October 15, 2021
Litigation Lenders Beware of Potential Adverse Cost Awards
By Alexander Soutter
A recent decision from the Ontario Superior Court of Justice may put litigation lenders on edge. In Davies v The Corporation of the Municipality of Clarington, 2021 ONSC 6449, Edwards RSJ considered a motion to hold non-party litigation funders jointly responsible for a cost award exceeding $3.4 million. Though the motion was refused, it is clear that in some circumstances litigation lenders may be liable for cost awards. Edwards RSJ also arguably increased the scope of loans that, when made to a class action member, may require court approval.
Background to the Zuber action
This action is a class action arising from a train derailment in 1999. Following a common issues trial lasting 47 days, all of the class members’ claims were resolved save for those of Mr. Zuber, who ultimately sought damages of $10 million. His trial began in September 2014 and took 106 days to complete. Judgment was rendered in July 2018 and Mr. Zuber was awarded damages of $50,000 (this decision, reported at 2018 ONSC 4370, is under appeal).
As it turns out, the award of damages was significantly less than amounts offered by the defendants to settle the claim. Further, during the course of the litigation it was revealed that Mr. Zuber had taken more than $500,000, plus interest, in funding from 4 lenders. Some of the funding agreements were expressly for litigation disbursements, others were expressly for “personal expenses”. Notably, Mr. Zuber’s indebtedness to these lenders was not contingent on his success in the litigation.
Given the ultimate quantum owed to the litigation lenders, however, Edwards RSJ described a Catch-22: Mr. Zuber may have needed the litigation funding in order to pursue his claim, but as the outstanding amount of the loan grew, the potential for resolving the claim shrank. (paras 19-22).
The defendants claimed $3.4 million from the litigation funders
Following the trial, the defendants sought to recover over $3.4 million in costs from those litigation funders. They relied on two possible sources of jurisdiction for such relief: s.131(1) of the Courts of Justice Act, and the Court’s inherent jurisdiction.
Section 131(1) of the Courts of Justice Act: Edwards RSJ cited the test for granting costs against non-parties as articulated by the Ontario Court of Appeal in 1318847 Ontario Limited v Laval Tool & Mould Ltd, 2017 ONCA 184. Discretion to award costs against a non-party arises where (a) the non-party had status to bring the action, (b) the named party was not the true litigant, and (c) the named person was a “person of straw” put forward to protect the true litigant from liability for costs (para 59). The litigation funders did not meet that test (para 60).
Inherent Jurisdiction: Even where the “person of straw” test is not met, the Court retains the inherent jurisdiction to award costs against a non-party. In such circumstances, the non-party must have initiated or conducted the litigation in such a manner to amount to an abuse of process. This fount of jurisdiction must be exercised “sparingly and with caution” (paras 60-61). In one example noted by Edwards RSJ, the non-party had engaged in “fraud and gross misconduct” in the course of the litigation. Edwards RSJ did not accept that the litigation funders had acted in a way that would support an exercise of the court’s inherent jurisdiction to award costs against a non-party (para 67).
Further discussion regarding potential liability of litigation funders
Though having disposed of the motion, Edwards RSJ made additional comments regarding claims that non-parties should be liable for costs:
- Opposite parties should put a litigation funder on notice of their jeopardy as soon as the opposite parties become aware of the funding (para 70). Despite this guidance, Edwards RSJ found that the litigation funders had sufficient notice in this case, where they only learned that costs were sought against them after the trial judgment was rendered (para 71);
- Even where a loan to a class member is a “true loan agreement”, the loan may require court approval if the class member becomes the de facto representative plaintiff (para 85). Edwards RSJ characterized a true loan agreement as one where there is no provision requiring the lender to indemnify the representative plaintiff nor any provision entitling the lender to a share in the proceeds of the class action (para 92). In this case, Mr. Zuber became the de facto class plaintiff because he was the only claimant who had not settled their claim; and
- Where a claimant intends on recouping interest on litigation funding as a disbursement, they should disclose the details of the loan to the other party by including these documents in the party’s affidavit of documents under Schedule “B” (documents disclosed but not produced given claims of privilege) (paras 109-110).
It is also clear from the decision that Edwards RSJ viewed the interest rates at issue (18-29%) as having a negative impact on access to justice and on the potential for settlement (see, for example, paras 115-116). Though the litigation funders were not held liable for the defendants’ costs in this case, Edwards RSJ certainly questioned whether the funding would have obtained court approval, and left open the door for potential claims against litigation funders in other cases.