Who’s footing the bill? Court of Appeal upholds the narrow circumstances for holding a non-party litigation lender liable for costs
The Court of Appeal of Ontario’s recent decision in Davies v. Clarington (Municipality) highlights that defendants may not be able to recoup their costs from non-party litigation lenders. In this instance, the Court confirmed that the lenders financing the plaintiff’s litigation were not liable to pay the significant costs awarded to the successful defendants.
Background
Mr. Zuber was the only outstanding claim in a broader certified class action brought by passengers who were travelling on a Via Rail train when it collided with a stopped tractor-trailer. Mr. Zuber sought $50 million for his claim.
Certain lenders (distinct from litigation funders) separately made high-interest loans to help finance Mr. Zuber’s individual assessment of his damages. The loans in this case preceded the enactment of section 33.1 of the Class Proceedings Act (CPA), which now governs the requirements for court approval of third-party funding agreements. Mr. Zuber did not obtain court approval of his litigation loans.
Before trial, he rejected an offer of $500,000, at a time when the loans (with interest) significantly exceeded that amount - meaning, if Mr. Zuber accepted the defendants’ offer, it would have left him with a net loss.
After a lengthy trial, he only recovered $50,000. The defendants were awarded costs against Mr. Zuber of more than $3.4 million, which he could not, or would not, pay. The defendants sought an order that the lenders, non-parties to the litigation, pay the costs awarded against Mr. Zuber.
Trial decision
The trial judge acknowledged that he had discretion to order costs against a non-party under the Courts of Justice Act, or as part of the court’s inherent jurisdiction. However, he was not prepared to do so, in this case, because it did not meet the limited circumstances outlined in 1318847 Ontario Ltd v. Laval Tool & Mould Ltd:
- The non-party had status to bring the litigation, was the true litigant, and put forward the named party as a person of straw to protect the true litigant against liability for costs, or
- The non-party initiated or conducted the litigation in such a manner as to amount to an abuse of process.
The trial judge observed that Mr. Zuber’s loans, which resulted in excess debt over the defendants’ offers, were a “massive impediment” to settlement (along with his own unrealistic expectations). Nevertheless, the loan agreements did not provide that the lender would indemnify him for any costs awarded against him, did not give the lender a share of any monetary award or settlement that Mr. Zuber might obtain, and did not give the lenders direct control over the litigation or the acceptance of any settlement. Certain loans were repayable regardless of whether his claim succeeded.
The defendants appealed the decision, arguing that the trial judge erred in confining his analysis of the abuse of process doctrine to situations where the non-party directly controls the litigation. In their view, the lenders’ business decision to advance loans with uncapped compound interest exerted influence on Mr. Zuber and his counsel, such that their involvement should have been seen as “conducting” the litigation within the meaning of Laval Tool.
Appeal decision
On appeal, the Court rejected the arguments advanced by the defendants and ultimately upheld the trial judge’s decision.
The Court held as follows:
- First, the mere fact that a loan’s principal is used to pay for unsuccessful litigation should not render the lender liable for the costs of that litigation, absent evidence that the lender exercises control over the conduct of the litigation in a manner that constitutes an abuse of process.
- Second, the lenders could not be considered the cause of Mr. Zuber’s refusal to accept the settlement offers, despite the high rates of compounding interest on the loans that contributed to Mr. Zuber’s indebtedness.
- Third, Mr. Zuber should have obtained court approval for the loans (as required by the common law, and now by section 33.1 of the CPA) and, if he had, the loans would not have been approved by the court because they limited access to justice. However, this ultimately did not relate to the question of whether the lenders controlled the litigation.
Key takeaways
The Court’s decision reflects the narrow circumstances under which a court will exercise its discretion to order a non-party to pay costs. However, this does not mean lenders are immune if the conduct falls within the parameters set out in Laval Tool.
Parties obtaining funds to pursue litigation should be independently advised and consider alternatives, while those on the opposing side should consider proactively addressing any circumstances where they are aware of funding that has not been court-approved pursuant to section 33.1 of the CPA, to avoid the circumstances that ultimately arose in Davies.
Section 33.1 of the CPA now requires that all third-party funding agreements be court-approved. To obtain approval, the court must be satisfied of certain factors, including that the agreement (and the indemnity for costs and amounts payable to the lender under the agreement) is fair and reasonable, and that the lender is financially able to satisfy an adverse costs award in the proceeding, to the extent of the indemnity provided under the agreement.