Schickedanz v. Wagema Holdings: The Costs of Arbitral Costs Awards

In Schickedanz v. Wagema Holdings Limited, 2023 ONSC 7219, the Ontario Superior Court of Justice dismissed an appeal of an arbitrator’s costs award. The Court emphasized that there is a high bar for overturning a costs award, as the decision-maker at first instance (i.e. the arbitrator) is in the best position to determine costs. The Court also found that, unless expressly stated otherwise in the arbitration agreement, an arbitrator may award reasonable legal fees without reference to any court scale. Below, we review the case and consider the implications of this decision in the construction industry.

Factual Background

The underlying dispute in this case involved five siblings who were equal shareholders of Wagema Holdings Limited (the “Wagema Respondent”).

In the fall of 2020, one of the siblings, Charlotte Schickedanz, and her holding company, Wagema Holdco (CDS) ULC (together, the “Appellants”), commenced litigation proceedings against the Wagema Respondent, Ms. Schickedanz’s brothers and their respective holding companies (the “Brothers”), a global law firm (the “Firm”), and the responsible partner at the Firm.

Ultimately, all the claims were consolidated into a single arbitration. For this purpose, the parties executed an arbitration agreement in April 2021 (the “Arbitration Agreement”). In the Arbitration Agreement, the parties agreed that the arbitration would be governed by the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”) and that all parties would have appeal rights from any final decision in the arbitration. With respect to the conduct of the arbitration, the parties agreed that the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”) would govern.

In December 2020, the Wagema Respondent retained the Firm to provide corporate advice to the Wagema Respondent in connection with the litigation commenced by Ms. Schickedanz against the Wagema Respondent in the aforementioned arbitration (the “Litigation Support Retainer”). The Firm had previously been retained by the Wagema Respondent as legal counsel in relation to a corporate reorganization and unanimous shareholder agreement in 2018.

On March 23, 2021, counsel for the Appellants sent a letter to counsel for the Firm and the Wagema Respondent regarding the Litigation Support Retainer. In this letter, counsel for the Appellants objected to an invoice sent by the Firm to the Wagema Respondent as: (a) it was unclear what the nature of the professional services were, and the Appellants did not know why the Firm would invoice the Wagema Respondent for Ms. Schickedanz’ litigation or in such high amounts; (b) the Wagema Respondent indicated that it would not take an active role in the litigation, and had a different law firm acting as litigation support; and (c) if the Firm was assisting the Brothers in litigation, those fees should be charged directly to those co-defendants, not the Wagema Respondent.

Counsel for the Wagema Respondent responded on April 7, 2021. The letter explained that the services were provided to assist the Wagema Respondent in “considering and, if necessary, responding to the arbitration and civil proceedings” commenced by the Appellants. In addition, counsel for the Wagema Respondent noted that although the Wagema Respondent did not intend to play an active role in the litigation, it believed that it was in “the company’s best interests that documents and information in [the Firm’s] possession as [the Wagema Respondent’s] corporate counsel be made available to, among other things, facilitate an expeditious determination of the matters in dispute.” Accordingly, the Wagema Respondent believed “that these costs are expenses incurred on behalf of the company and should be paid by the company.”

Later in 2021, the Appellants ultimately advised they were willing to dismiss the arbitration on consent and on a without-costs basis. However, the Brothers advised they were unwilling to settle the matter on a without-costs basis, as a result of which both the Brothers and the Wagema Respondent brought motions before the arbitrator for costs.

On October 8, 2021, the arbitrator released his costs award (the “Award”). In the Award, among other things, the arbitrator awarded $172,150.34 in costs to the Wagema Respondent for the legal expenses paid to the Firm pursuant to the Litigation Support Retainer.

The Appellants then commenced an appeal of this Award.

Motion to Quash the Appeal

In June 2022, the Wagema Respondent brought a motion to quash the appeal on the ground that leave to appeal was not sought pursuant to section 133(b) of the Courts of Justice Act, R.S.O. 1990, c. C.43 (the “CJA”).

The motion judge noted that the parties had negotiated and agreed upon a broad appeal process, without carving out a leave requirement for costs, and imposing a leave requirement would amount to judicial interference with the parties’ right to contract. After reviewing section 133(b) of the CJA and the Arbitration Act, she was not persuaded that leave to appeal was required.

Ultimately, the motions judge dismissed the motion to quash as she was “not satisfied that the appeal was devoid of merit nor that there was no likelihood that, if leave was required, it would not be granted in this case.” If leave was required, the application for leave could be dealt with by the judge hearing the merits of the appeal.

The Superior Court’s Decision

The Court dismissed the appeal, as the Appellants failed to show that the arbitrator made an error in principle or that the Award was plainly wrong.

Leave to Appeal

As a preliminary matter, the Court addressed the issue of whether leave to appeal an arbitral costs award is required. In the Courts view, leave to appeal was not required in this case.

