At some point in your small business career, the odds are great that either you will be suing someone or someone will be suing you. Litigation normally has a mystique to many people, and the process can be very frustrating and intimidating to the layperson. This article will discuss the various levels of court that you might be involved in, the actual litigation process in the major stages, and a hypothetical same of the legal fees and expenses that might be incurred. The overall benefit of this article should be to raise your level of awareness and insight into the litigation process. It is helpful to keep in mind that 95 percent of all litigation is settled before trial, either by a negotiated settlement, or because one side or the other discontinues the action.
This article contains general and generic comments. You need to obtain independent legal advice in your own province to get customized accurate feedback.
THE VARIOUS LEVELS OF COURTS
Law is based on provincial and federal statutes as well as the common law. Common law means previous court decisions primarily from Canada or England. In Quebec the law is governed by the Civil Code, as well as other provincial legislation. There are some differences between the systems but they are similar in their effect. This article will concentrate on discussing the typical legal trial process in Canada. The names of the courts or various levels of courts, the pre-trial steps, or the terminology in one province might vary from another province, but the concepts and procedures are similar.
In many provinces there are four levels of courts, which are governed by provincial legislation. (In some provinces there are three levels.) These are: Small Claims Court, County Court, Supreme Court, and Court of Appeal. The federal government has various levels of court, primarily the Federal Court of Canada and the Supreme Court of Canada.
Small Claims Court
Small claims court is designed for the layperson and small business owner to present a claim without the necessity of hiring a lawyer. The monetary limit in small claims court depends on the province. In B.C. for example, it is $25,000. A guidebook is generally available from the court which explains the step-by-step procedures to follow when making a claim. If you are suing someone in small claims court, you may find it helpful to attend the court as an observer to familiarize yourself with the process.
The other benefit to Small Claims Court, is that in many jurisdictions there are two pre-trial steps available at a nominal cost or no cost in order to resolve the situation, eg mediation, and if need be, a settlement hearing.
County court normally has a monetary ceiling of $25,000, although this can vary between provinces. The conduct of action in this court is formal, technical, and requires representation by a lawyer.
Supreme Court has unlimited monetary jurisdiction; it can hear any claim of any amount and of any nature. Again, the nature of the legal process at this level of court is formal and technical, and a lawyer is required.
Court of Appeal
If you believe the decision at the Supreme Court was legally flawed or handled unfairly, you can appeal the decision to the Court of Appeal. A rough estimation is that approximately 30 percent of judgments appealed to the Court of Appeal are overturned.
The Federal Court hears matters relating to federal government legislation. An example, under the Income Tax, is your company being sued for arrears of taxes.
Supreme Court of Canada
This is Canada’s court of last resort. It hears appeals from courts of appeal of the provinces. Appeals are heard from French and English speaking provinces, whether governed by the common law or by the civil code. The Supreme Court of Canada is selective over the cases it can handle, simply because of the workload involved. One criterion in the request for appeal is that the legal issues have a national implication or impact.
THE LITIGATION PROCESS
Although you may have very good grounds for suing someone, it may be far more pragmatic and expedient for you to resolve the dispute at the outset through personal negotiations with the individuals involved. In many cases it may be far more financially beneficial to you to settle the matter out of court. You and/or your lawyer may wish to hold a “without prejudice” meeting with the other party in the dispute. The term without prejudice means that any information discussed or revealed in the meeting would not be permissible evidence in court. Therefore, both parties may participate in full and open discussions in an attempt to reach an amicable settlement. You may decide to have your accountant attend as well if there are various financial considerations involved.
After assessing the situation, you may come to the conclusion that it is not worth suing someone, because the other party has little or no money. For example, you could be suing an individual who has no assets, equity, or net worth. You may be suing a corporation with liability limited to the assets of the corporation. However, by the time the trial date arrives, the assets of the corporation may have been pledged as security to other creditors or to raise money to pay the lawyer to defend the lawsuit. Or you may decide not to sue when the amount in dispute is disproportionate to the costs and legal fees that would be incurred in the legal proceedings. Litigation can be extremely expensive, as will be discussed later in this article. In addition, it is very time-consuming, full of potential risk of losing the case of losing money, and stressful. It can also involve expending a lot of negative emotion and energy over a sustained period of time, eg years.
