Erik S. Knutsen on "The Cost of Costs: The Unfortunate Deterrence of Everyday Civil Litigation"

Erik S. Knutsen (Queen’s University Faculty of Law) doesn’t like costs. Specifically, he doesn’t much care for Canada’s “loser pays” costs regime in civil litigation. In his article, “The Cost of Costs: The Unfortunate Deterrence of Everyday Civil Litigation in Canada” Queen’s Law Journal, forthcoming (available on SSRN) Professor Knutsen proposes a “two-track” costs regime to address perceived unpredictability and unfairness in fee-shifting impacting both plaintiffs and defendants. It is a lengthy article but well worth reading. Here is the abstract:

Costs today play a disproportionate role in many civil litigation decisions in Canada because of the inherent unpredictability built into the current overly complex costs system. Canada’s civil litigation system utilizes a fee shifting regime whereby an unsuccessful litigant must pay a proportion of the successful litigant’s legal fees. This costs system is designed to regulate litigation behaviour by deterring unmeritorious cases, by indemnifying successful litigants, by fostering efficient lawyer behaviour, by promoting settlement of disputes, and by ensuring access to the civil litigation system so that the cost of litigating is not out of reach for litigants. In today’s economy, however, the system is trying to do too much, and with too much at stake. The original system was put in place at a time when litigation costs were very often in reasonable proportion to the amount in dispute. Presently, the cost to litigate can quickly eclipse the value of what is at stake in the dispute. A summary judgment motion, for example, may cost upwards of the cost of a family vehicle for the average Canadian. In the minds of litigants and lawyers, unpredictable issues of legal costs often replace issues of substance at the heart of a litigated dispute. While the cost of civil litigation to an individual litigant has certainly increased over time, the increase is not due solely to the cost a litigant pays his or her own lawyer. An increase in the overall cost of litigation thus means an additional increase in costs the loser in a case must pay to the successful litigant, as well as to the loser’s own lawyer. If the loser is an average, middle-income earning Canadian litigating a standard contract or injury dispute, such a loss can be economically impossible to bear. Litigation costs through fee shifting have thus become a fundamental driving force in the Canadian civil litigation.

Courts in Canada exercise wide discretion in assessing costs through fee shifting and costs awards have become unpredictable as a result. This has led to an inability of litigants to ex ante predict their exposure to adverse cost awards. Risk averse litigants, especially those middle income Canadians with some financial exposure such as a house to lose, tend to shy away from the civil litigation system. This is how concern for costs can often eclipse the substantive rights being asserted in a particular case. Everyday litigants who are non-corporate individuals whose litigation costs are not covered by insurance cannot easily defray the financial burden of an adverse cost award. They are most likely to have cost concerns weigh heavily in the decision to advance a claim at all. However, should costs be driving litigation results? Should costs be driving access to the civil litigation system, particularly for the everyday litigants in Canada who have a house or modest savings to potentially lose?

Part I of this Article details how Canada’s fee shifting costs regime operates in a fashion to create a complex and unpredictable litigation dynamic. The Article explains the myriad of variables informing how legal costs are calculated in Canada and how lawyers, clients, and courts have difficulty in estimating financial exposure to such costs. In addition to the fee shifting system, the amount a litigant must pay her own lawyer plus Canada’s pre-trial settlement cost incentives also play large roles in how costs affect litigation decision-making in Canada. Part II of the Article attempts to define the everyday Canadian litigant who is most negatively affected by the current costs system because of an inability to internalize a negative costs award. The everyday litigant is in the most precarious position of potential litigants because costs drive a myriad of access to justice concerns for that group. Part III critically evaluates the costs landscape in Canada and concludes that costs, not the substantive legal claims of the litigants, are disproportionately driving the civil litigation system in Canada for everyday Canadian litigants. In short, costs have subsumed the substance of much Canadian litigation. This leads to not only over-deterrence of litigation in the name of settlement but to concerns about the ability of average Canadians to access the civil justice system for. Part IV evaluates possible fee regime models with an eye to informing modifications to Canada’s fee system. It recommends that Canada’s fee regime be reformed to allow for a hybrid, two-track approach. As a default, courts should adopt a one-sided pro-plaintiff fee shifting system as long as the defendant in litigation is able to somehow defray adverse cost awards through assets or insurance. If both plaintiff and defendant are litigants who cannot reasonably defray the cost of costs, a more American-style costs system of no fee shifting should govern. Settlement incentives should not be based on actual costs to litigate but instead should be a 10% uplift on final damages awarded at trial or settled. Part V concludes.

Professor Knutsen certainly identifies a number of systemic problems within the current costs regimes in various Canadian provincial jurisdictions. I am not thoroughly persuaded, however, that the “loser pays” costs regime is all to blame. Cost indemnification remains an important component to access to justice. (or justice of access). Both plaintiffs with meritorious claims and defendants facing unmeritorious claims have a prima facie entitlement to recovering the costs of legal representation. This offers a financial incentive to settling claims due to the potential adverse cost consequences built into offers to settle (e.g. Rule 49 of the Ontario Rules of Civil Procedure).  There is a reason, after all, why most civil cases settle (some studies suggest up to 95%). Risk aversion is endemic to human behaviour. Similarly, defendants who are forced to defend a claim have other means at their disposal: summary judgment. The recent amendments to the Ontario Rules of Civil Procedure under Rule 21 now empower motion judges to weigh evidence, assess credibility and order summary trials to narrow the issues, where necessary. One factor that the article does not address is that corporate litigants are able to claim legal expenses for tax purposes. Perhaps individual litigants should have the same privilege.

Is creating a two-tiered costs regime the correct legislative response to the disturbing increase in self-represented (pro se) litigants  and reduced access to justice?  Will following the American no  fee-shifting approach mean we are throwing the baby out with the bath water?