Litigation Funding - Overview

Litigation Funding: Overview, Practical Law Canada Practice Note Overview w-021-3651
Litigation Funding: Overview

by Geoff Moysa, Omni Bridgeway (formerly Bentham IMF) with Practical Law Canada
Corporate & Commercial Litigation
Practice note: overview | Published on 04-Feb-2020 | Canada
This Practice Note Overview discusses third-party litigation funding, a mechanism that enables non-parties to cover
litigation costs in return for a share of the recovery that results from a win at trial or settlement. This resource reviews
relevant case law and shares practical information about the litigation funding process, including the decision to
fund and the terms of the funding agreement.
Legal Framework in Canada

Maintenance and Champerty
Third-Party Funding in Class Action Litigation
Third-Party Funding in Commercial Litigation
Third-Party Funding in Insolvency
Why Third-Party Funding?

What do Funders Look For?
Stages in the Funding Determination and Due Diligence Process
Confidentiality Agreement and Preliminary Assessment
Term Sheet Stage
Due Diligence
The Litigation Funding Agreement and Mechanics of the Investment

Features of Typical Funding Arrangements
Risk Shifting and Sharing
Returns
Adverse Costs
Security for Costs
Key Legal Issues Raised in Third-Party Funding Arrangements

Confidentiality and Privilege
Priority of Payments and Funder's Interest
Disclosure and Court Approval of Funding Agreements
Control, Settlement and Termination
Copyright © Thomson Reuters Canada Limited or its licensors. All rights reserved. 1
Litigation funding allows third parties to invest in litigation. In a typical litigation funding transaction, the funder
(who is not a party to the case) pays all or part of a party's litigation expenses in return for a fee or a share of the
recovery.
These costs typically include lawyers' fees, expert reports and other disbursements. The funder may also provide
working capital to the client. In addition, the funder typically will agree to pay any court-ordered costs, including
any security for costs. A wide range of disputes may be suitable for third-party funding, including business disputes,
insolvency matters and arbitrations in the commercial litigation context. There is also a distinct and active market
for third-party funding in the personal injury and class action contexts.
The amounts payable to a funder depend on the successful resolution of the claim. A successful outcome for these
purposes may be a monetary award made in favour of the claimant or a settlement of the claim that involves a
financial recovery by the claimant.
However, third-party funding is typically provided on a non-recourse basis, and as such the funder assumes
significant risk when funding a claim. If the claim fails, the funder receives nothing and, typically, remains liable
for any fees due to the claimant's lawyer and other disbursements paid, together with any adverse costs that it has
agreed to pay and that are incurred during the term of the funding agreement.
The terms that govern a third-party funding arrangement are contained in an agreement called a Litigation Funding
Agreement ("LFA").
This Practice Note Overview looks at important topics for lawyers dealing with third-party litigation funding,
including:
• A legal framework for litigation funding in Canada, including a review of:
• the concepts of champerty and maintenance;
• the leading cases in the areas of class actions, commercial litigation and insolvency.
• Why you might consider third-party funding.
• What funders look for when deciding whether to fund a case.
• Stages in the funding determination process.
• The mechanics of funding.
• Key legal issues that arise in litigation funding arrangements.
Legal Framework in Canada

