Plaintiffs And Defendants Beware: The Trouble with Litigation Loans

CASE ALERT: Davies v. The Corporation of the Municipality of Clarington, 2021 ONSC 6449 (CanLII)

Impact on Defendants

In Davies, the remaining plaintiff Zuber was ordered to pay $3,434,000 in costs to the defendants.?Unfortunately for the plaintiff, he took out litigation loans totaling $500,000 but with accrued interest, this totaled more than $6,000,000! The defendants sought payment from the litigation loan providers on the basis that it was their loans that were the impediment to settlement and resulted in the trial of the action.?Justice Edwards, in finding that the non-party loan providers did not have to pay costs, did note the following:

• [99]???????Whether or not the loan agreements meet the criteria laid down by Perell J. in?Houle, in my view is not determinative of whether the litigation loan providers are required to pay the Defendants’ costs. In my view, the determination of the litigation loan providers jeopardy to pay the Defendants’ costs rises or falls in relation to the determination of the court’s inherent jurisdiction to award costs against a non-party and the application of?s. 131?of the?Courts of Justice Act. I have already determined that on the facts of this case, this court is not prepared to exercise its discretion to award costs against the litigation loan providers. That said, in relation to any future cases that come before this court as it relates to the potential jeopardy of a litigation loan provider to pay the costs of a successful defendant, the criteria that I?reference above could be determinative of that issue.

Justice Edwards referred to the Court of Appeal decision in 1318847 Ontario Limited v. Laval Tool and Mould 2017 ONCA 184, (referred to as Laval).?Justice Edwards noted that:

• [59]?… the Court of Appeal determined that costs against a non-party may be awarded where the non-party is a “man of straw” and the non-party is the “real litigant”. The person of straw test is met where the following elements are found by the Court, specifically:
• a)???the non-party has status to bring the action;
• b)???the named party is not the true litigant; and
• c)???the named party is a person of straw put forward to protect the true litigant from liability for costs.

However, the “man of straw” test is not the only basis for an award against a non-party.?In Laval, the Court of Appeal held that the court has the inherent jurisdiction to order costs against a discretionary basis where a non-party initiates or conducts the litigation in such a manner to amount to an abuse of process.?The Court of Appeal was clear that the court’s inherent jurisdiction should be exercised “sparingly and with caution” when considering costs against a non-party.?For consideration of the application of said inherent jurisdiction, please refer to the decision in Marcos v. Lad,?2021 ONSC 4900.

Given my reading of the above, the amount loaned out may not be the determining factor in whether the court should or should not make an award of costs against a non-party litigation loan provider.?What will be relevant will be the actions of the non-party and that should be the focus if the defence will have any possibility of recovering costs.

Impact on Plaintiffs

In Davies, the action arose because of a railway accident.?The plaintiff sought to recover interest on the litigation loan, which was denied by the judge.

At para. 108 it was held that the?“… Plaintiff was not successful in the recovery of the accrued interest because the Plaintiff never disclosed the existence of the litigation loans to the defence until what was, in essence, the eve of trial.”

Justice Edwards opined that if the plaintiff intended to recover accrued interest on a litigation loan as a disbursement, fairness would dictate the disclosure of the details of the ligation loan to the defence. In fact, if the plaintiff needed the assistance of a litigation loan, the plaintiff might consider all other methods of funding the costs of a disbursement before committing to onerous interest costs like the type that was at issue. Justice Edwards rightly noted that although these loans assist in accessing justice, it can also represent a significant impediment to settlement and justice itself.

As noted at para. 110:

• Disclosure is at the heart of all litigation whether it is a civil, criminal, or family matter.?Some documents are subject to privilege and thus not producible. The loan documents that lie behind a litigation loan likely fall into that category. While the loan documents may not be producible, they nonetheless should be disclosed in Schedule B of a litigant’s Affidavit of Documents. Such disclosure will, at the very least, alert the defence to the existence of a litigation loan.?Actual disclosure to the defence of the litigation loan documentation could trigger potential exposure to the defence for accrued interest as a disbursement.

The court noted that in cases such as a motor vehicle accident (which this was not), the plaintiff might consider the possibility of an advance payment from the defendant. This would be one option in cases where liability is not an issue (the court did not reference an admission of liability per se) and the only issue is damages.?However, as was rightly pointed out at para. 114:

• The defence traditionally is reluctant to make an advance payment as it is argued the provision of the advance will only allow the plaintiff to continue the pursuit of the litigation. This typical response from the defence may continue to be the approach from the defence. However, if a plaintiff makes a request for an advance payment and it is refused, this court is left to speculate how future requests for the funding of litigation loan interest as a disbursement may be handled by the court. Where need can be demonstrated for a litigation loan; where an advance payment has been refused by the defence and where there has been disclosure to the defence?of the litigation loan details, one can?foresee possible successful requests by the plaintiff to treat litigation loan interest as a disbursement.

It must be stressed that the foregoing is obiter and, therefore, is not binding.?Furthermore, I am uncertain that this position would necessarily be shared by other members of the judiciary (for an alternative perspective please see Giuliani v. Region of Halton,?2011 ONSC 5119, at para.?56- 59).?That said, I believe that if there is any chance of recovering interest on a litigation loan the plaintiff would need to ensure that the existence of the loan is conveyed to the defence;?an attempt was made to secure an advance payment from the insurer if liability is not an issue; on a balance of probabilities, damages are likely to be awarded; the plaintiff can demonstrate that the litigation loan was necessary given their unique financial circumstances; the loan interest is not unconscionable; and the quantum of the loan is justified.??

The foregoing should make clear that recovery of interest, if possible, will depend on the unique circumstances of the case.?Thus, counsel for the plaintiff should consider taking the steps noted above before embarking on a litigation loan.?As well, counsel should make it clear that the client may not recover any interest on the loan as a disbursement and that if such a loan is obtained the plaintiff is doing so knowing full well that it will likely not be recoverable.

As a final comment, I never recommend litigation loans. If my client insists upon such a loan, I write to them advising why I do not recommend it and that if they wish to obtain such a loan, they should seek independent legal advice. The client must be fully aware of the implications to obtaining a litigation loan and the impact it could have on the resolution of their claim and the exposure to them personally.??