Third-Party Litigation Funding In Canada

In the classic cartoon from The New Yorker, a lawyer sits across from a prospective client and remarks: "You have a pretty good case, Mr. Pitkin. How much justice can you afford?" Framed in the context of a class action lawsuit, the client may well have asked the lawyer. "I have a pretty good case Mr. Lawyer. How much risk can you tolerate?"

The class action lawsuit is a unique legal procedure. It allows many parties with similar claims to pursue them collectively against a given defendant. Like any other court proceeding, class actions are a risk-reward proposition. The potential for settlment or damages must be weighed against the expense of litigation and, in some jurisdictions, the risk of an adverse cost award. As such, deep pockets and a high tolerance for risk are often critical to pursue a good case on the merits.

Third-party funding has emerged globally and in Canada as a means by which claimants can pursue a class action lawsuit and minimise their risk to adverse cost consequences for claims that do not succeed. Under this arrangement, a commercial entity funds a class action lwsuit on behalf of claimants in exchange for a percentage of the proceeds. Recently, Ontario courts have taken a leadership role by governing what is essentially a private contract due to the absence of legislation and the unique legal relationship among class action counsel, claimant and funder.

Risky business

An economist might describe a class action lawsuit as a cost-effective risk transfer mechanism. Class actions proceed under the same 'loser pays' cost regime as other civil matters in Ontario. As a result, an unsuccessful claim could result in a six or seven figure adverse cost award. Claimants have several viable options at their disposal to transfer such risk. Section 31 of the Ontario Class Proceedings Act shelters class members, other than the representative plaintiff, from costs. It also gives the court discretion to award no costs where the class proceeding was a test case, raised a novel point of law, or involved a matter of public interest. Indemnification may also be offered by class action law firms, the Class Proceedings Fund in Ontario, and third-party commercial funders. Of these options, third-party funding has increasingly become a more palatable choice given that funders undertake dual risk of upfront litigation expenses and adverse cost indemnification.

Historically, the practice of funding legal action in exchange for future...