The Wagema Respondent relied on section 133(b) of the CJA, which provides that “[n]o appeal lies without leave of the court to which the appeal is taken […] where the appeal is only as to costs that are in the discretion of the court that made the order for costs”. However, the Court noted that the CJA only referred to a court, not a tribunal or arbitrator, and found that the CJA drew a distinction between a tribunal and a court.

The Court confirmed that “[l]eave to appeal an order as to costs is granted sparingly and only where there are strong grounds on which the appellate court could find that the decision-maker at first instance erred in exercising their discretion because they made an error in principle or their decision is plainly wrong”.

The Court then held that leave to appeal was not required in this case for the following reasons:

1. By its clear language, subsection 133(b) of the CJA only applies to costs awards made by a court.
2. Section 45 of the Arbitration Act deals with appeals from an arbitral award. It does not draw a distinction between (1) an appeal regarding the substantive disposition of the award, and (2) an appeal as to costs only.  Further, the Arbitration Act does not refer to subsection 133(b) of the CJA, even though it refers to other provisions of the CJA, when relevant: see sections 45(6) and 57 of the Arbitration Act.
3. As pointed out by the motions judge, the parties had negotiated and agreed upon broad appeal rights, without carving out a leave requirement for costs. The appeal rights were set out in section 12 of the Arbitration Agreement, in which the parties agreed that they had appeal rights from any final decision in the Arbitration, including on a question of fact, law or mixed fact and law. Subsections 45(2) and (3) of the Arbitration Act allow a party to appeal an award to the court on such questions “[i]f the arbitration agreement so provides”.

As subsection 133(b) of the CJA only applies to courts, and as there is no leave requirement imposed by the Arbitration Act with respect to costs award appeals, the parties were not required to seek leave to appeal the Award.

Applicable Test for Setting Aside a Costs Award

The Court set out the applicable test for setting aside a costs award as follows:

A court should set aside a costs award on appeal only if the decision-maker made an error in principle or if the costs award is plainly wrong.

The Court noted that costs awards are “notoriously difficult to appeal because they represent the decision-maker’s exercise of judgment as to the overall justice of the situation that they saw unfolding before them”. In that regard, a “reviewing court must be mindful that a costs award is a discretionary order and the decision-maker at first instance is in the best position to determine the entitlement, scale and quantum of any such award.”

Scale of Costs

The appellants argued that the arbitrator had made a reversible error by holding that cost recovery on a full indemnity basis was the normal practice in commercial arbitrations.

First, the Court noted that while Section 54 of the Arbitration Act states that an arbitral tribunal may award the costs of an arbitration, it does not refer to the Rules or the concept of scale of costs.

In granting costs to the Wagema Respondent, the arbitrator had relied on J. Brian Casey’s well-known textbook, Arbitration Law of Canada: Practice and Procedure for the proposition that the practice under domestic arbitrations is to award reasonable legal fees without reference to any court scale. The Court found that the general principles in that textbook were consistent with the language in section 54 of the Arbitration Act, and that there was support in the case law in other provinces that full indemnity is the norm for commercial arbitration.

The Court then considered a number of decisions the Appellants relied upon to argue against the above proposition, and found that all of the cases could be distinguished.

The Court found that, in light of the uncertainty in the authorities and the absence of any clear rule, the arbitrator did not make an error in principle and was not plainly wrong when he decided to award the Wagema Respondent its full legal expenses as the costs of the arbitration. The arbitrator did not infringe the Arbitration Act and exercised his discretion judicially, and not irrationally or whimsically.

Although the Appellants argued that the arbitrator had to proceed in accordance with the Rules of Civil Procedure as provided for in the Arbitration Agreement, the Court agreed with the arbitrator’s conclusion that the Arbitration Agreement only referred to the Rules in how the arbitration would be conducted by the parties, not with regard to how costs would be governed. Instead, the arbitrator concluded that he was to be guided on costs by the Arbitration Act. The Court found that it was open to the arbitrator to interpret the Arbitration Agreement in the way that he did. The Appellants did not raise any error in principle or show that the arbitrator was plainly wrong on that point.

Finally, the Court affirmed that appellate intervention solely based on quantum is problematic, as there is no meaningful way to determine when a number is too high. The amount of the costs award alone is not enough to show that the award is unreasonable or that there was an error in principle. Again, the Court emphasized that the decision-maker at first instance is in the best position to determine the quantum of any costs award.

Costs for Work Done by the Firm Pursuant to the Litigation Support Retainer

At the hearing, the Appellants also argued that the arbitrator made two other reversible errors: (1) allowing the Wagema Respondent to recover the Firm’s “litigation support” fees, as the Firm’s fees were excessive for an arbitration that did not progress beyond the production stage; and (2) allowing the Firm to recover its own arbitration costs indirectly through the Wagema Respondent, despite the Firm’s agreement to a without-costs withdrawal.

With respect to the Appellants’ argument that the fees were excessive, the Court again observed that the arbitrator was in the best position to determine the reasonableness of the fees. The arbitrator’s decision that the services were appropriate and the fees were reasonable did not disclose any error in principle.

