to settle the case and lost at trial. The action, in hindsight, should have been settled for $50,000, and the trial should not have taken place.
Our Court of Appeal has held that an element of compromise is not an essential feature of an offer to settle, but fairness is a relevant consideration to override the mechanical operation of Rule 49: Celanese Canada Inc. v. Canadian National Railway Co., [2005] O.J. No. 1122 (C.A.), at para. 33. This decision arose from a line of cases where plaintiffs made strategic offers of settle for almost the whole value of the claim. See Data General (Canada) Ltd. v. Molnar Systems Group Inc. (1991), O.R. (3d) 409 (C.A.) – compromise of 13 percent; Walker Estate v. York-Finch Gen. Hospital (1999), 169 D.L.R. (4th) 689 (C.A.), appeal dismissed on other points [2001] 1 S.C.R. 647 - compromise of 1/8000 of a liquidated claim. While the same type of discretionary saving may be made in the case where a defendant makes a “nuisance value” offer, there remains an injustice where the plaintiff in a failed action incurs no additional cost consequence for having rejected an offer of settlement made by the defendant in the range of 50% or better, or where the case is dismissed but the offer exceeds the amount of assessed damages reduced by the trial judge’s assessment of risk. If compromise is not essential to a tactical offer to settle, this does not mean that the courts should ignore a genuine use by a defendant to use a Rule 49 offer in aid of settlement.
It may be helpful to illustrate this point by revisiting the fact scenario in the Consultation Paper, where the successful plaintiff made a Rule 49 offer and recovers $45,500 in costs:
Let us assume that at the time of the offer each side has spent the same amount of time on the matter and that it would be appropriate to calculate partial indemnity costs up to the time of the offer at $14,000. Let us also assume that, by the end of the trial, each party spent a further equivalent amount of time on the case and the post-offer costs would be $21,000 on a partial indemnity scale and $31,500 on a substantial indemnity scale.

If the plaintiff's offer is successful (i.e. she beats the offer at trial) the plaintiff's costs recovery will be $14,000 (partial indemnity costs to the date of the offer) plus $31,500 (substantial indemnity costs from the time of the offer until the close of the trial), for a total of $45,500. In contrast, if the defendant's offer is successful (i.e. the plaintiff failed to do better than the defendant's offer) the plaintiff (who, keep in mind, won the case) will recover $14,000 (partial indemnity costs to the time of the offer) and must pay the defendant $21,000 (the partial indemnity costs from the time of the offer till the completion of the trial). The net result in this case is that the plaintiff is out of pocket $7,000 with regard to costs.

If the defendant made a successful Rule 49 offer, the defendant recovers a net amount of $7,000 in costs. If the rule were truly symmetrical, a defendant who has served a good offer and wins the case altogether should recover $45,000 in costs. Accordingly, Rule 49 as currently framed is asymmetrical in the plaintiff’s favour. This imbalance is demonstrated in Table 1, below. Under the current rule, the result of a significant bona fide defendant’s offer in a plaintiff’s victory is not analogous to a hypothetical result in a defendant’s victory. The difference is a $54,000 current difference favouring the plaintiff when one takes into account hypothetical comparative swing results. If the costs consequences in all four columns are implemented, there would be a net $42,000 advantage to defendants, because Column #2 is anomalous. For there to be true parity between outcomes, the current costs rule in Column #2 must be eliminated in favour of the postulated costs rule in Column #4. If the current costs rule in Column #2 is to be preserved at the same time as legislating the costs rule in Column #4, it is possible to design a formula that overcomes the disparity favouring defendant. However, such a formula is likely to be much more complex than any of the present underlying design of the rule. It may also be possible to amend the costs rule in Column #2 to restore parity without Column #4, but the formula would further erode the principle that costs be awarded to a successful plaintiff. Unless one chooses to eliminate the rule in Column #2, there is present disparity favouring plaintiffs without the rule in Column #4, and there would be a disparity favouring defendants if the postulated rule Column #4 were adopted.

