Investment in litigation by third parties was a taboo subject in Ontario, until relatively recently. Commercial third-party litigation funding is on the cusp of taking hold in Ontario, as it has in the United States, Australia and the UK. In this article, we will briefly examine the growth of this new solution to the funding dilemma surrounding large lawsuits in Ontario.
WHAT IS IT?
Third-party funding is an arrangement whereby a commercial funder, or a number of funders, finance claimants engaged in litigation or arbitration, as an investment. The investor will generally see a return on the investment where the claim is successful in the form of a share of the proceeds of the litigation. This type of arrangement is becoming more necessary as the expenses relating to litigation continues to rise. In the U.S., companies reported that from the year 2000 to 2008, litigation costs rose at an average rate of 9% per year.
WHY WAS IT TABOO?
The stigma arose from the statutory and common law doctrines of champerty and maintenance, which have historically been a bar to third-party litigation funding. “Maintenance” is directed against those who become involved with the litigation of others. The maintainer has no interest in the outcome, and the assistance he or she renders to one or the other parties is without justification or excuse. Maintenance seeks to prevent third party involvement for an improper motive, often described as wanton or officious intermeddling. “Champerty” is an egregious form of maintenance in which there is the added element that the maintainer shares in the profits of the litigation.
Ontario courts have slowly relaxed the restrictions on third-party funding. It began in the personal injury bar, where the courts started to allow the recovery of amounts incurred to finance disbursement costs. This expanded to allowing lawyers to invest their time into contingency fee arrangements. The proliferation continued in the class action context, whereby third-party arrangements were allowed provided they were disclosed to the Court and approved by it.
To this day, third-party arrangements will not be rubber-stamped by the courts. Courts will not approve these agreements where they compromise or impair:
(i) the lawyer-client relationship;
(ii) the lawyer’s duty of loyalty and confidentiality to the client; or
(iii) where it may impair the lawyer’s professional judgment in the carriage of the litigation.
THE VALEANT DECISION
Schenk v. Valeant Pharmaceuticals International Inc is the Ontario decision which is seen as opening the door for third-party funding in commercial litigation. On a motion for the approval of a litigation funding agreement, the plaintiff sued Valeant Pharmaceuticals for breach of contract, claiming damages of $40 million. The Litigation Funding Agreement (“LFA”) was conditional on approval by a court, given the size and breadth of the documentary production required. In analyzing the LFA, Justice McEwen noted that LFA’s were typically dealt with in the class action context, and wrote that “I see no reason why such funding would be inappropriate in the field of commercial litigation.” Justice McEwen also noted that the third-party funder was subject to a Code of Conduct (the “Code”) as part of the Association of Litigation Funders of England and Wales (the “Association”).
The United Kingdom was one of the first jurisdictions to allow litigation funding arrangements and, in so doing, developed the Association to regulate litigation funding. The Code the Association established addresses many of the common law issues that arise. For example, funders cannot arbitrarily terminate funding nor take control of the proceedings. Canada has yet to implement similar regulations, leaving it to the discretion of the courts. Further, while Schenk has provided useful guidance for commercial third-party litigation funding agreements, it does not lay out a framework governing the conduct of funders. As such, in the formation of their LFA’s, potential funders can and should take guidance from both Schenk and the Code.
THE BENEFITS OF THIRD-PARTY LITIGATION FUNDING
Litigation funding represents a new tool in the commercial litigation bar while providing plaintiffs with increased access to justice. It can also allow a lawyer to take on cases which their client(s) cannot afford to prosecute. From a business perspective, firms that currently take on contingency fee arrangements are also able to diversify their risk profile by sharing it with a litigation financing firm across a larger number of cases. It also presents an option for individuals and corporate entities to hedge against the risk of loss in a particular case, provided the funding arrangements are purely success-based.
WHAT YOUR LITIGATION FUNDING AGREEMENT NEEDS TO SAY
As it stands, there are few rules governing litigation funding agreements (LFAs) in the commercial litigation context. Much of the practice concerning LFA’s are adopted from class actions, where LFA’s require court approval. The following is a list of considerations that your LFA should (and should not) include:
- The third-party funder cannot receive more than 50% of the proceeds of the litigation. The Schenk decision adopted this threshold from Ontario’s statutory cap on contingency fee agreements, which is set at 50%. Justice McEwen felt that an LFA in which the third-party could receive the majority of the proceeds did not provide access to justice.
- Courts will allow the LFA to stand where reasonable limits are placed on the funder’s ability to influence the litigation via termination. Courts have refused to approve LFA’s where the funder retains the ability to terminate without cause. In Schenk, termination was allowed only where the claim reasonably ceased to be meritorious.
- LFA’s may be required to be disclosed to opposing parties; as a result, one should ensure that the terms and the substance of the agreement do not reveal any confidential information.
- If the LFA is a “litigation loan”, ensure that the terms of the loan, especially the interest charged, are reasonable. In the personal injury action, Guiliani v. Region of Halton (2011), Justice Murray refused to compensate the successful plaintiff for the interest charged on a loan from a funding company because the interest charged amounted to approximately two-thirds of the loaned amount. The Court found these interest rates to be “usurious”.
THE NEW FRONTIER?
The commercial third-party litigation funding sector is still in its infancy in Ontario; as such, it is important that a claimant partner with an experienced funder. As is the case with other investments, litigation funding should be undertaken by well capitalized, established firms with a proven track record. The new market, a lack of competition and pre-existing experience in foreign markets have brought many new funding firms into Ontario. For example, Gerchen Keller Capital LLC, the largest litigation funder in the world, recently highlighted Toronto as a potential growth market in the sector. Local businesses and funds are also getting into the game. Ontario-based investment fund Balmoral Wood Litigation Finance is currently launching a new investment strategy focusing on commercial litigation financing. In terms of total cost thresholds, Gerchen Keller Capital tends to consider cases starting at $500,000 and up, while Balmoral Wood will consider cases starting at $200,000.
Third-party litigation funding can now be seen as a tool for enhancing access to justice while allowing counsel to take cases to court which may never otherwise have seen the inside of a courtroom. The impact of the Schenk decision can be seen by the Ontario Bar Association hosting a professional development seminar dedicated entirely to the subject, while traditional media has also written about the effect of the decision. As it stands, third-party litigation funding has hit Ontario.
 U.S. Chamber Institute for Legal Reform, “Litigation Cost Survey of Major Companies” (Paper delivered at the 2010 Conference on Civil Litigation, Duke Law School, May 10-11, 2010), p 2 [unpublished].