Third-party litigation funding

  • Subtitle: Legal Report: Litigation. Canadian courts are increasingly being asked to scrutinize outside funding arrangements
Written by  Posted Date: January 3, 2017
Image: Jeannie Phan
Image: Jeannie Phan
The first statutory restrictions against maintenance and champerty were enacted in England in 1305, as a result of royal officials and nobles lending their names to dubious legal claims in exchange for a portion of any proceeds. The medieval-era statutes were repealed in 1967 and, for most in the profession today, the doctrines are likely a long-ago law school memory.
However, the concepts are being addressed again in courts in Canada in the 21st century, in connection with third-party funding agreements for litigation.

The practice has been in place in countries such as Australia and the United States for several years. One of the most high-profile examples is the funding by Silicon Valley billionaire Peter Thiel of the successful lawsuit by Hulk Hogan against Gawker over the publishing of a sex tape involving the former pro wrestler. In Canada, it is still a new phenomenon involving less salacious subject matter and primarily used in class action litigation.

In exchange for providing a financial hedge against expenses, the outside funders may receive as much as 40 per cent of any award, depending on the extent of the resources advanced and whatever is in the terms of the agreement.

Proponents say it is a way to increase access to justice given the current realities and costs involved in complex litigation. Those who are wary of the funding deals raise concerns about whether the client is best served by this type of funding arrangement and that it can raise ethical issues for the plaintiff-side lawyers.

While there may be debate about the practice of an outside investor covering costs awards, experts’ fees, disbursements or even the full expense of the litigation, the relatively few decisions in Canada in this area have all said that there is no prohibition against it. Where there have been differences have been in the specifics of the agreement, what is needed for court approval and what must be disclosed to a defendant.

Third-party litigation funding is almost certainly likely to increase, says Howard Borlack, a litigator and founding partner of McCague Borlack LLP in Toronto. “This should not just be limited to class actions. The companies doing this are very sophisticated. This is what they do for a living. They are not fishing for cases,” says Borlach, who has advised clients on third-party funding agreements. At the same time, he suggests that courts should continue to have an oversight role when a litigation funding deal is part of the proceeding.

Luciana Brasil, a partner at Branch MacMaster LLP in Vancouver who specializes in class actions, agrees that outside funding is going to be more widely used. She adds that courts have a role in ensuring that the rate of return in any agreement is reasonable, similar to fees for counsel in class actions.

One of the more recent entrants to this field in Canada is Bentham IMF Capital Ltd., an Australian company that opened an office in Toronto a year ago. The company has been publicly traded in Australia for more than 15 years with a focus on funding commercial litigation. Tania Sulan, chief investment officer for its Canadian operations, agrees that for lawyers in Commonwealth countries, there may be an initial instinct to be wary of outside funding. “Profiting from someone else’s lawsuit has always been an awkward topic,” says Sulan. At the same time, she stresses that there is a significant access to justice benefit when an outside party is able to fund litigation where there is a meritorious claim but limited resources. “We do a hefty due diligence before we enter. We are never in a case to extract an early settlement,” she says.

Entering into a third-party funding agreement is now being embraced more widely by experienced litigators across the country. “Class actions are very expensive,” says Reynold Robertson, partner at Robertson Stromberg LLP in Saskatoon. “It is now beyond the capacity of most firms to self fund. That is a huge risk,” he states. Robertson is counsel in a class action lawsuit initiated in 2010, which received court approval last August for a third-party funding deal in Schneider v Royal Crown Gold Reserve Inc. “Even large firms in Ontario are not doing it on their own. They have to get funding,” says Robertson.

To date, there have been decisions in seven provinces related to litigation funding agreements and fees paid out as part of these arrangements. Much of the legal analysis begins with a decision of the Ontario Court of Appeal in 2002, which concluded that it was not necessary to wait for the province to amend its Champerty Act (enacted in 1897) to conclude that contingency fees for litigation were permissible.

