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Articles & Publications - Ontario CLC Member

March 2021

Litigation Loans and Adverse Cost Insurance

Van Krkachovski
Van Krkachovski,
Partner

Catherine Korte
Catherine Korte,
Partner

Michael Kennedy
Michael Kennedy
Partner

Ryan R. Taylor
Ryan R. Taylor,
Associate

by Van Krkachovski, Catherine Korte, Michael Kennedy, and Ryan Taylor
of McCague Borlack LLP

This paper provides detailed information across all Canadian jurisdictions regarding:

  • Whether interest from litigation loans is recoverable by the plaintiff in Canadian actions, and

  • What the impact is of adverse insurance on litigation across Canada.

LITIGATION LOANS IN CANADA

Litigation loans remain a relatively novel issue in Canada, with widespread intra-provincial disagreement on their treatment. Globally, however, they are becoming a staple feature, especially in the personal injury field, indicating their use and prominence will be a growing feature of our legal system in the coming years. Within a moderately brief period of time, public policy surrounding litigation loans, as well as their judicial treatment, has shifted toward their acceptance. It is becoming more widely accepted that third party litigation loans act to bolster the integrity of the justice system. However, it remains to be seen if Canada's judicial system will follow this course, as currently only Nova Scotia and New Brunswick Courts have held that the interest accrued on a litigation loan is recoverable.

The use of litigation loans, and the allowance to recover the interest on these loans as a disbursement, could increase access to justice for impecunious plaintiffs who are otherwise unable to fund litigation. This may be especially true for matters where plaintiffs' counsel requires their client to obtain a litigation loan at the outset of their retainer agreement. Litigation loans required at the outset of a retainer will mitigate the risks faced by plaintiff's counsel, in addition to increasing access to justice.

There are several lending agencies in Canada who provide litigation loans (i.e. CaseMark, Lifeline Litigation, and Nudorra Capital Loans). Their interest rates range from 15 to 24%. With these substantial rates, tort defendants in provinces which allow for the recovery of the accrued interest on these loans must consider the existence of a litigation loan as part of their strategy.

Is interest from litigation loans recoverable from the defendant(s)?

Alberta - Litigation loan interest is not recoverable as a disbursement, but the Court has been deliberate in leaving the door open for further discussion on the issue.

In Do (Next friend of) v Sheffer, 2010 ABQB 422, the Court declined to allow the interest on the loan to be recovered as there was no precedent in Alberta for this type of disbursement, nor was it contemplated by the Alberta Rules of the Court. Additionally, there was no evidence before the Court as to the appropriateness or necessity of the loan. The Court left open the door for consideration when there is evidence of a party taking out a litigation loan because they are impecunious.

In Klychak v Samchuk, 2012 ABQB 85, the Court relied on Do v Sheffer in stating that “It may well be that, in appropriate circumstances, the cost of third party litigation funding is itself a recoverable cost”.

In Park Avenue Flooring Inc. v EllisDon Construction Services Inc., 2016 ABQB 332, a corporate plaintiff sought to recover the interest on their litigation loan, relying on the New Brunswick Decision, Bourgoin. The Court distinguished the case finding that here there was no information about what the funds were used for.

...refusing ... as it would prevent cost awards from being predictable and consistent...

British Columbia - Litigation loan interest is not recoverable.

In the case Mackenzie v Rogalaski and Chandi (Guardian ad litem of) v Atwell, 2014 BCCA 446, the Court held that the interest on litigation loans is not recoverable as a disbursement, as the term disbursement refers to expenses arising directly from issues in the case, not the circumstances of the litigant. Further, the Court held costs are only recoverable through the legislation, and the legislature did not intend to make recovery of interest expenses recoverable where they were not recoverable generally.

Manitoba - There is currently no case law regarding litigation loan interest being recoverable for Manitoba.

New Brunswick - If a litigation loan is “necessarily incurred”, loan interest will be a recoverable disbursement.

