Executive Summary: Key Legal and Evidentiary Issues

• Long-running commercial dispute over unpaid invoices for screed and an expansive Counterclaim alleging defective product and improper installation, with the trial focused almost entirely on the Counterclaim rather than the modest debt claim.
• Allocation and scale of costs between Innocon and Daro, including whether substantial indemnity or partial indemnity was warranted in light of offers to settle and the parties’ conduct over a 12-year litigation.
• Determination of how much of Daro’s costs were properly attributable to Innocon’s discontinued claim versus the Counterclaim, given that “likely less than 1% of all documents produced” related to the unpaid invoices.
• Application of the reasonableness and proportionality principles under Rule 57.01(1), Rule 1.01(1.1), and case law such as Boucher and Davies to fix costs rather than strictly tracking the parties’ full indemnity dockets.
• Assessment of whether Daro’s aggressive pleadings and serious allegations (including punitive damages and defamation) amounted to “reprehensible” or “outrageous” conduct justifying substantial indemnity costs, which the court found they did not.
• Scrutiny of substantial expert disbursements, particularly fees for a deceased expert whose evidence was never heard and for an accounting expert whose report was prepared but not used at trial, and whether those expenses should be shifted to the opposing party.

Facts and procedural history

The litigation arose from a commercial relationship involving the supply and installation of screed. Twelve years before the costs decision, the plaintiffs, Innocon and Lafarge (referred to collectively as “Innocon”), commenced an action against the defendants, Daro Industries Inc. and Robert Danninger (referred to collectively as “Daro”). The original claim advanced by Innocon was primarily a simple debt action concerning a modest sum, based on invoices that had been sent and not paid. Daro did not defend by asserting that the invoices were paid, but instead responded with a broad Counterclaim.

In its Counterclaim, Daro alleged that the screed supplied by Innocon was defective, not only with respect to the unpaid invoices but for all of the screed in issue. The central factual disputes became whether the screed itself was defective and whether the limited failure of the screed was attributable to Daro’s installation rather than the product. The trial thus focused on liability questions tied to product quality and installation, rather than the smaller unpaid-invoice component of Innocon’s claim. Experts were retained primarily to address the technical issues raised by the Counterclaim, rather than the debt portion of the action.

Both sides also advanced defamation claims in amended pleadings, arising out of a single incident. Innocon’s defamation claim was described by Daro as a “tit-for-tat” response after Daro amended its defence and Counterclaim to assert a defamation claim of its own. The defamation issues did not dominate the proceedings: the facts concerning what was said would have taken up very little time in discovery and pre-trial preparation, and the defamation claims did not occupy much of the trial itself. The main evidentiary focus remained on whether the screed was defective and whether Daro failed to install it properly.

As the matter approached trial, Innocon discontinued its own claim. The court was advised that, the day before the scheduled start of trial, Innocon had discontinued its action, leaving only Daro’s Counterclaim to be tried. In fact, Innocon had already advised Daro in its pre-trial memorandum dated January 31, 2024, that it would not be pursuing its claim at trial, so the last-minute complaint about timing was not borne out by the record. Only the Counterclaim proceeded to trial.

Following 21 days of testimony and detailed written and oral submissions, the trial judge dismissed Daro’s Counterclaim in Reasons for Judgment released on December 19, 2024. The later endorsement of November 25, 2025 deals exclusively with the costs consequences flowing from that outcome and from the earlier discontinuance of Innocon’s claim.

Parties’ costs positions

After Daro’s Counterclaim was dismissed, Innocon sought to recover a very substantial portion of its legal costs. Innocon asked for costs on a substantial indemnity basis, or alternatively partial indemnity costs up to March 18, 2024 (the date of its Offer to Settle), and substantial indemnity costs thereafter. Its Bill of Costs disclosed full indemnity fees of $1,191,471 (excluding HST), with substantial and partial indemnity amounts calculated at 90% and 66% of actual fees, and disbursements of $243,310.86 (excluding HST).

Daro opposed Innocon’s request for substantial indemnity, arguing that Innocon’s costs for defending the Counterclaim were excessive and that there was no justification for elevated costs. Daro instead advanced its own claim for costs relating to Innocon’s discontinued action. It relied on offers to settle made as early as 2015, by which Daro had offered to consent to the dismissal of Innocon’s claim without costs. Based on those offers, Daro submitted that it ought to receive its costs of Innocon’s claim on a partial indemnity basis up to the first offer in 2015, and on a substantial indemnity basis thereafter, totalling $319,630.15. Daro also challenged several of Innocon’s claimed disbursements, including those relating to experts.

In the alternative, Daro argued that if Innocon were awarded costs of defending the Counterclaim, a reasonable figure would be $200,000.