Third-party litigation funding is a relatively recent development in Canada. It is, however, better established in other
jurisdictions, including Australia (where it originated), the U.K. and the U.S.
Important differences in those countries' legal systems have resulted in divergent funding practices. For example:
• In Australia, contingency fees are prohibited and there is a harsh adverse costs regime. As a result, it can be
very hard to pursue cases absent external funding. When cases are funded in Australia, funders typically pay
the lawyers' full hourly fees and will meet any court-ordered costs.
• In the U.S., contingency fees are prevalent in commercial litigation and adverse costs are very rare. As a
result, funders in the U.S. often cover only a portion of the law firm's fees as a case progresses, and the law
firm carries the remainder in return for a partial contingency fee. Unlike in Australia, the risk of paying
court-ordered costs does not need to be allocated in the U.S.
Canada has developed as a sort of middle ground between these examples. In Canada:
• Contingency fees are permissible but uncommon in commercial litigation.
• There is an adverse costs regime in most provinces, but the awards are not as high as in Australia. However,
the presence of adverse costs regimes puts real financial risk on plaintiffs even when claims appear
meritorious.
This section of the Practice Note provides a review of central concepts and leading cases in litigation funding as it
applies in Canada.
Maintenance and Champerty
Discussions about third-party funding often raise questions about the common law doctrines of maintenance and
champerty. The principles of maintenance and champerty do not prohibit third-party funding, which has been
accepted by Canadian courts in both single-party and class action cases, but they need to be considered and
understood.
Maintenance refers to those who, for an improper motive, become involved with disputes of others in which they
have no interest whatsoever. It is 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.
(See McIntyre Estate v Ontario (Attorney General), 2002 CarswellOnt 2880 (Ont. C.A.), at paragraph 26.)
Both champerty and maintenance are torts in the common law jurisdictions of Canada, although they are most often
invoked as a "shield" against the enforcement of an agreement, rather than as a "sword”. See An Act Respecting
Champerty, R.S.O. 1897, c. 327.
Note the following regarding champerty and maintenance in the context of an LFA:
• It is champertous for a third-party to “stir up” litigation. Therefore a third-party funder in Canada cannot
instigate litigation or solicit plaintiffs.
• An LFA may also be champertous if it grants the funder too much control over the litigation. However,
a funder can provide advice about strategy, and preserve the right to terminate the agreement under
enumerated circumstances.
• An LFA may also be champertous if the returns under the agreement are "excessive". At present, there
is little guidance from courts in Canada about what constitutes an excessive return. A large return is not
necessarily excessive in light of the inherent uncertainty and risk of litigation.
In a commercial litigation context, a return above 50% of the total litigation proceeds may be champertous: see, for
example, Schenk v. Valeant Pharmaceuticals International Inc., 2015 CarswellOnt 8651 (Ont. S.C.J.). In arriving
at this conclusion, the court analogized a funder's return to the statutory cap on contingency fee recovery in Ontario
of 50% (see Contingency Fee Agreements, O. Reg. 195/04).
Courts in Canada have been reluctant to apply the doctrines of maintenance and champerty strictly, recognizing
that it should not stifle access to justice for meritorious claims. They have instead relied on the requirement of an
"improper motive" on the part of a third party to relax the prohibitions in appropriate cases. The following lessons
have emerged:
• Prohibitions on maintenance and champerty should be confined to cases of improper motive where the third
party was "stirring up strife”. In many instances, meritorious cases would not be advanced without help from
an outsider (Newswander v. Giegerich, 1907 CarswellBC 42 (S.C.C.)).
• Conduct that does not stir up strife, such as providing assistance involving locating witnesses to the event,
will not amount to "officious intermeddling" (R. v. Goodman, 1939 CarswellQue 41 (S.C.C.)).
• A bona fide business arrangement that does not "stir up" litigation is not necessarily champertous. A
commercial motive is not necessarily an "improper motive" (Buday v Locator of Missing Heirs Inc., 1993
CarswellOnt 480 (Ont. C.A.)).
Third-Party Funding in Class Action Litigation
In class actions cases, funders can provide a full or partial fees adverse costs indemnity, and disbursement funding,
in exchange for a portion of any recovery.
Class actions decisions have concluded that:
• Third-party funding is not maintenance and champerty per se (see Maintenance and Champerty).
• The court must consider the specific terms of an agreement to determine if it is champertous.
• Third-party funding can provide access to justice for plaintiffs.
• It is not necessary for a plaintiff to be impecunious in order to seek funding, as funding is a rational means of
mitigating risk.
• Third-party funding also ensures that the defendant knows its costs will be paid if costs are awarded against
the plaintiffs.
(See Metzler Investment GmbH v. Gildan Activewear Inc., 2009 CarswellOnt 4653 (Ont. S.C.J.); Dugal v. Manulife
Financial Corp., 2011 CarswellOnt 1889 (Ont. S.C.J.); Fehr v. Sun Life Assurance Company, 2012 CarswellOnt
5632 (Ont. S.C.J.); Smith v. Sino-Forest, 2012 CarswellOnt 6149 (Ont. S.C.J.); Musicians' Pension Fund of Canada
(Trustree of) v. Kinross Gold Corp., 2013 CarswellOnt 11197 (Ont. S.C.J.); Marriott v. General Motors of Canada
Company, 2018 CarswellOnt 6254 (Ont. S.C.J.).)
Principles that a court should bear in mind when deciding whether to approve an LFA in a class proceeding (which
have become known as the “Kinross factors") include the following:
• Third-party funding agreements are not categorically illegal as champerty or maintenance, but a particular
third-party funding agreement might be illegal as champertous or on some other basis.
• Plaintiffs must obtain court approval in order to enter into a third-party funding agreement.
• A third-party funding agreement must be promptly disclosed to the court, and the agreement cannot come
into force without court approval. Third-party funding of a class proceeding must be transparent, and it must
be reviewed in order to ensure that there are no abuses or interference with the administration of justice.
The third-party agreement is itself not a privileged document.
• The court has the jurisdiction to make an approval order binding on the class pre-certification of the class.
• To be approved, the third-party agreement must not compromise or impair the lawyer and client
relationship and the lawyer's duties of loyalty and confidentiality or impair the lawyer's professional
judgment and carriage of the litigation on behalf of the representative plaintiff or the class members.
• To be approved, the third-party funding agreement must not diminish the representative plaintiff's rights to
instruct and control the litigation.
• Before approving a third-party funding agreement, the court must be satisfied that the representative
plaintiff will not become indifferent in giving instructions to Class Counsel in the best interests of the class
members.
• Before approving a third-party agreement, the court must be satisfied that the agreement is necessary in
order to provide the plaintiff and the class members access to justice.
• In seeking approval for a third-party funding agreement, it is not necessary to have first applied to the
Ontario Class Proceedings Fund (CPF) for funding. If, however, approval from the Fund is sought and
refused, nothing can be taken from the fact that the CPF was not prepared to provide litigation funding.
• Before approving a third-party agreement, the court must be satisfied that the agreement is fair and
reasonable to the class. The court must be satisfied that the access to justice facilitated by the third-party
funding agreement remains substantively meaningful and that the representative plaintiff has not agreed to
over-compensate the third-party funder for assuming the risks of an adverse costs award.
• To be approved, the third-party funding agreement must contain a term that the third-party funder is bound
by the deemed undertaking and is also bound to keep confidential any confidential or privileged information.
• It is an acceptable term of a third-party funding agreement to require the third-party funder to pay into court
security for the defendant's costs.
(See Musicians' Pension Fund of Canada (Trustree of) v. Kinross Gold Corp., 2013 CarswellOnt 11197 (Ont. S.C.J.),
at paragraph 41.)
Certain terms in an LFA, including provisions about control and the funder's recovery, could signal an improper
motive, and thus indicate a champertous agreement.
Nonetheless, third-party funding of class actions was approved in a number of cases in accordance with the above
factors. For example, citing the Kinross line of cases, Justice Glustein held that “It is settled law that funding
agreements are an acceptable way to promote access to justice” (Marriott v. General Motors of Canada Company,
2018 CarswellOnt 6254 (Ont. S.C.J.), at paragraph 8).
A six-part test has also emerged for assessing an LFA in the class actions context:
• Can a court scrutinize the LFA?
• Is third-party funding necessary in the case?
• Will the funder make a meaningful contribution to the class action policy aims of access to justice or
behaviour modification?
• Will the funder be overcompensated for its risks in the case?
• Is the lawyer-client relationship protected from interference?
• Is the LFA not illegal under some other grounds, independent of champerty and maintenance?
(See Houle v. St. Jude Medical Inc., 2017 CarswellOnt 13215 (Ont. S.C.J.), at paragraphs 63, 73-100, affirmed 2018
CarswellOnt 17713 (Ont. Div. Ct.).)
In Houle, the plaintiff achieved approval of an LFA containing a novel hybrid retainer that combines a partial
contingency fee with a term that the funder would pay part of class counsels' hourly fees, in addition to agreed
disbursements and any court ordered costs. In that case, the court LFA met all six criteria except:
• Regarding over-compensation, the Court concluded that the appropriate level of compensation for the
funder can be determined only at the end of the litigation. In other words, the funder cannot know whether
it is entitled to its full contractual rate of return for its investment in the litigation until after the case is over.
The Court was willing to pre-approve 10% of the funder's return, by analogy to the CPF's rate of return.
• Regarding interference, the Court expressed concern that the funder's termination rights under the LFA
might interfere with the plaintiffs' litigation autonomy. Specifically, the Court held that the funder should
have no right to terminate the LFA if the case is no longer meritorious, and should be able to terminate the
LFA in other specific circumstances only upon court approval.
Other features of an LFA in a class action can add layers of fairness to the class, including:
• The claimants having the sole right to direct proceedings and instruct counsel.
• Termination of the LFA requiring leave of the court (and, if before certification, with consent of class
counsel).
• The funder paying costs up to the termination date if an LFA is terminated.
See the approval in David v. Loblaw, 2018 CarswellOnt 17950 (Ont. S.C.J.), where the Ontario Superior Court
of Justice also found that the Kinross factors were satisfied, and it approved an LFA covering payment of
disbursements, court ordered costs and security for costs in a price-fixing class action. The funder's return in that
case would be on par with the CPF, but also capped at a fixed amount, unlike the CPF.
In another example, JB & M Walker Ltd / 1523428 Ontario Inc. v. TDL Group, 2019 CarswellOnt 1750 (Ont. S.C.J.),
the Ontario Superior Court approved an LFA in a franchisee class action whereby the litigation funder paid all
fees and disbursements on a pay-as-you-go, non-recourse basis. Counsel would also receive a top-up of 2% to 3%,
to be determined at the end of the action. In exchange, the funder was to receive between 22% and 26% of the
litigation proceeds. This was the first decision in Canada where a court was asked to approve a funding arrangement
whereby the funder paid all of class counsel's fees, in addition to paying disbursements and providing an adverse
costs indemnity. The court found that:
• Third-party funding would "ensure that the Plaintiffs and the putative class of franchisees are able to achieve
access to justice" and deter wrongdoing (see paragraph 12).
• The LFA "protect[ed] the financial and human capital of class counsel while seeing to it that the Plaintiffs
and class have adequately resourced legal representation" (see paragraphs 13-17).
• The maximum combined return for the third-party funder and Plaintiffs' counsel would be 29%, which is
within the range of "presumptive validity" for contingency fees recognized in previous cases. The Court was
thus comfortable approving the agreement at the outset, subject to being able to control the fairness of the
ultimate recovery when a settlement is approved or a final award is rendered.
• Using a third-party funder would result in a greater recovery to the class than if class counsel had entered
into a typical 33%-plus contingency fee arrangement.
The court was further reassured by the fact that the agreement could only be terminated with court approval, and
that the Plaintiffs received independent legal advice regarding the agreement and budget from experienced class
action lawyers.
Ultimately, the Court approved a settlement agreement pursuant to which class members recovered overall value
of $37,396,000 (through cash and non-monetary items) (see JB & M Walker Ltd. v. The TDL Group Corp., 2019
CarswellOnt 6488 (Ont. S.C.J.)). The Court found:
• The funder, having incurred over $1 million in charges since signing the LFA, had undertaken “a substantial
risk in assuming liability for any adverse costs awards”, and had been “instrumental in the class achieving
the settlement” (see paragraph 17).
• The return sought by the funder and class counsel was less than what they were entitled to seek: the funder
sought approval of a payment in the amount of $3,622,641.51, or 24% of the $12,000,000 cash payment, and
class counsel sought approval of a payment in the amount of $377,358.49, or 2.5% of the $12,000,000 cash
payment, plus a marginal 2.9% and 0.3%, respectively, on the $25,396,000 non-monetary settlement. This
worked out to a combined return of 33% of the $12,000,000 cash component alone.
Third-Party Funding in Commercial Litigation
The principles developed in the class action context have largely been applied to single-party commercial litigation,
opening the door for third-party funding outside of the class actions context in Canada. In Schenk v. Valeant, 2015
CarswellOnt 8651 (Ont. S.C.J.), at paragraph 8, the court held that there is "no reason why such funding would be
inappropriate in the field of commercial litigation". In that case, a plaintiff of limited means sought approval of an
LFA with a U.K. funder, who would cover all legal fees and disbursements in exchange for a portion of the recovery.
However, the terms of the LFA could not be approved because they:
• Gave the funder an open-ended and uncertain recovery, such that the plaintiff could not understand what
the ultimate cost would be.
• Made it possible that the funder could have received "lion's share" or even all of the recovery.
LFAs may not require approval outside of the class actions context, because:
• There is no legal or logical basis to extend the requirement of pre-approval outside of class proceedings.
• The manner in which a plaintiff chooses to fund its litigation is of no concern to the court or to the defendant
in such a case. It has been held that "the Defendant has no legitimate interest in enquiring into the
reasonability, legality or validity of" the plaintiff's funding arrangements… because they do not affect or
determine the validity of the rights asserted by [the plaintiff] in this action” (Seedlings Life Science Ventures
v. Pfizer Canada, 2017 CarswellNat 5512 (Fed. Ct.), at paragraph 23). In Seedlings, the court refused to
order that the defendant be granted access to an unredacted version of the LFA, partly on the grounds of
privilege. See Privilege Over Funding Terms.
• The LFA need not be approved in order for a funder to be bound by the implied undertaking rule. Such
disclosure by a plaintiff to the funder is “neither improper nor alien, collateral or ulterior to the litigation",
as long as the funder agrees to abide by the implied undertaking rule (Seedlings, at paragraphs 33-34). For
more information, see Application of Implied Undertaking Rule to Funders.
The following principles can be taken from the case law on third-party funding in a commercial litigation context:
• Third-party funding agreements are not champertous per se.
• A court can look at the terms of an individual funding arrangement to determine if it provided the funder
with unreasonable returns. A return up to 50% would be reasonable in certain circumstances, analogizing
to the statutory cap on contingency fee recovery in Ontario of 50% (see Contingency Fee Arrangements, O.
Reg. 195/04).
• However, apart from concerns over illegality due to champerty, there is not necessarily any requirement to
disclose the existence of a funding arrangement or seek the court's approval of it.
• Should a party disclose an LFA, it should redact the commercial terms relating to funding commitments,
timing and other details, as they are protected by privilege and their disclosure could give the defendant a
tactical advantage.
• Funders are deemed to be bound by the implied undertaking rule the same as any other related third party
relevant to the carriage of the litigation.
Third-Party Funding in Insolvency
Third-party funding can allow insolvent estates to pursue meritorious claims that would have otherwise been
considered unaffordable by the estate or its trustee. Pursuing these claims can then maximize the pool of funds
recoverable in an insolvency, which benefits all creditors and stakeholders in the process. Third-party funding in the
insolvency context has long been accepted in Australia, and more recently in the United States. It has only recently,
however, been considered by Canadian courts.
Funding in the form of debtor-in-possession (DIP) financing provided by a hedge fund has been approved.
Crystallex International Corporation (“Crystallex”) was a Canadian mining company developing a gold mining
project in Venezuela. The right to develop the Las Cristinas gold deposit was Crystallex's principal asset. Venezuela
nationalized the gold deposit, and as a result of the nationalization, Crystallex was forced to enter Companies'
Creditors Arrangement Act, R.S.C., 1985 c. C-36 (CCAA) protection. Its principal asset became an ICSID arbitration
claim against Venezuela. The court-approved DIP financing allowed Crystallex to pursue the arbitration. In 2016,
the ICSID panel awarded Crystallex $1.36B.
Unlike modern third-party litigation funding, however, DIP financing is a recourse loan and DIP lenders are granted
super-priority over the debtor's assets. Litigation funding arrangements are typically non-recourse and the funder
only receives a recovery from the litigation proceeds if the litigation is successful.
The first non-recourse third-party litigation funding agreement in Canada in an insolvency was approved by the
Quebec Superior Court in Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.) -and-
Ernst & Young Inc., 2018 CarswellQue 1923 (Que. S.C.). The Quebec Superior Court decision was overturned on
appeal, but subsequently affirmed and reinstated by the Supreme Court of Canada on January 24, 2020.
The debtor, Bluberi, is a gaming corporation that entered CCAA protection. As part of its restructuring efforts, it
sought to assert a claim against its former lender, alleging that it caused Bluberi's demise. Bluberi lacked the funds
to advance that claim and sought funding. Bluberi and a third-party funder entered into an LFA whereby the funder,
subject to court approval, agreed to pay Bluberi's legal fees and disbursements, in exchange for a portion of any
proceeds of the litigation.
The court-appointed monitor supported the funding arrangement, and Bluberi moved for the CCAA court's approval
of the LFA. The lender brought a cross-motion for permission to call a creditors' meeting to approve its own plan of
arrangement, through which the lender would be released from any liability to Bluberi.
In his decision, Justice Michaud first dismissed the lender's cross-motion, finding that it constituted an attempt to
use the CCAA proceedings for an "improper purpose" and that it would result in a "substantial injustice" to Bluberi.
He then granted Bluberi's motion for approval of the LFA. In addition to holding that Bluberi did not need creditor
approval to bring its lawsuit and that Bluberi's CCAA stay of proceedings should be extended, Justice Michaud held
that the LFA:
• Provided funding that was necessary to allow Bluberi to gain access to justice, as its lawsuit represents the
"only avenue that can potentially allow for any meaningful recovery for the creditors".
• Did not diminish Bluberi's ability to control its litigation and instruct its counsel.
• Did not compromise or impair Bluberi's lawyer-client relationship or its lawyers' duties of loyalty and
confidentiality.
• Provided the funder, Bentham IMF, whom the court-appointed monitor called "a reputable lender with a
proven track-record", with compensation that is fair and reasonable.
• Protected confidential information.
• Provided Bentham with reasonable contractual termination rights.
• Was protected from disclosure to the defendant, who was not entitled to know "how much money Bentham
is investing, what its percentage of return is, or how any recovery would be apportioned".
In overturning the Quebec Court of Appeal, the Supreme Court of Canada held that the judge at first instance
properly exercised his discretion to approve the LFA after finding it "fair and reasonable". The LFA was not a plan
of arrangement, and did not need to be presented to Bluberi's creditors for a vote.
In coming to this conclusion, the SCC found in particular that:
• The approval of the LFA would assist Bluberi in finalizing a plan "with a view towards achieving maximum
realization of its assets…".
• The creditors would not be materially prejudiced by the Litigation Financing Charge placed on Bluberi's
assets and "given the particular circumstances of this matter, only potential recovery lies with the lawsuit
that the Debtors will launch."
• The court-appointed monitor supported approving the LFA as interim financing.
• The supervising judge was focused on the fairness at stake to all parties, the specific objectives of the CCAA,
and the particular circumstances of this case when he approved the LFA as interim financing.
(9354-9186 Quebec inc. v. Callidus Capital Corp., 2020 CarswellQue 3772 (S.C.C.), at paragraphs 106-107.)
Further the SCC acknowledged (at paragraph 111) that litigation can be treated as an asset class akin to a "pot of
gold" which may unlock additional value for creditors in an insolvency:
"When the 'pot of gold' is secure – that is, in the event of any litigation or settlement – the net funds will be distributed
to the creditors. Here, if the [claims] generate funds in excess of Bluberi's total liabilities, the creditors will be paid
in full; if there is a shortfall, a plan of arrangement or compromise will determine how the funds are distributed."
In many respects, the factors considered by the motions court in Bluberi echo what courts have considered in
the class action and commercial litigation context (see Third-Party Funding in Class Action Litigation and Third-
Party Funding in Commercial Litigation). Indeed, when assessing whether the LFA would diminish the debtor's
ability to control the litigation and instruct counsel, Justice Michaud cited the decision in Schenk v. Valeant, 2015
CarswellOnt 8651 (Ont. S.C.J.) as support for the proposition that the third-party funder's termination rights under
the LFA were commercially reasonable.
Why Third-Party Funding?

Litigation funding can serve a number of important functions, such as:
• Providing access to justice for those who cannot properly resource their litigation.
• Enabling corporations to more effectively manage cost and risk.
• Permitting law firms to take on cases they might not otherwise be able to accept.
• Generating more efficient and reliable revenue sources for law firms.
The rising costs of litigation combined with increased pressure on legal budgets means controlling the costs of
litigation is an issue of increasing concern for litigants of all types. The ability to spread and share these risks with
a third party may be attractive, even to clients with strong businesses and cash flows.
Third-party funding provides not only the financial resources with which to pursue a claim, but also opportunities
to manage financial risks associated with the pursuit of a claim through the litigation. A plaintiff can transfer some
or all of those risks to the funder, and thereby avoid the negative accounting treatment as litigation expenses paid
monthly factor into a company's profit and loss accounting and can impact corporate valuations.
Depending on the arrangements agreed with the funder, the plaintiff has the opportunity to achieve a successful
recovery without having to:
• Pay legal fees and other costs as the claim progresses.
• Undermine bottom line profitability.
• Obtain or allocate funds to deal with the consequences should the claim fail.
What do Funders Look For?

A funder's decision to fund a claim is an investment decision. In determining whether to fund a case, litigation
funders put each potential investment through rigorous due diligence in order to assess the financial risks it is being
asked to assume. The length of the due diligence process will vary depending on the nature and timing requirements
of the claim. Although case assessment needs will necessarily be tailored to the circumstances of each individual
case, the following factors will be central in any funding determination:
• Merits of the claim. The claim should have a strong likelihood of success, based on the evidence and the
law. A funder will ask for any available pleadings that best summarize the legal and factual arguments from
each side, together with documentary or other evidence that both supports the claims and refutes any facially
strong arguments from the defendant. In specialized areas it is common for a funder to retain its own second
opinion counsel or experts to assist with a review of the merits.
• A sound damages theory. A funder will assess the realistic quantum of damages that would follow a
finding of liability. The legal theory and evidence must support the damages claim. As with the merits
review, a funder may retain its own damages expert to assist in obtaining some certainty on quantum of
damages in the due diligence stage.
• Litigation budget. A funder will also consider the realistic budget through to the trial of the matter.
In order for a claim to be viable for funding, the budget should be roughly 1/10 the realistic damages
assessment in order for there to be a reasonable return for both the claimant and the funder.
• Defendant able to satisfy judgment. The defendant must be able to satisfy any settlement or judgment.
• Adverse costs exposure. Most Canadian civil litigation operates on a “loser pays” basis. A funder would
typically cover any court-ordered costs made during the duration of the funding agreement, and would
therefore need to understand what the costs exposure is, based on the jurisdiction and the applicable tariffs
(if any).
• Invested and commercially rational plaintiff. As a funding relationship is a long-term partnership,

funders seek to work with commercially rational plaintiffs who will play an active role in the case, and will
dedicate the time needed to marshal the evidence and instruct counsel.
Depending on the stage of the matter, all of this information may not be available. For example, if the case has not
yet been commenced, claimants may not yet be in a position to provide these details. An application for funding can
nonetheless be made at any stage.
Stages in the Funding Determination and Due Diligence Process

Third-party litigation funders typically go through a number of stages when deciding whether to enter into an LFA.
Confidentiality Agreement and Preliminary Assessment
During the due diligence process, the client, counsel and funder will work together to understand the key facts and
issues in the case.
Funder and client will enter into a non-disclosure agreement (“NDA”) before any substantive discussions about
a case occur. This is critical to the diligence process because it evidences the intent of the parties to maintain
confidentiality over shared information.
The communications between funder, lawyer and client are protected by privilege. See Key Legal Issues Raised in
Third-Party Funding Arrangements.
Term Sheet Stage
After executing the NDA, a funder and client typically begin discussing the key financial terms of the deal and often
will enter into a term sheet before the funder undertakes the more detailed due diligence process. The term sheet
is a document that outlines the economic terms of the proposed investment and provides for a due diligence period
to fully assess the merits of the case and related issues.
At the term sheet stage, claimants and their lawyers should expect to have a more robust, but still preliminary,
conversation with the funder about the case. In general, the funder will look for:
• A preliminary review of the case theory and key evidence as a “stress test” of the case merits.
• The anticipated funding amount sought.
• The ideal funding arrangement (i.e., whether the claimant is looking for working capital, litigation fees,
costs, or a combination of the three).
• Whether the matter meets the funder's basic parameters. Funders commonly require a realistic damages
estimate that supports that level of investment (usually about 8 to 10 times the proposed funding amount in
reasonably attainable damages).
From the initial discussions, the funder should be able to understand the claims, the amount needed to prosecute
the case to completion, and a reasonable estimate of potential recovery. This information allows the funder to gauge
its level of interest in moving forward. If that interest is strong, the funder will typically issue a term sheet.
Funders require exclusivity because the diligence process is time-consuming and may require bringing on an outside
expert to analyze the specific area of law at issue.
The funder's term sheet will invariably describe its proposed return structure. Returns typically (but not always)
increase over time as the funder continues to invest risk capital in the litigation. Returns are often calculated as a
multiple of the disbursed funding amount, a percentage of the litigation proceeds, or the greater of the two.
The term sheet will also typically address the proposed return priority structure. Generally, the funder will require
a first-priority position to receive, at minimum, the return of its principal.
Due Diligence
Once the NDA and term sheet are agreed upon, the funder will begin its full due diligence process.
Litigation funders put each potential investment through rigorous diligence, which typically takes 30 to 60 days.
This time frame may be impacted by the maturity of the claim process, the availability of responsive information
and the need to seek input from second opinion experts. Given that a typical case might last two or more years and
involve a multi-million dollar commitment, you should expect an in-depth review from the funder. This process
includes meeting with the party seeking funding, reviewing relevant documents, and possibly hiring outside experts
(especially if the case revolves around a highly-specialized area).
The funder will typically ask for pleadings that best summarize the legal and factual arguments from each side, and
documentary or other evidence that both supports the claims and refutes any outwardly strong arguments from the
adversary. A legally sound and objectively measurable theory of damages is important.
Consider the process an early opportunity to analyze the pitfalls in the case, identify the best evidence available, and
crystallize counter-arguments sooner than you otherwise would do in the litigation process.
While each case presents a unique set of issues, funders at a minimum look for the following in any case:
• A cogent liability theory supported by documentary evidence, indicating strong prospects of success.
• A sound damages theory that results in sufficient damages to cover the funder's return, the lawyers'
contingency stake (if any), and enough remaining for the claimant to recover at least 50% of any award or
settlement.
• A high likelihood of collectability.
After a thorough analysis, a funder is likely to consult with its management or an internal investment committee to
arrive at an investment decision. The parties will then enter into a more detailed LFA.
The Litigation Funding Agreement and Mechanics of the Investment

