Can litigation be cost-effective? The best practices for court cases & construction insolvencies

NRF's Alan Merskey charts the evolution of litigation: what is new, what is not, & how to utilize it

Litigation has seen a rapid evolution in recent years – a process that existed well before the COVID-19 pandemic – though present circumstances have forced its acceleration. This has had the effect of increasing access to court processes and augmenting their flexibility, leading to corresponding shifts in legal strategy. We asked the Toronto chair of Norton Rose Fulbright’s Litigation Group, Alan Merskey, to walk us through these long-emerging changes. Here, he explains how they have affected insolvencies in Canada’s construction sector and, more generally, Canadian litigation overall.

How have the processes, tactics, and logistics of litigation evolved in Canada over the last two decades?  How do you consider this space will continue to evolve in the future? Are there any “known unknowns” that need to be accounted for?

While many things could be considered, one of the single biggest issues in the conduct of larger-scale litigation has been the evolution of access to reams of electronic data and the struggle to manage that data in the litigation process. Extensive professional and judicial effort has been spent in managing and understanding the data issue, and coming up with principles of proportionality while still managing to provide access to relevant data and documents.

Technical solutions have become more sophisticated, and so have strategic ones. The bar has seen a refinement in the understanding of the importance of managing the strategy as well as the work effort. These days, the most successful litigation management strategies involve proactive considerations to master the data rather than letting the data master you.  At the end of the day, that can rest on one of the oldest techniques of all: having an informed and engaged client who can help explain the business underlying the litigation, and identifying the documents that do – and don’t – matter.

What are the key steps or strategies for reaching a resolution to litigation? How can clients prepare themselves for the various litigation processes – trial, preliminary dispositive steps, ADR, etc.?

The best approach is having a plan that addresses a client’s main concern – a cost-effective resolution of their business problems – while building in sufficient flexibility to allow for any changes in case new information arises. The methods to that end have to vary, because risk and cost vary – a lot. What does not vary is the ability at the outset of the litigation to establish client goals and expectations and study the upcoming milestones systematically. The milestones in a litigation proceeding are usually well known. Clients want to know where the “off-ramps” are, what it will cost to get there, and what they might achieve along the way. Determine what information is already, or likely to be, available and what information is likely to become available and what will likely always be tilting at windmills (although you might wish to choose a more diplomatic phrase in your client planning discussions).

What effect has the emergence of virtual processes had on Canadian litigation? How have virtual hearings, e-discovery, and the digitalization of the Canadian court system changed the way legal business is conducted?

E-discovery has a seismic effect -- more on cost than on evidence, mind you -- and there is an ongoing need to properly manage its impact. Court digitalization underwent forced acceleration in response to COVID-19, giving us a real look at where it could go. We have also seen effective implementation of virtual processes in other jurisdictions like the United States.  Virtual hearings yield significant gains in improving access to justice, both from cost and logistical vantage points.

Video conference hearings have proven to be as good -- if not better -- for short, scheduling or non-contentious matters. For participants, video conferences have reduced the friction and costs involved with standing time inside the court system, without compromising the effectiveness of presentations. For courts, they allow for more precise and economical hearing scheduling. For longer hearings, however, the verdict is not in. Purists miss flipping pages with the judge.  It is certainly fair to say that for longer and more complex matters, conducting a video conference and simultaneous electronic document analysis can be cumbersome. Ultimately, it is clear that video conferencing is likely here to stay given the benefits outlined. We will see some sort of hybrid model emerge that seeks to optimize the best use of resources, leveraging in-person and video as best suits the interests of all parties involved.

How do courts ensure fairness during the commercial litigation process? How they can improve it to make it more efficient and effective? How does summary judgement fit in to these needs and goals?

Three factors drive fairness during the commercial litigation process: availability, availability, and availability. We have decades of experience in the common-law world of developing and adjusting procedurally fair, cost-effective processes. Some rules you might like. Some you might not. What is undeniable is that without ready access to a courtroom to sort out those debates, the rules are not very good in the first place. The most experienced judges I have appeared before ensure that each side gets a fair chance to prepare and present its case, while leaving room for deciding interim issues, and generally getting things done.

One main cause of commercial litigation revolves around insolvencies. How can clients best mitigate or insulate themselves from the risk of insolvency? How can they be proactive, and what are the most important considerations if and when insolvency seems imminent?

Risk mitigation is dependent upon leverage, exposure, and profitability. As a general principle, the more important (and the less fungible) a provider of goods, services, or funding is to a recipient, the greater opportunity there is to extract favourable payment terms or protections. Specific provisions can include short payment terms, security, letters of credit and payment insurance. Equally, the more diversified a provider’s own customer base, the more risk-tolerant a business may be of an individual default. The best protection may simply be good monitoring, i.e.:

  • Know your accounts receivables;
  • be aware when one is becoming extended; and
  • decide whether to cease doing business as an account ages, extend further credit, or move to cash on delivery (COD).

What are some of the issues facing Canadian construction firms in particular in regards to insolvency? Do the relevant factors at play differ based on whether the firm is a contractor or a subcontractor?

The key issues facing construction firms in insolvency are Construction Lien Act/Construction Act trust priorities, undercapitalization (at the point in time of insolvency), and lengthy payment terms on larger projects. The trust priorities create an environment under which sub-contractors, sub-subcontractors, and payment sureties who would otherwise be at risk of going unpaid as unsecured trade creditors, improve their odds of recovery. However, these trust priorities -- if they are going to be paid for -- are usually recovered from existing or future cash receipts at the time of insolvency. In other insolvency environments, those receipts form the short-term cash flows or security for debtor in possession funding that are used to operate the business during an insolvency period. This results in a smaller pool of assets from which to restructure the business. Furthermore, payment terms on many construction contracts are ‘milestone-based’, creating some unpredictability in the timing of receipts. Undercapitalization can be a feature of smaller operators in the industry, which in turn implies a lower asset base from which to attempt a recovery.

The factors addressed above differ slightly depending on whether a firm is a contractor or a subcontractor. Trust and timing issues tend to disadvantage contractors, whereas timing and undercapitalization issues impact sub-contractors.

Do you have any other insights on helping construction, insolvency, or litigation clients navigate the legal landscape post/during COVID?

Be pragmatic and nimble where possible. The courts, like many aspects of society, came under a significant degree of strain through the pandemic. They can be credited with having adopted flexible processes and procedures. The courts now expect litigants to take a similar approach through reasonable compromises, whether procedural or substantive. The courts will also weigh the actual or potential impacts of the pandemic on businesses carefully in the balance.

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Alan Merskey is a commercial litigator with a particular focus on insolvency, construction, technology and other corporate disputes. His substantive and procedural experience in these industry sectors informs his overall strategic approach to complex commercial litigation. In the solvency area he has acted as counsel to court officers, debtors and creditors in leading roles in a range of contested restructuring matters, including many of the major public and private company restructuring proceedings of the last 20 years. These include Bondfield, Sears, Nortel, Cash Stores, Air Canada and Canada 3000. Among other things, Mr. Merskey appeared as counsel on precedent-setting decisions from the Supreme Court, Ontario Court of Appeal and Ontario Superior Court of Justice in areas such as environmental liabilities, debtor–creditor characterization and equitable subordination. In the construction area Mr. Merskey acts in complex delay and design deficiency cases for participants across the entire sector, from general contractors to owners and designers. Mr. Merskey is Toronto chair of our Litigation Group.

Lawyer(s)

Alan B. Merskey