There is an article in today’s Toronto Star that talks about the concern of school boards regarding what appears to be a growing number of claims against them in Small Claims Court. Is this really a concern? I believe that it is and that it is not only a concern for school boards or large institutional organizations, such as banks, but it is also a concern for your small business. Why is that the case? A few reasons.
The first is that, as of January 1 of this year, the amount that can be claimed in Small Claims Court is now $25,000. It’s not that $10,000 was an insignificant amount, but many defendants took the approach (quite reasonably) that if their exposure was only $10,000 plus costs then they would not hire a lawyer to represent them. Or, alternatively, they kept the lawyers out until the matter got to the trial stage in order to save money for the steps before the trial. Now small businesses can face a claim of $25,000 plus interest plus costs and that amount is suddenly requiring business owners to reconsider whether they should get a lawyer involved from the beginning of the case – with the increased amount of money that has to be paid on legal fees.
The second reason is that the costs of filing a lawsuit in Small Claims Court are still relatively nothing – it only costs $75. Now, one immediately has to put this into some perspective because the cost of filing a Statement of Claim in the Superior Court is only a little more than double that cost at $181. But, when combined with the third reason, the small amount’s impact becomes more noticeable.
The third reason is the fact that Rule 13 of the Rules of the Small Claims Court were changed in 2006 for settlement conferences. Before that time, settlement conferences were not mandatory and many self-represented plaintiff’s did not think about settlement conferences. As of 2006, the rule was changed to make settlement conferences mandatory for all claims. The result is not only additional costs (at least in terms of time or productivity lost for businesses in having to attend the conferences) but also the fact that, when combined with the second reason, a plaintiff now needs only to pay $75 and he/she/it gets a chance to haul a small business before a judge who will try to put pressure on the small business (and, in fairness, on the plaintiff as well) to settle the claim. If nothing else, that’s $75 to easily “roll the dice”. And what happens if the matter doesn’t settle? The plaintiff does nothing, eventually a notice dismissing the claim is sent and the defendant gets to go after the plaintiff for costs thrown away. Oh, and that’s where the fourth reason kicks in.
In 2007 the Osborne Report recommended, among other things, increasing the judgment amount from $10,000 to $25,000. However, Justice Osborne expressly found that there was no need to change the method by which costs are awarded in Small Claims Court. The costs regime is governed by a combination of Section 29 of the Courts of Justice Act (which caps the costs at 15% of the amount sought in the claim – so, a maximum of $3,750 for a $25,000 claim) and some Rules – mainly Rule 19 which provides for quite small amounts for fees. For example, $50 for the cost of preparing and filing pleadings. However, if you use a process server to file your defence, that will easily run you $30 (that’s not a criticism but a statement of fact) so the most you can get reimbursed on whatever legal fees you have to pay to draft and revise and finalize the Statement of Defence – $20 or less. Meanwhile, Rule 13.10 provides that unless the Court determines that there are special circumstances, the costs of a settlement conference is not to exceed $100.
So, let’s look at a scenario where someone sues your small business, forces you to defend and then takes the matter to a settlement conference, the matter doesn’t settle and the plaintiff is convinced to let the matter just die and eventually the claim is dismissed as being abandoned. What has it cost the plaintiff in terms of “hard” costs? The $75 fee to have the Statement of Claim issued. IF, and only if, the judge at the settlement conference orders that costs are to be paid (which is a rare event), then we have an additional $100. Then we have the costs which can be awarded for preparing and filing the defence – $50 maximum. And that’s the amount that you will get, $150, IF you go to the trouble of going to the court and asking for your costs to be paid. Most people wouldn’t even bother. With all due respect to Justice Osborne and his report, the failure to modify the costs system for Small Claims has left a huge hole in the system and is now, in part, why we see the increase in Small Claims Court claims.
The fifth reason is that not only do you not need a lawyer to have a claim in Small Claims Court (technically you don’t need one either in Superior Court or the other courts), but the rules and the system are geared towards helping people “do it themselves”. That is not a bad thing at all. But the simpler system also contributes to the number of people who have less than meritorious claims bringing those claims forward when a lawyer’s assistance might have shown them that their claims are doomed to fail for whatever reason.
These five reasons, combined with other lesser reasons, have contributed to the increase in the number of people willing to “roll the dice”, “take a run”, whatever phrase you wish to use. While I have gone on rants in the past about one item or another, this is NOT a rant against the Small Claims Court system. It has its faults, no question. However, if there was a perfect system for dispute resolution, then there probably wouldn’t be a need for that system because we would also have found a way to avoid the disputes in the first place. Moreover, every one of the changes that were made over the years were made for perfectly laudable reasons. The point of this post is to show how a convergence of the different rule changes, some taking place recently, some in 2006, some going back for decades, appear to stand now for the possibility that your small business could face more litigation than in the past – with most of it taking place in the Small Claims Court for $25,000 or less.
How can you avoid or reduce this effect? One is to have your standard contracts, purchase orders, etc. include alternative dispute resolution clauses – for example, any disputes under $25,000 have to go to arbitration. Another way could be to provide for shorter limitation periods (for an amount of time less than two years) - so that if the plaintiff doesn’t sue in time you can bring a motion to have the claim dismissed. But you have to remember that whatever you do you have both benefits and detriments. For the two examples, the benefits are to avoid the lawsuit in Small Claims Court or to quickly kill the claim. The detriments are, respectively, that with arbitration you can have severely limited appeal rights in some cases and if the limitation period applies to all parties then you could also be caught with more restricted deadlines if you want to sue. As a result, any changes to your documentation to avoid or reduce the risk of being caught in this growing trend to sue in Small Claims Court should be discussed with your lawyer to ensure that any “positive” changes you make don’t find a way to backfire on you.
Something to think about.