The LFA represents the funder's contractual obligation to finance litigation expenses or working capital in exchange
for a portion of any award or settlement. This contract is the only protection the funder has over its investment,
because funders typically do not take any security interest or collateral, other than to register security over the
proceeds of the litigation.
Regarding the day-to-day operation of a funding agreement, the LFA will typically require the funder to pay either
part or all of the lawyers' ongoing accounts and any disbursements as they are rendered, and after having been
approved by both the client and funder.
The LFA should also make clear that the client, and not the funder, controls the litigation. Allowing the funder
to exert control over decisions otherwise held by the lawyer or client (such as control over litigation strategy or
settlement) will:
• Risk rendering the LFA unenforceable because the arrangement constitutes champerty and maintenance.
See Maintenance and Champerty.
• Run afoul of professional ethical rules forbidding third parties from interfering with a lawyer's independent
professional judgment.
Key terms and features of an LFA are covered in this section and in Control, Settlement and Termination.
Once the transaction closes and the case is funded, the claimant's partnership with the funder begins. The funder's
level of involvement will depend on the needs of the client and lawyers, and the capabilities of the funder. Approaches
range from “light touch” monitoring where the funder requires regular updates on the progress of the case and
notification of any critical events, to more active involvement as a strategic partner and sounding board (without
controlling the conduct of the litigation).
Features of Typical Funding Arrangements
Types of Funding
In general terms, third-party funding involves a commercial funder agreeing to pay some or all of the claimant's
legal fees and expenses in return for reimbursement of the funder's direct outlays and a share of any sum recovered
from the resolution of the claim. In addition, the funder may agree to bear any adverse costs liability and provide
security for the respondent's costs. See Adverse Costs and Security for Costs.
Third-party funding has historically been suited to claimants with single high-value claims in which the funder
assesses and values the individual claim. Third-party funders may also offer funding to defendants or respondents
with a counterclaim. In these cases, a similar process used for funding a claimant applies.
As the third-party funding industry grows, new products are emerging. For example:
• Funding groups of claims on a portfolio or aggregated basis. For example, a funder may enter into
an agreement with a large company to provide funding for a number of related or recurring claims or with an
insurer to fund the pursuit of subrogated claims on an aggregated basis.
• Portfolio funding for law firms. In this model rather than entering into an agreement with the litigant
directly, the funder contracts with the law firm to provide capital to meet the firm's expenses of running a
claim or book of claims. This so-called “hybrid” arrangement allows the firm to offlay its risk, as a portion of
its fees will be paid win or lose, while allowing for an alignment of interests as the firm, the funder and the
claimant all share in the proceeds upon success. This model is increasingly common in the U.S. and has seen
some use in Canada.
• Funding for defendants (without a counterclaim). The funding models for this type of product
are still developing. However, a funder may be reimbursed for its direct outlays and paid a fee if there is a
successful outcome for the defendant. Success for a defendant could include an award in its favour, including
one in which no damages are awarded against it, a settlement of the claim on favourable terms, or an award
requiring the defendant to pay less than its potential liability or the amount originally claimed.
• Using the value of corporate claims as collateral for other forms of finance. For example, in
certain circumstances, a funder may be willing to advance capital to a corporation for non-litigious purposes,
such as to meet its working capital requirements, with the repayment of that investment secured against the
outcome of a claim or basket of claims.
Risk Shifting and Sharing
Third-party funding arrangements may employ a variety of methods of shifting or sharing the risk of the cost of
litigation:
• In the most basic “risk shifting” model:
• a funder will pay 100% of a claimant's fees and disbursements as the litigation proceeds, in addition to
paying any adverse costs awards;
• neither the law firm nor the client takes on any risk;
• thus, the risk has been “shifted” entirely to the funder.
• More commonly, the funder, client and law firm enter into a form of “risk sharing” arrangement whereby
the funder pays for a majority of the law firm's fees, and the law firm carries the remainder to be paid along
with a success fee out of any litigation proceeds. For instance:
• the funder may agree to pay 70% of a law firm's fees as they are billed, while paying 100% of
disbursements;
• the law firm would then carry the remaining 30% of its fees, which would be paid upon success out of
the litigation proceeds;
• the lawyers and the client could also then agree on a success fee to be paid to the lawyers for taking
on part of the risk of bringing the claim; for instance, a fee equaling double the carried fees, or a small
multiple of the overall award;
• funders may also ask clients who have the financial capability to fund a nominal portion of fees or
disbursements at set intervals as the matter progresses to ensure that the client remains engaged and
active in the litigation.
The risk shifting arrangements entertained by funders vary, and will depend on the litigation and the needs of the
clients, case by case. For instance, in the class proceedings context, a funder and a law firm entered into a “novel”
hybrid retainer whereby the funder agreed to pay 50% of the firm's fees while the firm carried the remaining 50%.
The court commented that “the novelty of the hybrid retainer that combines a partial contingency fee with a fee-for-
services retainer strikes me as a positive factor . . . this approach which partially protects the financial and human
capital of class counsel may expand the roster of firms prepared to assume the risks of class action litigation” (Houle
v. St. Jude Medical Inc., 2017 CarswellOnt 13215 (Ont S.C.J.), at paragraph 79).
Returns
Another key consideration when it comes to funding agreements is the return to the funder.
Typically, third-party funders seek a share of the recovery anywhere up to 50% (the median figure is around one
third), depending on the costs and risks involved in funding the dispute. The funder's fee may also increase over
time to reflect additional costs and risks being incurred.
Funding may also be provided on the basis of a fee calculated as a multiple of the amount the funder invests. As the
funder's investment and risk increases, so does the size of the funder's fee. Consequently, the fee often increases in
stages over time, to the final hearing. Some funding agreements calculate the funder's fee by reference to the greater
of a multiple of the funder's investment and a percentage of the successful outcome.
Whether any amounts are payable to a funder depends on the successful resolution of the claim. A successful
outcome for these purposes may be:
• A monetary award made in favour of the claimant.
• A settlement of the claim that involves a financial recovery by the claimant.
If the claim fails, the funder receives nothing and, typically, remains liable for any fees due to the claimant's lawyer
and other disbursements paid, together with any adverse costs that it has agreed to pay.
Courts will look to the reasonableness of the return to the funder in determining whether an LFA is enforceable:
• In the commercial litigation context, a 50% return to a funder would be reasonable in certain circumstances
(see Third-Party Funding in Commercial Litigation).
• In the class proceedings context, in one decision in Ontario, the court was reluctant to pre-approve returns
to third-party funders that are higher than the returns that the relevant provincial Class Proceedings Fund
would receive (generally 10%) (see Houle v. St. Jude).
Third parties who have funded class proceedings in Canada have generally funded disbursements and/or provided
an adverse costs indemnity, rather than funding fees, and have proposed a return at or below the class proceedings
fund returns.
However, in cases where a higher return has been proposed, or there is no cap on a funder's return in the LFA,
courts have declined to approve the LFA because the court is not in a position to assess the reasonableness of the
funder's return relative to the overall return to the class members until the settlement approval motion. See Metzler
Investment GMBH v. Gildan Activewear Inc., 2009 CarswellOnt 4653 (Ont. S.C.J.) and Houle v. St. Jude, 2017
CarswellOnt 13215 (Ont. S.C.J.).
A party seeking to fund class proceedings should ensure that the overall return to the funder is consistent with
and capped under the return that would be given to the relevant class proceedings fund. In a commercial context,
however, the courts are not constrained by the same class protection policy concerns, and have signaled that returns
in the 30% - 50% range may be commercially reasonable.
Adverse Costs
Most jurisdictions in Canada employ a “loser pays” costs regime for civil litigation, meaning that the party who is
successful in the litigation is presumptively entitled to be indemnified by the unsuccessful party for some portion
of the legal fees and disbursements it incurred.
The types of cases and degree to which a losing party will have to pay adverse costs varies by province and area of
law. For instance, unsuccessful plaintiffs in class proceedings in Ontario are ordered to pay relatively high adverse
costs awards, while British Columbia, Saskatchewan, Manitoba, Newfoundland and Labrador and the Federal Courts
have a no-costs regime for class proceedings. Meanwhile, costs awards for class proceedings in Quebec are generally
small.
Adverse costs consequences can be a key consideration in whether and how to bring a civil claim, and can affect the
dynamics between parties within litigation. As such, they also tend to be a key motivator for parties seeking third-
party funding. The location and nature of the case will, in many cases, determine the nature of the funding sought,
and what provision may be made for adverse costs in an LFA.
With regard to the costs a party incurs to obtain financing, such costs may be recoverable as part of an adverse costs
award, if the funding was necessary for the action to proceed (see Marcil v. Commission scolaire De La Jonqiere et
al (July 30 2018, unreported); Marcotte v. Banque de Montréal, 2015 CarswellQue 4055 (Que. S.C.).)
Security for Costs
The fact that a matter is funded by a third-party funder may have implications for security for costs motions or
applications. For general information about security for costs, see one of the following Practice Notes:
• Motions: Security for Costs (ON).
• Applications: Security for Costs (BC).
• Applications: Security for Costs (AB)
If a plaintiff's claim is funded by a third-party funder, the funding may weigh against any need for a security for
costs order.
In making a security for costs decision, a court or tribunal may look to the terms of the LFA to determine whether
the funder has agreed to cover any adverse costs awards. If it has not, it is possible that a court will order the plaintiff
to post security for costs.
A court will not likely order a third-party funder to pay security for costs of a funded matter, and indeed likely does
not have jurisdiction to do so unless the funder attorns to the jurisdiction of the court. For example:
• In a class action proceeding, the defendants requested that a third-party funder post security for costs in
response to the plaintiff bringing a motion to approve an LFA. The New Brunswick court denied this request,
holding that as the LFA in question met all of the factors for funding a class action proceeding and was not
champertous, there was no principled reason to require that the funder provide security for costs outside the
usual process for such an order (Hayes v. Saint John (City), 2016 CarswellNB 253 (N.B. Q.B.)).
• In an Ontario class action proceeding, the plaintiff sought approval of an LFA that provided that any
order for security for costs would be satisfied by way of an undertaking from the third-party funder to the
defendants. The court approved the LFA and approved the undertaking as an answer to any security for costs
order. Justice Morgan noted that the funder (Bentham IMF) was a well-capitalized entity and a reporting
issuer who had attorned to the jurisdiction of the Ontario court for the purposes of any enforcement
proceedings by the defendants, and also reviewed an unredacted copy of the LFA (a redacted copy was
provided to the defendants) and found that the funder's obligation to pay adverse costs, though capped in the
LFA, was sufficient to cover any likely costs award (David v. Loblaw, 2018 CarswellOnt 17950 (Ont. S.C.J.)).
Key Legal Issues Raised in Third-Party Funding Arrangements
Confidentiality and Privilege
Issues surrounding privilege and confidentiality arise through both:
• The disclosure of information by a party to a funder when it is seeking funding (and by extension, continued
disclosure of information during the dispute after funding is obtained).
• The assertion of privilege and/or confidentiality over the terms of the funding arrangement and the LFA
itself.
Confidentiality
In order to obtain funding, a party will need to disclose extensive information about a dispute to a funder in order for
the funder to complete its due diligence. Once funded, such disclosure will continue for the duration of the dispute.
This may necessitate the disclosure of materials privileged to the litigation and solicitor-client privileged material.
Protection of Information Exchange by Privilege