Table 1

If we restrict our focus to the incomplete range of outcomes of Rule 49, the Consultation Paper is correct that there is a flaw in the symmetry favouring defendants. If the rule were amended to include an incentive to a successful defendant, subrule 49.10(2) becomes anomalous because there can be no similar rule benefiting a plaintiff. This, ultimately, is the logical source of the issue addressed in the Consultation Paper. The rule in Column #2, subrule 49.10(2), is a concession to defendants designed to encourage offers from defendants in limited circumstances. Without defendants making offers, disputes tend not to settle. However, it is obviously desirable to encourage offers from defendants in cases where the plaintiff recovers damages at trial. For this reason, it is difficult to consider eliminating subrule 49.10(2) even though it is incapable of having an analogue where the action is dismissed. If we accept that the consensual resolution of disputes is good public policy, there is no reason why we should not encourage offers from a defendant who goes on to win the case outright. Although this policy choice would likely favour defendants, from a retrospective or post-trial perspective, it is also vital to understand that we use cost-shifting incentives to influence parties’ behaviour prospectively, in mid-process, where the outcome remains uncertain. Rule 49 is an instrument not only of justice (distributive or corrective) but also, perhaps more importantly, of stimulus of human behaviour within the litigation process toward alternative dispute resolution. An offer-to-settle rule is not intended to spur rights-based arguments over the spoils of litigation, but to draw the parties back from the brink.
To counter the cry that a costs rule which disproportionately favours defendants is unfair to plaintiffs, it may also be argued that innocent defendants should not pay anything. From a practical and juridical standpoint, the guilt or innocence of a defendant will never be established if the dispute is settled. That is a contingent innocence, and in civil disputes (as opposed to criminal litigation) a contingency must take a back seat to more pressing issues such as social harmony, commercial certainty and judicial backlog clearance. Since the role of the tribunal places an institutional burden on plaintiffs to justify making defendants pay, a rule which modifies defendants’ behaviour to encourage them to pay instead of standing on their rights is marginally better for the legal system and for plaintiffs as an overall class of litigants.

