Litigation loans have become increasingly prevalent as civil proceedings continue to remain costly. The recent decision of the Superior Court of Justice in Davies v. The Corporation of the Municipality of Clarington has important implications for the potential of future cost awards against litigation loan companies in the class action context.

In Davies, the Defendants sought to recover a cost award (ordered against the Plaintiff) of more than $3,434,000.00 from four litigation loan providers, who had advanced funds to the Plaintiff or his counsel throughout the course of the litigation. Additionally, the Plaintiff sought to recover the accrued interest on the litigation loans as a disbursement.

The Defendants advanced several arguments in support of their contention that the litigation loan providers should be responsible for the Defendants’ costs, including the following: a) the litigation loans required court approval, pursuant to s. 33.1(2) of the Class Proceedings Act (“CPA”); b) the court has jurisdiction to award costs against non-parties in appropriate circumstances, pursuant to s. 131(1) of the Courts of Justice Act; c) the litigation loans had impeded settlement of the action; and d) the loan provider agreements were abusive and champertous. Regarding the issue of the interest on the loans, the Defendants argued that the Plaintiff had failed to obtain court approval of the loan agreements, which precluded recovery of the interest as a disbursement.

Justice Edwards held that the Court has jurisdiction to award costs against a non-party, either via its statutory discretion pursuant to s. 131(1) of the CJA or pursuant to the court’s inherent jurisdiction to order costs against a non-party who commits an abuse of process. He declined to order a cost award against the litigation loan providers as their conduct did not amount to an abuse of process. Further, he refused to order that the Defendants pay the accrued interest on the litigation loans as a disbursement because the Plaintiff had failed to obtain court approval of the litigation loans. In addition, the Plaintiff had not disclosed the existence of the litigation loans to the Defendants until the eve of trial – the defendants were not aware of the loans for almost 6 years.

Justice Edwards’ obiter reasons provide insight as to the approach that courts may take regarding litigation loans in the future:

First, he stated that defendants must provide notice to litigation loan providers if they intend to seek costs against the loan providers as non-parties. Justice Edwards emphasized that notice in this regard must be provided at the earliest opportunity. He also suggested that other means of financing litigation ought to be explored before resorting to a high interest litigation loan (including the option of seeking advance funding from the defendant).

Second, the CPA and caselaw dictate that representative plaintiffs and class counsels must first obtain court approval of litigation loan funding agreements. As a matter of fairness, plaintiffs must also disclose the existence of the agreements if they intend to recover the interest on the loans as a disbursement. Such disclosure could oblige defendants to pay for the accrued interest.

Third, defendants may be able to secure a cost award against litigation loan providers if they can demonstrate that the loan providers’ involvement was spurred by an improper motive, and that their involvement enabled them to possibly acquire some gain through the litigation.

Fourth, it appears that it will be challenging for plaintiffs to successfully claim interest on the litigation loan where the interest rates is particularly high.

Fifth, the Court will want to see evidence that the litigation loan was used to fund the litigation and not some other purpose.

As third-party funding and the cost of disbursements remain alive issues in litigation and access to justice, Davies signals the importance of transparency and document disclosure by all parties involved.

Thulasi Kandiah is an associate at the firm and author of this blog. If you have a question about this decision or are facing a similar issue on a file, please contact Thulasi at 416-777-5231.