Canada: Third-Party Litigation Funding In Canada

In the classic cartoon from The New Yorker, a lawyer sits across from a prospective client and remarks: "You have a pretty good case, Mr. Pitkin. How much justice can you afford?" Framed in the context of a class action lawsuit, the client may well have asked the lawyer. "I have a pretty good case Mr. Lawyer. How much risk can you tolerate?"

The class action lawsuit is a unique legal procedure. It allows many parties with similar claims to pursue them collectively against a given defendant. Like any other court proceeding, class actions are a risk-reward proposition. The potential for settlment or damages must be weighed against the expense of litigation and, in some jurisdictions, the risk of an adverse cost award. As such, deep pockets and a high tolerance for risk are often critical to pursue a good case on the merits.

Third-party funding has emerged globally and in Canada as a means by which claimants can pursue a class action lawsuit and minimise their risk to adverse cost consequences for claims that do not succeed. Under this arrangement, a commercial entity funds a class action lwsuit on behalf of claimants in exchange for a percentage of the proceeds. Recently, Ontario courts have taken a leadership role by governing what is essentially a private contract due to the absence of legislation and the unique legal relationship among class action counsel, claimant and funder.

Risky business

An economist might describe a class action lawsuit as a cost-effective risk transfer mechanism. Class actions proceed under the same 'loser pays' cost regime as other civil matters in Ontario. As a result, an unsuccessful claim could result in a six or seven figure adverse cost award. Claimants have several viable options at their disposal to transfer such risk. Section 31 of the Ontario Class Proceedings Act shelters class members, other than the representative plaintiff, from costs. It also gives the court discretion to award no costs where the class proceeding was a test case, raised a novel point of law, or involved a matter of public interest. Indemnification may also be offered by class action law firms, the Class Proceedings Fund in Ontario, and third-party commercial funders. Of these options, third-party funding has increasingly become a more palatable choice given that funders undertake dual risk of upfront litigation expenses and adverse cost indemnification.

Historically, the practice of funding legal action in exchange for future remuneration has been governed by the common law doctrines of champerty and maintenance, which emerged to safeguard a party's best interests and protect the administration of justice against abuse from nonparties. Maintenance is the improper intermeddling in a lawsuit by a party with no legal interest in it. Champerty is a subspecies of maintenance and arises when a 'maintainer' shares in the profits of litigation. Courts have held that a person's motive is determinative of whether an arrangement constitutes maintenance or champerty.

Over time, Ontario courts have carved out exceptions to otherwise champertous acts in the presence of suitable justification. Ontario courts have held that funding agreements in the class action context are not champertous per se, as long as they adhere to certain guidelines. Some of these key principles are discussed below.

Anatomy of a third-party agreement

Champerty and maintenance continue to underpin the various Ontario judgments that have considered third-party funding agreements. Principles such as control, transparency and reasonable compensation are primary the considerations during motions to approve funding agreements. Below, we discuss five hallmarks of a properly drafted TPA.

1. Leave the big decisions to the plaintiff

An Ontario court will likely reject a TPA unless it leaves final decision-making authority in the hands of the plaintiff. In Metzler Investment GmbH vs. Gildan Activewear Inc., [200910.J. No. 3315 (Metzler), the court dismissed a motion to approve a TPA. It took particular exception to provisions that allowed the funding party to attend settlement discussions and to unilaterally withdrawal from litigation on seven days' notice. Presumably, such a withdrawal could wield considerable influence by cutting off litigation funding and re-exposing the representative plaintiff and/or class counsel to an adverse cost award. Two years later, the court in Dugal et al. vs. Manulife Financial Corporation et al., 2011 ONSC 1785 (Dugal) went a step further by requiring the funder to insert a provision stating that litigation control remained with the representative plaintiff.

2. Don't ask for too much

Ontario courts will favour funding agreements that contain reasonable caps on maximum returns. In Metzler, Justice Leitch concluded that a TPA would be champertous if it was spurred by an improper motive, and that the terms of remuneration were key to determining whether a funder's motive was improper. This principle was revisited in Dugal, where the court approved a TPA that allocated 7 percent in commission up to a maximum cap of C$5m prior to pre-trial and C$10m thereafter. In approving the TPA, Justice Strathy remarked that the maximum cap was reasonable in light of the potential downside risks facing the funder.

3. Put your cards on the table

Class action counsel and third-party funders should be prepared to disclose the terms of the funding agreement. In Fehr vs. Sun Life Assurance Company of Canada, 2012 ONSC 2715, the moving party sought an order to hold a TPA approval motion in the absence of the defendant and the general public. The court refused to grant the order. Justice Perell held that the terms of the TPA were not privileged in law. He further ruled that a motion to approve must be made on notice to the defendant, that the motion should be open to the public, and that court approval is mandatory for a TPA to come into force.

Given the level of transparency required by the court, funders and class counsel would be wise to ensure that their agreements do not include details on litigation strategy or budgetary limitations, which could easily compromise the integrity of the case and provide the defendant with leverage during negotiations.

4. The flow of information must be controlled

Third-party funders have limited rights when it comes to information obtained from litigation. In Dugal, Justice Strathy recognised that it was reasonable to provide a third-party funder with information regarding settlement offers and class counsel's assessment of liability and damages. Nevertheless, he suspended the approval of a TPA to ensure reasonable controls on the provision of information to the funder. The parties were asked to revise the TPA. According to the new agreement, the funder could not obtain evidence from the defendant without its consent. The plaintiff was also allowed to disclose formal settlement offers from the defendant provided that the terms remained confidential.

5. Prepare for a long-term financial commitment

An Ontario court may favour a TPA that envisions the participation of a third-party funder from start to finish. As noted earlier, the court in Metzler took exception to a provision in the TPA that would have allowed the funder to abandon the case on seven days' notice. Furthermore, in an effort to ensure the financial commitment of third-party funders, the courts in Dugal and Bayens required the funders to post security for costs.

Nevertheless, it may be possible for funders to negotiate a release clause under reasonable circumstances. In Metzler, Justice Leitch did not take issue with a provision that allowed the funder to remove itself from the action if the plaintiff failed to "fulfill its obligations under the agreement, if the plaintiff appoint[ed] different lawyers to replace current class counsel and for any other reason on seven days' notice".

Final thoughts

Third-party funding appears to be a mainstay in Ontario. Absent legislative intervention, it will continue to operate in the short term as a courtregulated economic enterprise. The degree to which the court can, or should, intervene further is a question for another day.

It is difficult to determine how many potential class actions have not been advanced due to the expense of litigation and potential cost awards. Whatever the number, it is likely that an increase in third-party funding will generate an increase in class action litigation.

Originally published with Corporate Disputes Magazine in June 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions