The litigation pot continues to bubble

A variety of business claims are being disputed, though arbitration has continued to be favoured as the courts have been slow to decide cases. The pandemic has also drawn greater attention to disclosures of risks
The litigation pot continues to bubble

Nearly two years on, the effects of the COVID-19 pandemic on business may be lessening, but they continue to keep the litigation pot bubbling.

“COVID-19 has thrown a lot of things up into the air,” says Hugh Meighen, an international arbitration lawyer at Borden Ladner Gervais LLP in Toronto. “It’s spurred a fair bit of litigation, and litigation funding has coincided with that development as a new opportunity within the legal market in Canada.”

Various business claims are being disputed, though arbitration has continued to be favoured as the courts have been slow to decide cases. The pandemic has also drawn greater attention to the importance of company disclosures of risks. And, there are still delays in cases wending their way through the courts.

COVID and the courts

“The court system has dealt with the pandemic very well in general,” says Christopher Richter, a corporate-commercial litigator at Torys LLP in Montreal. “Urgent matters have been dealt with.”

Although there has been a shift towards virtual hearings — and dealing with matters by email and other electronic means has generally gone well, he says — the courts’ “backlog is growing.” Richter blames a judicial system that has been “underfunded for many years, and we’re starting to see the limits of what they’re able to do in today’s emergency circumstances.” Ordinary commercial cases that are not urgent are beginning to take longer and longer.

“When people start to see that a court case can take many months or years, they do start to consider arbitration more closely.”

At the outset of COVID, litigator Allison Kuntz had a matter set for trial and two cases set for arbitration. “The trial dates for the litigation were postponed, and I think that pushed the parties to settle versus waiting for courts to reopen and have their cases heard — and that certainly wasn’t a bad thing,” says the Calgary-based partner in Stikeman Elliott LLP.

“I suspect a lot of parties found themselves in that situation, meaning they used the pause of the pandemic to re-examine their litigation and reach resolution on their own terms, which is really, in fact, the most desirable way to resolve a dispute.”

François Giroux, a litigation partner in McCarthy Tétrault LLP in Montreal, has also noticed an increased interest in arbitration during the pandemic — “the consequence of the very practical reality, which was that courts slowed down their activities.”

“We also see courts can be efficient,” he says, “when access was more limited or difficult. And we have clients who have shown interest in going to arbitration for disputes they might have otherwise brought to the courts.”

Although it can be challenging to switch horses mid-dispute, parties to contracts that are being drafted now are sensitive to backlogs in the courts, says Meighen. He is seeing a new interest in arbitration that he predicts will span another one to three years from now.

If the pandemic is a relevant factor for parties deciding whether to include arbitration clauses in their future agreements, “it would be on account of backlogs in the courts and the possibility that resolution of their dispute would be delayed,” Kuntz says. Speed has always been a consideration for parties who choose to arbitrate, she adds. Still, they also decide to include an arbitration clause based on other factors such as confidentiality or finality (given the limited rights of appeal from an arbitration decision).

“At the end of the day, pandemic or not, parties need to focus on choosing the best avenue for resolution of their potential dispute in light of all of the factors that are important to them…, and whether the speed with which they can have their dispute resolved will be impacted by pandemic-related issues.”

Disputes and business claims

A busy year in litigation saw the types of claims that many expected at the onset of the pandemic, says Giroux, such as consumer-related, business disruption and securities disclosures litigation.

Despite the pandemic, Canada has had relatively few bankruptcies, he says — perhaps because of the subsidies and financial support the government has extended.

“Now that the dust has settled a little on the pandemic, businesses are looking at the realities of the last year and a half, and they’re making decisions as to whether to proceed with formal claims,” says Meighen.

Construction projects are at the centre of these disputes, he adds, with COVID complicating work in the construction sector significantly through additional health and safety measures required, such as social distancing and supply chain problems.

Force majeure claims will continue to arise as business is interrupted, and in Quebec, says Richter, force majeure is an implied term of contracts. “Whether it’s for cancellation of products or services or events, or postponements or late deliveries, we’ve seen a lot of those kinds of contract disputes, and they tend to get worked out based on the particular wording of the contract, and of course, the relationship between the parties.”

Markets and regulation

Quebec also has an oppression remedy in its Business Corporations Act for provincially incorporated companies, Richter adds.

“The markets have been going very well; mergers and acquisitions activity has been very high,” he says, and there is always a percentage of transactions in which there is a problem in closing. “During the stresses of the COVID period, we’ve certainly seen some of those, and the oppression remedy that’s available now in Quebec is an interesting new twist to those kinds of commercial and corporate disputes.”

Now, the oppression remedy gives claimants additional rights to be treated fairly according to their reasonable expectations, Richter adds. “That’s opened up new scrutiny for boards of directors and management.”

The pandemic may also have drawn greater attention to the importance of company disclosures of risks. During the pandemic, management has been reacting to emergencies in the market and their businesses. The M&A scene has also been active, with some companies taking advantage of the situation to buy others at good prices, which also leads to increased scrutiny, he says.

“There’s a desire on the part of investors — both target and acquirer — to make sure that managements do a proper analysis, despite the very rapid evolution in the market sometimes.”

Regulators are also increasing their focus on competition among the “digital giants” and in the telecom markets and investor protection issues. They have been maintaining their focus — despite COVID, in respect to the new economy, Richter says — on fintech, cross-border sales and consumer protection measures.

“I would have thought that the pandemic would have slowed down the regulators because everyone’s working from home [and] a lot of institutions have struggled to keep up; but our regulators have been quite active, maintaining their activity levels and their enforcement level. So, we’re still having to respond to all kinds of inquiries, particularly from the Autorité des marchés financiers.”

Litigation funding

Third-party funding — already commonplace in the United States, United Kingdom and Australia — has seen increased implementation in Canada in recent years. Although Canadian law had previously imposed strict limits on funding litigation, it now provides greater scope, flexibility and sophistication in funding arrangements.

“There are, year-on-year, more inquiries into litigation funding,” says Meighen. “There are more funders in the Canadian market, either with dedicated Canadian offices or with teams of individuals and foreign funders who are focused on the Canadian market and make trips” to Canada.

More cases that involve funding agreements have also provided information about how third-party funding works and could work in Canada, “which I think has the effect of encouraging more interest in the area,” he says.

Courts have examined recent cases of litigation funding agreements, particularly in the class actions context, where a funding agreement would require approval of the court. “We’re aware of these types of agreements appearing in other forms of litigation, like single-party commercial litigation or bankruptcy proceedings,” says Meighen.

Litigation funding is “quite active, and volatility in the markets has created more opportunities to make claims,” says Richter, and the number of transactions has also meant there’s a greater number of possible claims out there. “In the corporate area, if you’ve got a more active market and more volatility, then there’s going to be more disputes as well.”

And as the COVID-19 pandemic starts to turn a corner after a year and a half, litigation may be only more likely.

“COVID-19 put a lot of things on pause as people held their breath, hunkered down, preserved their rights and preserved their relationships while the hardest months went by,” Meighen says.

“At the end of 2021, organizations are taking stock of the past year and a half for their company and their relationships, and they’re now starting to make decisions about the sense of litigation related to COVID-19 that was previously put on hold,” he adds.

“This is an inflection point now when the attitudes are beginning to change. … Issues of strategic litigation, or dormant litigation, are now more palatable than they previously were, and that may ultimately result in more claims and proceedings.”