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In the Ecuadorian province of Sucumbíos lies Lago Agrio, an oil field that has been a lucrative site for crude and natural gas extraction since Texaco Petroleum first discovered it in 1967. When Texaco’s government-issued license to drill expired in 1992, it left the country with billions of dollars in profit – but left in the country billions of gallons of toxic waste. The residents of Lago Agrio, many of them Indigenous, have suffered to this day from the consequences.
In 1993, a class action lawsuit was filed on behalf of 30,000 affected people, alleging a number of environmental and health harms caused by Texaco’s drilling operations. The plaintiffs, however, quickly realized that they had little chance of lasting in a drawn-out legal war of attrition against Texaco and its infinitely deep-pocketed parent company: oil giant Chevron. They had to get creative.
The plaintiffs turned to litigation financing, a resource not often used or discussed in the Canadian context. Litigation financing is the practice where an investor, usually a large and specialized firm, provides a non-recourse loan to a party pursuing or defending against litigation in exchange for a return in the event of a successful outcome or settlement. For the residents of Lago Agrio, they sold a 5.5% stake in the outcome to Burford Capital in exchange for $4 million upfront and a further $11 million paid in installments to fund their legal battle.
Initially, this bet seemed to pay off for both the plaintiffs and Burford. In 2011, an Ecuadorian court found against Chevron, ordering the company pay $9.5 billion in damages. But by the time this ruling was handed down, Chevron and Texaco had long since withdrawn from the country, and so the plaintiffs moved to recover against Chevron’s assets abroad. Unfortunately for the plaintiffs, a United States federal appellate court quickly held in Chevron Corp v Donziger, 833 F (3d) 74 (2nd Cir 2016), that this ruling was unenforceable against Chevron’s American assets (as did the courts in many other countries, including Canada), citing fraud and corruption by the plaintiff’s lawyers in obtaining the Ecuadorian judgement.
Although the Lago Agrio plaintiffs were ultimately unsuccessful, their story offers an interesting glimpse into the world of litigation financing. By selling a portion of their claim, the plaintiffs were able to meaningfully have their day in court and seek justice for the harms they have suffered – something they otherwise would not have been able to do. For Burford, had the judgement been enforced, they stood to take home a handsome $522.5 million payout for a relatively meagre $15 million initial investment. A win-win.
Outside of Ecuador, many countries – notably the UK, the US, and Australia – allow the practice of third-party litigation funding. In these comparable jurisdictions to Canada, litigation financing is a judicially sanctioned mechanism. Canadian courts, it seems, are also slowly acclimating to the practice. This post will argue that this is a positive development.
Historical Reasons for a Ban on Litigation Financing
Until recently, third-party funding for litigation would have been disallowed in Canada under the ancient doctrines of maintenance and champerty. In McIntyre Estate v Ontario, [2002] O.J. No. 3417, 2002 CanLII 45046 (ONCA) (McIntyre), the Ontario Court of Appeal defined maintenance as causing another person to institute, carry on, or defend against a proceeding without lawful justification (McIntyre at para 26). Champerty is a subset of maintenance. The word champerty stems from campi partitio, Latin for a “share of the field,” alluding to the practice of maintaining for a share in land. In other words, champerty is where the maintainer does so for a profit or a share of the proceeds (McIntyre at para 26).
In Ontario, these doctrines are still valid under a piece of legislation from 1897 entitled An Act Respecting Champerty [1]. Historically, courts defended maintenance and champerty on public policy grounds; however, these public policy grounds now push for the exact opposite conclusion. Any residual concerns are further mitigated by other areas of modern law, such as the rules surrounding standing and vexatious litigants.
In medieval England, the royal courts wanted to dissuade litigation that would not have arisen but for financial support from the landed elite. Powerful nobles, in return for a cut of the damages, would associate themselves with otherwise frivolous claims in order to intimidate judges to decide in their favour. As Jeremy Bentham described it:
“[the fear was] that a man would buy a weak claim, in hopes that power might convert it into a strong one, and that the sword of a baron, stalking into court with a rabble of retainers at his heels, might strike terror into the eyes of a judge upon the bench.”
The law, purporting to administer justice blindly, would instead become an instrument of injustice, abuse, and oppression at the hands of those who sought to pervert its machinery. Thus in medieval times, the doctrines of maintenance and champerty were justified on the basis that they protected the legal system from the swords of the barons.
This debate over the laws of maintenance and champerty rearose in the 20th century and the same arguments were made to uphold them: the law and the courts needed to be protected from a plague of busybodies. In Re Trepca Mines (No 2), [1962] 3 All ER 351, Lord Denning argued that disinterested third parties ought not be allowed to intervene in the litigation process, for they would “be tempted, for [their] own personal gain, to inflame the damages, to suppress the evidence, or even to suborn witnesses” [2].
The public policy rationale for maintenance and champerty laws in the 20th century were buttressed by the concern that courts would be burdened by an increase in frivolous litigation. It would have been detrimental to the public interest to allow mischievous third parties to interlope in a proceeding in which they do not bear any non-pecuniary interest nor undertake any responsibility for the legal consequences of failure. The medieval doctrines were thus co-opted to address a concern that courts could become too easy to access.
Litigation Financing Today
But do these criticisms still ring true today? Access to justice is an important pillar of our legal framework and our democratic order; and yet, the costs of hiring a lawyer and going to court have become increasingly prohibitive for many Canadians. In a 2018 speech on this issue, Chief Justice Wagner estimated that it costs, on average, around $31,000 for a two-day civil trial in Canada.
Moreover, access to justice is devoid of substance if a level playing field does not exist between the parties. As the Lago Agrio story highlights, even those with claims which are meritorious and virtually certain to guarantee a payout cannot always meaningfully have their day in court. Repeat players in the legal system – corporations or individuals with deep pockets – are, simply put, able to bleed people dry instead of facing their claims head on.
