When litigation concludes, the question of who pays for the legal battle does not end with the judgment itself. Canadian courts operate under a foundational principle that distinguishes our system from many other jurisdictions: the losing party generally bears responsibility for a portion of the winning party's legal costs. This principle, known as cost shifting or the indemnity principle, exists to discourage frivolous litigation, encourage reasonable settlement, and partially compensate successful litigants for the expense of vindicating their rights through the court system. For business owners, sole proprietors, and non-profit operators across Canada, understanding how cost awards function represents essential knowledge because these awards can dramatically increase or decrease the financial stakes of any legal dispute.
The rationale behind cost awards traces back centuries in the common law tradition and serves multiple purposes that Canadian courts continue to recognize today. First, cost awards provide partial indemnification to successful parties who should not have to bear the full burden of legal expenses when they have done nothing wrong or when their legal position was correct. Second, cost shifting discourages parties from pursuing weak claims or mounting unreasonable defences because they know that failure carries financial consequences beyond simply losing the case. Third, cost awards encourage settlement by adding another layer of risk assessment to litigation strategy, prompting parties to evaluate realistically whether their position justifies the potential exposure to adverse costs. Fourth, the cost regime helps regulate conduct during litigation itself, as courts can and do adjust cost awards based on how parties behave throughout the process.