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In Davies v. Clarington (Municipality), 2023 ONCA 376, the Ontario Court of Appeal reached the reasonable conclusion that non-party lenders with no involvement in directing litigation are not liable to pay an adverse costs award that a plaintiff will not pay. 

On this appeal, the Court provides a helpful statement of the law on awarding costs against non-parties; and in so doing, highlights the need for court approval of such agreements, which may limit access to justice (depending on the terms of the loan) in some circumstances instead of improving it.

The underlying class action in Davies related to a train crash. In November of 1999, a Via Rail train travelling between Montreal and Toronto collided with a tractor-trailer that was stopped on the railway track and the train derailed. In 2006, the class action settled for $252,000 in damages and $330,000 in costs, resolving all claims but for two. One of these outstanding claims was resolved the following year; the other claim went on to an individual damages trial that went on for a staggering 106 days and is the subject of this decision.

At the trial of his individual damages, the claimant Mr. Zuber sought $50 million. However, after extensively litigating his claims, he recovered only a fraction of that amount, a mere $50,000. Finding that Mr. Zuber’s claim was conducted in a way that was “a poster child for what our civil justice system can no longer accommodate”, the trial judge exercised his direction to award the Via Rail defendants more than $3.4 million in costs, payable by Mr. Zuber.

It was revealed during the trial that Mr. Zuber’s pursuit of his damages claim was funded by a group of third-party lenders. The lenders made loans with a principal amount of over $400,000, bearing interest, some at compound rates of up to almost 30% per year. As time passed, significant interest accrued on the loans, and the quantum of interest impacted Mr. Zuber’s willingness to settle.

Indeed, prior to the trial, Mr. Zuber refused an offer to settle his claims for $500,000. This was purportedly because the amount owing to the lenders under his third-party loans was even more, and if he had accepted the offer, he would have come out at a loss. In any event, because it was common ground that Mr. Zuber could not or would not pay the $3.4 million costs award to the Via Rail defendants, those parties sought to recover the money from the lenders that financed his claim.

At the lower court, the trial judge found that the loans bore onerous rates of interest and did not advance the goal of access to justice, and that Mr. Zuber’s indebtedness for interest under the loans, coupled with his unrealistic expectations about his claim, were impediments to settlement. However, he declined to order the lenders to pay costs on the basis that they did not meet the test set out in 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd., 2017 ONCA 184.

Pursuant to Laval Tool, non-party costs are discretionary. They may be awarded in limited circumstances where either (1) 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 (2) the non-party has initiated or conducted the litigation in such a manner as to amount to an abuse of process. 

The second prong of the test was germane to Davies. On that consideration, the Court of Appeal held that the trial judge “carefully considered the terms of the loans, including that they did not give the lenders any share of the proceeds” and that the lenders “did not instigate or conduct Mr. Zuber’s litigation in a manner that constituted an abuse of process”, and therefore declined to award costs against them.

Importantly, the Court of Appeal recognized that there can be “many situations in which a party to litigation decides to incur debt to be able to meet the expenses of litigating a position which the party believes to be legitimate”. The mere fact that a loan is used to fund unsuccessful litigation does not render the lender liable. This makes sense because in many situations, meritorious claims cannot be pursued without an infusion of external capital—modern litigation is extremely costly, and when matters go to trial, legal services are at their most expensive because of the significant lawyer time that is expended.

The Court of Appeal reached the right result. However, that is not to say that there were real issues in this case that were not resolved. Namely, a perverse incentive arose where Mr. Zuber was inclined to pursue an unreasonable amount of damages because he did not want his individual claim to come out at breakeven or a loss. The Court was simply not in a position to regulate the concerns or practices around litigation lending on this appeal.

Court approval of all litigation funding agreements may be one solution to these problems. Such approval is generally required in the class action context but was not required for the purpose of funding Mr. Zuber’s individual damages claim. Courts ought to be able to examine all litigation funding agreements to determine, among other things, whether the rate of interest is so significant that it would be contrary to the interests of justice to allow the loan. Where the loan is so significant that it impacts the judgement and realistic expectations of litigants, the resolution of claims is less likely to occur. Here, that risk came to fruition.

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