Third party funding (“TPF”) is a practice whereby a litigant seeks financial backing from an entity who is unrelated to (i.e., has no interest in) the litigation or arbitration. In exchange for financing all or part of the party's legal fees and disbursements, and usually indemnifying the party for any adverse cost award, the funder is entitled to a percentage of an award/judgment or a multiple of the funding amount should the funded party succeed.
Although there are no Canadian statutes or regulations governing TPF directly, TPF has existed in Canada for at least the last decade.[i] The Canadian TPF market is still developing with respect to both litigation and international arbitration. Almost all funding of Canadian claimants in international arbitration to-date originates outside Canada, mainly from TPF firms and hedge funds located in the United Kingdom and the United States.[ii] That trend may be shifting. In 2016, the Australian-based company Bentham IMF opened an office in Toronto, Ontario. January 31, 2017 marked Bentham’s first year operating in Canada at which point it had already received over 100 funding requests and has since funded several cases.[iii]
Why use TPF?
TPF can serve as a valuable access to justice tool for parties who could not otherwise bring forward meritorious claims. Even though law firms are sometimes willing to take cases on contingency, rarely are they willing to indemnify their client against an adverse cost award. In some cases, a funder’s backing might be the deciding factor as to whether a claim is brought since every Canadian jurisdiction (except Quebec) operates on a “costs follow the event” system. Even well-capitalized litigants may find TPF appealing by shifting a piece of litigation or arbitration from the liability to asset side of the balance sheet.
A number of cases from various Canadian jurisdictions have addressed TPF in the litigation context.[iv] In Ontario, the Superior Court of Justice has held that class action plaintiffs must move to have a TPF agreement approved by the court.[v] Parties have sought court approval of TPF agreements in other provinces but the courts in those jurisdictions have yet to make a similar pronouncement.[vi] The Ontario Superior Court of Justice has also confirmed that funders are captured by the “deemed undertaking rule”, which requires the funder to undertake not to use evidence or information disclosed by the opposing party during discovery for any purpose outside that proceeding.[vii]
Less clear is whether commercial plaintiffs in non-class action proceedings must seek court approval of their TPF agreements. We have found no legal authority for the proposition that court approval is required. At least in cases coming within the jurisdiction of the Federal Court of Canada, recent authority suggests that court approval is not required. In Seedlings Life Sciences Ventures v Pfizer, the Federal Court determined it had no jurisdiction to pre-approve a litigation funding contract in a patent infringement action, finding that there was no “legal or logical basis to extend the requirement of pre-approval outside of class proceedings”.[viii]
The Court in Seedlings expressly declared that the legal, procedural, and policy imperatives underlying court approval of litigation funding contracts in class proceedings do not exist in private litigation: there is no statutory basis in the Federal Courts Rules that mandates approval of fees, such as in the Class Proceedings Act, 1992,[ix] there is no need to preserve class members’ collective interests that may be affected by the litigation funding contract, and there is no need for the court to control abuse of its process. Given these findings, one may extend the logic in Seedlings to other actions and argue that, at least in non-class proceedings, court approval of TPF is similarly not required.
Since there is no general, freestanding obligation to disclose arrangements relating to litigation (such as retainer agreements) to the court, we conclude that there is no such disclosure obligation as of this writing. Some funders have nonetheless sought,[x] and will likely continue to seek, the court’s blessing on TPF agreements, at least until TPF becomes more commonplace or more courts state outright that their approval is not required in non-class proceedings.
Crystallex International Corporation v Bolivarian Republic of Venezuela[xi] is the only reported case in relation to which a Canadian court turned its mind, even tangentially, to TPF in the international arbitration context.[xii] This case is significant for international arbitrations and Canadian claimants in the oil, gas, energy and mining sectors who are frequently involved in investor-state arbitration.
