In the classic cartoon from The New Yorker, a lawyer sits across from a prospective client and remarks: “You have a pretty good case, Mr Pitkin. How much justice can you afford?” Framed in the context of a class action lawsuit, the client may well have asked the lawyer: “I have a pretty good case, Mr Lawyer. How much risk can you tolerate?”

The class action lawsuit is a unique legal procedure. It allows many parties with similar claims to pursue them collectively against a given defendant. Like any other court proceeding, class actions are a risk-reward proposition. The potential for settlement or damages must be weighed against the expense of litigation and, in some jurisdictions, the risk of an adverse cost award. As such, deep pockets and a high tolerance for risk are often critical to pursue a good case on the merits.

Third-party funding has emerged globally and in Canada as a means by which claimants can pursue a class action lawsuit and minimise their risk to adverse cost consequences for claims that do not succeed. Under this arrangement, a commercial entity funds a class action lawsuit on behalf of claimants in exchange for a percentage of the proceeds. Recently, Ontario courts have taken a leadership role by governing what is essentially a private contract due to the absence of legislation and the unique legal relationship among class action counsel, claimant and funder.

In this article, we discuss the treatment of third-party funding agreements (TPA) by Canadian courts. After a review of the relevant legal principles, we outline the hallmarks of a properly drafted TPA as defined by the courts and discuss undefined areas for future consideration. Virtually all of the substantive case law on third-party funding agreements in the class action context stem from Ontario courts. We therefore focus on these decisions. 

Apr-Jun 2015 issue

McCague Borlack LLP