Special Costs for Special Occasions: BCCA Rules Pre-litigation Misconduct Does Not Justify an Award of Special Costs

In a lawsuit, the successful party is generally awarded costs. We say “generally” because the trial judge ultimately has the discretion to decide whether a costs award is justified. Many litigants who are unfamiliar with the process assume, incorrectly, that if they win their lawsuit a costs award requires the losing party to reimburse the winner for their legal fees. “Costs” rarely amount to a full repayment of legal expenses. This is a complicated area but, in most cases, a costs award will be 20% to 30% of the legal fees spent by the successful litigant, plus reasonable disbursements (out of pocket expenses for things like photocopies, courier charges, etc.). These types of costs are known as “party and party costs”.

In rare cases, the court will order that the losing party reimburse the winner for something closer to a full repayment of legal fees. Such orders are for “special costs”. Special costs are awarded when the court has found that one of the parties has engaged in some sort of reprehensible conduct. There has been some uncertainty in the law about whether such reprehensible conduct needs to have occurred prior to the start of the litigation (“pre-litigation conduct”) or during the course of the litigation (such as giving false evidence) in order for it to attract a special costs award. The B.C. Court of Appeal recently addressed this issue in the decision of Smithies Holdings Inc. v. RCV Holdings Ltd., 2017 BCCA 177 (“Smithies”).

In Smithies, the issue before the Court of Appeal was whether the trial judge’s award of special costs for pre-litigation conduct was appropriate. The lawsuit arose from the termination of a joint venture agreement. The court found that the plaintiffs failed to keep the defendant (respondent), RCV Holdings Ltd. (“RCV”), one of the parties to the joint venture, informed about negotiations for the sale of the lands in question and failed to immediately disclose the existence of an offer to purchase the lands, a letter of intent prepared in respect of that offer, and ongoing negotiations with the prospective purchaser. The court found that, in doing so, the plaintiffs (appellants) had breached the joint venture agreement as well as the fiduciary duties that they owed to the joint venture. It was this pre-litigation conduct that the trial judge found to be deserving of sanction in his award of special costs to RCV.

On appeal, the appellants argued that special costs are not appropriate for pre-litigation conduct. Rather, they are to be awarded only where there has been egregious conduct during the course of the litigation itself. The issue that the Court of Appeal had to consider is whether special costs should be awarded for reprehensible conduct during litigation only, or whether they can be awarded for pre-litigation conduct as well.  In other words, the court’s task was to determine whether a “bright line” should be drawn between conduct that results in punitive damages and conduct that results in special costs.

The court compared special costs to punitive damages, which seem similar in nature. The purpose of punitive damages is to punish and deter misconduct. Citing the Supreme Court of Canada in Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130 and Whiten v. Pilot Insurance Co., 2002 SCC 18, the two leading cases on punitive damages, the court pointed out that punitive damages are awarded only for misconduct that is characterized as “malicious”, “high-handed”, “arbitrary”, or “highly reprehensible”. Punitive damages are generally awarded where such egregious behavior has been proven and where other punishments would not adequately punish and deter the wrongdoer.

The court thoroughly reviewed the previous authorities on the issue of special costs and determined that decisions of both the B.C. Supreme Court and the Court of Appeal were inconsistent in the circumstances in which they awarded and upheld awards for special costs. In some cases, the courts followed the line of authority that held that special costs were only to be awarded to sanction misconduct during the course of litigation. In others, the courts followed the principle that even pre-litigation misconduct that amounted to fraud or unconscionability justified an award of special costs.

In determining which line of reasoning should be followed, the court set out the basic principles of special costs: special costs are usually awarded when the conduct of one of the parties was reprehensible and are punitive (i.e., intended to punish the wrongdoer), not compensatory, in nature. They are awarded when the court wants to distance itself from the misconduct at issue. The court considered its own decision in Garcia v. Crestbrook Forest Industries Ltd. (1994), 9 B.C.L.R. (3d) 242 (C.A.) as being the leading case on special costs. In that case, the court held that special costs are awarded for reprehensible conduct, which is conduct that is “scandalous or outrageous”, but also includes less serious forms of misconduct that is “deserving of reproof or rebuke”.

The court held (at para. 131) that pre-litigation misconduct that forms the basis of a cause of action (i.e., misconduct that caused the lawsuit in the first place) will in and of itself justify a damages award. If that misconduct rises to the level of being “malicious, oppressive and high-handed”, punitive damages may be awarded. However, while the types of misconduct that justify punitive damages and special costs are substantially the same, the court held that “special costs should only be awarded to punish reprehensible conduct in the litigation” (at para. 133). In making this finding, the court confirmed that “a bright line can and should be drawn so that judges will be able to exercise their discretion in like cases in a like manner” (at para. 134).

Since there are other ways to punish pre-litigation misconduct such as a punitive or aggravated damages award, the court held that pre-litigation misconduct should not be considered when considering whether to make a special costs award. Awarding special costs for pre-litigation misconduct that is otherwise addressed through punitive or aggravated damages, for example, amounts to double punishment, which the courts are careful to avoid.

Smithies is clear authority that in British Columbia, special costs are reserved for misconduct committed during the course of litigation and are not to be awarded to punish pre-litigation behavior.