If you are involved in litigation, whether you are suing or being sued, the following explanation of the major steps involved will be helpful in understanding the process. Small claims court involves a simplified version of these steps, or eliminates them, to expedite the process.
Writ of Summons and Statement of Claim
The writ is the document that initiates the formal legal process. The statement of claim is the document in which the plaintiff (the person suing) sets out all the particulars of the claim. It sets out the facts, allegations, and the nature and amount of claim.
The writ of summons is usually attached to the statement of claim and is filed in the appropriate level of court. After the claim is filed at the court office, copies are delivered to the defendants (the individuals or companies being sued). The process of serving the defendants with the documents may take several weeks, and is usually done by a private process server, or a provincial sheriff.
An appearance is a short document filed in the court office by the defendant’s lawyer. It simply acknowledges receipt of the writ and statement of claim, states that a defence will be filed, and is signed by the defendant, or a lawyer on behalf of the defendant. It is normally filed within fourteen days of service of the writ and statement of claim. A copy of the appearance is served on the plaintiff’s lawyer.
If no appearance is entered within the limited time, the plaintiff’s lawyer can initiate steps to have a judgment entered in default of appearance. A judgment is an order by the court to the defendant to pay the plaintiff the amount of the claim. If this happens the default judgment can be removed, but an application to the court has to be made and reasons given to failure to file the appearance on time.
Statement of Defence
The statement of defence is a document in which the defendant states the intention to defend the action, and replies to statements made in the claim. This is done by explaining the key issues, circumstances, and factual and legal defences. The statement of defence generally must be filed within twenty-one days of receipt of the statement of claim. If the statement of defence is not filed within the time required, a judgment in the default of defence could be entered by the plaintiff. Again, this default judgment can usually be set aside by the court if an application is made to the court, and an affidavit is filed swearing that the defences that you have in the case have merit.
Summary Judgment Application
After reviewing the defendant’s statement of defence, a plaintiff may decide to make a summary judgment application to the courts. A judge will award a summary judgment when the facts and evidence clearly show that there are no merits to the defence. If the summary judgment application is successful, it terminates the legal proceedings, and the plaintiff is awarded a judgment against the defendant.
Sometimes a defendant, in preparing a defence, may counterclaim against the plaintiff for monies allegedly owed by the plaintiff, or other reasons for set-off. A counterclaim is, in fact, a separate lawsuit against the plaintiff based on the same overall facts. For instance, if you have refused to make final payments on a piece of equipment that was delivered late and the supplier files a lawsuit against you, you may enter a counterclaim on the supplier for damages due to the late delivery. Damages may include cancelled customer orders, missed promotion opportunities, cost of wasted advertising. Your counterclaim may total the amount of the plaintiff’s claim, and therefore on will offset the other. It could also exceed the plaintiff’s claim.
Defence to Counterclaim
Where a counterclaim has been filed, the plaintiff has to prepare the file a defence to the allegations raised in the counterclaim.
Third Party Claim
In some situations, a third party may be involved in the dispute, and may be brought into the action by the defendant. This may be done by the defendants’ lawyer filing and serving on the third party a document entitled third party notice. The third party then has to prepare and file a defence and serve it on the plaintiff and the defendant.
Discovery of Documents
Discovery of documents means that one party gives to the other party in the litigation, through their lawyers, a list of the documents to be used as evidence. This is a list of relevant papers and other material including letters, plans, diagrams, manuals, contracts, agreements, receipts, and any other matters relating to the case. Only certain documents are accessible. You can’t do a “fishing expedition”.
If a lawyer wishes to obtain a copy of items on the list, they can be supplied by the other lawyer or made available for photocopying. It is important for both sides to review these documents in order to prepare for the next stage, called the examination for discovery.
Depending on the nature of the case, some documents could be protected by “privilege”, eg correspondence with lawyers, or dealing with government agencies.