In Bourgoin c Oullette, 2009 CarswellNB 207, the Court cited the statement of Chief Justice Beverly McLachlin, as she then was, in a presentation where she highlighted the financial constraints faced by middle-class Canadians who cannot afford the cost of legal services, denying them access to justice. The Court awarded the plaintiff the interest on the loan.

In LeBlanc v Doucet, 2012 NBCA 88, the Court relied on Bourgoin finding again that while there is no rule expressly allowing for the recovery of interest on litigation loans, the New Brunswick Rules of Court generally encompassed all “necessarily incurred” disbursements that were reasonable.

Newfoundland and Labrador - Litigation loan interest is not a recoverable disbursement.

In Cabana v Newfoundland and Labrador, et al (2016 NLCA 75), the Court adopted the ruling from MacKenzie v Rogalasky, 2014 BBCA 446, refusing to allow the interest on litigation loans to be recoverable as a disbursement as it would prevent cost awards from being predictable and consistent across similar cases.

Nova Scotia - Litigation loan interest is a recoverable disbursement if it was necessary for litigation to proceed.

In National Bank Financial Ltd v Potter, 2014 NSSC 264, the Court held that litigation loans are recoverable as disbursements when there is evidence that a loan was necessary in order for the litigation to proceed or continue.

Ontario - Current case law does not allow for the principal, nor interest accrued on litigation loans, to be recoverable.

The Court leaves this decision open for discussion if a case arises where...

The Court leaves this decision open for discussion if a case arises where the defendants are aware of the presence of the litigation loan, and if the plaintiff had requested Court approval for the loan.

In Mann v Jefferson, 2019 ONSC 422, the Court held neither the principal nor the interest on litigation loans is recoverable as damages as it is too remote and not reasonably foreseeable.

In Davies v The Corporation of the Municipality of Clarington et al, 2019 ONSC 2292, the plaintiff had obtained around $250,000 in litigation loans. By the date of the trial, the principal and accrued interest on these loans totalled over $3.1 million. The Court decided there was no legal basis upon which the Court could award the costs of the litigation loans and accrued interest. It reasoned the defendants were not aware of the loans until the trial, had no knowledge of any exposure to paying the interest on these loans, and the plaintiff did not seek approval for his loans. Given these factors, the Court determined it would be grossly unfair to make the defendants pay for the loans and interest.

Prince Edward Island - There is no case law determining whether litigation loan interest is recoverable.

In Fraser v Runighan, 2018 PESC 26, the Court did not rule on, but did not dismiss the option for litigation loans to be claimed as a disbursement.

Quebec - Litigation loans under the Companies' Creditors Arrangement Act are permitted if they are reasonable and fair. No case law determines whether litigation loan interest is recoverable.

In 9354-9186 Quebec Inc. v Callidus Capital Corp, 2020 SCC 10, the Supreme Court of Canada ruled that per the Companies' Creditors Arrangement Act, (RSC 1985 c. B-3) litigation funding can be approved by a Judge presiding over the Court proceedings if the Judge believes it is fair and reasonable.

Saskatchewan - The case law does not establish a mechanism for dealing with “litigation funding agreements” to finance indemnity or disbursements in the event of a failed lawsuit.

In Schneider v Royal Crown Gold Reserve Inc., 2016 SKQB 278, the Court held there are no public funding agencies that would provide indemnity and disbursement financing for parties in the event their action is lost. This results in the use of third parties for such agreements.


IMPACT OF ADVERSE COST INSURANCE ACROSS CANADA

Similar to litigation loans, adverse cost insurance has become more prevalent across Canada, particularly when it comes to actions involving personal injury. Adverse cost insurance provides insurance to a party if their legal action fails, and they are ordered to pay costs to the successful party within the litigation. (Also known as: trial insurance, after the event or ATE insurance, and legal expense insurance.)

Adverse cost insurance becomes important in the face of an unsuccessful lawsuit when there is a contingency agreement between the plaintiff and their counsel. In this situation, the plaintiff is usually required to pay at least a portion of the successful party's legal costs, as well as owing their own lawyer the disbursements. Adverse cost insurance provides coverage to address these situations.

