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Market overview

Third party funding (TPF), or dispute finance as it is increasingly termed, has been embraced into the mainstream of Canadian litigation, including in terms of the types of parties using litigation funding, the scenarios in which parties rely upon litigation funding and the perspectives expressed by courts and lawmakers. As discussed in greater detail below, the law has confirmed the suitability of TPF in the context of class proceedings, bankruptcy proceedings and single-party commercial litigation, subject to certain requirements. As a result, the opportunities in the Canadian market for TPF are increasing.

International funders have taken note. Recent case law refers to a number of international litigation funders, including an Irish funder, Claims Funding International, British funders, Redress and Harbour, an American funder, Galactic TH Litigation Funders LC and an Australian funder, Omni Bridgeway (formerly known as Bentham IMF), which was the first to open a Canadian office, in 2016, and expanded to Quebec (Canada's only civil law jurisdiction) in 2018. Augusta Ventures and Woodsford have since followed with offices in Canada.

The development of Canadian law and the Canadian legal market for TPF has been self-reinforcing. Increased funding opportunities have resulted in greater opportunities for the Canadian courts to scrutinise third party funding agreements (TPFAs), and to develop more sophisticated rules governing them. This exposure has brought the opportunity of funding to the fore. As one class actions lawyer recently noted, contingency fees are becoming increasingly insufficient to meet the costs of litigating a matter, and law firms are increasingly concerned with the risk involved in contingency fees: 'it is now beyond the capacity of most firms to self-fund . . . they have to get funding'.2 Moreover, in one judgment involving a TPFA,3 the court noted that 'anecdotal evidence suggests that indemnity agreements became more popular than resorting to the Class Proceedings Fund'.4 One reason for the popularity of TPF over the Class Proceedings Fund is that the latter has relatively limited resources, does not provide compensation for legal fees and covers only limited disbursements during the proceedings.

The jurisprudence regarding TPF has been typically considered in the context of class proceedings, as courts in Canadian common law jurisdictions (all provinces aside from Quebec) must approve a TPFA at the outset of the case for it to be binding on the class. At the same time, however, litigation funding for single-party commercial litigation and bankruptcy proceedings is becoming more commonplace in Canada. In this connection, litigation funders report seeing increased appetite from commercial claim holders, including many who are financially well-resourced, looking at funding to advance their claims, just as they might finance any other corporate asset.

Legal and regulatory framework

i Maintenance and champerty

For most of the 20th century, the legal landscape regarding TPF was overshadowed by the common law doctrines of maintenance and champerty.5 The Court of Appeal of Ontario described these concepts in McIntyre Estate v. Ontario (Attorney General) as follows:6

[m]aintenance is directed against those who, for an improper motive, often described as wanton or officious intermeddling, become involved with disputes (litigation) of others in which the maintainer has no interest whatsoever. Champerty is an egregious form of maintenance in which there is the added element that the maintainer shares in the profits of the litigation

The concept of and prohibition on champerty have long been codified in the Act Respecting Champerty RSO (1897) (Champerty Act), which states that:

1 Champertors be they that move pleas and suits, or cause to be moved, either by their own procurement, or by others, and sue them at their proper costs, for to have part of the land in variance, or part of the gains.2 All champertous agreements are forbidden, and invalid.

As outlined in jurisprudence and in the Champerty Act, the prohibition on maintenance and champerty is intended to discourage 'unnecessary' litigation7 in Canadian courts as a result of the 'officious intermeddling' of a third party. The law took a particularly dim view of an individual deriving a profit from this misconduct, so much so that champerty was criminalised in Canada until the mid-20th century.

Notwithstanding the prohibitions against maintenance and champerty, the concept left open the possibility of 'proper' forms of litigation support. More specifically, the courts' early analysis of the issue in Newswander v. Giegerich emphasised the concern over a maintainer (i.e., the third party that maintains the party with a direct interest in the claim) who is 'stirring up strife'.8 In other words, the motive of an alleged maintainer was particularly important to determine if the act was, in fact, maintenance.

Champerty in Canada is a 'subspecies' of maintenance, as there cannot be champerty without maintenance.9 Accordingly, the concept of champerty in Canadian law similarly invokes the concept of proper and improper motives underpinning litigation funding. In Goodman v. R,10 Goodman was charged with champerty after agreeing to assist an improvident claimant injured by a streetcar in exchange for a share of any proceeds. However, the Supreme Court of Canada (SCC) quashed Goodman's conviction and held that his conduct did not amount to officious intermeddling as he had not stirred up strife.11 Following Newswander and Goodman, maintenance and champerty were removed from the Criminal Code in 1953.12