Examination for Discovery
An examination for discovery is an interview of the parties involved by their lawyers for the purpose of collecting the facts and evidence relevant to the case. A separate examination for discovery is held for each defendant and plaintiff. Each part is questioned by the lawyer of the other party, while under advisement of his or her own lawyer.
The examinations take place under oath and are reported verbatim, that is, word for word, by a court reporter, or taped and transcribed. A copy of the transcript can be requested and later entered into court as evidence. The purpose of the examinations is to allow each party the opportunity to become familiar with the opposing sides’ case. In addition, they serve the purpose of providing a better basis upon which to negotiate an out-of-court settlement. Examinations for discovery are an essential part of the pre-trial process. Although the “pleadings”, that is the documents that constitute the initial stages of litigation including the statement of claim, defence, counterclaim, defence to counterclaim – allege various facts, they are not made under oath. The facts alleged could have substantial merit, very little merit, or no merit. The examination for discovery, conducted under oath, assists in clarifying how much merit may be involved in the pleadings.
Once the discoveries have been completed, both parties are in a position to assess the strengths or weaknesses of their respective cases. Approximately 70-85% percent of settlement negotiations that result in a compromise resolution before trial occur after the examinations for discovery.
Discovery by Interrogatories
There are occasions when a one-on-one examination for discovery is not practical, for example, if some of the parties live in remote areas or in another country. It saves costs in such situations to have the discoveries done by written examination. Interrogatories are a list of typed questions posed by one party in the litigation to the other. Similar to the examination for discovery, they are usually done well before the trial and after the defence and other similar documents have been filed and served. The party who receives the questions has to answer them in writing. These care called answers to interrogatories, and are usually in the form of a typed reply, sworn under oath.
As in examinations for discovery, the interrogatories are designed to discover more of the facts and issues of the case. Interrogatories are often helpful where there are no material documents to be disclosed. The answers to interrogatories can be used as evidence or for cross-examination at trial.
Trial Date Set
The trial date is set by the lawyer for the plaintiff based on an agreement between the lawyers as to the duration of the trial. If there is a disagreement between them, a trial date will be set based on the lawyer who suggests the longest duration of trial. Generally speaking, the longer the length of trial, the longer the wait before a trial date. The waiting time for trial could be anywhere from six months to three years or longer.
At any time after a trial date has been set, one or the other party can request of the court that a pretrial conference be held. The conference is attended by a judge and the lawyers for the parties, and considers such matters as the clarification of the legal issues and any other matters that might help in disposing of the action or settling the dispute.
The trial is held before a judge alone unless the legislation in your province allows for a jury to be requested by one of the parties.
Each party presents its case, the plaintiff first, then the defendants all together or each in turn. Witnesses may be called or subpoenaed as well as to give evidence on facts. Witnesses of the plaintiff give testimony to the plaintiff’s lawyer, and are then cross-examined by the defence; and vice versa for witnesses of the defence. Expert witnesses may be called to venture professional opinions about some aspects of the evidence. If a claim is being made for damages (financial losses), a professional accountant may be called to give expert testimony in the calculation of figures. Keep in mind that if you claim damages, you have to prove that you have acted reasonably and in good faith, to mitigate ongoing damages from the time it became apparent that there was a problem, eg breach of contract. It all depends on the facts of the situation. For example, say you are a landlord, and your tenant broke the lease and left, and you sued for your losses due to breach of the lease. As a landlord, you have to show that you immediately tried to re-lease the property, and the steps you took to do so. The tenant could argue that you were negligent in not trying hard enough. You get the idea. The litigation process is inherently adversarial.
In the final stage of the trial, the lawyers present legal arguments in an attempt to persuade the judge and/or jury that the evidence and applicable laws call for a verdict in favour of their client. It is in these arguments that past cases which have a bearing on the present case are often brought forward. This is called referring to the common law or court case law. These cases generally come from other court case in Canada, the United States, or England.
The judge or jury has the responsibility to determine the extent that each party contributed to the overall problem and the amount to be paid. One or more of the defendants in whole or in part may be held responsible. Or, the plaintiff may have partly contributed to the problem. If the defendants have put in a counterclaim and the counterclaim is upheld by the courts, then a set-off will occur against any claim in favour of the plaintiff.