What is the impact of adverse insurance across Canada?

Alberta - There is currently no legislation or case law that has considered the impact of adverse cost insurance in Alberta.

British Columbia - The costs associated with insurance is not a proper or necessary disbursement incurred in conducting litigation and is not recoverable.

In Wynia v Soviskov, 2017 BCSC 195, the Court held that the cost of an insurance policy protecting a plaintiff from adverse costs/disbursements is not recoverable, as the disbursement must have been necessarily or properly incurred in the conduct of the proceeding. The costs of an adverse costs/disbursements insurance policy do not arise from the exigencies of the litigation and do not relate directly to the direction, management, or control of the litigation used to prove the claim against the defendants.

In Clubine v Paniagua, 2018 BCJ No 1315, the Court held that the adverse cost insurance purchased by the Plaintiff prior to trial strongly weighed in favour of the defendant's cost application, accepting the argument that such insurance effectively undermines the intent of the offer to settle [Rule 9-1] and allows the Plaintiff to avoid punitive cost consequences of the rule.

Manitoba - There is currently no legislation or case law that has considered the impact of adverse cost insurance in Manitoba.

New Brunswick - There is currently no legislation or case law that has considered the impact of adverse cost insurance in New Brunswick.

Newfoundland and Labrador - There is currently no legislation or case law that has considered the impact of adverse cost insurance in New Foundland and Labrador.

Nova Scotia - There is currently no legislation or case law that has considered the impact of adverse cost insurance in Nova Scotia.

Ontario

There is conflicting case law as to the obligation to produce an ATE insurance policy.

Producing the Policy

There is conflicting case law as to the obligation to produce an ATE insurance policy. If the plaintiff is the policyholder, the Court has held this policy needs to be produced to the defendants: Fleming v Brown, 2017 ONSC 1430; r. 30.02(2) Rules of Civil Procedure RRO 1990, Reg. 194.

However, if the policyholder is the plaintiff counsel's firm, the policy does require production: Jamieson v Kapashesit et al, 2017 ONSC 5784; followed in James v McGuire, 2020 ONSC 914.

Priority to Policy Proceeds

In Peter B. Cozzie Professional Corporation v Szot, 2019 ONSC 1274, the funds available under an ATE insurance policy did not cover both the plaintiff's disbursements, and the costs. The plaintiff authorized the funds to cover first the disbursements, followed by the costs. The defendant challenged this, arguing they were entitled to priority over the ATE policy proceeds, but the Court rejected this argument as it lacked a legal basis.

Recovery of Premium

In Little v Floyd Sinton Limited, 2018 ONSC 3165 and other earlier cases, (Valentine v Rodriguez-Elizalde, 2016 ONSC 6395, and Markovic v Richards, 2015 ONSC 6983) the Court held ATE insurance policy premium were not assessable disbursements. However, in Steward et al v Wood et al, 2019 ONSC 3931, the Court held the ATE insurance policy premium was a compensable disbursement, as it related to an access to justice issue.

It is clear there is conflicting case law on whether the policy is an assessable disbursement, seemingly turning on the access to justice issue.

Quebec - Adverse cost insurance is well established in Quebec, but there is no discussion as to any obligations on the plaintiff if they have obtained this type of policy. A typical policy covers the opponent's adverse costs and the plaintiff's own disbursements in the event of a loss.
Insurers who provide adverse cost insurance must obtain a license from the relevant authority.

Prince Edward Island - There is currently no legislation or case law that has considered the impact of adverse cost insurance for Prince Edward Island.

Saskatchewan - There is currently no legislation or case law that has considered the impact of adverse cost insurance in Saskatchewan.


This white paper was presented at CLC's seminar of the same title. Christopher Potenza of Hurwitz Fine presented the USA perspective.

This information is also available in chart format for download in both Canadian & USA versions.


 
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