What is third party funding of litigation? At its most basic, it used to be the giving of money for a “piece of the pie”. In exchange for advancing funds, the third party, who had no interest in the litigation, would receive a percentage of the award/judgment or some other payment as agreed. The initial focus of this funding was personal injury cases, and it then expanded to class actions. Now we are seeing third party funding for business disputes, breach of contracts and/or fiduciary duties, litigation involving securities fraud, anti-trust, intellectual property, tax disputes, bankruptcy, and international arbitration.

Now both plaintiffs and defendants are using third party funding. General Counsel and Chief Financial Officers embrace it as a tool of choice, to move costs and risks off balance sheets and to transform the litigation department into a profit centre. For companies, it releases their capital to pursue other priorities. Moreover, it can control costs, as lawyers work within budgeted commitments and focus on the strategy of the lawsuit.

The sources of funds are expanding, and include publicly traded financiers, private funds, hedge funds and individuals ("Funders"). And, these Funders are looking to be players in the Canadian litigation market.

In Canada, third party funding is still developing, and somewhat unregulated, but it is here to stay. Courts are relaxing rules and opening the door[1] to such funding arrangements, and Canada is drawing its guidance from the UK, USA and Australia, where case law and regulations are more developed.

Is third party funding right for your litigation? Let us look at the steps that should be taken and the questions that should be posed to allow a litigant to find the right Funder. We will examine the issues that should be addressed with the third party funding agreement ("Agreement"), and the Court's perspective and this type of funding.

1. Due Diligence on the Funder

While the Funder is performing its own due diligence on the lawsuit and determining if the litigation should be part of its portfolio[2], the client/the lawyer should perform their own due diligence on the Funder.

  • You want to look at the Funder's creditworthiness. What is its record of accomplishment? Will it be financially able to bear the costs and risks of the litigation through to conclusion? The client/the lawyer does not want the funding to run out mid-stream.
  • You will want to protect any confidential information. Is the Funder willing to enter into a secure confidentiality agreement/non-disclosure agreement? Does the Funder have the necessary policies in place to secure any confidential information that will be shared?

2. The Agreement: Be careful how it is drafted. You want it to be valid and not overarching[3]

  • Do the terms comply with applicable statutes or regulations? Consider the common law doctrine of champerty and maintenance[4]. While parameters regarding these doctrines have softened in Canada[5], the USA and the UK, Ontario still has an Act Respecting Champerty[6], and some states (like Minnesota) still prohibit third party litigation financing. The law differs from jurisdiction to jurisdiction because the underlying law about champerty and maintenance varies from jurisdiction to jurisdiction.
  • Agreements are not categorically illegal on the grounds of champerty or maintenance, but a particular Agreement may be illegal as champertous or on some other basis[7].
  • Consider ethical pitfalls. Who is the client? It is not the Funder. These ethical pitfalls also come into play during strategy, settlement and payment. Make sure the client is "calling the shots", not the Funder.
  • Make sure the Agreement does not: create a conflict of interest[8]; undermine the lawyer's obligations; compromise the lawyer and client relationship; and/or affect the lawyer's professional judgment[9].
  • Ensure that independence and impartiality remain throughout the litigation.
  • Make sure that the client retains the ability to instruct and control the litigation, including the right to hire and fire as applicable, the right to decide settlement and the right to direct strategy.
  • Ensure that payment terms are fair. Avoid potentially high usury interest rates[10].

3. Risks: Any time privileged and confidential information is shared with a third party there is a risk that privilege is waived, and that information will be shared beyond the client's expectations.

  • Consider when the sharing of confidential information arises: at the due diligence stage; during negotiations; in the resulting contract; and in continued communication once funding occurs.
  • The client needs to know the risk of disclosure and the lawyer needs to obtain informed consent before proceeding to share confidential information.
  • The client should enter into a non-disclosure agreement with the prospective Funder.
  • Consideration should be given as to what and how much information needs to be shared with the Funder.

4. The Agreement: Case law is unsettled (other than in class actions) as to whether the Agreement needs to be shared with the opposing party.

In class actions,[11] Courts have held the Agreement is not privileged, the opposing party has a right to disclosure of the Agreement and it must be produced.

  • Given the uncertainty in case law and the concerns that disclosure could provide a tactical advantage to the other side: avoid extraneous and otherwise privileged information in the Agreement; avoid including any solicitor and client communication; avoid including elements of litigation strategy and/or the lawyer's view about the strengths or weaknesses of the litigation; and avoid stating the total amount of funding and compensation formula.
  • Consider that the Agreement might be protected by litigation privilege, and lay the groundwork to make that possible. Consider maintaining notes regarding delivery of records and information to capture that umbrella of privilege.

Just as we have seen in the USA, the UK and Australia, now that the third party funding door has not only been unlocked but pushed wide open in Canada, stay tuned as we see the trend grow, morph and adapt to the litigation needs of commercial matters outside of class actions. We expect the Courts will be seeing a lot more Agreements in the future.