Litigation Funding in Canada (Ontario)

Litigation Funding in Canada

Litigation Funding in Canada (Ontario)

It is hard to miss the fact that litigation funding is undergoing exponential growth internationally and now constitutes a multi-billion dollar global industry. In the United Kingdom, Australia, and the United States funding of both individual claims and class or group actions is now commonplace. Increasing liberalization of both civil litigation and arbitration regimes in other jurisdictions continues to open a greater number of jurisdictions to the possibility of funding. Changes in the law in Hong Kong and Singapore since 2018 permit third-party funding in respect of international arbitration and in 2021 Singapore further liberalized, permitting third-party funding of domestic arbitration and proceedings in the Singapore International Commercial Court (SICC). Coupled with greater awareness of the many advantages of funding amongst both attorneys and clients and combined with a greater number of sophisticated providers of litigation finance, litigation funding is now part of the discussion around how proceedings should be financed in many cases.

Canada is no exception to this trend; judicial treatment of funding is increasingly favorable and contingency fee arrangements are being used by the Canadian bar with greater frequency, paving the way to greater access to justice for all Canadian plaintiffs.

You can read our whitepaper, Litigation Funding in Canada (Ontario) below or you can download the PDF here

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Litigation Funding in Canada (Ontario)

Woodsford Litigation Funding Insight

It is hard to miss the fact that litigation funding is undergoing exponential growth internationally and now constitutes a multi-billion dollar global industry. In the United Kingdom, Australia, and the United States funding of both individual claims and class or group actions is now commonplace. Increasing liberalization of both civil litigation and arbitration regimes in other jurisdictions continues to open a greater number of jurisdictions to the possibility of funding. Changes in the law in Hong Kong and Singapore since 2018 permit third-party funding in respect of international arbitration and in 2021 Singapore further liberalized, permitting third-party funding of domestic arbitration and proceedings in the Singapore International Commercial Court (SICC) . Coupled with greater awareness of the many advantages of funding amongst both attorneys and clients and combined with a greater number of sophisticated providers of litigation finance, litigation funding is now part of the discussion around how proceedings should be financed in many cases.

Canada is no exception to this trend; judicial treatment of funding is increasingly favorable and contingency fee arrangements are being used by the Canadian bar with greater frequency, paving the way to greater access to justice for all Canadian plaintiffs.

What are the Advantages of Litigation Funding?

As we have seen over the last several years in the United States, litigation funding can be applied to a catalog of varied commercial matters, and its economic and strategic advantages can be substantial for both plaintiffs and lawyers alike.

The first is that litigation finance provides access to justice for plaintiffs with meritorious claims but limited means to prosecute litigation, or those facing insolvency. This is particularly true in “David v Goliath” cases where individuals or a smaller corporate takes on a bigger, well-resourced corporate defendant, which may attempt to delay proceedings to drain the plaintiff’s financial resources and exhaust their appetite and ability to pursue the claim. Partnering with a well-capitalized funder like Woodsford counters this imbalance and substantially levels the playing field by allowing a proper claim to proceed and survive solely on its merits.

Increasingly, litigation funding is also being utilized by plaintiffs who are choosing to take advantage of litigation finance, not because of financial constraints but with the aim of sharing the risk of ongoing legal costs and contingent liabilities of the claim with a third-party. Chief Financial Officers and their General Counsels are also recognizing the accounting and budget benefits of third-party funding, as it shifts ongoing litigation expenses off a company’s balance sheet.

The utilization of litigation funding has also demonstratively led to better settlement outcomes in certain scenarios by providing strategic options to claimholders and their counsel. Knowing that they have the financial support to fully pursue a dispute provides clients with better leverage in settlement discussions as they will not be forced to accept a low offer based on capital constraints or risk adverseness.

Furthermore, if and when the plaintiff’s attorneys feel it is strategically optimal, the defendants can receive a powerful signal that a sophisticated and reputable litigation funder such as Woodsford, with substantial litigation expertise, believes strongly enough in the merits of the underlying claim to put their capital at risk, having carried out a thorough due diligence exercise on the plaintiff’s claims.

Finally, it should be emphasized that most reputable litigation funders are completely passive investors who do not exercise any control over the funded matter. Although a litigation funder like Woodsford, staffed with expert litigators possessing decades of international law firm experience, can prove to be a valuable resource to claimholders and their attorneys, all decisions regarding the litigation and potential settlement remain firmly in the hands of the attorneys and their client. That detachment will be important to the courts when reviewing the appropriateness of funding agreements.

In Ontario, the Ontario Trial Lawyers’ Association has developed a policy to outline standards for interactions with litigation financiers that reflect some of the aims of the UK’s Code of Conduct promulgated by the Association of Litigation Funders, of which Woodsford is a founder member.

What forms can Litigation Funding take?

Most attorneys are now familiar with the fundamentals of litigation funding: a third party, which is otherwise unrelated to the litigation, agrees to fund all or part of the plaintiff’s costs of the litigation. The costs can be attorney’s fees and/or other disbursements such as experts’ fees. The third-party may also indemnify the plaintiff against the risk of any adverse costs through an indemnity. The funder may also provide the indemnity by purchasing an after-the-event insurance policy. Funding of this kind is non-recourse, in that it is not repayable if the case does not succeed, with the funder obtaining a return on its investment only in the event of success, with such return comprising a proportion of the damages and/or costs recovered by the plaintiff.

As well as providing non-recourse finance to plaintiffs to meet their legal fees and/or disbursements in respect of a single litigation or arbitration case, funding can also be advanced to plaintiffs in respect of a “portfolio” of claims. Take, for example, a construction company that is involved in a series of disputes over various projects. Litigation funding can be provided to fund all of those disputes. The advantage for the plaintiff is that such finance can, on the whole, be provided at a better rate, and the funder will often be able to apply a lighter touch to due diligence, saving management time. For the funder, the risk of loss is lessened since the funder’s collateral includes proceeds generated from any of the cases.

As the use of contingency fees in Ontario, and more widely in Canada increase, and the costs of litigation rise especially in the class action context, law firms are finding it harder to bear the burden of funding these contingency arrangements from their resources. There is a gap growing between the capacity of law firms to take on contingent fee work and the appetite of plaintiffs for such arrangements. There is also the potential for conflicts to develop in full-service firms, with the litigation group often having to persuade non-litigators to support their contingent fee portfolio. Litigation funding can step in to meet this demand and solve the inherent conflicts that might develop over securing internal resources.

As well as providing finance to a single case, litigation funders such as Woodsford can also offer structured non-recourse financing facilities directly to law firms providing economic support to their contingency practices and a boost to both the firm’s day-to-day cash flow and its overall financial position. Law firm finance, where a funder enters into a funding facility directly with a law firm cross-collateralized against a portfolio of the firm’s contingency cases, can mitigate cash flow challenges for the firm, providing a certainty that overheads including salaries and legal invoices will be timely paid and enabling the partners to focus on the practice of law. These law-firm side arrangements are also a vehicle to allow a firm to expand by serving new clients and offering more flexible arrangements to existing business relationships with ongoing engagements.

Supreme Court of Canada ruling on litigation funding

Québec inc. v. Callidus Capital Corp. (the “Bluberi case”)

In January 2020, the Supreme Court of Canada considered the litigation funding agreement (the “LFA”) for the first time [1]. The Court heard the appeal of the claimant and overturned the decision of the Quebec Court of Appeal which imposed the LFA to be submitted to the creditors for a vote as a plan of arrangement. Following an initial order under the Companies Creditors’ Arrangement Act (CCAA), one of three principal insolvency statutes in Canada, substantially all of the assets of the Bluberi companies were liquidated. The notable exception was retained claims for damages against the companies’ only secured creditor, Callidus Capital Corporation, which describes itself as an “asset-based or distressed lender”.

It was alleged that Bluberi’s liquidity issues were the result of Callidus taking de facto control of the corporation and dictating several purposefully detrimental business decisions. Bluberi alleged that Callidus engaged in this conduct in order to deplete the corporation’s equity value with a view to owning Bluberi and, ultimately, selling it. Callidus’ efforts to push through a plan of arrangement were thwarted by the supervising judge, Michaud J. in the Quebec Superior Court, who considered that Callidus was acting with an improper purpose. The supervising judge also authorized Bluberi to enter into a third-party litigation funding agreement, which would permit them to pursue litigation of the retained claims against Callidus. The litigation funding agreement provided for the placement of a $20 million super-priority charge in favor of the litigation funder on Bluberi’s assets, in particular the retained claims, which Bluberi asserted should amount to over $200 million in damages.

The Court of Appeal of Quebec set aside the supervising judge’s order, but the Supreme Court disagreed with the Court of Appeal and reinstated the supervising judge’s order. The Supreme Court focused on the fairness of the LFA and reiterated the principles in McIntyre Estate v Ontario. [2] The Court found that whether third-party litigation funding should be approved as interim financing is a case-specific inquiry. Interim financing is a flexible tool that may take on a range of forms. In some circumstances, like the instant case, litigation funding furthers this basic purpose. Third-party litigation funding agreements may therefore be approved as interim financing in CCAA proceedings when the supervising judge determines that doing so would be fair and appropriate, having regard to all the circumstances and the objectives of the CCAA.

Developments in Ontario

Class actions

Third-party funding for class actions has received court approval in several instances over the last decade. The courts have provided useful guidance on which litigation funding agreements (the “LFAs”) should be approved in Ontario. The approved LFAs have on the whole provided for the funding party to commit to pay disbursements, to advance security for costs as ordered by the court, and to meet adverse costs. The funder receives a return based upon a percentage of any settlement or judgment obtained on behalf of the class. In David v Loblaw [3], the Ontario Superior Court of Justice set out the factors which it took into account in making such an assessment:
• the plaintiffs’ rights to instruct lawyers and direct the litigation was not fettered;
• the plaintiffs had received independent legal advice on the terms of the funding;
• the funding agreement could only be terminated by the funder with the leave of the court (with the funder paying costs up to the date of termination);
• the court was satisfied that the funder’s obligations were sufficient to cover any adverse cost orders; and
• no assignment of the funding agreement could take place without court approval and notice to all parties.

In March 2021 in Drynan v. Bausch Health Companies Inc. [4], the Ontario Superior Court of Justice reiterated that the general test for approval of an LFA is that it should not be illegal, and it must be a fair and reasonable agreement that facilitated access to justice while protecting interests of defendants. Also, the court refused to amend the “promise clause” in the LFA requiring the plaintiff to conduct the litigation in a way that avoids unnecessary litigation costs, yet it raised that an LFA cannot effectively bind the plaintiff’s hand and undermine the plaintiff’s ultimate control of the litigation.

In addition to the courts’ guidance on the LFAs, the Class Proceedings Act (the “Act”) now regulates the LFAs within the context of class actions in Ontario. The Act codifies that a plaintiff who has entered into an LFA must receive court approval. The court will approve the LFA if (1) the agreement is fair and reasonable, (2) the agreement does not diminish the rights of the representative plaintiff to instruct counsel and control the litigation, (3) the funder can satisfy the adverse costs awards, and (4) the funder meets any other prescribed requirements. The Court will also consider whether the representative plaintiff received independent legal advice with respect to the agreement.

The cost awards have also been regulated with the Act: defendants can recover any costs awarded against the representative plaintiff directly from the funder to the extent of the indemnity provided by the funder under an approved LFA. The defendant is entitled to obtain security for costs from the funder, again subject to the terms of the LFA, if, (1) the funder is ordinarily resident outside of Ontario, (2) the defendant has an order against the funder that remains unpaid in whole or in part, and (3) there is good reason to believe that the funder has insufficient assets in Ontario to pay the costs.

While the Class Proceedings Fund does provide some public funding for class proceedings in Ontario, the fund covers only disbursements (including experts’ fees) and indemnifies plaintiffs against adverse costs awards, but it does not provide funding for the plaintiffs’ attorney’s fees. Further, cases seeking public funding must engage the public interest, which may not be the case in many class actions. Here, litigation funding from a reputable third-party funder such as Woodsford can help achieve access to justice for claims which do not obtain such public funding.

