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Risk Premium Set Aside

Published in the November 2006 issue of Litigation Notes - View Article

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In Walker v. Ritchie, the Supreme Court of Canada considered whether it was appropriate to add a “risk premium” to the costs award payable to the plaintiffs by the unsuccessful defendants. This was a motor vehicle accident case. The plaintiff and her family sued the defendant truck driver and his corporate employer and were successful at trial. During the course of the litigation, the defendant denied any liability, refused to admit any facts and rejected an offer to settle made by the plaintiffs.

The trial judge awarded the plaintiffs over $5 million in damages, including costs of over $500,000.00. The trial judge also found that the plaintiff’s counsel had conducted the litigation through trial without payment as the plaintiffs could not afford it. As liability was not admitted, plaintiffs’ counsel faced the risk of non-payment and so the trial judge also ordered the defendants to pay a “risk premium” of $192,600.00 to the plaintiffs in addition to the other costs awarded.

The defendants appealed the awarding of the risk premium, and the Court of Appeal upheld the award. The Court found that risk premiums should be awarded only rarely, and could only be justified where there was both a risk of non-payment and an outstanding result, as was the case here.

The defendants then appealed to the Supreme Court of Canada. The Supreme Court reviewed Rule 57.01, the Ontario rule of civil procedure that sets out the factors that a court may consider in awarding costs. The Rule includes a general provision, which would allow a court to consider “any other matter relevant to the question of costs”.

The Supreme Court of Canada concluded that the “risk of non-payment to the plaintiff” would not fall under this general provision, as it is not neutral (equally applicable to either party) and, as a risk premium is a financial arrangement between the plaintiff and his counsel, would not be within the knowledge of the defendant. This would mean that defendants would be unable to gauge their exposure to costs in such cases, and would turn the costs rules from ones that “induce and encourage settlement, to [ones] that penalize a defendant for not accepting an offer by imposing what may be a totally unexpected obligation in an unknown amount.” The Court found that the new costs rules and the change permitting counsel to charge his own client a contingency fee would ensure that counsel continued to take on meritorious cases for impecunious plaintiffs. The Court allowed the appeal with costs and set aside the risk premium.