Dispute Resolution in Western Canada for Public Infrastructure Projects: The Costs of Litigation Relative to Arbitration

Public utilities, municipalities and other government or quasi-governmental entities are confronted with unique challenges when assessing risks related to dispute resolution. This includes considering how the cost of legal fees and disbursements will financially impact taxpayers or require the use of public funds.

In Western Canada, arbitration can be a compelling avenue for dispute resolution due to the increased likelihood of recovering full indemnity costs. Arbitral practice and case law out of Western Canada has shown that successful parties may be able to recover all reasonable legal fees and disbursements, resulting in significant savings of taxpayer funds. This stands in stark contrast to typical costs recovery in litigation, where successful parties may only expect to recover 40–50% of incurred legal fees.

Background

Generally, a successful party to a dispute is entitled to costs against the unsuccessful party, whether the dispute is resolved by litigation or arbitration. When defining “success” in the context of costs awards, courts focus on substantial success, not complete success. Generally, costs follow the ultimate result rather than being apportioned on an issue-by-issue, claim-by-claim or head-of-damages basis.

Assessing Cost Recovery in Litigation and Arbitration

Litigation

In Western Canada, costs awards in litigation and arbitration are not the same. Courts award “reasonable and proper” litigation costs on a discretionary basis. While judges may consider factors such as the complexity of the case and the conduct of the parties when awarding costs, most provinces’ rules of court or civil procedure include a tariff or schedule of compensable legal fees and disbursements. These tariffs and schedules offer courts guidance and encourage predictability and consistency across cost awards. However, the actual costs of litigation typically exceed the amounts recoverable based on such tariffs and schedules, especially in construction disputes.

In McAllister v. City (Calgary), the Court of Appeal of Alberta indicated that a 40–50% level of partial indemnification is a reasonable guideline for judges making costs awards. However, several decisions have taken a more restrained approach in favour of lower proportionate cost awards. In Barkwell v. McDonald, the Court of Appeal of Alberta clarified that the reasonableness of those costs must be assessed as part of the analysis. While the level of partial indemnification may vary across jurisdictions, the overriding principles courts will consider when awarding costs are reasonableness, fairness and proportionality.

Arbitration

Arbitration often presents an opportunity to recover significantly more legal costs and disbursements than in litigation. Full indemnification for the successful party is considered the norm regarding commercial arbitration in Western Canada, absent special circumstances that justify different outcomes (such as K-Rite Construction Ltd v. Enigma Ventures Inc, Allard v. The University of British Columbia and Schickedanz v. Wagema Holdings Limited). This starting point is a marked departure from the typical litigation approach.

Legislation and contractual arrangements can affect the potential for full recovery. Domestic arbitration legislation often confers jurisdiction on an arbitral tribunal to award costs to the successful party. The parties are free to contract in such a way that limits or broadens the potential for full indemnification when drafting their arbitration contracts, the contracts that are the subject of the dispute or the pleadings.

Key Takeaways

Arbitration can be an attractive option for public entities involved in dispute resolution, particularly when the parties take steps to preserve their entitlement to full indemnification, such as by ensuring that the governing arbitral legislation, the contract at issue in a contractual dispute, the pleadings and any terms of reference or arbitration contracts expressly permit, or at least do not prevent, full indemnification.

The risk of arbitration is that the unsuccessful party may incur substantially greater costs if required to completely indemnify the successful party. Despite this risk, the opportunity to receive a full indemnity cost award in cases with a strong likelihood of success should be appealing to public entities conscious of spending taxpayer funds to resolve disputes by arbitration.

For more information, please contact the authors or any other member of our Litigation & Dispute Resolution, Arbitration or Infrastructure groups.