Recoverable disbursements: Who should pay for the plaintiff's litigation funding costs?

Whether during settlement negotiations or at the end of trial, a successful plaintiff will seek to recover some or all of the costs incurred in the course of the litigation from a defendant. As defence counsel, it is essential to ask whether all costs claimed by the plaintiff are actually recoverable disbursements that the defendant is required to pay for.

This article will explore whether the following two types of costs are recoverable disbursements in Ontario:

1. the interest on loans obtained by a plaintiff to fund the litigation (i.e. pay their lawyer); and
2. the premium paid by a plaintiff (or their counsel) for adverse costs protection insurance.

Interest on Loans to Pay Legal Fees

Originally seen primarily in the context of class actions, third party funding of individual actions has become more common place and may take the form of "litigation loans" used by plaintiffs to pay their lawyers to advance their claim. Importantly, an attempt may be made by the plaintiff to pass the cost of borrowing (the interest payable on the loan) onto the defendant as a recoverable disbursement.

The interest payable on a litigation loan does not fall within the prescribed list of compensable disbursements set out in Tariff A of the Rules of Civil Procedure. However, this is not the end of the discussion, as Tariff A contains a "catch-all" provision which affords the court the discretion to allow for a disbursement to be recovered where it was "reasonably necessary for the conduct of the proceeding".

Arguments in support of the recoverability of interest on litigation loans are primarily grounded in the need to provide access to justice. Simply put, a plaintiff will argue that the litigation loan (and corresponding interest cost) was reasonably necessary to allow the plaintiff to pay their lawyer's legal fees to proceed with the litigation and thus, is a recoverable disbursement.

While the possibility of awarding borrowing costs as a disbursement was implicit in the decision in Giuliani v. Region of Halton,¹ subsequent decisions on this point suggest that a court will not easily exercise its discretion to make such an award.

For example, in Poile v. Collins,² the plaintiff sought to recover the interest paid to a litigation finance company as a disbursement. The court could not "find it was reasonable for the plaintiff to expect the defendant to pay interest costs on a litigation loan" and accordingly, the court declined to exercise its discretion to allow the disbursement.³ Notably, in its decision, the court stated:

While costs cases do take the reasonable expectations of the parties, typically the losing party, in to consideration, encouraging an express inquiry to the ways and means of parties regarding costs, adds an unnecessary degree of complexity to the process leading to a costs determination. Inquiring if particular parties can "afford" to litigate, and creating an obligation for the opposing party to facilitate this would mean that in any civil litigation matter where one party becomes obligated to pay "costs" to another, these costs can include anything that permits the litigate to have "access to justice". This is a far too nebulous and loosely defined basis to approach the matter of costs.⁴

[emphasis added]

In Warsh v. Warsh⁵ (another case where the plaintiff sought to recover interest payable on amounts borrowed to pay her lawyers), Justice Lauwers warned:

A precedent that allowed interest on litigation loans to be recovered as a disbursement could create a perverse incentive on litigants to borrow to finance lawsuits. This would have the effect of reversing s. 128 of the Courts of Justice Act for practical purposes by making a form of pre-judgement interest payable on costs.

...

In my view the policy implications of awarding interest on litigation costs as a disbursement are significant and I decline to exercise my discretion to make such an award where ... a more fulsome policy development process is plainly required."⁶

Notably, section 128 of the Courts of Justice Act provides that a person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest at the prejudgment interest rate. However, an award of pre-judgement interest on a costs award is specifically excluded.⁷

Premiums for Adverse Costs Protection Insurance

More recently, a question has arisen with respect to the recoverability of premiums for insurance products called after-the-event ("ATE") insurance (also known as adverse costs protection insurance) or legal cost indemnities.⁸ These products can be purchased by either a plaintiff or their counsel to protect against an unfavourable outcome at trial in the form of an adverse costs award including defence legal fees.

Like interest on litigation loans, the premiums paid for ATE insurance or similar products also do not fall within the prescribed list of compensable disbursements set out in Tariff A of the Rules of Civil Procedure. Accordingly, the court's exercise of the discretion implied in Tariff A is required in order for such a cost to be recovered as a disbursement.

A recent Ontario decision, Markovic v. Richards,⁹ considered whether the premium paid by the plaintiff for ATE insurance was a recoverable disbursement. In holding the premium was not a recoverable disbursement, Milanetti J. stated:

While it is clearly the plaintiff's prerogative to obtain ATE insurance, I do not accept that such premium should be reimbursed by the defendants as a compensable disbursement. Such disbursements have not, as far as I am aware, ever been entertained in Canada and have certainly not been the subject of legislative reform as was the case in the UK. I can think of no policy reason that such should be compensated as a taxable disbursement. Existence of the policy may well provide comfort to the plaintiff, it is however an expense that is entirely discretionary, does nothing to advance the litigation, and may in fact even act as a disincentive to thoughtful, well-reasoned resolution of claims. I do not think it fair and reasonable that an insurer be expected to cover the disbursement for this payment of premiums. Moreover, as I understand it, ATE insurance is offered by DAS Canada, a full service legal expense insurer that is recognized by the Canadian Bar Association. DAS provides legal expense coverage that can be purchased by individuals who need to pursue legal action, covering disbursements and adversary costs in the event of an unsuccessful case. It appears that the premium is only payable if the case is successful.¹⁰

 

[emphasis added]

This decision appears to be the first of its kind in Canada. Until the precedent set by the Markovic decision is overturned or distinguished, it appears that the recoverability of such a cost as a disbursement is entirely precluded. It is important that this message be brought home to plaintiffs as it appears they will bear the ultimate cost for having "piece of mind" in advancing their claim.

Conclusion

From a defendant's perspective, the distinction between a recoverable disbursement and the costs incurred by a plaintiff in connection with the litigation is an important one. While it may be argued that litigation loans or ATE insurance facilitate a plaintiff's ability to prosecute their claim, the authorities suggest that it will be difficult to recover their associated costs as disbursements in the absence of a clear policy decision by the legislature. Consequently, plaintiff's counsel should expect significant resistance from defence counsel to their recoverability as part of a settlement or costs award.

Notwithstanding the above, it is likely that the trend toward the use of litigation loans and ATE insurance by a plaintiff as litigation funding mechanisms is here to stay. Unfortunately, it is anticipated that the use of these mechanisms may not only encourage the commencement of frivolous lawsuits but also discourage a plaintiff from settling their claim in advance of trial. Therefore, while the plaintiff will ultimately bear their litigation funding costs, this victory may only be a small one given the broader implications of these litigation funding mechanisms.