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June 28 2018
Third-party funding in commercial arbitration in Canada has moved increasingly into the mainstream. Its implementation is largely influenced by the treatment of third-party funding in litigation, which is why it is important for arbitration practitioners in Canada to continue to follow jurisprudential trends regarding the treatment of third-party funding.
In this regard, a recent third-party litigation decision from Quebec provides valuable insight into the analysis behind whether to enforce third-party funding.
In Re 9354-9186 (formerly Bluberi Gaming Technologies Inc) and 9354-9178 (formerly Bluberi Group Inc),(1) the Quebec Superior Court was faced with an application, in the context of Companies' Creditors Arrangement Act proceedings litigation funding, to permit the debtors to pursue their last remaining asset – a C$200 million claim against their secured lender. The debtors wanted to initiate proceedings against their lender, Callidus Capital Corporation, and filed an application on February 6 2018 seeking, among other things:
As part of its judgment, the court reviewed the terms of the third-party funding agreement between Bentham IMF and the debtors. Overall, the judgment can best be described as consolidating the growing case law in Canada regarding third-party funding and contributing to the conceptual division between litigation funding in the context of class actions, on the one hand, and other forms of commercial litigation, on the other. This will be a ripe source for arbitration funders in Canada when they consider the terms of their funding agreements, particularly because of its cross-jurisdictional analysis.
The court consolidated the existing case law by building upon various judgments from common law jurisdictions. Citing the Ontario and New Brunswick judgments Bayens v Kinross Gold Corporation(2) and Hayes v the City of Saint John,(3) the court confirmed that funding agreements "should be approved, subject to [certain] principles", including as follows:
The court also highlighted the fact that these principles arise in common law provinces which apply the doctrine of champerty, whereas in Quebec – Canada's only civil law jurisdiction – "litigation funding by a third party has been accepted". These statements should provide further reassurance to funded parties and funders that their agreements will typically be enforceable in Canada.
The court's analysis similarly followed precedents to review in detail certain provisions of the proposed third-party funding agreement to test whether the abovementioned principles were reflected in the terms. The court considered the compensation model applicable to both the funded party and counsel and was satisfied that the terms of the third-party funding agreement conformed with the general principles listed above. For instance, it found that the potential percentage returns for both counsel and the funder were reasonable considering their investment in the litigation and the associated risks. It further confirmed that the considerations relevant to assessing a funding agreement in the single party commercial context (which reflects the scenario of most arbitrations) are different from those expressed in the case law relating to class actions.
As Canada has no regulations governing third-party funding agreements akin to the regulations for contingency fee agreements, the case law on the enforceability of these agreements and their terms provides the most useful guidance on third-party funding agreements. In this regard, this judgment provides an important contribution to, and consolidation of, the growing jurisprudence, which is also important to parties in arbitral proceedings – with some important distinctions. Claimants in arbitration must be aware of the Canadian case law on third-party agreements, as this law would likely apply to any question on the enforceability of such an agreement under Canadian law in the context of an arbitration. However, in respect of certain issues, Canadian jurisprudence may be limited in the direction that it can offer parties in arbitration. For example, the following considerations, unique to arbitration, arise:
There may be other areas where the courts take a particular, nuanced approach to arbitration, which do not apply to litigation proceedings. As mentioned above, a dichotomy between third-party funding agreements in a class action or bankruptcy context, rather than a general commercial context, appears to be developing. A further distinction regarding funding in arbitration may be necessary in the future.
However, for now, parties that are pursuing a claim in arbitration and may be seeking third-party funding to assist with the concomitant financial risks should review this case in order to understand the types of provision found in funding agreements that will be enforced by the courts. It also provides guidance as to the types of provision that may attract greater scrutiny, even as they exist between sophisticated commercial parties.
For further information on this topic please contact Hugh A Meighen or Cristina Birks at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or email (firstname.lastname@example.org or email@example.com). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
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