Policy Considerations
It is a truism that the Anglo-Canadian legal tradition does not favour penalties or bonuses in the resolution of civil disputes, although it is not uncommon in other jurisdictions. (Treble damages in U.S. anti-trust legislation, for example. Penalties or bonuses distort market factors for an overriding social or economic goal.) The Rules Committee has a status quo with which it can “tinker,” in that because of Rule 49 we already live with an element of penalty and sanction through the award of partial or substantial indemnity for litigation costs. The rule should not be disturbed lightly, at least without a transitional provision, as it would apply retroactively to all pending civil actions (costs are procedural law). The remedy of cost-shifting in civil cases is borrowed from distributive justice principles, and appended to common-law substantive rules founded on corrective justice. Cost-shifting rules are designed in compromise between justice (fairness to the parties) and a procedural policy toward consensual dispute resolution that promotes civil order, reduction of court dockets and access to justice (encouragement of settlements). This balance must not be ignored to express political favouritism toward one perceived class of litigant over another. The paradigmatic example of the “political” choice is the assumption that defendants are, as a class, institutional or more capable of managing risk. This is a Manichaean oversimplification unsuitable for a rule applying to a diverse range of proceedings. Personal injury cases may often feature this power imbalance, but commercial contract cases rarely do. In commercial cases, the labels “plaintiff” and “defendant” are often determined by the race to issue the writ first, and not the nature of the underlying dispute. In debt proceedings, plaintiffs are usually institutions and defendants are individuals in financial trouble. This problem can partly, but by no means altogether, be addressed by measures such as Rule 36.2A of the Civil Procedure Rules of the courts of England and Wales, which treats personal injury cases separately. (Part 36 of those Rules is much more complex than the model for our Rule 49.) Many defendants in civil disputes, including personal injury actions, are not defended by insurers or professional defence associations. In those cases without liability insurers or defence funds, defendants face the same risk of financial ruin as do injured plaintiffs.
If we were to deal with this issue from a neutral perspective, we must start with the premise that the basic cost rule in the Anglo-Canadian tradition, that costs follow the event, has no overt bonuses or penalties. In such a régime, ordinary partial indemnity costs sanctions do encourage settlement in that intransigent parties, whether plaintiff or defendant, face equal additional consequences for litigating an unmeritorious claim or defence. Residual discretionary power allowing judges to override costs rules only help to address inequities in extreme cases.
In the absence of Rule 49 or other cost-shifting rule, “settlement amounts can be expected to deviate from the expected judgment in favour of the party with lower litigation costs.” This is a hidden disparity within an overtly non-discriminatory costs régime. The rationale for this conclusion is that the party with the lower litigation costs will have less at stake than the party with higher litigation costs. The reasoning is taken to its extreme in forums where each side bears his or her own costs no matter what the substantive result at trial or on appeal (the traditional model in the United States). The lower the transaction cost of litigation procedures, the more parties are encouraged to take their chances at trial. After deducting the “cost of doing business,” they may feel “nothing to lose” by playing a perceived judicial lottery. Parties who are at a traditional tactical advantage, such as defendants in medical negligence cases, might also be even less affected by litigation costs because the substantive law is stacked in their favour. The same can also be said of plaintiffs many non-iatrogenic personal injury cases, such as municipal trip-and-fall cases, where there is a low risk of dismissal and often the only serious live issue is the quantum of damages.
True asymmetry, based on labeling one side David and the other side Goliath, can only be measured on a case-by-case basis, and it is impossible to use normative principles to forge a “one-size-fits-all” solution which perfectly balances symmetry (equality of range of outcomes) and encouragement of settlement. It is also difficult to do so in a way which is readily understood by unrepresented litigants, clients, and lawyers outside the litigation bar.
The Consultation Paper did not call for a major overhaul of Rule 49. However, sight must not be lost of the fact that any reform of Rule 49 must be informed by a “back to basics” approach to the policy of the rule as part of overall promotion of settlements. An important part of such an approach is to encourage bona fide attempts at settlement by both parties to a civil dispute. The Consultation Paper engages solely in dealing with a perceived (incorrectly perceived) distributive asymmetry in the post-trial outcome. As we consider this point, we must also keep at the back of our minds the fact that symmetry is not necessarily the hallmark of fairness. The litigation process, in procedural and substantive law, features numerous burdens and presumptions, the chief of which lies on the plaintiff to prove both liability and damages. Human nature also weighs heavily on judges to exercise caution before calling on one party to pay another.
The critical flaw in the Consultation Paper’s methodology is the treatment of costs consequences under Rule 49.10 as an extension of substantive law to be resolved after trial. In fact, the genus of the rule is procedural and its true influence is intended to work before trial. Thus, our attention should be devoted more to designing costs rules which encourage settlements before battle-lines are drawn for trial. Our perspective must be shift to mid-process, rather than a post-trial allocation. It is then possible to see the contemporary litigation process as one which encourages a common quest by adversaries for a middle ground before justice is imposed by a final arbiter. This means that the rules of court should encourage more genuine offers from defendants even where liability is strongly disputed. At present, a case in which a defendant, objectively speaking, has a strong case offers no incentive to the defendant to put forward a significant offer. For example, a defendant well-advised by a good lawyer could imagine a 70% likelihood of success at trial. The balance of probabilities requires a swing of 31% in the plaintiff’s favour, but in practice few defendants would offer 30% of the plaintiff’s claim because chance in litigation is not properly measured by odds but by the strength or weakness of one’s case. These are not the odds of a lottery, but rather the chances of a 70kg wrestler in a ring with a 30kg child. In a $100,000 case in the current régime, the defendant in such a case would consider an offer of nuisance value but not $30,000. If, however, to advance such an offer prior to trial could lead to an award of substantial indemnity costs, the defendant’s thinking begins to change and might see the equation in terms of odds. If 70/30 were the odds, a defendant could be encouraged to offer $30,000, because it represents a serious offer. A plaintiff, with equally competent counsel, should consider a 30/70 case to be one of questionable merit. If offered an amount equating the odds, as opposed to relative strengths, the plaintiff could not pass on the offer without some serious soul-searching.
At present, defendants are rewarded for putting in a careful but genuine offer only if they are likely to lose the case but their successful Rule 49 offer meets or exceeds the plaintiff’s damage assessment at trial. No presumptive cost-shifting rule exists to reward a defendant who wins the case but has previously made a reasonable offer in order to settle the claim out of court. If such a rule existed for defendants as it currently does for plaintiffs, defendants who feel they have a stronger case on liability than their plaintiff counterparts would be encouraged to put more money on the table. In fact, where the first-party cost of defence is a significant factor, as it is in most cases, defendants (especially insurers) would be encouraged to estimate the cost of trial preparation and trial and offer it up in a formal offer prior to such expenses are incurred in earnest. While it may be true, as the Consultation Paper implies, that this is a type of risk analysis that a certain group of the defendant class is used to making, the rules of court should use this “human factor” to the advantage of promoting settlements. The risk to a defendant with a strong defence in putting in a substantial offer is that the plaintiff might very well serve an acceptance of the offer. As the rule currently stands, there is a built-in disincentive for such risks being taken which artificially dampens the interest of a defendant who is not very worried about losing at trial. From a law-and-economics standpoint, the “market” for settlements is skewed by the absence of economic consequence to a significant offer placed by a successful defendant. Using this market analysis, reform of Rule 49 to provide defendants with a mirror-image of the successful plaintiff’s offer should have the effects of discouraging unmeritorious litigation and, at the same time, encouraging defendants to making more substantial and more frequent offers to plaintiffs even where there is a strong defence. In short, a cost-shifting rule encouraging good offers from defendants will in fact benefit plaintiffs in the long run.
The foregoing policy analysis calls for a true analogue to subrule 49.10(1) for defendants, i.e. one which rewards defendants for making offers when the case is dismissed at trial. We must, however, deal with the fact that the range of outcomes becomes skewed in the defendants’ favour if subrule 49.10(2) is preserved. As stated earlier, an asymmetrical rule is not necessarily unfair. If symmetry were the only reason to introduce an analogue to subrule 49.10(1), the argument would not carry much weight. If such an analogue were to encourage defence offers even though cases go on to be dismissed, there is a good argument to introduce it, even though the preservation of subrule 49.10(2) would swing the current asymmetry in defendants’ favour. In terms of range of outcomes, it could not be argued that a defence analogue to subrule 49.10(1) would provide a remedy that was not available to plaintiffs. The only reason for the overall skew, in a catalogue of outcomes, is that there is no logical plaintiffs’ analogue to subrule 49.10(2).