While there are currently no reported decisions regarding to what extent communications around obtaining third-
party funding are privileged, it is likely that based on existing principles, litigation privilege, solicitor-client privilege
and common interest privilege could, working together, apply to these communications.
Litigation privilege attaches to all types of communication exchanged between a client or its counsel and a third
party when the communication is made for the dominant purpose of litigation. This is because the purpose of
litigation privilege is to create a "zone of privacy" in relation to pending or apprehended litigation and to ensure the
efficacy of the adversarial process (Blank v. Canada (Department of Justice), 2006 CarswellNat 2704 (S.C.C.), at
paragraphs 27, 34, 60). Documents, discussions and analyses related to the litigation that are shared with a funder,
which are by definition shared for the dominant purpose of litigation, should therefore be captured by litigation
privilege.
Solicitor-client privilege protects communications between a lawyer/client and third parties where the
communications are "essential to the maintenance and operation of the solicitor-client relationship" (General
Accident Assurance Co. v Chrusz, 1999 CarswellOnt 2898 (Ont. C.A.)). Documents, discussions and analysis with a
funder would directly support or enable the solicitor-client relationship, and should therefore be covered by solicitor-
client privilege.
At law, common interest privilege (also called deal privilege) is not a freestanding form of privilege. Rather,
it is a well-established defence against a claim that privilege has been waived. Applied most commonly in the
transactional context, common interest privilege protects communications between arm's-length parties to a
prospective transaction so that they may share otherwise privileged legal opinions with one another in furtherance
of their common interest in consummating a deal (Iggillis Holdings Inc. v. Canada (Minister of National Revenue),
2018 CarswellNat 10957 (Fed. C.A.)). As funders, clients and lawyers are all sharing information between each other
in furtherance of entering into a funding transaction; this sharing would likely fall within the “common interest”
defence against waiver.
For a more detailed review of the various types of privilege, see Practice Note, Privilege: Overview.
Application of Implied Undertaking Rule to Funders

