Litigation Finance in Canada

November 30, 2022

Litigation Finance in Canada

Following the path of other common law countries: the United Kingdom, Australia, and in the United States, where litigation funding has become a very well-established, judicially recognized, and commercially useful tool, Canada has also been embracing third-party funding (TPF) in the recent years.

The law has confirmed the suitability of TPF in the context of class proceedings, as courts in Canadian common law jurisdictions (all provinces aside from Quebec) must approve a litigation finance agreement at the outset of the case for it to be binding on the class. At the same time, litigation funding for single-party commercial litigation and bankruptcy proceedings is becoming more common in Canada.

That evolution is accelerating as commercial litigants recognize that litigation funding can be a powerful tool used in a variety of commercial cases. The growing interest have brought a number of international litigation funders to Canada and some of them followed with setting up their offices in the country.

Current situation

For centuries, the common law in Canada prohibited TPF as it was thought to enable frivolous litigation. The origins of this disapproval come from the common law doctrines of champerty and maintenance.

Eventually, courts began to recognize that as litigation costs rose, access to justice could be served by allowing third parties to fund litigation (McIntyre Estate v. Ontario, 2002). The perspective of the courts in Canada has now firmly shifted to acceptance of litigation funding as a tool, and different structures have been applied in a variety of contexts in Canada.

Class Proceedings

Class proceedings have provided a productive area for the development of Canadian law on litigation funding agreements (LFAs) where LFA is subject to the requirements of judicial review and approval.

The courts have developed a five-part test to determine on a case-by-case basis whether the LFA is appropriate in the context. To approve the agreement, the following requirements must be fulfilled (Houle v St. Jude Medical Inc, 2018):

  1. a) the agreement is necessary in order to provide access to justice;
  2. b) the access to justice facilitated by the agreement must be substantively meaningful;
  3. c) the agreement must be fair and reasonable;
  4. d) the funder must not be overcompensated for assuming the risks of an adverse costs award; and
  5. e) the agreement must not interfere with the lawyer-client relationship.

The courts have consistently held that a commercial agreement in good faith that does not give rise to unnecessary and unmeritorious litigation is not necessarily champertous (Lilleyman v Bumble Bee Foods LLC, 2021).

Insolvency Proceedings

Canadian courts decided to accept the idea that litigation financing can be a valuable tool in combatting access to justice discrepancies. In Quebec Inc. v. Callidus Capital Corp, 2020, the Supreme Court of Canada ruled unanimously that private, third-party funding is allowed in bankruptcy and insolvency situations, and that LFAs are not necessarily unlawful in other contexts as well.

Single-party commercial litigation

Despite the above case law in the context of class proceedings, Canadian law on TPF in the context of commercial disputes between individual parties was still relatively underdeveloped. In 2015, however, the courts took a step forward in Schenk v. Valeant, where the court set the three key criteria to review an LFA:
(1) the funder did not ‘stir up’ the litigation;
(2) the funder cannot control the litigation; and
(3) the funder’s return must be reasonable.

In Schenk, the court drew guidance from Ontario’s Contingency Fee Regulations, which allow a return of up to 50 percent of the litigation proceeds.

The Federal Court has found that “there are no procedural requirements for the approval of a party’s funding agreement outside of class proceedings” (Seedlings Life Science Ventures, LLC v. Pfizer Canada Inc., 2017). The question is strictly a matter of contract between the claimant and the litigation funder.

Future developments

Overall, the law regarding LFAs continues to develop favourably for the funding industry in Canada. There are further examples of successfully approved LFAs, which provide further clarity on the components of an acceptance of LFAs in the context of class proceedings.

It is also important to watch the extent to which legislatures guide the evolution of TPF in Canada. Legislatures have begun amended existing statutes to address this topic. For example, British Columbia amended its International Commercial Arbitration Act confirming that TPF for an arbitration is not contrary to the public policy in British Columbia. In addition, in May 2021, the Canadian government announced a new bilateral investment treaty model, called the Foreign Investment Promotion and Protection Agreement Model, which includes commitments for claimants to disclose TPF.

Finally, in 2020 litigation funding was directly recognized in the Ontario Class Proceedings Act, which codifies and regulates LFAs in the context of class actions in Ontario.

The perspective of the courts in Canada has now firmly shifted to acceptance of litigation funding as a tool, and different structures have been applied in a variety of contexts in Canada. Litigation funding is becoming increasingly common in arbitrations, insolvency proceedings, IP enforcement, construction disputes, and business to business commercial disputes.

November 30, 2022