Even today though, despite the serious access to justice issues in our society, detractors of litigation financing abound. Some worry that the practice could disincentivize settlement and interfere with the lawyer-client relationship. Others bemoan the commodification and securitization of yet another aspect of our personal lives. Still others worry that litigation financing could have the unintended and paradoxical effect of spawning a legal arms race, thus aggravating the costs of litigation even further.
Despite all this, our legal system is slowly warming up to the idea of third-party involvement or financing in litigation. Champerty is no longer a crime, only a tort (McIntyre at para 25). Legal aid, for all intents and purposes, is a state-funded exception to the doctrine. Insurance companies have built subrogation rights into their contracts and unions can sue on behalf of their members. Lawyers themselves now frequently employ contingency agreements which stipulate that they will only be paid in the event of a successful outcome for their client, in essence financing the litigation through their own time and effort.
On a more theoretical level, though, there are good reasons why litigation financing should at least exist as a readily available option for Canadians. The antiquated arguments for maintenance and champerty laws no longer hold water today. These laws were initially necessary to prevent vexatious litigation and abuses of legal process; however, they also made it harder for people with meritorious claims but without the resources to pursue them from having their day in court. Originally, maintenance and champerty laws sought to protect the less fortunate from exploitation by the rich and connected individuals in society. Now, that exact same public policy rationale militates for the exact opposite conclusion. It is precisely that same goal of ensuring equal access to justice which now weighs in favour of allowing litigation financing. Moreover, Canadian rules on standing and vexatious litigants, to a large degree, adequately address and ameliorate the historical concerns that once justified maintenance and champerty.
Although perhaps trite and cliché at this point, it is nonetheless still true that a right without a remedy is no right at all. Rights which cannot be meaningfully enforced become mere privileges. Access to the courts is a foundational right for our legal order and should be available to everyone, not just those able and willing to pay the extravagant costs of modern litigation. As the former President of the UK Supreme Court, Lord Neuberger, put it: “as long as litigation [and] access to the courts remains expensive, then anyone who has a right that stands in need of vindication should be able to obtain funding from anyone willing to offer it.” Yes, courts need adequate protection from busybodies and interlopers; but if there are already sufficient safeguards for that in place, why maintain a system which also has the effect of only allowing claims brought forward through the litigant’s own expense?
The Current Test
Canadian courts have begun to accept the idea that litigation financing can be a valuable tool in combatting access to justice discrepancies. In 9354-9186 Quebec Inc. v. Callidus Capital Corp, 2020 SCC 10 (CanLII) (Callidus), the Supreme Court of Canada ruled unanimously that private, third-party funding is allowed in bankruptcy and insolvency situations. In obiter, Wagner CJ and Moldaver J opined that third-party litigation funding agreements are not necessarily unlawful in other contexts as well (Callidus at paras 95-96). There is no principled basis, they argued, upon which to restrict supervising judges from approving litigation funding agreements when appropriate (Callidus at paras 95-96). Neither party in Callidus asked the Court to rule on the legality of litigation financing more generally. As such, the Court confined the limits of its ruling to the bankruptcy and insolvency context.
Ontario trial courts in particular, however, have taken up the mantle, recognizing that litigation funding agreements can be helpful and valuable in the right circumstances. The courts have consistently ruled that a bona fide business arrangement which does not invite unnecessary and unmeritorious litigation is not necessarily champertous (Lilleyman v Bumble Bee Foods LLC, 2021 ONSC 4968 (CanLII)). Sometimes, third-party funding might genuinely be the only way for a litigant to achieve access to justice.
The courts have developed a five-part test to determine on a case-by-case basis whether the litigation funding agreement is appropriate in the context. To approve the agreement, a judge must be satisfied that (Houle v St. Jude Medical Inc, 2018 ONSC 6352 (CanLII) (Houle)):
a) the agreement is necessary in order to provide access to justice;
b) the access to justice facilitated by the agreement must be substantively meaningful;
c) the agreement must be fair and reasonable;
d) the funder must not be overcompensated for assuming the risks of an adverse costs award; and
e) the agreement must not interfere with the lawyer-client relationship.
In formulating this test, Ontario’s courts were undoubtedly influenced by the public policy arguments against litigation financing which have shaped the debate since antiquity. However, they are also clearly animated by the inescapable truth that there is a serious concern with access to justice in our society. Litigation financing, if properly implemented and regulated, has the potential to help bridge that gap.
As a safeguard to the judicial system and to litigants, judges must hear and approve every funding agreement before the case is allowed to proceed to trial. An overview of the Ontario case law on this issue reveals that, generally speaking, funding agreements that are reasonable will be approved without much hassle. Agreements that are denied tend to be those which have unfair or unreasonable fee structures, as was the case for the oft-cited decision in Houle. As one commentator puts it, the courts are still “unwilling to cut a blank cheque to those profiting from the litigation in fear of overcompensating them.”
The underlying public policy rationale which initially supported the doctrines of maintenance and champerty now justify the opposite conclusion. Litigants no longer fear the swords of barons, but there is cause for concern regarding the wallets of the affluent. For those in a David and Goliath battle without adequate resources, litigation financing offers the underdog the capital that they need to have their day in court. If presented with another case similar to Callidus, the Supreme Court should take the opportunity to rule on litigation financing agreements in all contexts by adopting or approving the Ontario test. If the Supreme Court were to do this, it would further strengthen Canada’s blossoming litigation financing industry by providing the necessary clarity and certainty on the appropriate framework and principles judges will apply. Such an outcome would be a welcome change, providing Canadians with the meaningful access to justice that they deserve.
