Costs and Pre-Litigation Offers to Settle

There have recently been a couple of interesting decisions in the case of Borrelli v. Dynamic Tire Corp.:  One deals with tax deductions from a judgment, which is interesting and useful, but in this entry I want to talk about the costs appeal recently decided by the Divisional Court.

Background

Mr. Borrelli was dismissed without cause.  It appears that he was initially offered 16 months' pay in lieu of notice, with a 50% clawback in the event of successful mitigation.  In the course of negotiations, the employer did offer more (it isn't clear exactly how much), but Borrelli didn't accept, instead choosing to litigate.

Early in the litigation, the employer made a formal offer to settle which would have been the equivalent of 12 months' pay in lieu.  (One assumes that the logic was that this was going to be a lump sum, without a mitigation clawback - so without the potential to benefit from a mitigation clawback, they discounted the scale of their settlement position.)  Ultimately, on a summary judgment motion, the judge awarded 16 months' pay in lieu of notice, and denied the plaintiff's claims for bad faith damages, etc.

The Costs Decision

After the summary judgment motion, both sides sought costs.  The plaintiff wanted substantial indemnity costs of about $29,000, or partial indemnity costs of about $20,000; the defendant wanted substantial indemnity costs of about $36,000 or partial indemnity costs of about $28,000.

Justice Mullins was critical of the plaintiff's failure and refusal to accept the pre-litigation offers, calling the defendant's positions "reasonable, exemplary even", and referring to the plaintiff's action as "ill-conceived".  She considered the pre-litigation offers to be 'relevant' to costs.  Still, the Plaintiff was awarded modest costs, of $6000, representing costs of the motion and not of the action more generally.

The Appeal

The employer appealed to the Divisional Court.  (This is an unusual process, requiring 'leave', which was obtained.)  It would appear that they regarded themselves as having been the 'successful party', having held the plaintiff to basically the same amount they put on the table at the very beginning.

The Divisional Court dismissed the appeal, making four observations:

1. The Defendant didn't beat its own "Rule 49" offers in the course of litigation.  Had they, then they presumptively would have been entitled to costs...but because their in-litigation offers were a little on the cheaper side than their pre-litigation offers, the Rule wasn't triggered.
2. Awarding costs of the motion made sense:  By the time the motion was commenced, the plaintiff's alternative - of accepting the Rule 49 offer on the table - would have gotten the plaintiff a lesser remedy than when he ultimately received.  Accordingly, it's fair to say that the plaintiff won the motion.
3. The plaintiff acted unreasonably by not accepting the pre-litigation offers.  "This is a factor that, in my view, reasonably results in a significant reduction in the amount of costs that should be awarded to the plaintiff."
4. Ultimately, awarding the plaintiff only $6000, when he was seeking over $20,000 on a partial indemnity basis, reflects an appropriate balancing.

Lessons Learned

The importance of a Rule 49 Offer can't be overstated.  Fundamentally, these are what define the parties' positions when it comes to the costs award - they're what defines who 'won' and who 'lost'.

By scaling back to a 12 month offer in the Rule 49 Offer, having had 16 months on the table before, this was going to be a tough one to settle once litigation started.  Having taken that position through litigation, it's completely right to deny them costs.

On the flip side, this is an unusual case where pre-litigation offers became important.  It's quite rare for an employer to beat its pre-litigation offers in this context.  This unambiguous statement from both the motions judge and from the Divisional Court expressing the importance of the pre-litigation offers will stand as a caution to plaintiffs:  If your employer is making reasonable offers, don't get greedy.  (To be absolutely clear, I am not saying to just accept an offer if it looks okay.  Quite the contrary, if anything, this makes it more important to get legal advice on an offer, to know whether or not the offers are, in fact, reasonable.)

However, I'm not entirely convinced that this proposition has a particularly widespread application.

Limits:  The LTD Problem, and Other Uncertainties

It isn't clear to me if this employee had a benefits package including, say, long term disability.

However, many insurers simply will not continue LTD benefits through a non-working notice period, and those that will charge a very hefty premium for it.  As a result, most of the negotiated settlements I've seen have an exclusion for LTD.  An employer's offer, no matter how generous it is in other respects, will basically never include LTD.

In the right fact pattern (or, perhaps more accurately, the worst possible fact pattern), the discontinuation of LTD can result in a claim that is well in excess of any other 'reasonable notice' types of claims.  (See my discussion from Brito v. Canac Kitchens for details.)

Which makes every early-stage settlement a bit of a gamble on the employee's part:  I'm betting that I'm going to stay healthy.  If I accept a 'generous' offer from my employer, that's almost certainly going to require me to sign a release of any LTD claims that might arise, and if something happens to me during the notional notice period, that means that I've lost very substantial entitlements by signing the release.

Maybe the package is reasonable in other regards, but I'm worried about losing LTD benefits.  Is that unreasonable?  It'd be a stretch for a costs doctrine to send a message that employees should sign away their LTD rights willy-nilly.

Mitigation Clawbacks

Even in this case, the mitigation clawback itself raises its own uncertainties.  The 'standard' form of these clauses is roughly this:  You'll be paid a salary continuance, and as soon as you get a new job, you need to let us know, and we'll stop your salary continuance and instead pay a lump sum equal to half the outstanding continuance payments.

In other words, if I have a 16 month salary continuance, and get a new job after 6 months, then my employer will just pay me an additional five months - giving me a total pay in lieu of notice equivalent to 11 months - and we're done.  But this doesn't mean that I've gotten a five-month windfall.  It's possible that my new job doesn't pay me as much, firstly.  (I usually include language, on the employee side, to prevent the clause from being triggered by nominalistic income, but they never require the new job to be at 100% of prior income levels.)

And more importantly, what happens if I lose that job during a 3 month probationary period?  So I got the new job after six months, worked at it for two months, earning 80% what I was making before, and was dismissed because of poor fit.  End result?  Within my 16 month notice period, I got six months of salary continuance, a five month lump sum, and the equivalent of 1.6 months' wages in mitigation earnings: the 'generous' employer offer, which looked like it gave me 16 months of income security and the potential for a sizeable windfall, actually left me short by 4.4 months' wages.

These are the kinds of uncertainties that can create challenges for early-stage settlement.  And while most employees would probably rather have a deal in place now and see what comes, it's not totally unreasonable for an employee to prefer to take a 'wait and see' approach to see what his claims are actually worth.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.