Taking place alongside Crystallex’s investor-state claim were proceedings in Ontario under the Companies’ Creditors Arrangement Act (“CCAA”). The CCAA is corporate reorganization legislation designed to allow debtor corporations in precarious financial positions to carry on business and, if possible, avoid bankruptcy proceedings.[xiii] Crystallex’s CCAA proceedings commenced after it filed its Request for Arbitration against Venezuela. The Ontario Superior Court of Justice (Commercial List) approved bridge financing, over the objection of certain creditors, from a hedge fund (Tenor Special Situations Fund LP), which Crystallex used to fund its ongoing investor-state claim.
Champerty and maintenance
Critics of TPF argue such agreements constitute champerty and maintenance. Maintenance is ancient common law doctrines designed to prevent third-parties from instigating frivolous litigation. Champerty is maintenance, but when the third-party obtains a benefit from a successful outcome. Champerty and maintenance remain torts in the Canadian common law jurisdictions. Ontario still has a champerty statute on the books based on an English statute harkening back to 1305.[xiv] It seems Ontario Courts have largely ignored that statute, however, relying instead on the classic common law iteration of the doctrine.[xv]
Although still alive and well, champerty is unlikely to affect most TPF agreements. An important limiting factor to champerty is the requirement to demonstrate the champertor acted for an improper motive, such as “officious intermeddling” or “stirring up strife”.[xvi] The champertor must act to encourage litigation that otherwise would not have occurred.[xvii] The recent Federal Court decision, Seedlings, also was careful to draw narrow boundaries around the common law concept, holding that champerty and maintenance does not give courts the discretion to inquire into and approve or disapprove funding agreements as a condition precedent to litigation. According to the Court, it is limited to rendering agreements tainted by champerty and maintenance unenforceable.[xviii]
As a civil law jurisdiction, Quebec does not recognize champerty and maintenance as private law doctrines. In addressing the analogous civil law doctrine, pactum de quota litis, Quebec courts have held that contingency fee agreements (ententes à pourcentage) are permissible except in some family law matters.[xix] There are no reported cases from Quebec addressing pactum de quota litis as applied to non-lawyer litigation/arbitration funders. However, the Court of Appeal of Quebec[xx] has found that contingency fee agreements do not offend public order and are permissible in principle. The Court’s comments were not expressly limited to lawyer-client contingency agreements and can reasonably extend to TPF agreements as well.
Potential costs consequences
We are unaware of any reported cases speaking to whether funder success fees are recoverable as costs. Two differing decisions from different provinces offer a glimpse into how Canadian courts might treat the issue. In Do v Sheffer, the Alberta Court of Queen’s Bench refused as disbursements interest paid on a litigation loan, which the plaintiff obtained from a “litigation funding company”.[xxi] In contrast, in Bourgoin v Ouellette, the New Brunswick Court of Queen’s Bench allowed a successful plaintiff in a personal injury action to recover interest due on a loan from a company providing temporary financing to personal injury plaintiffs awaiting insurance claim settlements.[xxii] The extent to which these cases might apply to a commercial party’s claim for a funder’s success fee as costs remains to be seen.
Looking at the question on the basis of first principles, courts might prove reticent to categorize a success fee as “costs” since the successful party never actually incurs any costs or expenses. Costs are designed to indemnify a successful party for the investment it makes in pursuing a legal claim[xxiii] and traditionally relate to costs actually incurred.[xxiv] On one view, a funder’s success fee is more properly characterized as a diminution in benefit rather than an incurred cost. When a plaintiff acquires TPF, the risk associated with investing in litigation is passed to the funder. The rationale for awarding costs (i.e. indemnity for litigation expenses incurred) thus apparently does not jive when applied to a funder’s success fee.
On the other hand, in many instances TPF promotes access to justice, which is another of the purposes behind legal cost regimes.[xxv] One might therefore argue that allowing litigants to recoup the funder’s success fee will further incentivize using TPF, in turn leading to more meritorious claims seeing daylight. Time will tell how Canadian courts opt to address this issue if and when it arises.