Recent Decision Rejects Asymmetrical Cost Regime For Class Actions In Ontario

The cost of contesting certification in the class action context routinely runs into the hundreds of thousands of dollars. We have previously discussed the reluctance of one justice of the Ontario Superior Court to grant costs awards of significant magnitude to the successful party on certification on the basis that they may act as a deterrent to plaintiffs bringing class actions. But is that really fair to defendants, who justifiably may go to considerable effort and expense to find a way to stop an action that impugns their business integrity or exposes them to significant liability? A recent cost decision suggests that the courts are alive to this concern.

In his May 23, 2014 decision in Holley v. The Northern Trust Company, Justice Perell of the Ontario Superior Court held that two defendants in a proposed class action were entitled to sizeable costs awards on a partial indemnity scale ($110,000 each), without further discounts from their bills of costs, in the context of a successful motion to strike.

The decision is noteworthy in several respects. First, the court acknowledged that the Legislature intended for there to be an adverse cost system, and not an asymmetrical cost regime, for class actions in Ontario when the Class Proceedings Act (CPA) was enacted. Whether the adverse costs regime goes too far in deterring access to justice for meritorious claims – a concern raised by several justices in recent decisions – is a matter better left for the Legislature to consider. Second, the decision suggests that a significant cost award may be warranted where the plaintiff’s allegations put the defendant to considerable expense in reasonably defending the class action. Given that this particular action involved serious allegations of fraud, which naturally raise issues of business integrity and often demand a strong response, the precedential impact of this decision remains to be seen.

The Claim

The plaintiff alleged in the proposed class action that, among other things, the two defendant trust companies had committed fraud by allowing trust assets to be improperly removed from a health fund, with the result being that the class members were deprived of employee benefits.

The defendants successfully moved to strike the claim on the grounds that it did not disclose a reasonable cause of action, that parts of the claim were within the proper purview of an insolvency proceeding, and that it was statute-barred due to a limitation period.

The  Costs Submissions

The defendants each sought costs of approximately $160,000 on a substantial indemnity basis. In her response, the plaintiff raised arguments that will be familiar to class action defendants and their counsel – that the plaintiff sought justice for a disadvantaged group, that novel points of law were raised, that the claim was brought in the public interest, and the amounts claimed by the defendants were shocking and disproportionate for a two-day hearing. These arguments were all rejected.

The Cost Award

First, the Court held that the plaintiff’s submissions were premised on the incorrect assumption that her allegations of fraud were proven when, in fact, they were vigorously contested. The defendants had a defence on the merits in this respect but the issue was not decided because the claim was legitimately struck on more technical grounds.

Second, the Court noted that alleging fraud against trust companies did not make the claim in the public interest. While Justice Perell did not grant costs on a substantial indemnity basis (which frequently accompany unfounded allegations of serious wrongdoing) because the plaintiff never had chance to prove the allegations, the fact remains that the allegations were unproven.

Third, Justice Perell noted that merely pursuing “access to justice” is insufficient for a claim to be in the public interest – otherwise, all class proceedings would be in the public interest. The CPA clearly contemplates that this is not the case, as Ontario does not have a no-costs regime for class actions. In this regard, he suggested that the plaintiff was being disingenuous, seeking a “heads, I win; tails, you lose” approach to costs in class actions. This asymmetrical approach is inconsistent with the adverse cost system which was intended by the Ontario Legislature.

Finally, Justice Perell observed that the plaintiff’s assertion that she was “shocked” at the size of the defendant’s bills was “self-serving and meaningless”, particularly in the absence of her lawyers disclosing the amount of time that they had spent on the file. He held that the plaintiff should not have been “shocked” that the defendants went through herculean efforts to defend themselves from her serious allegations which could have resulted in liability of up to $60 million. He agreed with the defendant’s submission that the amount of costs they claimed was reasonable and fair, and implicitly praised the defendants for managing to end the litigation relatively early.

The case is thus encouraging for defendants, particularly those who reasonably mount a successful and vigorous defence to serious allegations which could otherwise have resulted in large liability. At the very least, it suggests that costs in class proceedings should not be a one-way street.