High-interest litigation “loans” vs. non-recourse litigation funding
Last month’s Ontario Superior Court costs decision in a personal injury-type case, Davies v. Clarington (Municipality), 2019 ONSC 2292 ("Davies"), caught our attention. It puts into sharp relief the differences between companies who offer loans for personal injury-type litigation and funders like Bentham who provide funding for corporate-commercial claims and class actions.
Davies relates to the derailment of a passenger train in 1999. It started as a class action, which was settled in 2006 on behalf of all plaintiffs except for one: Christopher Zuber. Mr Zuber pressed on with what amounted to a personal injury action. His 106-day trial resulted in a $50,000 damages award in his favour in 2018, after which Mr Zuber sought to have the defendants pay about $7,000,000 in his legal costs.
For present purposes, the key takeaways relate to the approximately $3,150,000 of costs that Mr Zuber attributed to his litigation "loans":
- The plaintiff received various interest-bearing litigation loans from 2008-2013 that totalled about $250,000.
- He never sought court approval for the loans, and disclosed them to the defendants only shortly before trial.
- Mr Zuber now owes over $2,900,000 in interest on the litigation loans.
- The trial judge held that, while he had the discretion to allow the loans to be considered as disbursements, he would decline to do so for several reasons, including:
- The lack of disclosure of the loans to the court, contrary to the standard practice of receiving court approval for litigation funding in Ontario class action cases;
- The late disclosure of the loans to the defendants; and
- The lack of explanation as to why high-interest litigation loans were pursued rather than more favourable funding from another litigation funder (the Class Proceedings Fund).
Ultimately, the court held that requiring the defendants to reimburse costs associated with the litigation loans "in the absence of court approval, and in the absence of any information communicated to the Defendants until early 2014, in my view would result in a gross unfairness to the Defendants" (para. 86).
How does this contrast with litigation funding offered by Bentham?
Bentham does not provide loans: we make a non-recourse investment in the litigation, to be repaid only if and when the plaintiff succeeds. Bentham’s rate of return varies depending on the specifics of each case, but it is typically either a multiple of its investment or a percentage of the award. If the case is unsuccessful, Bentham loses its investment and Bentham pays the legal costs of the other side. This also means that Bentham does not charge "interest" on its funded amounts. In Davies, the accrued interest by the time of the costs award was over 11 times the principal amount of the loans.
In addition, Bentham only funds cases that are very likely to succeed and very likely to result in an award large enough to allow for the participation of a funder (our full criteria are explained here). Said otherwise, Bentham must be convinced that an award will be large enough to allow for a return on its investment, while resulting in the plaintiff keeping the lion’s share of the award: historically, plaintiffs retain about 62% of awards in successful cases. Otherwise, there is a risk that the presence of a funder could be an impediment, because the plaintiff may have little to gain from a reasonable settlement if the only party standing to gain financially is the funder.
Lastly, in class action cases, Bentham always follows the process mentioned in Davies of seeking court approval in advance of providing funding. It has been Bentham’s experience that doing so can benefit the plaintiff in several ways, including by signalling to defendants that a reputable and well-capitalized funder, one with a historical success rate of 90%, stands behind the plaintiff.
Bentham’s funding process and Code of Best Practices are both available on our website.
If you would like to learn more about litigation funding, please reach out to any of us. Our team, made up entirely of former litigators from top Canadian firms, would appreciate the opportunity to speak with you.