Third Party Arbitration Funding (Part 2)

In my previous column, I looked at the growth of third party litigation (and arbitration) funding in Canada and discussed whether an arbitration Tribunal has any jurisdiction to control the involvement of funders. If the Tribunal does have jurisdiction, what issues should it be concerned about?

Here are just a few thoughts on some of the issues raised by third party funding in commercial arbitration and how to deal with them.

• Whether the third party funding agreement must be disclosed to the tribunal and/or the opposing party.
• Whether such disclosure should exclude privileged or confidential information.
• Whether other information about the funder should be disclosed, to address concerns that the funder, or its investors, is in competition with a party or whether there are other potential conflicts of interest.
• Whether there should be any restrictions on disclosure of information to the funder, or it should be required to sign a confidentiality agreement.
• Whether the funder is bound by the implied undertaking rule.
• Whether the funder should be liable for costs and, if so, whether the it should be required to post security for costs.
• Whether the involvement of the funder in the arbitration gives rise to any potential conflict issues for the Tribunal.

Confidentiality

Commercial arbitration often arises from agreements that include confidentiality clauses which restrict disclosure not only of information relating to the subject matter of the agreement, but details of the agreement itself. Even the fact of a dispute between the parties may be confidential. And at least one of the parties usually wants to keep it that way. That may be why they choose arbitration in the first place.

The party seeking outside funding – usually the Claimant, but sometimes a Respondent in connection with a counterclaim – will not want the opposing party to know about it. Certainly, not before it has secured a funding commitment. Knowing your opponent can’t finance its claim is definitely a tactical advantage. And if the party is unsuccessful in obtaining funding, that may signal that funders don’t think the claim has much merit or value.

On the other hand, the opposing party will be concerned about the disclosure of any of its confidential information, especially if it’s being disclosed to multiple potential funders or other unknown third parties.

In Ontario, the Arbitration Act is silent on the confidentiality of arbitration.

Section 4.18 of the ADR Institute of Canada (ADRIC) Arbitration Rules provides that arbitration proceedings must take place in private, unless the parties agree otherwise.

And it says the Tribunal must decide issues related to privacy or confidentiality.

“Confidential Information” is defined extremely broadly under the Rules. It includes the existence of an arbitration and the meetings, communications, documents, evidence, awards, rulings, orders, and decisions of the Tribunal in respect of the arbitration.

The parties and the Tribunal must keep all thisinformation confidential. The only exception is where disclosure is required by a court, necessary in connection with a judicial challenge or enforcement of an award or otherwise required by law.

But the rule permits disclosure to a “person with a direct financial interest in the arbitration” (section 4.18.4). So the question is whether a third party funder – or potential funder – is a person with a direct financial interest in the arbitration.

A party opposing disclosure of confidential information to a third party would argue that the third party has no financial interest until an agreement to share in an award is actually signed. This would preclude the disclosure of information at the due diligence stage, when the potential funder is assessing the merits of a case and deciding whether to fund it.

So, there’s a Catch 22. The funder can’t assess the viability of a case unless it has access to information about the dispute and the arbitration. But the party can’t disclose any of that information unless the third party already has a financial interest in the arbitration.

So the Tribunal may have to intervene, to allow or limit disclosure, or to control what the recipient can do with the information. But the Tribunal can only do so after the arbitration has commenced and the Tribunal has been appointed.

Arguably, the Arbitration Rules would not apply if the discussion occurs before there is an actual arbitration. What power does a Tribunal have with respect to disclosures that occurred before the arbitration? Or disclosures made without the knowledge of the Tribunal or opposing party after the arbitration has commenced? Can it impose confidentiality obligations retroactively? What limits should the Tribunal set on disclosure?

In Dugal v. Manulife Financial Corp., 2011 ONSC 1785, the court approved the funding agreement but said there should be limits on the exchange of information between a party and the third party funder.

36. […] I agree with the defendants’ submission that there should be some reasonable controls on the provision of information to the funder. The management of the funder’s own affairs requires that it be provided with reasonable information concerning class counsel’s assessment of liability, damages and trial prospects. It is also reasonable that information be provided concerning settlement offers. Appropriate guidelines need to be established to recognize the interests of both [the funder] and the defendants.

In that case, the parties agreed that evidence obtained from the defendant was not to be provided to the third party without the defendant’s consent. Formal settlement offers could be communicated, but must be kept confidential. And, with respect to any evidence that was disclosed, the funder would be subject to the deemed undertaking rule that it not use any evidence or information disclosed for any purpose other than the proceeding at hand.