Single-party commercial case funding

While much of the discussion around third-party funding is focused on funding for class actions, and in relation to claims by insolvent parties, funding for solvent claimants on a single case basis in Ontario is increasingly gaining traction. The costs of disputes are rising and recognition is increasing that claims must not only be sufficiently legally meritorious to warrant being commenced but must also be economically viable to be assets worthy of incurring the costs and risks of litigation. The commercial reality is that plaintiffs may need or want to share the risks and rewards of litigation. The courts of Ontario have recognized this reality. In Schenk v. Valeant Pharmaceuticals International Inc [5], the Ontario Superior Court of Justice commented that “[t]ypically, [third-party funding] agreements have arisen in class proceedings. […] This being said, I see no reason why such funding would be inappropriate in the field of commercial litigation”. The court dismissed the motion for approval of the funding agreement in this case but granted the plaintiff the opportunity to revise the agreement, which confirmed that third-party funding agreements can exist in the single-party commercial litigation context.

As a result of Schenk, third-party litigation funding arrangements began to spread, but the procedural boundaries, particularly in regard to whether judicial approval of the funding agreement was required, were still unknown. In Seedlings Life Science Ventures, LLC v Pfizer Canada Inc [6], judicial treatment of third-party funding agreements was voluntarily sought by the funder and the plaintiff who wanted judicial confirmation that the agreement would not be held unenforceable as champertous. The court questioned why its approval would be necessary in the context of single party commercial litigation and confirmed that, in this context, a “[d]efendant has no legitimate interest in enquiring into the reasonability, legality or validity of [the plaintiff’s] financial arrangements […] or the manner in which [the plaintiff] chooses to allocate the risks and potential returns of the litigation”. This decision marks a distinction between funding in the class proceedings context, where court approval of a funding agreement at the outset of litigation is required, and in the single-party commercial litigation context, where court approval is arguably not required.

Conclusion

There are now more options available for plaintiffs in Ontario who wish to pursue their legal rights and manage the inherent risks of litigation. With litigation finance on the rise and continuously taking different forms, it makes sense for lawyers to educate themselves on funding and the numerous finance solutions that are available to their firms and clients. When clients require or may otherwise benefit from litigation finance, it is arguably incumbent upon the lawyer not only to have adequate knowledge of funding and the products available but also to help the client in deciding which funders to approach and which ones to avoid. In this regard, lawyers should select only reputable and professional litigation finance providers who are experienced in the practice of dispute resolution.

[1] 9354-9186 Québec inc. v Callidus Capital Corp, 2020 SCC 10[2] McIntyre Estate v Ontario (Attorney General), 2002 CanLII 45046 (ON CA)[3] David v. Loblaw, 2018 ONSC 6469[4] Drynan v. Bausch Health Companies Inc., 2020 ONSC 4379[5] Schenk v. Valeant, 2015 ONSC 3215[6] Seedlings Life Science Ventures, LLC v. Pfizer Canada Inc., 2017 FC 826

About the authors

Ekin Cinar
Based in Toronto, Ekin is a lawyer with extensive experience in complex, high-value disputes involving commercial arbitration and litigation, major construction projects, foreign investments, and shipping matters.

Prior to joining Woodsford, Ekin has worked at international law firms and has acted as counsel in numerous international arbitration proceedings before the ICC, LCIA, ICSID, and AAA in relation to commercial and investment disputes. Ekin also has experience in cross-border enforcement proceedings.

Ekin holds graduate degrees in law from the University of Toronto and Université Paris I Panthéon Sorbonne.

Mark Spiteri
Woodsford’s Finance and Commercial Director is an economics graduate from the London School of Economics. He started his career in 1997 at Coopers & Lybrand (now Pricewaterhouse Coopers), where he trained as a management consultant and was admitted into the Chartered Institute of Management Accountants (CIMA).

Mark went on to become a manager in the Corporate Finance division of PwC, where he specialised in strategic M&A and outsourcing transactions. Major clients included Royal Mail, the NHS and a number of private equity firms.

For further information, or to discuss a matter for funding, contact Mark directly