The judge will present an opinion on the case and state the amount of the judgment to be awarded and court costs, if any. The losing side is usually obliged to pay court costs to the other side, based on a specified tariff schedule. If the court awards party-party costs, this is a lower tariff schedule than solicitor-client costs. The court has the discretion to grant the higher level of costs if it is felt that the circumstances justify it. The highest level of court costs generally only represents between 15 percent and 35 percent of the actual amount of the winner’s legal costs. Actual legal costs obviously vary, depending on the fee arrangement, the experience and efficiency of the lawyer, and the complexity of the case.
After the judgment is rendered, one or more of the parties may decide to appeal either the finding of liability, or lack thereof, and/or the amount of the damages awarded or other judgment. A notice of appeal must be filed within a limited time after judgment. Appeals are heard before a panel of senior judges, and are concerned primarily with errors in the interpretation and application of law, as opposed to the interpretation of the facts and evidence. There is not a “re-trial”. Like the trial process, the appeal process can be lengthy, expensive, unpredictable, and stressful.
Examination in Aid of Execution
Once a judgment has been obtained, the party who has been awarded the judgment is entitled to examine under oath the person or company on which the judgment was obtained. The purpose of this examination, which normally occurs in front of a court reporter, is to determine all the assets of the judgment debtor. Once all the assets are determined, then procedures can be commenced to collect the amount of the judgment.
Execution of Judgment
Once you are aware of the debtor’s assets, there are various forms of execution of a judgment. Some of these include garnisheeing bank accounts and accounts receivable, seizing assets such as cars, boats and equipment, and commencing action on any real estate owned by the debtor. In many cases, the assets may be already pledged as security to other creditors, and very little equity, if any, may be remaining in them.
It is frequently advisable that the parties attempt to reach a compromise rather than proceeding to trial. As mentioned earlier, civil litigation is very expensive, uncertain, and stressful. Negotiations can be conducted at all stages of the litigation process commencing from the service of the writ and the statement of claim. After the examination for discovery, negotiations usually occur in earnest as the bargaining positions become clear.
The courts encourage out-of-court settlements by providing a procedure whereby a party may make a formal offer to settle. If this is done within a limited time prior to the trial and the outcome of the trial is at least as favourable to the offeror as the terms of the offer, the party who failed to accept the offer is penalized by the court by having to pay a high percentage of the offeror’s legal expenses. The offer is open for acceptance until it is either formally withdrawn or the judgment is rendered.
LEGAL FEES, EXPENSES, AND COURT COSTS
If you are suing more than one defendant, you can multiply the legal costs, as there is limited economy of scale in time, as the facts could vary and there are parallel steps. The legal process can become very complex. The example below is based on just suing one defendant.
To illustrate the potential high costs involved in litigation, an example will be given. Say you wanted to sue a debtor for $50,000 and retained a lawyer to represent you on an hourly bill-out rate of $300. There is GST on this service fee, plus PST or HST depending on the province. In B.C., for example, there is GST and PST charged on the legal fee. The more experienced a lawyer, the highly the hourly rate. It could go up to $500 an hour or more, for senior lawyers. It is generally rare for a lawyer to act on a contingency-fee basis for collection of debts, because of the risk that he/she may lose and therefore not be paid – but it all depends on the circumstances of the case. The other reason is that the lawyer may not know all the facts at the outset, as the client was selective with information, or did not fully disclose it. The contingency fee arrangement is normally in a personal injury case, where there is no issue that the injury actually occurred. The issue is the responsibility of those who allegedly caused it the injury, and how much the injury is “worth”.
In the above scenario of claim for debt, the defendant files a defence and a counterclaim against you for $50,000, claiming a set-off for sloppy workmanship, incomplete workmanship, and delays. You believe the defendant is bluffing, and has no merits to the defence or counterclaim, so you proceed down the litigation road.
The pretrial procedures go on for a year and then there is a further one-or two-year wait before trial. At the trial you win on your claim, and the other side loses on the counterclaim. You are awarded court costs. The trial lasts a week, and there are many witnesses, and large quantities of documents. The legal issues are complex.