Future Study
Whether or not the above proposition is adopted, we still need to consider the underlying principle that, in the absence of a cost-shifting offer-to-settle rule, no matter whether one is a plaintiff or defendant, the side which requires less cost to litigate will generally be more likely to fancy his or her chances at trial. In order to address this case-by-case skew in the likelihood of a party to settle (as opposed to any perceived legislated bias), we must question the assumption that each party spends the same amount of time to prosecute a civil action as the other side spends to defend one. In practice, most cases involve an imbalance. Cases involving more than one lawyer in succession tend to cost more due to duplication and the repair of tactical errors made by the predecessor lawyer(s). Weaker cases or defences will require more shoring up by experts and additional investigation or legal research, to reach parity with the opponent at trial. In theory, an ideal offer-to-settle costs-shifting rule should address the imbalance created by a lower transaction cost and risk to prosecute or defend a case by one side, as opposed to another. A complex medical negligence suit, for example, in relative terms carries enormous risk to the plaintiff in terms of first-party legal expenses compared to an automobile accident case.
It is likely impossible to design a rule of general application which is sensitive to the wide diversity of cases and parties. Rule 49.10 should not come to resemble the Income Tax Act. Nevertheless, this is a topic which calls out for further study, not just by jurists but also by economists and psychologists. The hope is not necessarily that further study will lead to a latticework design of complex rules covering every contingency. Rather, the ultimate reward of this work would be to provide insights into the effects of offers to settle on the behaviour of civil litigants. Enhanced sensitivity among jurists will likely correct some institutional asymmetries. More importantly, there will be offers to settle in cases where previously there might not have been.

1 R. Lee Akazaki, of the Ontario Bar. The origin of this paper was a July 28, 2005, response by the author to the Consultation Paper of the Rules Secretariat for the Ontario Courts’ Civil Rules Committee. This earlier draft was mentioned in the submission dated August 12, 2005, by the Civil Litigation Section of the Ontario Bar Association to the same Consultation Paper.

2 In this article, “cost-shifting” is an inclusive phrase which incorporates the various methods by which an offer-to-settle rule can be designed to alter the ordinary outcome that costs partially indemnify the victor, for example, “costs uplift” and “costs holiday.” While such distinctions may allow creative manipulation of costs incentives, they would unduly complicate the policy analysis here.

3 As acknowledged by the Court of Appeal for Ontario, in S.&A. Strasser Ltd. v. Richmond Hill (1990), 1 O.R. (3d) 243 (C.A.), at 245, when it said that “the rule has no application where the plaintiff fails to recover any judgment.”

4 A view shared by the Civil Litigation Section of the Ontario Bar Association, as stated in its response to the Consultation Paper, dated August 12, 2005, which derived some elements from the original draft of this article. The contrary view was expressed in the Ontario Trial Lawyers Association submission, dated September 25, 2003, available at www.otla.com.

5 Ibid, at p. 2 of the OBA Civil Litigation Section’s response, referring to S.&A. Strasser Ltd. v. Richmond Hill, supra at note 3.

6 I use the word “doubt,” as opposed to “dispute,” because it better captures the prospective thinking of the defendant, whose behaviour we seek to alter in encouraging genuine offers to settle even where the plaintiff’s case is considered weaker than the defence.

7 Consultation Paper, p. 3

8 Bebchuk and Chang (Stanford Law School), “The Effect of Offer-of-Settlement Rules on the Terms of Settlement,” The Journal of Legal Studies, Vol. 28, No. 2 (June 1999), from the working paper published at http://papers.ssrn.com/paper.taf?abstract_id=86752. The citation is from p. 21 of the working paper: “To produce settlements equal to expected trial outcomes in cases of disputed liability, offer-of-settlement rules would have to be more complex; we leave this subject to future research.”

9Consultation Paper, p. 3

10 Bebchuk and Chang, op. cit., at p. 4 of the working paper.

11 Akazaki, “Medical Malpractice in Crisis," 21 The Advocates' Quarterly 163 (1999), at 170-71; and Sappideen, “Look Before You Leap: Reform of Medical Malpractice Liability,” 13 Syd. L. Rev. 523 (1991) at 527-28

12 Cf. the England and Wales Rule 36, which runs 11 pages long

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