17 August 2017
Third-party arbitration funding can benefit both under-resourced growing businesses as well as established and profitable companies, allowing them to cover the legal costs of potentially complex proceedings. However, companies should be aware of its potential risks and downsides, such as concerns over confidentiality and privilege of sensitive information, the funder’s self-interest in returning a profit on its investment and potential conflicts of interest between funders and arbitrators. A number of jurisdictions and arbitration institutions are considering introducing external regulation of third-party arbitration funding.
Is third-party arbitration funding common in your jurisdiction?
The Canadian courts have confirmed in a series of recent cases that third-party funding is permitted in Canada. Previously, in Canada's common law jurisdictions (ie, all provinces apart from Quebec), opportunities for third-party funding were constrained by the longstanding common law principles of maintenance and champerty. However, the law has evolved to permit third-party funding, subject to certain restrictions which are typically aimed at limiting:
In the arbitral context, third-party funding has been more broadly discussed in Canada following the successful enforcement of a funded Canadian investor's claim that may otherwise have been impossible (Crystallex International Corporation v Bolivarian Republic of Venezuela, International Centre for Settlement of Investment Disputes (ICSID) Case ARB(AF)/11/2). Crystallex had obtained one of the largest ever ICSID (Additional Facility) awards (approximately C$1.4 billion in damages) for Venezuela's expropriation of Crystallex's interest in a large untapped gold mine, which was enforced in the Ontario courts, and was aware from prior proceedings that the case was funded. While perhaps not considered common in Canada, third-party funding has a demonstrated potential to provide access to justice to claimants that may otherwise be unable to pursue worthwhile claims.
More generally, in the past 18 months, a prominent international third-party funder, Bentham IMF, has expanded into Toronto and begun funding cases. Bentham Canada has had over 150 applications for funding since opening in January 2016, including seven arbitration cases.
What terms and conditions are generally associated with third-party arbitration funding in your jurisdiction? Does this type of funding usually include punitive measures in the event of an adverse outcome for the claimant company?
Generally, funders and claimants can negotiate the terms of a funding arrangement at the outset of proceedings. The terms of such agreements are flexible to suit the risk profile of the claim and other factors relevant to the conduct or outcome of the proceedings. In Ontario, jurisprudence around class action litigation has provided guidance on how the courts are likely to treat third-party funding arrangements. For instance, a third-party funding agreement must contain terms that are fair and reasonable in the eyes of the court and should be non-champertous and promote the claimants' access to justice (Dugal v Manulife Financial Corporation, 2011 ONSC 1785). Further, the court may impose conditions, such as the funder demonstrating that it could cover an adverse costs award against the claimant.
Conversely, the jurisprudence also contains examples of the terms and conditions not generally accepted by the Ontario courts (Metzler Investment GmbH v Gildan Activewear Inc  OJ 3315 (SCJ)). In Metzler, the claimants' could not obtain approval for their third-party funding arrangement because the court was concerned about the amount of compensation that the funder would receive under the proposed arrangement.
In the arbitral context, final awards are typically accompanied by an adverse costs award against the unsuccessful claimant. As United Nations Commission on International Trade Law Model Law jurisdictions, most Canadian provinces grant tribunals the discretionary power to award costs against unsuccessful claimants, including against those that are funded. However, punitive measures against a funded party would unlikely be the result of an adverse outcome alone. Other factors may be relevant for an arbitrator or court to issue a punitive order against a funded party. Further, where the funder has acted improperly – for instance, by engaging in maintenance and champerty through the funding agreement – this would likely constitute an independent tort, rather than being the subject of a punitive measure per se.
Third-party arbitration funding can involve potential risks for claimant companies. What measures can be taken to avoid or minimise such risks?
The risks to claimants involved in a third-party funding arrangement relate principally to uncertainty around the application of common law principles to the commercial development of third-party funding. In certain respects, the common law has adapted to third-party funding and provided general guidance regarding arrangements that are permitted. In this regard, careful review of case law and the drafting of terms in the funding agreement between the claimant and the funder to ensure compliance with these principles is essential.
There are also risks in respect of the claimant and its relationship with its chosen counsel. Involving experienced counsel at the outset of the funding arrangement is important, as it may assist the claimant in protecting its privilege and confidentiality over documents exchanged with the funder (see below). Further, retaining counsel experienced in handling mandates involving a funded party will assist in the future prosecution of the claim. The conduct of counsel during the proceedings is subject to the professional rules of conduct, which means that lawyers must be attuned to issues embedded in the funding relationship, particularly regarding the source of their instructions and payment terms. Clarifying the rules applicable to lawyers and ensuring that these rules are reflected in the terms of the funding agreement is essential to the successful use of third-party funding.
How does third-party funding affect the confidentiality and privilege of sensitive material in arbitration proceedings?
The Canadian courts have dealt with confidentiality and privilege in the context of third-party funding arrangements in different ways. For example, a British Columbia Supreme Court decision addressed, among other things, whether communications between the claimant and the funder, including the funding agreement itself or portions of it, were protected by privilege. The court noted that most aspects of the funding agreement will be protected by privilege; however, some parts of the agreement, such as the amount of control the funder has over the litigation, could be open to disclosure to the opposing party in certain circumstances (Stanway v Wyeth Canada Inc, 2013 BCSC 1585).
Further, in a 2012 Ontario decision involving a litigation funding agreement in a class proceeding, the court took a different approach (Fehr v Sun Life Assurance Co of Canada, 2012 ONSC 2715). In that decision, the court held that funding agreements were not privileged and that such agreements should be transparent and not clandestine, due to a concern that it might subvert the public policy purposes of class proceedings. Further, the court held that if a third-party funding agreement is found to be covered by privilege, that privilege is to be deemed waived. Accordingly, there is a level of uncertainty surrounding this issue in Canada.
Given the significant legal and ethical issues associated with third-party arbitration funding, such as potential conflicts of interest and questions regarding impartiality, is external regulation needed in your jurisdiction?
At present, there is no regulation akin to the Contingency Fee Regulation (which expressly regulates the terms of contingency fee arrangements) that is applicable to third-party funding arrangements.
That said, as discussed above, the evolution of Canadian common law has provided principles that effectively regulate third-party funding in Canada, which has addressed any immediate need for balancing the competing interests at the heart of third-party funding. In McIntyre Estate v Ontario (Attorney General), the court recognised that contingency fee and third-party funding arrangements are no longer illegal due to champerty and maintenance. However, as exemplified by Metzler, third-party funding arrangements might raise various concerns with the Canadian courts regarding the fairness and reasonableness of their terms and conditions.
Further, common law procedural regulations have been developed in respect of the third-party funding of litigation. In Fehr, again in the context of class action proceedings relating to protecting the public, the court stated that:
"a third-party funding agreement must be promptly disclosed to the court and [that] the agreement cannot come into force without court approval. Third-party funding… must be transparent and it must be reviewed in order to ensure that there are no abuses or interference with the administration of justice."
This transparency is reflected in the context of international disputes and arbitration. In May 2017 Canada approved Bill C-30, which enacts the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union. CETA defines third-party funding and Article 8.26 provides that where third-party funding exists:
These terms reflect a growing practice of arbitral tribunals in the context of investor-state arbitrations and a standard of transparency regarding third-party funding that has become more common in the international sphere. The future treatment and development of this provision in the international sphere may provide helpful guidance to the courts and arbitrators considering issues underlying funding arrangements in the domestic context.
For further information on this topic please contact Craig R Chiasson, Hugh A Meighen or Robert JC Deane at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
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