With respect to the second alleged error, the Appellants complained that the arbitrator did not address their following arguments: “(i) the costs paid pursuant to [the Firm’s] Litigation Support Retainer should have been [the Firm’s] costs as a litigant and were improperly diverted to [the Wagema Respondent], and (ii) such costs were not recoverable given the settlement between [the Firm] and the Appellants.”

In response to this argument, the Court noted three key points:

1. The amounts charged by [the Firm] pursuant to the Litigation Support Retainer did not include the fees paid by [the Firm] for its own counsel in the litigation […].
2. When the Appellants and [the Firm] agreed to a without costs dismissal at the end of July 2021, the Appellants had known for more than four months that [the Firm] was doing litigation support work for [the Wagema Respondent] and invoicing [the Wagema Respondent] for that work.
3. [The Firm] was the repository of virtually all of [the Wagema Respondent’s] relevant corporate records. Since [the Wagema Respondent] was [the Firm’s] client with respect to these documents, the documents were within [the Wagema Respondent’s] power or control for the purposes of production.

The Court found that the arbitrator had adequately addressed this argument. The arbitrator found that the work done by the Firm pursuant to the Litigation Support Retainer was work that would have had to be done by a law firm representing the Wagema Respondent regardless, and that if other counsel had done the work under the applicable tight timeframe, the cost would have been higher than that paid to the Firm.

The Court found no error in principle, and that the arbitrator was not plainly wrong in his conclusion that the assistance provided by the Firm to the Wagema Respondent and its litigation counsel to bring litigation counsel up to speed and to produce documents was an appropriate expense. The arbitrator was in the best position to make this factual determination.

Analysis

For arbitration practitioners, Schickedanz is a helpful reminder for parties to specifically turn their minds to the issue of costs when drafting an arbitration agreement and/or Procedural Order #1. In large construction disputes, where costs can (and often do) run several millions of dollars, identifying the limits (if any) on the tribunal’s authority to award costs may have a significant impact. This is particularly true when one considers that in arbitration, the parties will also have to pay the costs of one or three arbitrators, the costs of having an institution administer the arbitration (if the parties so choose), and the costs of any experts the tribunal might retain for itself. This latter set of costs, which do not exist in litigation, can in and of themselves add significant sums to the costs award.

That being said, and contrary to the Court’s observation of commercial arbitration that full indemnity costs are the norm, it is more common in the construction context (where arbitrations typically include a multitude of different disputes) for an award to apportion costs between the parties based on their relative success in the arbitration as well as the manner in which they conducted themselves throughout proceedings (e.g. did they facilitate or obstruct the efficient and economical resolution of the dispute).

Furthermore, and as noted by the Court in Schickedanz, institutional rules will typically stipulate that the costs award will allocate the parties’ “reasonable” legal fees and expenses, such that there are typically safeguards against excessive fees (unless the parties contract out of such provisions). Thus, the costs regime in arbitration is not without guardrails, and it is unusual – albeit possible, as Schickedanz confirms – in practice for costs to be awarded on a full indemnity basis. In the authors’ experience, full indemnity costs in construction arbitrations are highly unusual, which may be attributable to the use of institutions and/or procedural orders stipulating that costs are to be apportioned.

In any event, as the foregoing makes clear, courts are reluctant to overturn arbitral awards, as decision-makers of first instance (both in litigation and arbitration) are entitled to significant deference on this issue. Despite arbitration generally being understood to offer greater flexibility compared to litigation, this flexibility can in fact cut both ways if parties do not specifically consider how they might be best served by reducing that flexibility.

On the issue of costs, parties will therefore now be acutely aware that courts will often enforce an award functionally the same way as a lower court’s decision. In order for a court to overturn an arbitrator’s costs award, a party must prove that the arbitrator made an error in principle or that the costs award was plainly wrong. As such, parties should ensure that all relevant cost arguments are heard at first instance, even if there is a broad right to appeal (as there was in this case).

Finally, it is significant that the Court recognized that an arbitral costs award may be for all reasonable legal costs for the arbitration. Despite costs commonly being restricted to the partial indemnity or substantial indemnity scale at court, Schickedanz confirms that arbitrators do not have the same restrictions and may award full indemnity in the absence of language to the contrary in the arbitration agreement or procedural order(s) (which may incorporate institutional rules).

In that regard, the outcome of Schickedanz may also be attributable in part to the brevity with which the Arbitration Act deals with the power to award costs, as it simply states that “an arbitral tribunal may award the costs of an arbitration” (emphasis added). As compared to institutional rules that deal with costs more comprehensively (including for example, ADRIC, LCIA, and ICC) and specifically address apportionment on the basis of relative success, the Arbitration Act is much less robust in this regard. Accordingly, Schickedanz reinforces the necessity, as expressed by others in Ontario’s arbitration bar, of updating Ontario’s arbitration legislation on this issue and many others.

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