Other cases have also imposed confidentiality and deemed undertaking restrictions. And, it seems, those restrictions have generally been acceptable to third party funders, who seek such information only to make fully informed funding, case management and settlement decisions.

Privilege

Generally, it seems that funders are also willing to agree to limited disclosure of the terms of their funding agreements in order to get approval of the arrangement. However, there are certain key terms that the funder, and the party they are funding, will want to keep confidential. These include such things as:

• the timing and total amount of the funding commitment, which could give the opposing party a tactical advantage, and
• the compensation formula, which may provide insight into incentives to settle at different stages of the proceeding.

There may also be concerns about disclosing the funder’s assessment of the value of the case, as well as its factual and legal strengths or weaknesses.

The Ontario the Court in Fehr v. Sun Life Assurance Co. of Canada, 2012 ONSC 2715 said third party funding agreements are not privileged.

129. I see no reasonable possibility that any genuinely solicitor-client communication need be revealed as a part of any third party funding agreement. Thus, there is no privileged information.

130. Put differently, if a third party funding agreement contained information that disclosed counsel’s legal opinion about the merits of the litigation or disclosed how counsel proposed to carry out the litigation beyond what might be disclosed in the litigation plan that would be disclosed for a certification motion, then it was both unnecessary and wrong to include that information.

More recently, in Seedlings Life Science Ventures, LLC v. Pfizer Canada Inc. 2017 FC 826, the Federal Court said that the funding agreement is privileged and refused to order disclosure of the complete unredacted agreement to the defendant. In a ruling on the disclosure motion, Prothonotary Tabib said the agreement was privileged because it was created for the sole purpose of the litigation. She said portions relating to details of the amount and timing of the funding could be withheld. Otherwise, the defendant would have “a tactical advantage in how the litigation would be prosecuted or settled, … the very essence of what the litigation privilege is designed to protect.”

So it seems there are still open questions as to what is privileged and what must be disclosed. The answer may well depend on the context of the litigation or arbitration, and be different for class actions or other commercial disputes.

Conflicts

Third party funding of arbitration raises another important consideration that doesn’t usually apply in litigation: whether the involvement of the funder creates any conflict issues for the Tribunal. In order to determine that, the Tribunal members must at least know the identity of the funder, and may need information about other individuals or entities related to the funder, in order to comply with continuing disclosure obligations.

The difficult question is what the Tribunal should do, if there is prior connection between a Tribunal member and a funder. For example, if arbitrator has decided another case involving the same funder.

And what about potential conflicts involving parties to other cases the funder may be involved with? For example, is it a conflict if the arbitrator (or the arbitrator’s law firm) represents a party in a completely unrelated matter involving the same funder? How far does the Tribunal need to go to avoid any potential conflicts, particularly since a funder may be financing dozens or hundreds of cases?

And how much involvement should the funder have in the selection of the Tribunal (for example, to exclude potential arbitrators who they believe could have a conflict)?

Liability for Costs and Security for Costs

In most funding agreements, the funder agrees to assume the risk of liability for any adverse costs award, if the claim is not successful. That is one of the benefits of the agreement for the party being funded. The funder takes all (or most of) the risk and shares in the rewards.

It would be a significant red flag, if the funder sought to avoid that risk. That is one of the reasons why the Tribunal should have some visibility into the funding arrangement.

By taking a “direct financial interest” in the arbitration, and by taking a measure of control over how the claim is prosecuted and any settlement decision, the funder becomes a direct party to the arbitration. It should not be permitted to seek the benefits of the arbitration while avoiding the risk of costs if the arbitration is not successful.

The Tribunal also has jurisdiction to order a party, and by extension the funder, to post security for costs.

It is unusual to order a plaintiff or claimant to post security for costs as a condition for prosecuting a claim or counterclaim. Courts and arbitrators are rightly reluctant to impose impediments to access to justice.

However, in several Ontario cases, third party funders have voluntarily agreed to provide security for costs in order to obtain court approval of funding agreements. (See Dugal v. Manulife Financial and Schenk v. Valent Pharmaceuticals International Inc. 2015 ONSC 3215)

The funders have recognized that the courts still have a long-standing aversion to maintenance and champerty, even though they have now recognized that contingency fees and third party funding are necessary for access to justice in some situations. Funders seem to be willing to go to some lengths to assure courts that approval of funding is in the interests of access to justice and not contrary to public policy, at least in the class action context.

But there are still many concerns relating to litigation funding, and many that are unique to arbitration. It will be interesting to see how the law and arbitration practice continues to develop in this area.