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After looking at the preceding example, you might have considerable anxiety when contemplating suing or being sued. In the example given, even though the case was decided in the plaintiff’s favour, the plaintiff was still out of pocket. As well, for a two-year period the plaintiff had to deal with the risk, uncertainty, anxiety, frustration, and negative energy of the litigation process. There are a number of questions that you should consider when looking at this example:
- Was the litigation exercise worth the aggravation and risk?
- What if the defendant succeeded in the counterclaim?
- What if the court did not award costs to either party in the event that both parties won on their respective claims, or partially won on their claims?
- What if the defendant was a corporation, and by the time the trial ended, it had no assets, and you had no personal guarantees from the principals (eg director) of the company), eg you could not collect on your judgment?
- What if the lawsuit was against an individual, and they were “judgment proof”, eg no assets in their name?
- What if the defendant’s assets were pledged as security to creditors, or to the bank for a loan to pay the legal fees?
- What if the defendant corporation stopped doing business or went into bankruptcy just prior to or after the trial?
- What if just prior to trial your lawyer required another retainer to proceed any further, and you did not have sufficient cash flow or financial resources to pay the fee, and therefore had no choice but to discontinue the case?
- What if the defendant’s counterclaim against you showed up in a Dun & Bradstreet or Credit Bureau record, and because of it creditors as well as your bank would not advance further funds or credit to you?
- What if the nonpayment of the $50,000 debt plus the extensive legal fees caused your business to go under because you could not in the end collect on the debt? If you had signed personal guarantees for your corporate liabilities, you may have additional legal problems.
This litigation example demonstrates the potential perils of getting involved in a legal fight. Until or unless you receive a judgment at trial, you would not be entitled to examine the debtor under oath as to the assets of the debtor. Therefore you would have no idea if the company was pledging its assets, selling off its assets, or ready to go under prior to trial or shortly thereafter and before you can collect.
Some lawyers are more efficient and more expert than others in litigation matters. If you are involved in litigation, it is very important to make sure that the lawyer whom you have representing your interests is a skilled litigator. It is also advisable to ensure that your lawyer is a skilled negotiator and attempts at various appropriate stages in the litigation process to resolve the matter by out-of-court settlement, if at all possible.
You have to make a tough business and financial decision before commencing litigation, based on legal advice from at least 3 experienced litigators. You want to make sure the advice is consistent, and you have a sober reality check as to the potential range of costs, and risks.
LEGAL STRATEGIES AND TACTICS
When you are dealing with litigation matters, there are many tactical and strategic considerations that influence the outcome. It is common for settlements to be made not on what is fair, in the opinion of one or both parties, but what is economically and pragmatically expedient in practical terms. It is helpful to understand these realities before getting involved in litigation.
The civil litigation process is adversarial in nature. That means that each side will exert their best efforts to convince the court on the merits of their respective positions, by accentuating the positive and rationalizing the negative as irrelevant or insignificant. At the same time, the goal is to try to diminish the merits of the other side’s case. In other words, strongly argued positions at both ends of the spectrum frequently occur. The reality might be somewhere in the middle, or maybe weighted on one side or the other.
There are various factors or strategic approaches that could influence the outcome of the case or settlement. They have very little to do with the facts or dispute at issue. They have a lot to do with tactics and strategies. It is assumed of course, that all the approaches used fall within the guidelines of proper professional conduct. Keep in mind, though that because it is an adversarial process, there is a wide range of approaches that can be used that are completely in keeping with that adversarial process. Some lawyers by nature or by client instructions are prone to try to find a point of settlement when the timing is right. Other lawyers by nature or by their client’s instructions want to proceed regardless of the cost, without any desire or attempt to compromise or settle. Those who adopt this latter approach tend to do so out of emotion, principle, or just a bad attitude. Seldom is the outcome satisfactory on any level – financial or emotional.
It is always best to try to find a pragmatic solution, and move on, even though you do not feel fully satisfied with the outcome. Consider it a learning experience, and take legal and risk management steps to pre-empt a repeat in the future.
A separate article will soon follow detailing approximately 25 litigation legal strategies and tactics. These will give you “talking points” to discuss with your lawyer, and to help you better understand the process.