The prohibitively high cost of litigation is arguably one of the main barriers to access to justice in Canada. As in many other legal markets, the soaring cost of legal fees has created an impediment to even well resourced parties bringing the most meritorious of claims. “Litigation funding” or “third-party funding” is a way of surmounting this barrier. Litigation funding has become a well-established, judicially recognized and commercially useful tool in the United Kingdom, Australia, and the United States, but is a relatively nascent phenomenon in Canada. While the first approval of a private-funding arrangement in Canada occurred in 2009,[1] the Supreme Court of Canada (SCC) in 2020 has commented that the jurisprudence in this area is still evolving.[2]
That evolution is accelerating as sophisticated Canadian commercial litigants recognize that litigation funding from a reputable, well-resourced funder can be a powerful tool that is not simply limited to funding class actions, but can be used in a variety of commercial circumstances, from insolvency proceedings to IP enforcement disputes. It can be used to take the risk and costs of meritorious claims or enforcement of judgments off a company’s balance sheet, freeing up valuable working and investment capital. Litigation funding is another tool that canny General Counsels need to be aware of in the battle to control legal spend and efficiently manage in-house legal resources.
What is Litigation Funding?
While litigation funding can take on different forms, a typical litigation funding arrangement involves:
- an investor who is not a party to the litigation;
- payment by the third-party investor of all or a portion of a plaintiff’s litigation costs; and
- payment of a return to the investor if (and only if) there is a recovery in the litigation.
Often, litigation funding transactions are structured to provide the third-party investor with a portion of a recovery or damages award if the litigation is successful. Of course, litigation funding requires a thorough assessment of the merits of a claim by the proposed funder. Reputable litigation funders are passive investors who do not exercise any control over the funded matter and ordinarily, all decisions regarding the litigation and potential settlement remain firmly in the hands of the parties to the lawsuit.
A litigation funding agreement (LFA) is a contract between a third-party investor and the litigant seeking funding. The LFA governs the terms of the funding arrangement and sometimes requires court-approval to effect a binding agreement on the parties in court supervised matters, such as class actions or insolvency proceedings.
The Recognition of Litigation Funding in Canada
For centuries, the common law in Canada prohibited what we now call litigation funding as it was thought to enable frivolous litigation. The basis of this historical disapproval was found in the common law doctrines of champerty and maintenance.[3] Eventually, courts began to recognize that as litigation costs rose, access to justice could be served by allowing third parties to fund litigation.[4] This gradual approval led to widespread debates and the eventual acceptance of the legitimacy of contingency-fee arrangements between lawyers and clients, which faced very similar scrutiny.
The perspective of the courts in Canada has now firmly shifted to acceptance of litigation funding as a tool, and different structures of LFAs have been applied in a variety of contexts in Canada. While often seen in class actions due to the public policy driven court supervision of those proceedings, litigation funding is becoming increasingly common in arbitrations, insolvency proceedings, IP enforcements, construction disputes, business to business commercial disputes, judgment enforcements, as well as various other types of litigation.
Judicial Approval in Canada
In both private commercial arbitration and litigation, court approval of an LFA is generally not required. Prior to the firm shift towards litigation finance approval, parties to these agreements had sought and obtained court approval out of caution. However, today this approval is deemed unnecessary.
Litigation funding is now a regular feature of many private commercial arbitrations and lawsuits between sophisticated commercial parties. LFAs in these proceedings are rarely made public given that they are private commercial arrangements that do not need to be scrutinized by supervising courts in the same way as in public policy driven, court supervised proceedings. Private parties often turn to litigation funding to fund claims or enforce judgments, allowing them to preserve working capital and focus management and in-house counsel on core business activities.
However, in proceedings that have an element of court supervision, such as class actions and insolvency proceedings, the decision to approve an LFA is required and generally determined with regard to the purposes and objectives of the statute or regime that governs the litigation.
Over the last decade, there has been a host of favourable judicial commentary in Canada on the advantages of litigation funding in public policy driven court supervised proceedings. In fact, litigation funding has now been directly recognized in the Ontario Class Proceedings Act, which codifies and regulates LFAs in the context of class actions in Ontario.
In a recent case, Lilleyman,[5] the Ontario Superior Court of Justice applied the litigation funding provisions of the Class Proceedings Act and confirmed the public policy benefit of litigation funding in situations where individual plaintiffs may have difficulty obtaining damages from a deep-pocketed corporate defendant. In Lilleyman, litigation funder Lake Whillans provided funding to the class for expenses and provided an indemnity for any adverse cost award. The Court recognized that funding by a third party can play a large role in ensuring that defendants are held accountable for their alleged wrongful actions. Justice Perrel observed that:
Third-party litigation funding is acceptable as promoting the important objectives of class proceedings, including promoting access to justice and behaviour modification and may be justified in class proceedings as a matter of necessity. [6]
Expanded Application of Litigation Funding in Insolvency Proceedings
Litigation funding has proven to be beneficial in Canada well beyond the borders of class proceedings. Notably, the use of third-party litigation funding has also gained traction in the insolvency context in Canada. In any insolvency proceeding, maximizing creditor recovery is a fundamental objective, and there has been judicial recognition in Canada that litigation funding can further this purpose.
In the recent Bluberi case, the SCC considered the legitimacy of litigation funding in the context of insolvency proceedings under the Companies’ Creditors Arrangements Act (CCAA).[7] The SCC in Bluberi noted that while litigation funding differs from more common forms of interim financing that are simply designed to help the debtor “keep the lights on,” there are circumstances where a single litigation asset that could be monetized for the benefit of creditors has taken “centre stage.”[8]
Similarly, in Crystallex International,[9] the Ontario Court of Appeal (ONCA) noted that since the debtor’s only significant asset was an arbitration claim against the Venezuelan government for breach of contract, arbitration financing was integral to the debtor’s successful restructuring.
In both Bluberi and Crystallex International, the granting of a super-priority charge over the assets of the insolvent debtor to a third-party litigation funder furthered the purpose of maximizing the value of the insolvent estate, and was sanctioned by the courts.
These cases have firmly opened the door to the increased use of litigation funding to advance meritorious estate claims that previously would have been abandoned or auctioned off due to a lack of estate resources.
The Future of Litigation Funding in Canada
As the jurisprudence develops in this area and parties to litigation in Canada normalize the concept of third-party litigation, the importance of engaging a highly reputable and well-capitalized litigation funding firm, supported by experienced commercial counsel, cannot be overstated.
As the law develops in this area and the market for litigation funding continues to grow, consideration of the availability and efficacy of litigation funding should be one of the tools that every commercial litigator and in-house counsel considers when considering a claim.
[1] Hobsbawn v ATCO Gas and Pipelines Ltd., (14 May 2009), Calgary 0101-04999 (Alta QB).
[2] 9354-9186 Québec Inc. (Bluberi) v Callidus Capital Corp, 2020 SCC 10 at 95 [Bluberi].
[3] The tort of maintenance prohibits “officious intermeddling with a lawsuit which in no way belongs to one.” Champerty is a species of maintenance that involves an agreement to share in the proceeds or otherwise profit from a successful suit (ibid at 94).
[4] McIntyre Estate v Ontario (Attorney General), 2002 CarswellOnt 2880.
[5] Lileyman v Bumble Bee Foods LLC, 2021 ONSC 4968 [Lileyman].
[6] Ibid. at 22.
[7] RSC 1985, c C-36.
[8] Supra note 2 at 96.
[9] Crystallex International Corp., Re, 2012 ONCA 414 [Crystallex International].
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