The costs judgment in Guiliani v. Region of Halton (2011 ONSC 5119), handed down August 31st, followed a trial in February 2010 concerning injuries incurred in a motor vehicle accident. The damages awarded were $375,000, however the costs and disbursements incurred by the Plaintiff's counsel totaled approximately $788,000. Murray J. was critical of the amount of costs, however of particular note are the judge's consideration of a loan which the Plaintiff had obtained from Lexfund Inc. to finance disbursements.
The loan was taken out on November 15, 2009, for $150,000. Repayment was contingent on success at trial. The interest rate was 3.5% compounded monthly (an effective annual rate in the region of 50%). There was an additional underwriting fee of 7.5% on the amount advanced that was added to the principal debt. Also, (despite the proximity to trial) the agreement provided for a penalty if the loan was repaid within 24 months from drawdown. According to the Plaintiff's counsel, the agreement required repayment of $379,625.71. If this was as of the date of the costs Judgment, the effective annual interest rate would have approached 85% (and if any earlier date, be higher still). Perhaps unsurprisingly, the amount claimed on taxation was significantly less ($92,734.26 – stated to be owing as of November 2010). Given the effective annual rate on this amount is 59.53% (by the authors' calculations), it may have been chosen specifically to fall below the Criminal Code rate (60%). Regarding the rate, the Judge commented that "[the loan was] in effect a contingency arrangement which allows the lender to make huge profits from the proceeds of litigation rather than from a commercially normative interest rate on a risky loan".
Murray J declined to rule on whether the loan agreement was champertous. It is not clear from the judgment whether that had been argued by the Defendant, but the Judge did note, obiter, that Courts have taken into account excessive fees as one of the factors to be considered in determining whether third party funding of litigation is champertous, and if so, it may be that the loan at issue amounted to champerty and would be unenforceable for that reason alone.
In addition, while the defendants argued the effective rate exceeded the Criminal Code rate, the Judge declined to decide that issue, holding "[the financier was] not on trial before me for violating the Criminal Code".
The issue of recovery of the interest payment turned on the less esoteric argument of whether the disbursement was reasonable in assessing costs payable by the Defendant under the Ontario equivalent of British Columbia Rule 14-1(2). Approaching it under this analysis, Murray J. held:
"I am in complete agreement with the submissions of Defendants' counsel that: "this Court should not reward, sanction or encourage the use of such usurious litigation loans, which in this case has interest provisions that are arguably illegal, otherwise such loans will be seen to be judicially encouraged and could become a common-place tactic." I agree that an award of interest in this case would likely have an adverse impact on other Defendants' decisions to proceed to trial or to Appeal. I think the Defendants' counsel is correct in stating that access to justice is a two-way street. As I have indicated above, to award interest as requested by the [Plaintiff's counsel] would not facilitate access to justice and would undoubtedly bring the administration of justice and to disrepute."
Murray J. thus disallowed the interest claim in its entirety (as opposed to substituting a lesser amount). Curiously, the judge did allow pre-judgment interest on the allowed disbursements – a controversial interpretation of the Ontario statue, and the opposite finding to current BC case law on the Court Order Interest Act (see Moore v Dhillon 1992 CarswellBC 1453 at para 437).
An argument raised in other cases in which interest was awarded (e.g., Bourgoin v. Oullette (2009) 343 NBR (2d)) has been the need for finance in order to facilitate access to justice. The Plaintiff had not provided any Affidavit evidence to support such assertion, although did make that argument. On the topic, the judge had held that the financing terms imposed were counter to the notion that the loan agreement facilitated access to justice:
"The interest rate on the loan obtained by the Plaintiff for disbursements is unconscionable. It is turning the world on its head to assert, as does [the Plaintiff's counsel] that this is an access to justice issue and that ordering interest payments on the Lexfund [sic] is reasonable. ..."
This is a scathing criticism of the terms of the loan obtained, in circumstances where other such loans with high interest rates have been allowed (e.g. Bourgoin v. Oullette – 32.9% effective annual interest rate). Where the tipping point falls such that the rate renders the loan agreement champertous, remains to be seen. The fact that a lesser sum than owing was pursued is an intriguing development. It will be interesting to see what steps the litigation finance industry may take in response to this decision, given the obvious advantage to it of borrowers' ability to recover the interest charge from defendants (following success at trial), to be balanced against commercially enticing rates of return where the financing lacks traditional security of repayment.
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