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MacKenzie v. Rogalasky

The Recovery of Interest for Litigation Financing is not a Dead Issue – Counsel Needs to Change Tack and Focus on Recovery in Tort

November 21, 2014

On November 17, 2014, the British Columbia Court of Appeal rejected an appeal seeking the recovery of interest for a loan obtained by the claimant to pay for the cost of disbursements. The claimant borrowed money from a litigation financier to pay for the cost of their counsel’s disbursements and sought recovery of the interest. The B.C. Court of Appeal’s decision is the latest pronouncement on the issue concerning the recovery of financing costs in litigation and unfortunately contradicts a recent decision reached by the New Brunswick Court of Appeal in Leblanc v. Doucet, further adding to the growing number of conflicting decisions across Canada on this issue. Although it is tempting to say that the recovery of financing costs for loans used to finance disbursements incurred in litigation is a “dead issue”, there are very good reasons not to rush to this conclusion.

In MacKenzie, counsel claimed the recovery of interest as a disbursement in a cost assessment proceeding rather than developing a separate claim for the recovery of interest as a special damage in tort. Ironically, in seeking recovery as an assessable cost, counsel advanced arguments using “tort principles” to justify returning the client to their pre-litigation position, or alternatively arguing restitution as a justification for recovery. Interestingly, it appears that counsel did not specifically plead the recovery of interest in tort as a special damage in the statement of claim.

By framing the recovery of interest as a “cost” issue, counsel unnecessarily restricted the scope of inquiry to a determination of whether interest is an “assessable” cost. By claiming the interest as a special damage the individual circumstances of the client could be taken into account to develop the claim for recovery. Registrar Sainty, who heard the original motion in MacKenzie, described the cost issue as follows:

“The assessment of a successful party’s disbursements following an action is done by a registrar pursuant to the provisions of Rule 14-1(5) of the Supreme Court Civil Rules [Rules].

That provision of the Rules says:

(5) When assessing costs under subrule (2) or (3) of this rule, [and this assessment before me is under subrule (2) since it is an assessment of party and party costs] a registrar must

(a) determine which disbursements have been necessarily or properly incurred in the conduct of the proceeding, and

(b) allow a reasonable amount for those disbursements.

Therefore the issue before me is whether under that Rule interest on a loan taken to fund disbursements is, in and of itself, a disbursement that was “necessarily or properly incurred in the conduct of the proceeding.”

Later in her decision Registrar Sainty crystallized the difference between seeking recovery of financing costs in tort versus as an assessable cost in the following statement:

“Nor can it be said that the object of costs (as compared to damages for a tortious act) is to return a party to his pre-litigation status {underline added for emphasis} and thus interest ought not to be recoverable. Costs are not intended to provide full indemnity to a successful party and the successful party is only entitled to recover necessary or proper disbursements at a reasonable amount. In my view it cannot be said that interest on disbursements is a necessary and proper adjunct of litigation. It is simply one of those unfortunate matters that arose in the circumstances of this particular plaintiff and I find it is not reasonable that the plaintiff recover it.”

Her statement above differentiating recovery in tort, which is designed to return a party to their pre-litigation status, from the recovery of “costs”, which is derived from the indemnity principle in a loser pays system, is critical and paves the way for a better approach to seeking the recovery of financing costs incurred to pay for disbursements.

Framing the issue as a “cost’ issue rather a “tort recovery issue” takes the focus away from evaluating the claim as an access to justice issue. By claiming recovery of interest in tort as a special damage counsel makes the claimant’s personal situation the dominant issue, namely their financial difficulty and requirement to borrow funds as a last resort to pay for the disbursements required to advance their claim. This is much more preferable than having to argue that the cost is recoverable since it was “reasonable and properly incurred”. Although other courts have taken a more liberal “tort approach” to cost assessments (e.g. the aforementioned New Brunswick Court of Appeal in Leblanc v. Doucet) conflicting decisions across the country clearly indicate that Canadian courts have difficulty reconciling the traditional principle of costs, as a form of indemnity, from a “tort” based cost recovery model.

Not surprisingly, in the absence of a tort claim, the British Columbia Court of Appeal focused exclusively on the issue of whether the financing costs incurred by the claimant were “reasonable and properly” incurred,

“It appears to me that the purpose of permitting the recovery of disbursements in the context of a costs regime is to permit the recovery of those expenses that arise inherently and directly from the issues in the case which relate, as the appellants suggest, to the direction, management, or control of litigation and which pay for materials and services used to prove a claim or defence. These expenses arise directly from the nature and conduct of the allegations in a proceeding. By contrast, interest expenses do not arise from the nature of the allegations or the conduct of proceedings, they arise from unrelated causes including the financial circumstances of a party. In my view, as such, they do not fall within the meaning of the word “disbursements” in the context of a costs rule.”

Although one can criticize the British Columbia courts for taking such a narrow and restrictive view of this issue, they had no other choice. They were not presented with an opportunity to consider whether interest costs on litigation loans can be recovered in tort as special damages.

Counsel should be looking for the right case to test the tort principle of recovery. In doing so they may want to consider the following:

  • Ensure the claim for recovery in tort is properly plead in the statement of claim;
  • Demonstrate that the claimant was impecunious or was otherwise unable to pay for the cost of disbursements (or alternatively treatment, loans to fund living expenses are more difficult to justify);
  • Demonstrate that the inability to pay was primarily caused by the deterioration in the claimant’s financial position that arose as a result of the defendant’s negligence causing the accident that has prevented the client from working or otherwise sustaining themselves financially (or that it exacerbated the decline in a claimant’s financial position) ;
  • Provide evidence that the claimant attempted to obtain financing from family, friends, banks and other traditional sources of finance before obtaining financing from a specialist litigation lender, or other non-traditional sources of capital (i.e. establish the market rate of borrowing); and
  • Provide evidence that the borrowed funds were used exclusively to finance disbursements (or treatment where applicable) and were not used for any other purpose.

This approach allows counsel to advance an access to justice argument that forces the court to look at the individual circumstances of a client and consider compensation that will return him or her to a similar position pre-litigation. This is preferable to arguing that costs are “reasonable and proper” in a cost assessment proceeding after the litigation has concluded where the individual circumstances of the client are not the issue.

It remains an open question whether courts will allow the recovery of interest in a situation where funds are borrowed from counsel offering legal services through a contingency fee agreement. In this case a defendant may argue that disbursements are the responsibility of counsel, since counsel is compensated to bear the financial risk of litigation through the contingency fee arrangement. Therefore, it could be argued the insurer should not be responsible for funding the working capital requirements of the claimant’s counsel. Similarly, where an expert finances a claimant’s disbursements by holding their account pending the resolution of litigation, it would be open to a defendant to argue that the expert has a financial interest in the litigation and therefore is not providing objective evidence.

The recovery of interest is not a dead issue.

It is time to focus on tort as the theory of recovery and find the “right” fact scenario to resuscitate the debate.

An annotation of decisions across Canada concerning the recoverability of interest in litigation can be found on our website.

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MacKenzie v. Rogalasky