Applicable legal principles on costs

The court reviewed the legal framework governing the exercise of its broad discretion to award costs. Under Rule 57.01(1), the court must consider several factors to reach a result that is fair and reasonable for the unsuccessful party to pay, and costs must be proportionate to the issues, complexity, conduct of the parties, and the result achieved. The judge cited Boucher v. Public Accountants Council for Ontario for the principle that costs should be fixed at an amount that is fair and reasonable, rather than being treated as a strict mathematical reflection of the successful party’s actual legal spend.

The decision also emphasized that fixing costs is not an exact science, and the court need not undertake a detailed line-by-line analysis of time dockets. Instead, the court may fix costs based on its overall sense of the case, the nature of the proceedings, and the reasonableness of the amounts claimed, drawing on authorities such as Harley v. Harley, Bender v. Dulovic, Persampieri v. Hobbs, Zesta Engineering Ltd. v. Cloutier, and Brophy v. Harrison.

On the question of elevated costs, the court underscored that substantial indemnity awards are exceptional. Apart from the operation of Rule 49.10, elevated costs should only be awarded where there is a clear finding of reprehensible conduct by the party against whom the award is made. The judge referred to Davies v. Clarington (Municipality) for the principle that costs must be fixed on a principled basis and that a fundamental change to the law on elevated costs is not permitted through an overly broad exercise of discretion.

The court further noted that substantial indemnity awards are generally based on misconduct during the litigation process, rather than on the underlying misconduct giving rise to the proceeding itself. Misconduct that might justify elevated costs includes evidence tampering or conduct reflecting a patent and persistent disregard for the court’s processes, with reference to decisions such as Hunt v. TD Securities Inc., Turtle Creek Landscape Inc. v. Summit Auto Brokers Inc., and Tridelta Investment Counsel Inc. v. GTA Mixed-Use Developments GP Inc.

Finally, the judge reiterated that, in fixing costs, he must consider the factors in Rule 57.01(1), the principle of proportionality under Rule 1.01(1.1), and the need to balance the indemnity principle with the overarching objective of access to justice.

Daro’s costs claim for Innocon’s discontinued action

Daro argued that it was entirely successful on Innocon’s discontinued action, pointing to its early offers to settle that claim by consenting to its dismissal without costs. Daro maintained that these offers presumptively entitled it to substantial indemnity costs from 2015 onward, capturing all discovery and trial preparation attributable to Innocon’s action.

The court accepted that Daro’s position was correct in principle: Daro was entitled to some costs in relation to the Innocon claim, and some portion should reflect the elevated scale in light of the offers. The central difficulty, however, was evidentiary. Daro had not attempted to separate out what time and expense related specifically to Innocon’s debt claim, and the judge concluded that very little of the overall work was truly attributable to that part of the case.

The decision highlights that Innocon’s action was “primarily, a simple debt action for a modest sum,” while Daro’s Counterclaim about defective screed effectively drove most of the litigation. The trial and pre-trial work, including document production and expert evidence, largely concerned the allegations of defective screed and faulty installation raised in the Counterclaim. Counsel for Innocon estimated that “likely less than 1% of all documents produced” related to the unpaid invoices. Likewise, the expert evidence was retained to address the technical issues arising from the Counterclaim rather than the simple unpaid-invoice claim, and the defamation components consumed only minimal time.

Given the minimal work truly tied to Innocon’s claim and the absence of a precise breakdown from Daro, the judge exercised his discretion to fix a reasonable lump-sum amount. Taking into account Daro’s entitlement to some measure of costs, the impact of its offers to settle, and what Innocon ought reasonably to have expected to pay, the court fixed Daro’s costs for Innocon’s action at $25,000, inclusive of disbursements (if any) and HST.

Innocon’s costs claim for defending the Counterclaim

Turning to the Counterclaim, Innocon sought costs of the entire action on a substantial indemnity basis, or, in the alternative, partial indemnity costs to March 18, 2024 and substantial indemnity costs thereafter. It argued that Daro had made serious and baseless allegations, including that Innocon knew the screed was defective, deliberately misrepresented its quality, and set out to harm Daro by making false statements, among other things.

While the decision acknowledges that serious allegations of wrongdoing that prove unfounded can sometimes justify substantial indemnity costs, the court held that such awards are not automatic. Citing appellate authority, the judge reiterated that substantial indemnity costs are generally reserved for situations involving reprehensible, scandalous, or outrageous conduct.

In this case, the judge concluded that Daro’s conduct did not meet that high threshold. Although Daro pleaded its case aggressively and sought punitive damages, there was no finding of misconduct in the manner in which the action was pleaded or conducted. The court found that Daro did not unduly attack the character or reputation of Innocon’s witnesses, and there was no evidence that Innocon, Lafarge, or their employees were actually affected or harmed by Daro’s Counterclaim beyond what is inherent in contentious litigation. Complaints raised by Innocon about Daro’s trial conduct—such as lack of cooperation over a joint document brief, lengthy cross-examinations, and decisions about which witnesses to call—were seen as part of the cut and thrust of a long and complex trial, not grounds for elevated costs.

