Third party litigation funding is becoming more commonly used in Canada, allowing claimants to pursue litigation when they otherwise may not be financially able to do so. In such circumstances, a litigation funder and the claimant will enter into an agreement under which the funder agrees to pay for all or for a portion of the legal fees and disbursements associated with the claim. In exchange for doing so, the litigation funder will receive a share of any proceeds of the claim if it is successful. Traditionally, litigation funding agreements were used for class action disputes; however, the use of litigation funding has been expanding to include an increasing number of claims outside of the class action context.

The use of third party funding in private litigation in Ontario was first addressed in 2015 by the Ontario Superior Court in Schenk v. Valeant Pharmaceuticals International Inc. Although the court ultimately did not provide approval for the funding agreement, the court confirmed that litigation funding agreements could exist in the context of private commercial litigation.

Since the Schenk decision, there have been further developments in the case law providing further guidance for the use of litigation funding agreements in the private litigation context. Most notably, the Federal Court discussed these issues in Seedlings Life Sciences Ventures LLC v. Pfizer Canada Inc in July 2017. Firstly, the court in Seedlings held that litigation funding agreements should be treated as privileged documents. As litigation funding agreements are prepared and created for the sole purpose of the litigation, the court determined that litigation privilege attaches to the agreement. As such, the details of the litigation funding agreement need not be disclosed to the opposing parties, as the details of a funding agreement would give a tactical advantage in knowing the details of the litigation strategy.

In a second Seedlings decision by the Federal Court in September 2017, the court addressed the issue of whether a funder was entitled to access to information and documents produced throughout the course of the litigation. The court held that a funder is entitled to access to such information, without being a party to the litigation. However, the funder must agree to abide by the implied undertaking rule, under which they are not entitled to use the information produced in the litigation for any ulterior or collateral purpose.

Prior to the decision in Seedlings, litigation funding agreements required pre-approval from the court. However, the Federal Court in Seedlings clarified that pre-approval of a litigation funding agreement was not required in a case of private litigation in order for the litigation to receive funding. This conclusion confirmed that pre-approval of funding agreements is only required in the class actions context in order to protect class members.

Although litigation funding agreements have been traditionally used to assist claimants in class action proceedings, the law continues to develop with respect to the use of third party funding agreements in the context of private litigation, acting as a step forward in increasing access to justice on a wider scope litigation matters. Please contact us if you have any questions about the use of third party litigation funding or regarding the drafting of litigation funding agreements.