The disclosure of information to a funder is also addressed by extension of the “implied undertaking” rule to funders.
When producing documents or information to another party in litigation, the party receiving the documents is
subject to an implied undertaking that it will not use them for any other purpose than the proceeding at hand
(Goodman v Rossi, 1995 CarswellOnt 146 (Ont. C.A.). This rule, also known as the "deemed undertaking rule" and
the "implied undertaking principle", has long been part of the common law in Canada, and has since been codified
into some Canadian rules of civil procedure. For more information about the rule generally, see one of the following
Practice Notes:
• Discovery: Deemed Undertaking Rule (ON).
• Disclosure of Information: Implied Undertaking Rule (AB).
• Discovery: Implied Undertaking Principle (BC).
The implied undertaking rule has been extended to related third parties necessary for the litigation, including
experts, potential witnesses, consultants or others whose advice is relevant to the carriage of the litigation. The
Federal Court of Canada has found that the implied undertaking rule expressly extends to a third-party litigation
funder receiving information, stating that such disclosure by a plaintiff to the funder is “neither improper nor alien,
collateral or ulterior to the litigation”, as long as the funder agrees to abide by the implied undertaking rule (see
Seedling Life Science Ventures LLC v Pfizer Canada Inc., 2017 CarswellNat 5512 (Fed. Ct.), at paragraphs 32-33.)
Privilege Over Funding Terms

Courts have differed in their treatment of whether LFAs themselves are wholly protected by privilege. What is clear
is that certain key terms of an LFA will be protected by privilege.
Some courts have found that litigation privilege attaches to the LFA itself, as “it was prepared and created for the
sole purpose of the present litigation,” and that disclosure of provisions of the LFA relating to details of the funding
commitment would give the defendant “a tactical advantage in how the litigation would be prosecuted or settled, and
the very essence of what the litigation privilege is designed to protect.” Seedling Life Science Ventures LLC v Pfizer
Canada Inc., T-608-17, July 17, 2017 (unreported). In a preliminary motion prior to the LFA approval motion in that
case, the defendant sought an unredacted copy of the LFA (it had been provided with a version redacting commercial
terms, while the court was given an unredacted version). The court dismissed the defendant's motion, finding that:
• Litigation privilege attaches to the LFA, as it “was prepared and created for the sole purpose of the present
litigation”.
• It was proper for portions relating to details of the funding commitment and timing variables to be withheld
from the defendant. Otherwise, the defendant would get “a tactical advantage in how the litigation would be
prosecuted or settled, and the very essence of what the litigation privilege is designed to protect”.
Other decisions have taken a more selective approach and found that, while the LFA as a whole is not subject
to privilege, the individual terms concerning litigation strategy, budget, and other sensitive topics are privileged
and should be redacted (see Schneider v. Royal Crown Gold Reserve Inc, 2016 CarswellSask 569 (Sask. Q.B.), at
paragraph 10; Hayes v. Saint John (City), 2016 CarswellNB 253 (N.B. Q.B.); and Stanway v. Wyeth Canada Inc.,
2013 CarswellBC 2630 (B.C. S.C.)).
Priority of Payments and Funder's Interest
The LFA will usually set out the priority of payments following a recovery due to an award in the claimant's favour,
including any interest and costs ordered, or on a settlement of the claim. Some funders prefer that the priorities
among the various stakeholders are set out in a separate priorities agreement, particularly if there are terms in the
LFA that the claimant wishes to shield from other parties.
LFAs often provide for payment of proceeds in the following order:
• The funder is reimbursed for its investment or expenses to date.
• The funder is paid its return.
• The balance is paid to the claimant.
Where there is an insurer involved in the claim, or the lawyers have acted on a deferred, contingent or conditional
basis, the priority of payments to the insurer or lawyer will be included in the agreement or in an ancillary agreement
that is linked to the LFA. Usually, the insurer will be paid its deferred premium and the lawyer is paid a deferred,
contingent or conditional success fee before the claimant is paid the balance of the proceeds.
The LFA should also include a term that any recovery is to be paid into a trust account held by the claimant's lawyer
and that those sums that are due to be paid to the funder are to be held in trust by the lawyer for the funder and the
balance in trust for the claimant. In some LFAs, the lawyer is a party to the agreement and agrees to distribute the
proceeds in accordance with the priorities set out in the agreement. In other agreements, the lawyer is not a party,
but is directed by the claimant to make payments under the agreement at the funder's request.
When negotiating the LFA, the claimant and the claimant's lawyer need to ensure that the payments to the funder do
not take place until the proceeds are actually recovered. Therefore, any terms that define the proceeds must be clearly
drafted so there is no misunderstanding between the parties as to when the payments are to be made. The LFA should
also specify whether the funder is liable for any reasonable recovery costs, including enforcement proceedings.
Disclosure and Court Approval of Funding Agreements
The question of whether the existence of an LFA must be disclosed, and the disclosure of the terms of the LFA to the
defendant and the court, is a developing issue. It will depend on the type of dispute and forum of dispute. Outside of
class proceedings and insolvency matters, there is no legal obligation to disclose a funding agreement or seek court
approval of funding arrangements.
In the context of class proceedings and insolvency, third-party funding must be approved by the court supervising
the proceeding (see Musicians' Pension Fund of Canada (Trustee of) v. Kinross Gold Corp., 2013 CarswellOnt
11197 (Ont. S.C.J.), at paragraph 41; Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies
Inc.) -and- Ernst & Young Inc., 2018 CarswellQue 1923 (Que. S.C.), as well as Third-Party Funding in Class Action
Litigation and Third-Party Funding in Insolvency.)
Courts in Alberta, Saskatchewan and New Brunswick have approved third-party funding arrangements on an ex
parte basis and sealed the file, as “the existence of the LFA has no bearing, substantively or procedurally on the
defendants or the third parties. From whose pocket an adverse cost award is paid is of no consequence to the
defendants and the third parties”: Schneider v. Royal Crown Gold Reserve Inc. Schneider v. Royal Crown Gold
Reserve Inc. 2016 CarswellSask 569 (Sask .Q.B.), at paragraph 11. See also Roth v. Alberta (Minister of Human
Resources and Employment), 2005 CarswellAlta 2309 (Alta. Q.B.); Hayes v. Saint John (City), 2016 CarswellNB
253 (N.B. Q.B.).
In Ontario, by contrast, courts have held that the defendant should be notified of an approval motion, as they may
have necessary and helpful submissions on issues including whether the LFA:
• Is champertous or otherwise contrary to public policy.
• Might constitute insurance or a security.
• Might otherwise be contrary to law or policy.
(Fehr v. Sun Life Assurance Co. of Canada, 2012 CarswellOnt 5632 (Ont. S.C.J.).)
In certain cases, a “sequential approach” to approval might be appropriate, where the defendant need not be put on
notice at the outset of approval, but may need to become involved depending on how the request for court approval
unfolds (Berg v. Canadian Hockey League, 2016 CarswellOnt 10803 (Ont. S.C.J.)).
The typical practice now is to make an approval motion or application on notice to the defendant.
There is no requirement to disclose the existence of funding, or obtain approval for funding, in commercial litigation
cases outside of class proceedings or insolvency: see Third-Party Funding in Commercial Litigation. As a practical
matter, however, a funded party may choose to disclose the existence of funding to the other parties to allow the
opposing parties to raise any potential issues at the outset.
Where the funded party must seek court approval, or where a funded party voluntarily discloses the existence of an
LFA, the funded party typically submits an unredacted version of the LFA to the court under seal, while delivering
to the defendants either a copy of the specific terms at issue, or a copy of the LFA redacted to remove privileged and
strategic terms that may include:
• The amount of the investment.
• The percentage or apportionment of the return.
• How settlement discussions are to be conducted.
(Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.) -and- Ernst & Young Inc., 2018
CarswellQue 1923 (Que. S.C.); Schenk v. Valeant, 2015 CarswellOnt 8651 (Ont. S.C.J.)).
Control, Settlement and Termination
Third-party funders cannot exercise control over strategy and day-to-day litigation decisions because:
• Exercising control over litigation would offend prohibitions against champerty and maintenance, where
relevant.
• Ethical rules provide that regardless of who is paying the legal fees, counsel take instructions from the client
and must always make independent recommendations that are in the best interests of their clients.
However, litigation funders (who are often staffed with former litigators) can serve as a strategic sounding board
for the lawyers and clients they finance. Because the funders are not involved in the day-to-day conduct of a case,
they can provide an objective high-level viewpoint.
Control
Courts will scrutinize LFAs and related evidence to assess whether the funding arrangement diminishes the
plaintiff's right to instruct and control the litigation, or impairs the lawyer's duties in any way. A number of Canadian
decisions have addressed the issue of control of litigation when considering third-party funding arrangements. For
example:
• In the commercial litigation context, an Ontario court examined a lawyer's letter of engagement and the
funding agreement itself to conclude that the litigation funding arrangement (including rights to terminate
where the funder reasonably ceases to be satisfied about the merits or commercial viability of the case) did
not restrict the litigant's ability to instruct counsel (see Schenk v. Valeant, 2015 CarswellOnt 8651 (Ont.
S.C.J.)).
• In the context of a claim brought by a company while undergoing restructuring under the Companies'
Creditors Arrangement Act, the plaintiff brought a motion to approve the LFA. The defendant opposed the
LFA approval on the grounds that the termination provisions (which included rights to terminate where
the funder reasonably ceases to be satisfied about the merits or commercial viability of the case) gave the
funder too much control. The Quebec Superior Court found that the LFA did not compromise or impair the
plaintiff's ability to control its litigation (Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming
Technologies Inc.) -and- Ernst & Young Inc., 2018 CarswellQue 1923 (Que. S.C.)).
• In the class actions context, an Ontario court expressed concern that certain termination rights in the
LFA might interfere with the plaintiffs' litigation autonomy, and held that the funder should not have the
right to terminate the LFA in circumstances where the funder reasonably considered that the case is no
longer meritorious or not commercially viable, and should be able to terminate the LFA in other specific
circumstances with court approval (Houle v. St. Jude Medical Inc., 2017 CarswellOnt 13215 (Ont. S.C.J.)).
Settlement
Settlement negotiation is a specific aspect of litigation in which issues of control also come into play. Settlement
discussions present a decision-making point at which the incentives as between client, lawyer and funder can diverge,
particularly in situations where a lawyer and funder both recommend that a client accept a settlement offer, but the
client wishes to proceed. Keep in mind:
• A funder will typically ask to be apprised of settlement negotiations and may offer non-binding views.
Acceptance or rejection of a settlement offer should remain fully within the client's purview so that the
funder does not exercise control over the conduct of the action.
• To guard against situations where a client may refuse a commercially reasonable settlement against the
advice of their counsel, funders may insert a contractual safeguard that does not give the funder control
over settlement. For instance, a funder may require that the parties engage in good faith negotiations
on settlement offers, and in a situation where the funder, counsel and party cannot agree, that the
reasonableness of the settlement offer be referred to an independent counsel or arbitrator for binding
determination.
Termination
LFAs typically contain termination rights allowing a funder to terminate the agreement in certain circumstances.
For instance, a funder may reserve the right to terminate a funding arrangement if the client has made material
misrepresentations concerning the case, or if the merits of the case change materially such that it is no longer a
viable investment. The exercise of such termination rights may mean that a funder will no longer be entitled to all
or a portion of its contracted-for return. In practice, such rights are seldom exercised as, once a funder expends
significant capital to fund a case, the incentives of the funder and party are typically aligned to ensure that some
return is achieved.
However, termination provisions may raise concerns about control over litigation. In the commercial litigation
context, courts have held that reasonable termination rights do not diminish the plaintiff's control over the litigation.
For instance, in Schenk v. Valeant, 2015 CarswellOnt 8651 (Ont. S.C.J.), the Superior Court examined a lawyer's
letter of engagement and the funding agreement itself to conclude that the litigation funding arrangement (including
rights to terminate where the funder reasonably ceases to be satisfied about the merits or commercial viability of
the case) did not restrict the litigant's ability to instruct counsel. See also Arrangement relatif à 9354-9186 Québec
inc. (Bluberi Gaming Technologies Inc.) -and- Ernst & Young Inc., 2018 CarswellQue 1923 (Que. S.C.).
END OF DOCUMENT
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Case Assessment Checklist • Maintained
Commencing a Proceeding Checklist (ON) • Maintained
Commencing a Proceeding Checklist (BC) • Maintained
Commencing a Proceeding Checklist (AB) • Maintained

