To date, there has been limited jurisprudence on whether or not third-party litigation funding agreements require court approval before an action is commenced. The recent decision of the Federal Court of Canada in Seedlings Life Science Ventures LLC v. Pfizer Canada Inc.1 (“Seedlings Life”) provides some direction for commercial parties, litigators, and arbitration practitioners, on how courts may interpret the request for court approval of third-party funding of litigation costs, outside the context of class action proceedings. The Seedlings Life decision is noteworthy because in it the Federal Court held that:
- in the context of private commercial litigation, it does not have jurisdiction to assess the legality of a litigation fund agreement unless (i) it relates to a class action properly before the Federal Court, (ii) it somehow affects the legal rights of the parties to pursue the litigation in question before the Federal Court; and
- court approval of third party funding is strictly a matter of contract between the contracting parties and assessment of the legality of such arrangements is more properly within the jurisdiction of the Provinces’ superior courts.
Facts and Background:
Seedlings Life Science Ventures (“Seedlings”), a small health care-related research and product development company, brought a patent infringement action against Pfizer Canada Inc. (“Pfizer”), a large pharmaceutical company, in the Federal Court of Canada.
Concerned about the inherent costs and risks of complex patent litigation, Seedlings entered into a Litigation Funding Agreement (“LFA”) with Bentham IMF Capital Limited (“Bentham”). Bentham is the Canadian subsidiary of a professional litigation funding enterprise from Australia.
The LFA provided that Bentham would fund Seedlings’ legal fees and disbursements, and in turn would be entitled to a share of the proceeds from the litigation. Further, the LFA allowed Bentham to terminate the agreement if it was no longer satisfied of the merits or commercial viability of the action.
Most notably, the enforceability of the LFA was conditional upon approval from the Federal Court. Absent this approval, Bentham could declare the LFA null and void. Seedlings and Bentham therefore made an application to the Federal Court for approval of the LFA.
Interestingly, and as an aside, Bentham also had the right to be consulted regarding potential settlements, and to access all documents produced in the course of litigation, subject to the same confidentiality and implied undertaking obligations as Seedlings.
The Federal Court's Decision:
The Federal Court maintained that its jurisdiction is statutory and cannot be presumed. It is unable to grant remedies and make final determinations of rights in matters “over which it has not been expressly granted jurisdiction by statute.”2 The Court also noted that there is no precedent for it to grant such approval.
Further, the Court found that the approval sought by Seedlings and Bentham was “neither necessary nor ancillary” to the underlying litigation. As a result, the Court had no jurisdiction to enquire into the legality of the LFA or to make any determination regarding the validity or propriety of the LFA. The Court stated that:
…where the Plaintiff is asserting its own rights against the Defendant, this Court has no jurisdiction to make any determination in respect of any funding agreement to which the Plaintiff is a party, whether of the Court’s own motion, at the behest of the Plaintiff or on a motion of the Defendant.3
Furthermore, the Court differentiated this motion from the procedure of approving funding agreements in the context of class proceedings. The Court maintained that the “legal, procedural and policy imperatives underlying the practice or requirement developed in Ontario and other provinces of submitting LFAs to prior court approval in class proceedings do not exist in the context of private litigation.”4 As such, to the extent that Bentham required “the comfort of a court’s prior determination of the enforceability or moral acceptability of the LFA before proceeding with it”, it was “strictly a matter of contract between subject and subject and properly within the jurisdiction of the courts of the provinces.”5
Seedlings and Bentham also argued that the Court’s approval of the LFA was a matter of access to justice.6 In rejecting this argument, the Court noted that while Seedlings and Bentham chose to make their agreement contingent upon the Court’s approval, the Federal Court’s jurisdiction “cannot be conferred by agreement between parties.”7 The Federal Court could not find any legal or logical basis to extend the requirement of pre-approval of such LFA agreements outside of class proceedings.8
Doctrine of Champerty and Maintenance Specifically:
The Court rejected the argument that it had jurisdiction through the doctrine of champerty and maintenance. The Court recognized that parties sometimes seek prior court approval to protect the funding party from the consequences of a subsequent finding that the agreement might be champertous and further, that the doctrine exists to protect against abuses of the court process.9 However, the Court held that the purpose of the doctrine of champerty and maintenance is not, and was never intended, to result in judicial approval of funding agreements becoming a condition precedent to pursuing litigation that a party is otherwise legitimately entitled to pursue.10
The Court further clarified that this was not a case where a champertous agreement went to the foundation of the actual litigation. In this respect, the Court held that the “manner in which Seedlings chooses to fund a litigation it has every right to bring is of no concern of the Court or to the Defendant because that manner does not affect the validity of the underlying rights asserted in the action.”11
The legal procedure as it relates to third-party litigation funding agreements in the context of private litigation is a developing area of law. This decision provides guidance that the Federal Court does not have the jurisdiction to “approve” a litigation funding agreement outside of the context of class proceedings. The exception to this would be if the litigation funding agreement affects the entitlement of the parties to pursue the underlying litigation before the Federal Court. Absent these two circumstances, the direction from the Federal Court is that it is the Provinces’ superior courts that are the more appropriate venue for parties seeking the comfort of an advance determination of the enforceability of their litigation funding agreement.12
Note however that in the event that the litigation funding agreement does affect the entitlement of the parties to pursue the underlying litigation, it appears the Federal Court may be of the view that will engage the issue of whether such a litigation funding agreement would violate the rules against champerty and maintenance. While each case is unique and strategy must be determined accordingly, counsel should bear in mind that the balance between being able to seek Federal Court approval and limiting the prospect of a litigation funding agreement contravening the rule against champerty and maintenance may be best struck in favour of avoiding the latter, and seeking advance determinations before the Provinces’ superior courts, even if the subject matter of the lawsuit is otherwise before the Federal Court.
The development of this area of the law is one to watch closely as litigation funding becomes more common in the commercial disputes context. As a result, the courts will continue to grapple with where the legitimate boundaries are for such means of financing resolution, be it through conventional litigation or arbitration.