Law Times

Law TiMes • March 24, 2014 Page 7 www.lawtimesnews.com COMMENT Arbitration another solution to overwhelmed civil justice system n Jan. 23, the Supreme Court of Canada released its landmark decision in Hryniak v. Mauldin. While specifi cally dealing with the applicable test on summary judgment mo- tions, Hryniak may be even more important as a precur- sor to substantial future revisions to our judicial system. In commenting on the state of the judicial system, the Supreme Court wrote: "Ensuring access to justice is the greatest challenge to the rule of law in Canada today. Trials have become increasingly expensive and protracted. Most Canadians cannot aff ord to sue when they are wronged or defend themselves when they are sued, and cannot aff ord to go to trial. Without an eff ective and accessible means of enforcing rights, the rule of law is threatened. Without public adjudication of civil cases, the development of the common law is stunted. "Increasingly, there is recognition that a culture shi is required in order to create an environment promot- ing timely and aff ordable access to the civil justice sys- tem. is shi entails simplifying pretrial procedures and moving the emphasis away from the conventional trial in favour of proportional procedures tailored to the needs of the particular case. e balance between procedure and access struck by our justice system must come to refl ect modern reality and recognize that new models of adjudication can be fair and just. "Summary judgment motions provide one such op- portunity." Arbitrations provide another underutilized opportu- nity. On Dec. 30, 2013, I won a $2.1-million arbitration award, including costs, on behalf of a client in a fi nder's-fee dispute against a publicly traded resource development company focused on developing one of the world's largest iron ore deposits in Nunavut. e company had retained my client, Storm Capital Corp., to identify potential strategic partners and investors in China to help fi nance and develop its iron ore projects. Storm Capital in turn introduced the company to a massive Chinese state-owned enterprise that committed to providing up to a billion dollars in fi nancing. To date, the Chinese enterprise has transferred more than $15 million to the Canadian resource company. Notwithstanding an agreement to pay Storm Capital a fi nder's fee, the resource company's president and chief executive offi cer refused to honour that agreement, com- pelling Storm Capital to commence legal proceedings. is was unfortunately an all-too-typical multimil- lion-dollar commercial dispute where the defendant, a public company with signifi cant resources, engaged in strong-arm tactics from the start that invariably result in the need for numerous motions. In our court system, these tactics would have fi nan- cially exhausted the far smaller plaintiff who would probably not even have made it to the discovery stage at this point. In these circumstances, parties o en use the court sys- tem to force the fi nancially weaker plaintiff into a money- draining black hole of procedural gamesmanship and then, depleted of resources, to accept an inequitable and wholly defi cient settlement. e proverbial slingshot that felled the larger company in this action, however, was the arbitration process. Once engaged, it prevented the defendant's strategy from gain- ing any traction. ere were hearings and decisions on motions almost immediately, a fact that negated the typi- cal time delays and prohibitive costs complained about by the Supreme Court in Hryniak. In short, the matter resolved in a far shorter time period than if it had proceeded in the court system. Given the potentially prohibitive costs, Storm Capital likely would never have achieved this result in the court system. I am not critical of the court system per se, just of the ease with which a party that chooses to use its processes primarily to increase costs and cause delay can manipulate it to its own advantage. e arbi- tration process is less susceptible to such manipulation. However, Justice Andromache Karakatsanis stated in Hryniak: "In some circles, private arbitration is increas- ingly seen as an alternative to a slow judicial process. But private arbitration is not the solution since, without an accessible public forum for the adjudication of disputes, the rule of law is threatened and the development of the common law undermined." Is it time to merge the two systems? Should we not change the rules to encourage, if not require, that parties direct motions to an arbitrator for resolution when they appear at motion scheduling court with such arbitrated decisions being potentially reportable? e one thing we have no shortage of is highly com- petent arbitrators willing to schedule and hear a motion on an expedited basis. While this great resource remains largely underutilized, the courts are sagging under the weight they carry. Maybe all of the challenges faced by our court system and openly addressed in Hryniak just need some minor rule changes that require litigants to ac- cess the broad resources of the arbitration regime unless they can clearly show some reason why this route would be inequitable. If successful, this approach could quickly increase access to justice by shi ing most cases, or at least dis- crete aspects of them, over to the vastly underutilized arbitration regime, thereby relieving and dissipating the issues that come with an admittedly overwhelmed civil justice system. LT James Zibarras is co-managing partner at Brauti orn- ing Zibarras LLP and head of the fi rm's civil and commercial litigation practice group. u SPEAKER'S CORNER Aging population a recipe for growth of reverse mortgages he Toronto Lawyers Association recently presented a superb con- tinuing professional development seminar for real estate lawyers. As part of the seminar, Raymond Leclair, by far one of the best of LawPRO's public speakers, gave the obligatory speech on the LawPRO claims history for real estate practitioners in Ontario. While much of Leclair's speech echoed the usual professional negligence themes, one aspect raised some eyebrows in the