Litigation Funding - Overview

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Litigation Funding: Overview, Practical Law Canada Practice Note Overview w-021-3651

Litigation Funding: Overview

Practice note: overview | Published on 04-Feb-2020 | Canada

Legal Framework in Canada

Third-Party Funding in Class Action Litigation

Third-Party Funding in Commercial Litigation

Third-Party Funding in Insolvency

Why Third-Party Funding?

Term Sheet Stage

The Litigation Funding Agreement and Mechanics of the Investment

Risk Shifting and Sharing

Security for Costs

Key Legal Issues Raised in Third-Party Funding Arrangements

Priority of Payments and Funder's Interest

Disclosure and Court Approval of Funding Agreements

Control, Settlement and Termination

• A legal framework for litigation funding in Canada, including a review of:

• the concepts of champerty and maintenance;

• Why you might consider third-party funding.

• What funders look for when deciding whether to fund a case.

• Stages in the funding determination process.

• The mechanics of funding.

• Key legal issues that arise in litigation funding arrangements.

Legal Framework in Canada

• Contingency fees are permissible but uncommon in commercial litigation.

Maintenance and Champerty

Third-Party Funding in Class Action Litigation

Class actions decisions have concluded that:

• Third-party funding can provide access to justice for plaintiffs.

• Can a court scrutinize the LFA?

• Is third-party funding necessary in the case?

• Will the funder be overcompensated for its risks in the case?

• Is the lawyer-client relationship protected from interference?

• The funder paying costs up to the termination date if an LFA is terminated.

Third-Party Funding in Commercial Litigation

• Third-party funding agreements are not champertous per se.

Third-Party Funding in Insolvency

• Protected confidential information.

• Provided Bentham with reasonable contractual termination rights.

In coming to this conclusion, the SCC found in particular that:

• The court-appointed monitor supported approving the LFA as interim financing.

Why Third-Party Funding?

• Enabling corporations to more effectively manage cost and risk.

• Pay legal fees and other costs as the claim progresses.

• Undermine bottom line profitability.

What do Funders Look For?

• Invested and commercially rational plaintiff. As a funding relationship is a long-term partnership,

Stages in the Funding Determination and Due Diligence Process

Confidentiality Agreement and Preliminary Assessment

Term Sheet Stage

• The anticipated funding amount sought.

• A high likelihood of collectability.

The Litigation Funding Agreement and Mechanics of the Investment

Features of Typical Funding Arrangements

Risk Shifting and Sharing

• In the most basic “risk shifting” model:

• thus, the risk has been “shifted” entirely to the funder.

• A monetary award made in favour of the claimant.

• A settlement of the claim that involves a financial recovery by the claimant.

Security for Costs

• Motions: Security for Costs (ON).

• Applications: Security for Costs (BC).

• Applications: Security for Costs (AB)

Key Legal Issues Raised in Third-Party Funding Arrangements