In our earlier blog post, after the Supreme Court of Canada issued its judgment from the bench in 9354-9186 Quebec Inc. v Callidus Capital Corp,[1] we commented on the highly anticipated reasons to follow in the appeal. Notably, this is one of the first cases raising the issue of third party litigation funding at the Supreme Court of Canada.
This appeal involved an insolvency dispute in a Companies’ Creditors Arrangement Act proceeding. At issue was whether the debtor was required to obtain creditor approval for the litigation funding agreement. By granting the appeal, the Supreme Court of Canada restored the decision of the Quebec Superior Court Judge, Justice Jean-Francois Michaud, which approved the litigation funding agreement that the debtor had entered into with Bentham IMF. On May 8, 2020, the Supreme Court of Canada released its reasons providing helpful guidance to parties considering the use of a third party litigation funding agreement.
The Court considered the historical development of third party funding in Canada, and provided an overview noting the controversy that initially surrounded these types of agreements:
Third party litigation funding generally involves “a third party, otherwise unconnected to the litigation, agree[ing] to pay some or all of a party’s litigation costs, in exchange for a portion of that party’s recovery in damages or costs” (R. K. Agarwal and D. Fenton, “Beyond Access to Justice: Litigation Funding Agreements Outside the Class Actions Context” (2017), 59 Can. Bus. L. J. 65, at p. 65). Third party litigation funding can take various forms. A common model involves the litigation funder agreeing to pay a plaintiff’s disbursements and indemnify the plaintiff in the event of an adverse cost award in exchange for a share of the proceeds of any successful litigation or settlement (see Dugal v. Manulife Financial Corp., 2011 ONSC 1785, 105 O.R. (3d) 364; Bayens).[2]
Outside of the CCAA context, the approval of third party litigation funding agreements has been somewhat controversial. Part of that controversy arises from the potential of these agreements to offend the common law doctrines of champerty and maintenance. The tort of maintenance prohibits “officious intermeddling with a lawsuit which in no way belongs to one” (L. N. Klar et al., Remedies in Tort (loose-leaf), vol. 1, by L. Berry, ed., at p. 14-11, citing Langtry v. Dumoulin (1884), 7 O.R. 644 (Ch. Div.), at p. 661). Champerty is a species of maintenance that involves an agreement to share in the proceeds or otherwise profit from a successful suit (McIntyre Estate v. Ontario (Attorney General) (2002), 218 D.L.R. (4th) 193 (Ont. C.A.), at para. 26).[3]
The Court then considered the use of such agreements in class proceedings observing:
Building on jurisprudence holding that contingency fee arrangements are not champertous where they are not motivated by an improper purpose (e.g., McIntyre Estate), lower courts have increasingly come to recognize that litigation funding agreements are also not per se champertous. This development has been focussed within class action proceedings, where it arose as a response to barriers like adverse cost awards, which were stymieing litigants’ access to justice (see Dugal, at para. 33; Marcotte v. Banque de Montréal, 2015 QCCS 1915, at paras. 43-44 (CanLII); Houle v. St. Jude Medical Inc., 2017 ONSC 5129, 9 C.P.C. (8th) 321, at para. 52, aff’d 2018 ONSC 6352, 429 D.L.R. (4th) 739 (Div. Ct.); see also Stanway v. Wyeth, 2013 BCSC 1585, 56 B.C.L.R. (5th) 192, at para. 13). The jurisprudence on the approval of third party litigation funding agreements in the class action context — and indeed, the parameters of their legality generally — is still evolving, and no party before this Court has invited us to evaluate it.[4]
The Court was clear that the law in relation to third party agreements is still evolving, especially so in the class actions context.
Of particular significance in this decision is the Supreme Court of Canada’s confirmation that third party litigation funding agreements are not per se illegal. The Court noted, “That said, insofar as third party litigation funding agreements are not per se illegal, there is no principled basis upon which to restrict supervising judges from approving such agreements as interim financing in appropriate cases.”[5]
Over the past decade we have seen the more wide spread use of third party litigation agreements, especially in the context of class proceedings. While the Court refrained from providing an outline for approval of these types of agreements, the Supreme Court of Canada’s confirmation that third party litigation funding agreements are not per se illegal, provides important clarification from Canada’s highest court and is likely to impact the use of third party litigation funding agreements going forward.
[1] 9354-9186 Québec Inc. v. Callidus Capital Corp., 2020 SCC 10.
[2] Ibid at para 93.
[3] Ibid at para 94.
[4] Ibid at para 95.
[5] Ibid at para 96.
