Canadian Underwriter

Why it might get easier for plaintiffs to fund their lawsuits

May 21, 2020   by Greg Meckbach

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With a recent Supreme Court of Canada decision involving third-party litigation funding coming on top of the economic disruption caused by the COVID-19 pandemic, Canadian courts are likely to see a spike some types of lawsuits, suggests the head of an international litigation financing provider.

“We have seen a significant amount of interest from Canadian litigation law firms for litigation funding,” said Steven Friel, London-based CEO of Woodsford Litigation Funding, in an interview. Friel is referring to arrangements in which a company other than the plaintiff’s law firm would agree to fund all or part of the plaintiff’s costs in a lawsuit.

Litigation funding is different from contingency fee agreements.

In a contingency fee arrangement, plaintiffs do not have to pay their lawyers up-front. If the plaintiffs win, the lawyers keep a certain percentage of the award. With litigation funding, a third party (not the law firm) fronts the costs of litigation. If the plaintiff wins or settles, then the third-party financing firm gets to keep a certain percentage. If the plaintiff loses, the third-party litigation firm loses its investment.

Litigation funding has important implications for insurers because it can result in “nuclear verdicts,” wrote Diane Injic, director for commercial auto underwriting at Verisk Analytics Inc.’s ISO unit, in an earlier article.

The Insurance Bureau of Canada (IBC) is “generally opposed” to third-party litigation funding but has not taken a formal public position, an IBC spokesperson told Canadian Underwriter.

On May 8, the Supreme Court of Canada released its decision in 9354-9186 Québec inc. v. Callidus Capital Corp. This, Friel observes, is the first time Canada’s top court took a close look at litigation funding.

“I think we will see in Canada what we have already seen in the U.K. and Australia, where litigation funding goes from a relatively unknown phenomenon to a permanent fixture in the litigation landscape very quickly,” said Friel.

The Callidus ruling arose from an ongoing proceeding in a Quebec court under the federal Companies Creditors Arrangement Act. Gambling casino machine vendor Bluberi Gaming Technologies Inc. sought court protection from creditors in 2015. Bluberi owes more than $100 million to Callidus and also wants to sue Callidus.

Generally in CCAA cases, a court issues an order protecting a company from creditors, but appoints a monitor to oversee a process whereby those creditors get as much of their money back as they can.

In Callidus, the Supreme Court of Canada restored a March 2018 Quebec Superior Court decision that denied Callidus a right to vote on an interim financing plan put forth by Bluberi. That plan includes a funding agreement with a third-party firm [Omni Bridgeway Limited) so that Bluberi can cover its legal costs of suing Callidus.

Callidus wanted the court to rule that the interim financing plan was actually a “plan of arrangement,” meaning Callidus, as a creditor of Bluberi, could vote against that plan and potentially quash the litigation funding agreement.

Quebec Superior Court Justice Jean-Francois Michaud initially ruled that Bluberi’s litigation funding agreement is not a “plan of arrangement” under CCAA and is therefore not subject to a vote by creditors.

Initially Callidus was successful on appeal. In a ruling released in 2019, Quebec’s appeal court found that the litigation funding should not be approved because it is not connected to Bluberi’s commercial operation.

But the May 8, 2020 Supreme Court of Canada ruling restores Justice Michaud’s original 2018 ruling.

“When the highest court in Canada makes very clear that is sees litigation funding as a positive thing, which is to be encouraged, then taken together with the recession that we are about to slide into, there is undoubtedly going to be a huge increase in litigation generally but specifically of insolvency-related litigation in Canada,” Friel told Canadian Underwriter.

In Callidus, the Supreme Court of Canada ruled that under the specific circumstances involving Bluberi, within the context of the federal Companies Creditors Arrangement Act, litigation funding can be approved by a judge presiding over the court proceedings if the judge thinks it is fair and appropriate.

“There is no principled basis upon which to restrict supervising judges from approving such agreements as interim financing in appropriate cases,” the Supreme Court of Canada wrote in Callidus.

“The Supreme Court of Canada highlights that Canadian courts are very receptive to litigation funding and are going to great lengths to make sure litigation funding is accommodated within the Canadian legal landscape,” Friel said in an interview.

The financial crisis we are entering as a result of pandemic lockdown measures makes it very likely that there will be a very significant increase in insolvencies, said Friel. This means there is also likely to be an increasing in litigation related to insolvencies.

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