The prospect of TPF in Canada was significantly enhanced in the early 2000s when helpful jurisprudence developed in the context of contingency fee arrangements and class proceedings. Most notably, in 2002, the Ontario Court of Appeal found that the interests of justice can, in fact, be served by allowing third parties to fund litigation. In McIntyre Estate v. Ontario (Attorney General),13 a plaintiff who intended to commence an action against Imperial Tobacco and Venturi Inc for wrongful death of her husband first sought a declaration from the Court that the contingency fee arrangement with her lawyers was not prohibited by the Champerty Act. The Ontario Court of Appeal found that a determination of the proposed agreement as champertous depended on the outcome of the litigation. It considered the funder's motive as a proper consideration and confirmed that a decision as to whether a particular agreement is champertous is a fact-dependent determination, requiring the court to inquire into the circumstances and the terms of the agreement.14 In making these findings, it was clear that the Court was aware of increasing concerns over access to justice and the potentially beneficial role of contingency fee agreements in this regard. This evolution in the priorities of the Canadian justice system necessitated a more flexible understanding of champerty and the applicability of the Champerty Act.

ii Class action funding

Class proceedings have provided a fruitful area for the development of Canadian jurisprudence regarding TPFAs. Much of the law has developed around this model in the class proceedings context, as TPFAs concluded between a representative plaintiff and a TPF are subject to the requirements of judicial review and approval.15

In 2009, the courts considered the legality of TPFAs in Metzler Investments GMBH v. Gildan Activewear Inc in detail.16 In Metzler, a representative plaintiff moved for the approval of a costs indemnification agreement entered into with an Irish company whose main business was litigation funding in Europe. Relying upon the analysis of McIntyre, the court applied the existing law on contingency fee arrangements to third party involvement in litigation. It found that case law pointed to 'two crucial elements' that constitute a champertous agreement:17 the involvement must be spurred by some improper motive; and the result of that involvement must enable the third party to possibly acquire some gain following the disposition of the litigation.

As a TPFA has, by its very nature, the purpose of gain for the third party following the disposition of the litigation, the first consideration was most vital to the assessment of champerty in the context of TPF. Metzler, therefore, confirmed that the principles of fairness and reasonableness, the importance of the motive underpinning the funding arrangement and the increasingly relaxed application of the Champerty Act – all of which developed in the context of the McIntyre Estate analysis of contingency fee arrangements – could apply equally in the context of TPFAs.

Since 2009, the judicial review of TPFAs between funders and representative plaintiffs in class proceedings has provided useful guidance on the law applicable to TPF. For example, the courts have provided useful commentary in the following cases:

  1. In Dugal v. Manulife Financial Corp,18 Strathy J approved a funding agreement under which a third party agreed, inter alia, to indemnify the plaintiffs against their exposure to the defendants' costs, in return for a 7 per cent share of the proceeds of any recovery in the litigation.19 The court built upon the principles articulated in McIntyre Estate and Metzler,20 and recognised that funding agreements had been approved in other provinces of Canada, albeit without reasons,21 as well as in other common law jurisdictions around the world.22
  2. In Fehr v. Sun Life Assurance Company of Canada (Fehr),23 the court discussed the law on litigation funding and reviewed the key judgments (identified as McIntyre Estate in 2002, Metzler in 2009 and Dugal in 2011).24 It concluded that TPFAs are not categorically illegal on the grounds of champerty or maintenance, but a particular TPFA might be illegal as champertous or on some other basis, and that a plaintiff must obtain court approval to enter into a TPFA.
  3. In Labourers' Pension Fund v. Sino-Forest,25 the representative plaintiffs moved for approval of a funding agreement that was described by the court as being nearly identical to the one approved by Justice Strathy in Dugal.26 The court nevertheless identified individual key terms of the funding agreement, including the grounds of the funder's agreement to pay the plaintiffs' adverse costs orders and the terms of recovery on a settlement or judgment in favour of the plaintiffs. Upon doing so, the court approved the funding agreement.
  4. In Bayens v. Kinross Gold Corporation, the court noted that the 'concept of third party funding is a work in progress' and that 'courts have been left to develop the approval criteria for third party funding largely on their own initiative, relying on common sense, knowledge of the problems of access to justice and of the administration of justice, and academic commentary'.27 While the court did not go into the same detail regarding the terms of the funding agreement, it nevertheless approved the agreement based on principles derived from the above-mentioned cases (and particularly, Fehr, Metzler and Dugal ).28
  5. In Houle v. St Jude Medical Inc,29 the Ontario Superior Court (ONSC) provided a thorough analysis of the law regarding approval of TPFAs and specific terms contained therein. The ONSC once again confirmed that 'deciding whether to approve a [TPFA] will depend upon the particular circumstances of each case';30 however, it also opined that, based on the foregoing case law, the court must be satisfied of at least four criteria to approve a TPFA.31 On appeal, the ONSC Divisional Court seemingly confirmed the above analysis by noting that the ONSC 'applied the proper principles and provided a roadmap to the parties if they wish to proceed under the proposed type of arrangement'32 and upheld the decision of the ONSC.
  6. The law on TPF developed significantly in Quebec, Canada's only civil law jurisdiction, in 2014. In Marcotte v. Bank of Montreal, a class action against chartered banks was funded by two third parties. Like the analysis of funding arrangements in common law provinces, the Superior Court of Quebec determined that, without funding from third parties, the plaintiffs could not have pursued the case and been reimbursed fees that had been illegally collected by the financial institutions, and that funding provided a 'path to justice'.33
  7. In Difederico v. Inc,34 the Federal Court in a class action claiming damages of C$12 billion approved a funding agreement wherein the funder agreed to pay disbursements and adverse costs up to a confidential maximum, as well as security for costs if required. In approving the funding agreement, the Federal Court noted that funding was required to facilitate access to justice as the case would otherwise not be prosecuted without a funder's support. Without developing the basis for the observation, the Court commented that TPF ought not to be approved if it is not necessary for a particular proceeding, which is arguably a novel formulation of the test in that it elevates this factor to being determinative or 'paramount', as discussed by the Divisional Court in Houle 35 at paragraph 31.
  8. In Hoy v. Expedia Group,36 the Court declined the invitation to insert itself into the bargain between the parties.

