Three’s a Crowd: Third-party Litigation Funding of Class Actions in Canada

• Author: Peter Senkpiel
• Pages: 294-329

294

THREE’S A CROWD: THIRD-PARTY

LI TI GAT ION FUNDIN G OF CL ASS

ACTIONS IN CANADA

Peter Senkpiel*

A. INTRODUCTION

In the early 90’s, class counsel Harvey Strosberg brought a class action

against the maker of a defective pacemaker.1 To do so, Strosberg arranged

for a handful of wealthy investors to contribute $350,000 to help finance

the lawsuit. The agreement stated that if the lawsuit was successful, the

investors would receive back their initial investment plus 20 percent

annual interest. In the event that the lawsuit failed, the investors would

lose their entire investment.2 Three years later, the case settled for $23.5

million and the investors were paid accordingly.

Despite the apparent success of the arrangement in Nantais and the

fact that “the return on investment was reasonable to both the investors

and the plaintiffs,”3 over thirteen years later the idea of treating litiga-

tion as an asset class remains controversial in Canada. A March 2008

National Post article notes: “Senior litigator Alan Lenczner, who’s led

some of Canada’s most expensive lawsuits, is apoplectic about the idea

that litigation is being viewed as an asset class, saying, ‘This will turn our

courts into a stock exchange.’”4 At the same time, the article notes that

* Mr. Senkpiel recently graduated from the University of Toronto, Faculty of Law

with a J.D. Beginning in the Fall of 2009, he will clerk for the Chief Justice of

British Columbia, the Honourable Lance Finch.

1 Nantais v. Telectronics Proprietary (Canada) Ltd. (1996), 28 O.R. (3d) 523 (Gen.

Div.) [Nantais].

2 V. Lawton, “Investors Betting Lawsuits Will Bring Big Payoffs” The Toronto Star

(22 February 1998) A3.

3 Poonam Puri, “A Share of Justice: Financing of Litigation by Third Party

Investors” (1998) 36 Osgoode Hall L.J. 515 at para. 51 [Puri, “A Share of

Justice”].

4 Margaret McCaffery, “Litigation as an Asset Class” National Post (26 March

2008) FP8.

VOL UME 5, No 2, august 2009 295

Harvey Strosberg, “Canada’s class-action king, sees third-party litigation

financing as a reality of commercial life. ‘Lawyers invest in litigation: why

shouldn’t a commercial lender be able to do the same?’”5 Between these

positions is the Law Society of Upper Canada, which has “considered

the funding issue via its Access to Justice Committee and is adopting a

‘watch-and-wait’ approach.”6

Which position is correct? This article proposes to examine the con-

troversial issue of third-party litigation funding in Canada as it relates to

class actions.7 Specifically, it will determine whether a market for third-

party litigation funding of class actions is viable in Canada.

Part B sets out what is meant by “third-party funding.” Part C argues

that third-party funding of class actions is legally viable because either

maintenance and champerty will be abolished in relation to third-party

financing or such funding will fit within a permissible exception to the

rule. Part D then explores whether there is a viable market for third-party

funding of class actions, first from the perspective of investors, then from

the perspective of class counsel.8

Ultimately, this article argues that while third-party funding arrange-

ments are legally possible, and while investors are likely to see litigation

as a desirable asset class, it is the lack of demand from class counsel that

will be the real impediment to the development of a vibrant market in

third-party funding of class actions in Canada.9

5 Ibid.

6 Ibid.

7 Third-party funding can theoretically be used for many forms of litigation. I

suggest that the viability of third-party funding will vary depending on the

type of litigation being funded. This article focuses on the viability of a funding

market for class actions, in which the funding dynamics are unique due to the

nature of class proceedings. Third-party litigation funding is less controversial

in other jurisdictions like Australia and the UK. However, Canada’s class pro-

ceedings are unique, requiring the viability of a litigation funding market for

class actions to be assessed in light of the Canadian model.

8 Much has been written about the need to increase access to justice in Canada

and third-party funding’s ability to do that. See, for example, John P. Rossos,

“Access to Justice: Using Third Party Financing to Fulfill the Promise of Class

Action Litigation” (2009) 5:1 Can. Class Action Rev. 77 [Rossos, “Access to

Justice”]. This article will not repeat such analyses. Instead, it proceeds on the

assumption that third-party funding has the potential to increase access to jus-

tice, and then examines whether a funding market is both possible and likely.

9 Note that while this edition was going to print, Justice Lovecchio of the Alberta

Court of Queen’s Bench approved a third-party funding arrangement in the

class action in Don Hobsbawn v. ATCO Gas and Pipelines Ltd. on an ex parte

basis. The arrangement included an indemnity agreement between the plaintiff

296 THE CANADIAN CLASS ACTION REVIEW

B. WHAT IS THIRD-PARTY FUNDING OF

CL ASS ACT IONS?

In assessing the legal viability of a litigation funding market for class

actions, it is important to distinguish between two kinds of funding

arrangements. The first arrangement is the one used in Nantais, in which

Strosberg effectively borrowed money from investors on a non-recourse

basis and agreed to pay them interest on the loan in the event the litiga-

tion was successful. In this arrangement, the investor merely receives

an interest payment on capital rather than a percentage of the potential

damage award.10

The second form of arrangement is one in which the investor actually

purchases a “piece” of the litigation, paying consideration for a percent-

age of the potential damage award or settlement — a piece of the “fruits

of the action.” For example, instead of providing funding in return for

interest on their investment, the investors in Nantais could have provided

the same funding in exchange for the chance to receive 10 percent of the

damages recovered. In this model, the plaintiffs are effectively “selling” a

percentage of the fruits of their action.

While both of these arrangements are examples of litigation funding

— money is being provided by a third-party investor to help fund the

litigation in exchange for a chance at profit — their structures are fun-

damentally different even though the financial outcome for the investor

may not be.11

and BridgePoint Financial Services Inc. Details of the financing and indemnity

have been sealed and are not publicly available. In view of its importance and

the fact that the order was made ex parte, it is likely that the decision will be

appealed. Until more is known and the issue is dealt with on appeal, the con-

clusions in this paper with respect to the availability, propriety, and practicality

of third-party funding of class actions in Canada stand.

10 Such loan structures are used by Canadian funder Lexfund: “Lexfund offers

loans to help finance meritorious commercial and civil litigation lawsuits.

Dedicated to helping plaintiffs achieve the highest possible settlement and in

furthering greater access to justice, Lexfund’s loans are provided on a non-

recourse basis: the plaintiff owes nothing if the case is lost,” online: www.lex-

fund.ca.

11 It is possible to structure both arrangements so that the potential payout to the

investors is the same, depending on how you vary either the rate of interest or

the percentage of the damage award. The investor is likely to require the same

potential profit given that the risk of the action is the same regardless of which

arrangement is used.