The court also considered Innocon’s Offer to Settle of March 18, 2024. That offer proposed to resolve the entire action by Innocon paying Daro $1.1 million in damages and $122,000 for costs, interest, and disbursements. Innocon ultimately achieved a far better result at trial, as Daro’s Counterclaim was dismissed. However, the court noted that Rule 49.10 does not create a presumptive entitlement to higher costs for a defendant in circumstances where the plaintiff (here, Daro on the Counterclaim) is entirely unsuccessful. Even so, the judge accepted that the Offer remained relevant as a factor in assessing the appropriate scale and quantum of costs, especially for the post-offer period.

Fixing the quantum of costs and treatment of expert disbursements

In reviewing Innocon’s Bill of Costs for fees incurred before March 18, 2024, the judge found the amounts claimed—almost $500,000 on a partial indemnity basis—to be excessive. Large blocks of time were attributed to pleadings and work with experts, but the allocation of this time was not entirely clear, and the judge was concerned that substantial amounts of work, particularly in earlier stages, may have been overstated given the nature of the case. By contrast, Daro’s Bill of Costs was seen as more reasonable in the way it attributed a larger proportion of fees to trial preparation and attendance.

Recognizing that costs assessment is not an exact science and that a granular docket-by-docket review was unnecessary, the court fixed Innocon’s pre-offer fees at $300,000 (excluding HST).

For the period after March 18, 2024, Innocon’s Bill of Costs sought about $565,000 on a substantial indemnity basis or about $294,000 on a partial indemnity basis. Given the length and complexity of the trial, the judge accepted that these figures, while higher than Daro’s, were not inherently unreasonable. Taking into account the factors in the Rules, the Offer to Settle, and the reasonable expectations of the parties, the court concluded that the appropriate award for post-offer fees should be higher than a simple partial indemnity figure but less than Innocon’s substantial indemnity claim. It therefore fixed Innocon’s post-offer fees at $400,000, plus HST.

Because Innocon had discontinued its own claim and Daro was entitled to $25,000 on that portion of the case, the judge also adjusted Innocon’s costs to ensure it did not recover for time spent pursuing its own action. Having fixed Daro’s costs of Innocon’s claim at $25,000 inclusive of HST, the judge reduced Innocon’s costs by that amount. As a result, the total amount payable by Daro for Innocon’s costs of defending the Counterclaim was set at $675,000 plus HST.

The court then turned to Innocon’s claimed disbursements of $243,310.86 (excluding HST), much of which related to expert evidence. Almost half of that amount was attributable to Dr. Thomas ($114,100), an expert who died before trial, requiring Innocon to retain a replacement expert, Dr. Carballosa. Daro then incurred additional costs to respond to the new expert evidence. While the court recognized that this sequence of events was unfortunate and could not have been prevented, it was not prepared to require Daro to pay for Dr. Thomas’s fees. The judge concluded that it was sufficient that Daro had to bear its own additional costs in responding to Dr. Carballosa, and he disallowed Innocon’s claim to be reimbursed for Dr. Thomas’s expenses, with a small further reduction of $1,500 for other minor objections related to Dr. Thomas.

Daro also objected to Innocon’s disbursements for its accounting expert, whose total came to $19,423.59 and whose report was ultimately not used at trial. The court accepted that the report had been prepared to respond to Daro’s damages claim and found that it was a reasonable expense in the circumstances. The fact that Innocon did not ultimately need to call that expert did not render the disbursement unreasonable. In the end, the judge fixed the disbursements payable by Daro to Innocon at $125,000 plus HST.

Policy terms and clauses

In the material before the court on this costs endorsement, there is no discussion of insurance policy terms, contractual clauses of an insurance policy, or other policy wording. The decision focuses on the factual and procedural history of the litigation, the competing claims and Counterclaim, and the legal principles governing cost awards. Any policy terms or clauses that may have been relevant to the underlying commercial relationship are not discussed in this particular decision.

Outcome and monetary orders

The combined effect of the trial judgment and this subsequent costs endorsement is that Daro’s Counterclaim was dismissed after a lengthy trial, while Innocon’s original claim was discontinued before trial commenced. On the costs front, the court recognized Daro’s success on the discontinued Innocon claim by awarding it a lump sum of $25,000, including disbursements and HST, for that component of the litigation. At the same time, the court recognized Innocon’s success in defeating the Counterclaim by ordering Daro to pay Innocon costs of the Counterclaim in the amount of $675,000 plus HST and to reimburse Innocon’s disbursements in the amount of $125,000 plus HST. Because HST on these amounts is not quantified in the decision, the exact net total in Innocon’s favour cannot be determined from the text alone.