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Interest Expenses Not Recoverable as Disbursements Following Litigation

This week, the Court of Appeal for British Columbia released reasons regarding an appeal from an order from the BC Supreme Court, which concerned whether or not out-of-pocket interest payments incurred to finance disbursements are recoverable as disbursements.

In MacKenzie v. Rogalasky, 2014 BCCA 446, the Court of Appeal heard argument concerning two cases in which the recovery of disbursements, pursuant to  Rule 14-1(5) of the Supreme Court Civil Rules, B.C. Reg. 168/2009 (the “Rules”), was in question. Under that Rule, a registrar, when assessing costs, may award “a reasonable amount” for disbursements that “have been necessarily or properly incurred in the conduct of the proceeding”.

The Court summarized the issue of incurred interests, stating:

[4]        Litigants, whether plaintiffs, defendants, third-parties, petitioners or respondents, may find themselves incurring interest expenses in a variety of circumstances. They may personally take out a loan to fund the disbursements incurred in prosecuting or defending a proceeding. Alternatively, they may take advantage of financing arrangements to fund disbursements put in place by their law firms. The record in these appeals describes arrangements, for example, in which personal injury law firms uses lines of credit often provided by lenders specializing in funding disbursements. Those lines of credit may be secured by the assets of the firm or the personal assets of the principals of the firm. The law firm uses the line of credit to fund disbursements (and perhaps other costs of doing business) but the client agrees with the law firm (and perhaps directly with the lender) to be responsible for both principal and interest on disbursements recovered in the action. In the Chandi appeal, for instance, the plaintiff borrowed both from his solicitors and from a third-party lender to fund disbursements, thereby incurring interest obligations. The plaintiff in the MacKenzie appeal also borrowed money from a third-party. Interest may be incurred as an out-of-pocket expense in other circumstances, as well. For example, a party may incur interest costs on unpaid invoices for services provided in the conduct of litigation, such as interest on the cost of an MRI, as in Milne, or an expert’s fees. [5]        It may be surprising that the issue before us has not been authoritatively settled in this Province. Whether the question is open, as the appellants suggest, because it has been conventional wisdom until recently that interest is not a disbursement or because, as the respondents contend, it is only recently that financing litigation has become so difficult and expensive that there is an economic incentive to seek to recover interest costs, is a matter of speculation. The fact is that the question is open and there is a surprising dearth of authority that assists in answering it.The Court, per Mr. Justice Harris, stated that the resolution of the issue lies in the correct interpretation of the applicable Rule, as read “in the context of the purposes of the costs regime and the general legal environment governing recovery of pre-judgment interest, including the Court Order Interest Act, R.S.B.C. 1996, c. 79 (the “COIA”)”.

The applicable Rule 14-1(5) regarding recovery of disbursements is as follows:

(5)When assessing costs under subrule (2) or (3) of this rule, 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.

The context in which an out-of-pocket expense is incurred, is essential to the propriety of that expense being recoverable following litigation. But, as the Court points out, the interpretation of the term “disbursement” and the phrase “incurred in the conduct of the proceeding” limit the scope of recoverable expenses, and the question becomes one of whether an expense is recoverable only by reason of its being incurred due to necessities arising directly from the legal and factual issues inherent in the particular litigation, rather than from the circumstances of the litigant, or whether any reasonable out-of-pocket expense incurred by a litigant, due to the litigation, is recoverable as a disbursement, provided it was “necessarily or properly incurred”.

In concluding that out-of-pocket interest expenses are not recoverable disbursements, the Court stated:

[8]        On the former view, inherent in the word “disbursement” used in the context of cost recovery and in the phrase “incurred in the conduct of the proceeding” are limits that qualify the scope of recoverable disbursements by requiring a connection between what is necessarily, properly, or inherently involved in the conduct of the litigation in the sense of what is required to prove or disprove a case. By contrast, the latter view captures expenses that may be necessary, not in the conduct of the case as such, but by reason of the particular circumstances of the litigant. On this view, a reasonable amount of any out-of-pocket expense that was incurred during the course of a proceeding, regardless of the underlying reason why it was incurred, is recoverable, subject only to a determination by a registrar that it was proper or necessary to incur it. Accordingly, it is irrelevant whether the expense was incurred because of the impecuniosity of the litigant, rather than arising directly from the issues engaged in the proceeding.

Essentially, the term “disbursement” is not defined, and for that reason, the Court turned to the ordinary rules of statutory interpretation, taking into account the entire context of the term’s usage. From this analysis, the Court concluded the following:

[52]      First, I consider what guidance is provided by the ordinary meaning of the word “disbursement”. I conclude that the ordinary meaning of the word is not decisive, but requires interpretation in the context of the common law and statutory changes to the common law over time. I observe, however, that case law does intimate that the core meaning of the word “disbursement” refers to the expenses arising directly from the issues in the case, rather than the circumstances of the litigant. [53]      Second, I consider legislative changes to the common law governing the recovery of disbursements and pre‑judgment interest. I conclude that that history militates against concluding that the legislature intended Rule 14-1(5) to permit recovery of interest expenses as a disbursement. [54]      Third, I interpret Rule 14-1(5) in the context of the purposes of a costs regime drawing on and applying the principles laid out by the Supreme Court of Canada in Walker. The purpose of a costs regime reinforces the interpretation that out-of-pocket interest expenses are not recoverable.

