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Third Party Arbitration Funding

Third party litigation funding is growing in Canada and starting to appear in commercial arbitration as well. This raises some interesting questions about an arbitration tribunal’s authority to allow (or refuse to allow) third party funding and, if it is permitted, the degree to which the tribunal should control the funder’s involvement in the arbitration.

To date, in Canada, most court decisions regarding third party funding have involved class actions. This is partly because the cost of large class actions has grown beyond the capacity of plaintiffs’ counsel to self-fund them and partly because the courts have an inherent jurisdiction to oversee counsel fee arrangements and, by extension, financial arrangements with any funder.

Interest in funding commercial claims has been growing since the Ontario court said there is “no reason why such funding would be inappropriate in the field of commercial litigation.” (Schenk v. Valeant Pharmaceuticals International Inc. 2015 ONSC 3215)

One of the arguments in favour of third party funding is that it enables a plaintiff to pursue a claim for which it might otherwise not have the financial resources. More rarely, a defendant may seek funding for a counterclaim. Funders are not usually interested in funding a defense, because a successful defense doesn’t provide a pool of funds from which they can make a return.

In a commercial context, funding may simply be an effective way for a business to manage its legal risks.

Typically, the funder will agree to finance the legal fees and expenses – and assume the risk of an adverse costs award – in exchange for a percentage of any settlement or final award. The return to the funder will often vary depending on the timing of a settlement or amount received.

Funding arrangements have raised a number of issues relating to privileged and confidential information (both of the parties and the funder), control over the litigation process, and liability for costs.

In Seedlings Life Science Ventures, LLC v. Pfizer Canada Inc. 2017 FC 826, the plaintiff and funder (Bentham IMF Canada) requested court approval of the funding agreement.

Protonotary Tabib, acting as case management judge, noted that there was no precedent in the Federal Court for such a procedure. She questioned why court approval was necessary, or appropriate:

[18] To the extent the doctrine of champerty and maintenance remains relevant in Canadian common law, even as means of protecting the courts and vulnerable litigants against abuses, its purpose is not and was never intended to be achieved by conferring on the courts the discretion to inquire into and approve or disapprove of a plaintiff’s funding arrangements as a condition precedent to instituting or pursuing litigation. It simply operates and achieves its purpose by rendering agreements tainted by maintenance and champerty unenforceable.

In the end, the court declined to approve, or even consider, the funding agreement.

[23] The Defendant has no legitimate interest in enquiring into the reasonability, legality or validity of [the plaintiff’s] financial arrangements, its counsel’s fee structure or the manner in which [the plaintiff] chooses to allocate the risks and potential returns of the litigation…”

The Seedlings case is somewhat unusual, because the Federal Court has no inherent jurisdiction, unlike the provincial superior courts. Madam Tabib found that there were no procedural requirement for approval of a funding arrangement outside of class proceedings and no substantive grounds on which the Court could assume jurisdiction [28]

Interestingly, Madam Tabib, also expressly noted that: “The Federal Court’s jurisdiction cannot be conferred by agreement between parties.” [27]

So the case is not completely analogous to arbitration, in which the parties clearly can agree to confer jurisdiction over their dispute to the Tribunal. But it is more analogous than many of the other cases, in that the Tribunal has no inherent jurisdiction and must find its authority in the agreement of the parties, the applicable rules, or governing statute.

So the question arises whether an arbitration Tribunal has any jurisdiction to approve or disallow third party funding arrangements and, if so, what terms a Tribunal ought to impose.

Tribunals’ Jurisdiction

What is the Tribunal’s jurisdiction to authorize or supervise third party funding?

An arbitrator has no inherent jurisdiction. It arises from the agreement of the parties, and any applicable Rules or arbitration statute.

The Ontario Arbitration Act is typical of most arbitration statutes when it says parties shall be treated equally and fairly and each party shall be given an opportunity to present a case and respond to the other parties’ cases (s. 19).

Arguably, access to third party funding is a matter of equity and fairness, if that is the only way one party can obtain the financial resources to present its case.

The Act also gives the tribunal broad authority to determine procedural matters (s. 20(1)).

But the Tribunal has no authority over any person who is not a party to the arbitration agreement. It can assert authority over the party being funded (or seeking funding) in connection with their conduct of the arbitration, but it has no authority over the funder (or prospective funder) unless it agrees to be bound by the arbitration agreement and the Tribunal’s decisions.

Funders recognize this and, if they are serious about funding arbitration claims, ought to be willing to formally submit to the Tribunal’s jurisdiction. But they may be reluctant to do so, if the conditions imposed by the Tribunal are too onerous or frustrate the business case for the funding arrangement.

Nevertheless, the Tribunal has a duty to both parties to treat them fairly, so it must balance the interests of both the party being funded and the opposing party to ensure they aren’t prejudiced by the funding arrangement.

In my view, this is the most compelling argument in favour of the Tribunal asserting jurisdiction over the funding arrangement.

If the Tribunal has jurisdiction, how should it exercise that jurisdiction and what terms should it impose?

There are a number of steps a Tribunal may be asked to take in exercising its jurisdiction to control to arbitration process.

And in some cases, the Tribunal may even refuse to allow the funding or the participation of the funder in the arbitration.

While Canadian courts have said that third party funding agreements are not per se illegal (champerty or maintenance) or contrary to public policy, they have said that specific agreements may not be permitted.

For example, the funder may be seeking some kind of collateral benefit from the proceeding, or the financial terms of the agreement may be contrary to public policy. (See for example Metzler Investment GmbH v. Gildan Activewear Inc., (2009), 81 CPC (6th) 384, 2009 CarswellOnt 4653 (Sup Ct) where the Ontario Superior Court refused to approve a costs indemnification agreement by a third party funder.)

Internationally, there are examples of situations where third party funding could be contrary to public policy. For example, in the United States, Hulk Hogan’s widely reported lawsuit against Gawker raised a number of issues quite apart from the merits of the case (privacy rights vs. free speech). Many people were troubled to learn that billionaire Peter Thiel had secretly funded the lawsuit, apparently in retaliation for disclosures about his personal life, which were not actionable. Critics claim Theil’s sole motive was to drive Gawker into bankruptcy, and to create a chill for similar online gossip sites, not to recover any damages for Hulk Hogan. Others praised him for holding Gawker accountable for invasion of privacy.

While situations where the funder has an ulterior motive in supporting the litigation may be relatively rate, it is a risk that requires some degree of oversight by a court or Tribunal.

And in exercising this oversight, the Tribunal may impose conditions on the parties and the funder

  • It may require disclosure of all or part of the funding agreement and other information.
  • It may require the funder to sign a non-disclosure agreement with the opposing party, or limit the disclosure of certain confidential information to the funder.
  • It may require the funder to post security for costs.

One thing that is clear from the cases is that the Tribunal must look at each case and decide how to manage the arbitration process in the context of its own unique facts.

In my next column, I will look at these and other issues the Tribunal may have to consider in exercising its jurisdiction over the arbitration procedure and the involvement of a third party funder.

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