Costs awards: Your entitlement to indemnity for legal expenses

February 10, 2021 | Alice M.L. Wong

More so than most other forms of litigation, construction litigation often involves multiple parties and multiple issues, all of which typically result in a significant amount of documentary evidence as well as necessitating the input of expert witnesses.  As a result, the legal fees and disbursements associated with such protracted, document intensive litigation can be substantial, irrespective of the size of the claim.

Absent exceptional circumstances (such as conduct worthy of sanction, by either the successful or unsuccessful parties), costs awarded to the successful party in Alberta are “reasonable and proper costs” permitted under Rule 10.31(1)(a) of the Alberta Rules of Court, otherwise known as “party and party costs.”  Such costs are set out as tariff levels in Schedule C of the Alberta Rules of Court.  Except for a set adjustment to account for the quantum range in which the claim falls, these Schedule C costs are generally applied without regard to the actual legal costs incurred by the successful party.

However, in McAllister v Calgary (City), 2021 ABCA 25 (“McAllister”), the Alberta Court of Appeal clarified that Schedule C is not the default rule for making costs awards.

Costs awards are discretionary and Courts are granted a wide degree of latitude in determining what costs they deem to be appropriate in each case.  Nonetheless, such discretion is governed by the Alberta Rules of Court and the obligation of the Court to act reasonably.  The applicable Rules are as follows:

  1. Rule 10.2(1) sets out the factors to be considered in determining whether a lawyer’s fees are reasonable;
  2. Rule 10.33 sets out the factors to be considered by the Courts in determining the amount of a costs award; and
  3. Rule 10.31 sets out the types of orders the Court can make in awarding costs.

It is under Rule 10.31(3) that a Court is permitted to order a lump sum percentage of legal costs, if proper and reasonable in the circumstances, without reference to Schedule C.

This then leads to the question of what is the appropriate percentage to be applied if Rule 10.31(3) is held to be applicable.  The Rules do not specify an explicit level of indemnification.

In answering this question, it is important to note that although the primary purpose of a costs award is to indemnify the successful party for expenses incurred as a result of validly pursuing or defending a claim, indemnification is not intended to be complete.  In other words, often much to the surprise of litigants, the costs that they are awarded upon “winning” an action do not fully cover their legal fees and disbursements.

In McAllister, the Alberta Court of Appeal confirmed that under Alberta law, party and party costs should normally equate to 40-50% of the successful party’s actual costs.  Again, this is not a hard and fast rule.  It is a reference point to establish what is typically considered to be “proper and reasonable costs,” considered in conjunction with the factors set out in Rules 10.2 and 10.33.

That is not to say that Schedule C is to be disregarded in its entirety.  Schedule C is commonly and expeditiously used in many interim applications and judgments, without issue.  The application of Schedule C may, or may not, result in “reasonable and proper costs.”  What McAllister emphasizes is simply that Schedule C is not to be considered a standard or a starting point.  It is merely one of a number of tools that a Court can use in order to determine an appropriate level of costs.

The importance of McAllister in the context of construction actions is evident.  The costs incurred by a party in complex, protracted litigation can often extend into the hundreds of thousands of dollars and can easily exceed the level of costs granted under Schedule C, even under the highest tariff level.  By establishing a benchmark of 40-50% indemnity for incurred costs, the Alberta Court of Appeal has clarified both the level of risk involved in pursuing or defending a claim without merit, as well as the degree to which a successful party can expect to be compensated at the end of the day.  In addition to hopefully instilling within certain parties the desire to forgo unmeritorious actions or defences at the outset, it may also serve to encourage parties to minimize unnecessary steps in litigation and achieve an earlier resolution of issues, to the benefit of all parties.

Lastly, with some degree of forethought and negotiation, parties can avoid the uncertainty of relying on a Court to determine costs by including a provision regarding costs in their contract.  Absent conduct that a Court would consider to be improper or oppressive, an agreement between parties as to who will pay costs, and the quantum of such costs, is enforceable and takes precedence over the decision of the Court.[1]  Examples of such a contractual provision include specifying that each party will bear its own costs or that one of the parties will pay for solicitor-client full indemnity costs depending on the nature of the issue.

[1] Marzetti v Marzetti, [1991] A.J. No. 768 (Q.B.) at para. 8; Servus Credit Union Ltd. v Waylan Mechanical Ltd., 2010 ABQB 276 at paras. 2-14.


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