audience. Leclair noted that with the rapid aging of our population, we could expect to see more reverse mortgages underwritten in Canada. While it wasn't surprising to hear that a fi nancing technique aimed exclusively at seniors would rise in popularity concur- rent with the aging of the population, what was surprising was that some of the lawyers in the audience seemed to have no idea what these so-called reverse mortgages actually were. In retrospect, that shouldn't have been so surprising. While reverse mortgages have been available in Canada since the introduc- tion of the Canadian Home Income Plan in the mid-1980s, reverse mortgages have nonetheless remained relatively rare and obscure in Canada with very few large insti- tutional lenders currently off ering anything like a reverse mortgage product. at, how- ever, might be about to change. e reverse mortgage concept is surpris- ingly simple. Senior homeowners borrow against the equity in their principal resi- dence in pretty much the same fashion as any home-equity refi nancing. e principal money may be advanced to the borrower in instalments or in a single, lump-sum ad- vance and therea er accrues interest like any ordinary mortgage. e diff er- ence, however, is that the bor- rower never has to make any in- terest or principal payments (al- though the borrower must still pay the taxes and maintenance and repair costs for the mort- gaged property). It takes its pop- ular title, the reverse mortgage, because the lender advances to the borrower and never expects any instalment payments in re- turn. So colloquially, it's the reverse of most mortgage fi nancing scenarios. is isn't, of course, to suggest the bor- rower miraculously never has to pay any interest or pay back the principal borrowed. Of course, the borrower has to pay interest and pay back the principal borrowed but just not in regular instalments. Instead, all pay- ments of interest and principal continually get recapitalized and added to the amount owing and are all payable in one lump-sum balloon payment at the end of the term. A reverse mortgage's term to maturity is un- usual. e reverse mortgage doesn't mature at a fi xed time. Instead, reverse mortgages mature whenever the borrower dies (in ef- fect being paid by the borrower's heirs or by the sale proceeds in a power of sale a er the borrower dies if the heirs refuse to pay) with a further acceleration clause when the bor- rower moves out of the mortgaged property. As such, there's a certain actuarial risk to the reverse mortgage business model. Since, generally speaking, the borrower never has to make a principal or interest payment before dying, there's a certain science to predicting when that might actually happen. Predicting anticipated mortality won't aff ect instalment payments as there aren't any un- der a reverse mortgage, but get- ting the average anticipated age of death right will aff ect the loan to value advanced. e older the borrower is, the closer the person will be to dying and the more the lender can advance. A truly lucky borrower (for many reasons) is the one who takes out a reverse mortgage and then far outlives the anticipated age of the death, thereby running out whatever equity may re- main in the home (even accounting for prop- erty value infl ation over the same period). Because of the risk of long payment-free pe- riods, lenders rarely give reverse mortgages to borrowers younger than 62 years old. at's why people associate reverse mortgages with seniors who are house rich but cash poor. To provide the necessary equity buff er lenders need to ensure there will be enough equity in the mortgaged property to pay off the accrued principal and interest balance, the typical reverse mortgage loan-to-value ratio is much lower than traditional home- equity mortgage loans. For typical Canadian reverse mortgages, this loan-to-value ratio can be as low as 25 per cent a er accounting for closing fees. at compares to traditional home-equity mortgages that see loan-to- value ratios as high as 75 per cent. erein lies the usual criticism of reverse mortgages. Many antipoverty advocates and champions of consumers and the rights of the elderly have alleged reverse mortgages end up being inherently predatory as they lure seniors into rash borrowing decisions with the appeal of no payments only to fi nd themselves with much smaller loan proceeds, an overall higher net cost of bor- rowing, and rapidly depleting home equity. Notwithstanding this early criticism, re- verse mortgages nevertheless have become quite popular in the United States among aging baby boomers to the point the ar- rangements, the overwhelming percentage of which are federally insured by the Federal Housing Administration, have become a se- rious drain on the federal treasury. Many of these U.S. reverse mortgages are now under water because of plummeting home-equity values since the beginning of the subprime mortgage crisis. e claims on the Federal Housing Administration for lender losses under reverse mortgages had become so se- rious since 2008 (with aggregate losses since that time exceeding US$5.25 billion at the end of 2013), that Congress recently passed legislation seriously restricting the future availability of federally insured reverse mort- gages (although, frankly, the Federal Hous- ing Administration had already started im- plementing selective underwriting measures to try and at least lower the loan to value of insurable reverse mortgages long before the introduction of these legislative reforms). It's speculative to suggest that the Cana- dian reverse mortgage market will ever rival that of the United States. at said, Employ- ment and Social Development Canada has estimated that by 2051, about one in four Canadians will be 65 or over. at certainly sounds ripe for a fi nancial product specifi - cally tailored and available only to seniors who are house rich but cash poor. LT Jeff rey W. Lem is a partner in the real estate group at Miller omson LLP. His e-mail ad- dress is jlem@millerthomson.com. BY JAMES ZIBARRAS For Law Times O T The Dirt Jeffrey Lem Jeffrey Lem

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