Following, extensive discussion on each of the first two points, the Court turned to the third conclusion drawn, discussing the role of recoverable expenses against the purpose of a costs regime:

[77]      The conclusion that out-of-pocket interest expenses are not recoverable is supported by the wording of the rule from time to time and the purposes of a costs regime in the justice system. [78]      In my opinion, the various iterations of the rule set out above permitting recovery of expenses focuses most naturally on the exigencies inherent in the particular litigation rather than capturing expenses arising from the financial circumstances or other choices of a party. Embedded in the rule is the requirement for a causal connection between the issues in the case and the expense incurred to prove or disprove them. [79]      The rule, in its current form, permits the recovery of “disbursements … incurred in the conduct of the proceeding”. In my view, quite apart from the language “incurred in the conduct of the proceeding” the term “disbursement”, when used in the context of a costs rule that relates to the taxation of costs in particular litigation, does contain limits that narrow its potential broad applicability. 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. [80]      It will be apparent that the conclusion I have reached does not depend on limiting the applicability of the word “disbursements” by reference to the phrase “incurred in the conduct of the proceeding”. I consider that the meaning of the words “disbursement” or “expense” has always excluded out-of-pocket interest expenses. The addition of the phrase “incurred in the conduct of the proceeding” in the rule in 1990 did not narrow or change the meaning of the word “disbursement” or otherwise limit its application. Rather, the phrase reinforces and confirms what has always been the case. To be recoverable a disbursement must arise directly from the exigencies of the proceeding and relate directly to the management and proof of allegations, facts and issues in litigation, not from other sources. In my view, that is what is captured by the phrase “the conduct of the proceeding”. [81]      In my opinion, this interpretation of the rule flows naturally from the purposes of a costs regime and the guidance provided on that subject by the Supreme Court of Canada, most particularly in Walker. Several points emerge which assist in interpreting the rule. The first is that a costs regime serves multiple functions, only one of which is indemnification. Even in respect of that function, the costs regime provides only partial, and not full, indemnity to a successful party. Accordingly, one is not compelled to conclude that interest expenses must be recoverable because the purpose of the rule is to make a successful party whole. To the contrary, partial indemnification underlies both the recovery of costs on a tariff and disbursements (because the reasonable amount awarded may not fully indemnify the cost of necessary or proper disbursements). [82]      Second, within the context of partial indemnification, costs awards should be predictable and consistent across similar cases. Only if this is the case can parties accurately assess the risks of engaging in litigation and make rational decisions about settling or prosecuting the case. Recognizing interest expenses as recoverable disbursements is inconsistent with this objective because exposure to costs and disbursements would not depend on the nature of the case itself, but on the particular circumstances of a party. These circumstances may well involve the relationship between the party and counsel and be matters the opposing party has no right to know. [83]      Third, although costs regimes may affect access to justice, the Supreme Court has made it clear that costs are not the means of securing access to justice, except in exceptional circumstances. Of this more below. [84]      Finally, costs awards relate to the particular case and are made as between the successful and the unsuccessful parties. On the facts of these appeals, it seems reasonable to infer that recognizing interest as an expense would lead to a transfer of resources between classes of parties in which unsuccessful defendants are exposed to the risks of paying high interest rates designed to pay for the cost of lending money, not just to the successful party in the case but other plaintiffs who receive financing but may not recover moneys to pay for their loans. I expand on this concern a little later in these reasons. …
[91]      More telling, in my view, is the function of the costs regime in providing predictability and consistency in costs awards that allow parties rationally to assess the risks of litigation and to guide their conduct accordingly. There can be little doubt that recognizing interest as a disbursement would undermine that purpose since costs awards would vary not according to the nature of the case, but according to the financial circumstances of a successful party. Moreover, the proposition that an unsuccessful party should pay roughly similar amounts across similar cases would be undermined if interest expenses counted as disbursements. This follows not only because the amount of interest paid depends on the financial circumstances of the litigant, but it may also follow for other reasons unconnected to the issues in the case. [92]      It is apparent from the record that the interest rates charged to successful plaintiffs by lenders are high relative to prevailing interest rates. It is reasonable to infer, given that the lender’s recourse is limited to the settlement or judgment amount, that the interest rate charged by lenders reflects the risk they carry on loans to unsuccessful plaintiffs. Accordingly, if one were to assume that the interest rates are reasonable in light of the portfolio of risk, the effect of recognizing interest expenses as a disbursement is that the cost of financing a portfolio of successful and unsuccessful plaintiffs’ cases is being transferred to unsuccessful defendants. Unsuccessful defendants are not required to subsidize unsuccessful plaintiffs’ cases or the costs of running a plaintiff’s side personal injury practice. In my view, this result is not consistent with ensuring that costs awards are specifically referable to costs incurred in the particular litigation itself. I see no obvious way that registrars could be expected to eliminate the “subsidy” component inherent in these financing arrangements.

For the reasons noted, the Court allowed the appeal, setting aside the orders of the Supreme Court and of District Registrar Cameron, restoring the order of Registrar Sainty, stating:

[93]      I conclude that an out-of-pocket interest expense incurred to finance disbursements is not a recoverable disbursement under Rule 14-1(5). I acknowledge that this result is likely inconsistent with the position in New Brunswick and possibly Ontario. To the extent that this is the case, I am respectfully, and for the reasons set out above, unable to agree with the conclusion those courts reached

November 18th, 2014
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