“Advantages to the administration of justice from permitting properly regulated contingency fee agreements in the form of increased access to justice are compelling,” wrote then-Associate Chief Justice Dennis O’Connor in McIntyre Estate v. Ontario. “Indeed, there is a strong case to be made that the continuation of a per se prohibition against contingency fee agreements actually tends to defeat the fundamental purpose underlying the law of champerty — the protection of the administration of justice,” he stated. At the same time, the Court of Appeal cautioned that contingency fees should be regulated, the amounts should be controlled and courts needed to play an oversight role. “Fairness to clients must always be a paramount consideration,” wrote O’Connor.

Those principles have been applied by judges deciding on the merits of third-party funding agreements, most notably Ontario Superior Court Justice Paul Perell. In his 2013 decision in Bayens v. Kinross Gold Corporation, the judge set out a number of conditions for court approval in a class action context.

The agreement itself was not a privileged document, ruled Perell. As well, the conditions included requirements that the terms do not compromise the lawyer’s duties to the client and that the role of the representative plaintiff is not diminished.

Exactly what must be disclosed to a defendant when there is an outside funding agreement has not been settled in Canada.

Monique Jilesen, a partner at Lenczner Slaght Royce Smith Griffin LLP in Toronto, says there should be some disclosure to the defence about the terms of the funding. “Are they indemnified for costs? If not, the defence has the right to know,” she says. In one of his rulings in this area, Perell concluded it was acceptable, although not always necessary, for a third-party funder to pay security for the defendant’s costs.

Other courts have concluded that sealing orders and ex parte hearings related to the third-party funding arrangements are appropriate, such as the decision in Schneider, by Chief Justice Martel Popescul of the Court of Queen’s Bench in Saskatchewan. That province is now a “costs jurisdiction” for class actions, as is Ontario. Popescul found the terms of the litigation funding agreement to be reasonable and also that it need not be disclosed. “The existence of the LFA has no bearing, substantively or procedurally on the defendants or the third parties. From whose pocket an adverse cost award is paid is of no consequence to the defendants and the third parties,” wrote the judge.

The information that a plaintiff can seek about a defendant’s financial resources or insurance coverage is limited, says Robertson, so it is only fair that third-party funding agreements be confidential. “You don’t want to telegraph to your opponent how well funded you are. That is because they can motion you to death,” he says.

While litigation funding deals are not necessarily a bad thing, Jilesen says courts should scrutinize how high the percentage return might be for the outside party and access to documents in the litigation, even with a deemed undertaking. “I remain concerned about litigation funders and access to information about the defendant in the documents,” says Jilesen. She adds that this includes the possibility of the use of information disclosed in one action in another case against the same defendant.

Jacqueline Horvat, a commercial litigator and partner at Spark LLP in Toronto, says there are ways to address these concerns to the satisfaction of both parties. “You can designate documents as level A and level B” in terms of access by the funder, she explains, along with a deemed undertaking. “As long as the lawyers are open and creative,” these issues can be resolved, says Horvat, who also teaches legal ethics at the University of Windsor law school.

Another concern that may arise with an outside source of funding is when there is a settlement offer. “The funder should not be the one dictating whether to accept the offer,” says Brasil.

For its part, Bentham is not seeking to overstep its role in any litigation proceeding, says Sulan. “We are a strategic sounding board. We want to be consulted at key points. Ultimately, though, it is the client’s case,” says Sulan.

While much of the third-party funding litigation so far has been in class actions, other forms of commercial litigation are likely to be a growth area. In June 2015, Ontario Superior Court Justice Thomas McEwan concluded in Schenk vs. Valeant Pharmaceuticals that third-party funding was permissible in single-party commercial litigation, although he did not approve an arrangement that could have seen the funder in that case receive more than 50 per cent of any award or settlement (the terms were revised and later accepted by the court).

Proceedings under the Companies’ Creditors Arrangement Act may also be an appropriate forum for outside funding, says Horvat. “There are often groups of creditors who can’t afford to fight for their rights. This would be an example of access to justice,” she says.

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Shannon Kari

Shannon Kari is an experienced legal journalist who is currently serving as the staff writer for the Canadian Lawyer/Law Times group. He can be reached at shannon.kari@thomsonreuters.com.

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