For further examples of court consideration of TPFAs, see Stanway v. Wyeth Canada Inc,37 Schneider v. Royal Crown Gold Reserve Inc,38 Berg v. Canadian Hockey League39 and, most recently, David v. Loblaw,40 JB & M Walker v. TDL Group,41 Drynan v. Bausch Health Companies Inc,42 Tidd v. Regional Health Authority,43 Heller v. Uber Technologies Inc,44 Lilleyman v. Bumble Bee Foods LLC,45 Galloway v. AB,46 Flying E Ranche Ltd v. Canada (Attorney General)47 and Kan v. Kew Media Group Inc.48

In July 2020, Ontario introduced amendments to the Class Proceedings Act 2002, including various new provisions concerning TPF and requirements for the approval of TPFAs.49 Under the new legislative framework, which came into force in October 2020, a court will not approve a TPFA except where it is satisfied that the agreement is fair and reasonable, the agreement does not impair the solicitor–client relationship and the funder will be able to satisfy adverse cost awards to the extent it has agreed to provide an indemnity for such risks. The amended Class Proceedings Act, 2002 also allows successful defendants in class actions to recover any awarded costs directly from the unsuccessful claimant's funder.

iii Single-party commercial litigation

Despite the above jurisprudence in the class proceedings context, as at 2015, the law on TPF in Canada remained relatively underdeveloped in the context of single-party commercial litigation. However, that year, the courts took a step forward in Schenk v. Valeant (Schenk).50

In Schenk, the court case drew upon the jurisprudence in the class proceedings context and extended similar principles to single-party commercial litigation. Justice McEwen commented that '[t]ypically, such agreements have arisen in class proceedings' but that he saw 'no reason why such funding would be inappropriate in the field of commercial litigation.'51 McEwen J also commented that 'the statutory and common law prohibition on champerty and maintenance in the Province of Ontario must be considered'.52 In applying this law to the facts of the particular TPFA at issue in Schenk, the ONSC declined to approve the agreement.53 However, McEwen J granted the plaintiff, Schenk, the opportunity to revise the agreement and bring a further motion for approval. In other words, there is no reason why TPF cannot exist in the single-party commercial litigation context, but TPFAs must be based upon reasonable and fair terms.

There have been further decisions in the single-party commercial context. For example, in Seedlings Life Science Ventures, LLC v. Pfizer Canada Inc (Seedlings),54 the court considered the enforcement of the plaintiff's patent against an international pharmaceutical company. Seedlings sought approval of the agreement, but, as explained in Section IV.ii, the Court ultimately concluded that it did not need to approve the funding agreement. This case demonstrates the growth of funding beyond the class action context, which has contributed to an increasing divergence in the law applicable to TPFAs in the class action context and those in the context of single-party litigation. Indeed, following Seedlings, it would be surprising for a commercial user of funding to seek court approval of how a claim is to be financed.

The developing common law has also applied to bankruptcy proceedings. In a March 2018 decision, Re 9354 9186 (formerly Bluberi Gaming Technologies Inc) and 9354 9178 (formerly Bluberi Group Inc),55 the Quebec Superior Court relied upon Kinross (cited above under class actions) and Hayes v. City of Saint John56 to find that TPFAs 'should be approved, subject to [certain] principles' that reflect the considerations addressed in common law jurisprudence. The SCC ultimately upheld the judgment of the Quebec Superior Court, by focusing on the fairness of the TPFA in its reasons, which harkens back to the guiding principles first articulated in McIntyre Estate v. Ontario (Attorney General). The Court unanimously found that the Companies' Creditors Arrangement Act Court properly exercised its discretion to approve the relevant TPFA after finding it to be fair and reasonable. The TPFA was not a plan of arrangement and did not need to be presented to Bluberi's creditors for a vote.