Maintenance & Champerty—Implications for Litigation FundingBjornsson et al v Smith et al, 2016 MBCA 91 (CanLII)
Keywords: litigation funding, champerty and maintenance, third party agreements
Mr. Smith, a lawyer, prepared Ms. Bjornsson’s will and acted as executor to her estate after her death in October 2006. The principal asset of the estate was a home appraised at $90,000. The beneficiaries were her two sons (receiving 41.66% each) and the Winnipeg Humane Society (“WHS”)(receiving 16.68%).
In December 2006, the sons contacted Mr. Smith numerous times requesting proceeds from the estate. Mr. Smith indicated that the administration of the estate, including the sale of the home, would need to be completed before any money was released. He estimated it could take approximately one year to complete. The sons continued to make requests for proceeds from the estate. Mr. Smith told them the appraised value of the home was $90,000, however he could arrange for a quick sale to an “investor” for $50,000. If agreed to, Mr. Smith would immediately release $10,000 to each son. He would release the balance of their share when the property title passed to the purchaser. The sons agreed.
The sale was finalized in June 2007. Mr. Smith had failed to disclose that the investor was his wife. This prompted the WHS & the sons filed claims with the Law Society of Manitoba’s Reimbursement Fund seeking compensation for the difference between the appraised value and the amount it was sold for to Mr. Smith’s wife. In June 2012, the Law Society paid the sons and WHS $47,000 from the reimbursement fund in exchange for a release and assignment from the estate. The Law Society then commenced action against Mr. Smith.
Mr. Smith moved to have the action struck on the basis it was being funded by the Law Society and thus a product of champerty or maintenance. The motion was dismissed. Mr. Smith appealed. The Court of Appeal dismissed the appeal.
Court of Appeal decision
The Court found that the Law Society had a legitimate interest in the outcome of the lawsuit: the recovery of $47,000 paid out of the reimbursement fund. The purpose of the fund was to compensate claimants who suffered loss due to misappropriation of funds by a member of the Law Society.
The Court cited McIntyre Estate v Ontario (Attorney General) to define champerty and maintenance:
- maintenance is the intermeddling in litigation by a disinterested party for an improper motive
- champerty is the process whereby the maintainer shares in the profits of the litigation.
Champerty and maintenance can be determined by one’s motive (para. 21 citing McIntyre para. 27). One can be viewed as a maintainer if their actions are found to be “officious intermeddling” or “stirring up strife”. The Court then considered what constitutes an improper motive. The lack of a legitimate interest would be deemed an improper motive:
“The mere fact that one is providing financial support to a lawsuit is thus not sufficient. It must be established that the party providing support does not have a legitimate interest in the outcome of the lawsuit.” (Professor of Law John D McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at pp 441-42)
Champerty and maintenance case law
Although litigation funding has been prevalent in the U.S., U.K., and Australia for some time, it has until recently been more limited in Canada. This matter furthers the notion that courts may be more broadly accepting of litigation funding or third party agreements in certain circumstances. The key consideration in these cases has been the balance between access to justice and preventing the abuse of the administration of justice.
Fredrickson v. I.C.B.C., 1986 CanLII 1066 (BC CA), one of the leading cases of champerty and maintenance, discusses this balance. Justice McLachlin (as she then was) commented that:
“... the court must ask itself whether the assignment can fairly be seen as prompted by a desire to advance the cause of justice rather than as intermeddling for some collateral reason... “ (para. 23)
Since then, several lower court decisions, in Ontario have commented on litigation funding or third party arrangements:
- Bayens v. Kinross Gold Corporation, 2013 ONSC 4974: “Third party funding agreements are not categorically illegal on the grounds of champerty or maintenance.” (para. 41)
- Berg v Canadian Hockey League, 2016 ONSC 4466: “[I]f the agreements do not overreach or interfere with the lawyer and client relationship or the administration of justice, or some regulatory provision, then they are permissible and justified as a means to afford plaintiffs access to justice.” (para. 5)
- Schenk v Valeant Pharmaceuticals International Inc., 2015 ONSC 3215: “Counsel could not locate any cases in which third party funding has been extended to the context of commercial litigation. This being said, I see no reason why such funding would be inappropriate in the field of commercial litigation.” (para. 8) Schenk also commented on the criteria of third party agreements, namely a 50% cap on proceeds is reasonable (para. 17) and termination rights for the funder should be included within the agreement (para. 23).
These cases highlight that:
- litigation funding or third party agreements are not prima facie illegal;
- third party agreements may be permissible if they do not interfere with the lawyer-client relationship and are not contrary to regulations or statute; and
- the scope may be broadened from class action lawsuits to commercial litigation.
Although the Court discussed litigation funding, champerty and maintenance, this matter provided a twist on third party agreements. The Reimbursement Fund allowed the Law Society to compensate the beneficiaries $47,000, thus enabling the Law Society to create an interest in the lawsuit. However, the reasoning put forth by the Court affirms that a purely financial interest is not sufficient in proving an improper motive. The Court further suggests that the onus is on the Appellant to demonstrate that the third party does not have a legitimate interest in the outcome of the lawsuit, and thus an improper motive.
By affirming that providing financial support to a lawsuit may not amount to maintenance or champerty, the Court has opened the door for litigation funders to involve themselves in lawsuits by way of third party agreements. The Court follows the reasoning of lower court decisions in enhancing the flexibility of claimants in accessing justice in a reasonable manner. This case was among the few to discuss litigation funding and third party agreements at the appellate level. With the recent emergence of international litigation funding companies in Canada, the next case heard on this matter at the appellate level may open the doors wider for litigation funders in a commercial context.
Counsel for Appellant: S. Green, Q.C.
Counsel for Respondent: David Skwark and Anthony Foderaro (Fillmore Riley LLP, Winnipeg)
Supreme Advocacy would like to thank and acknowledge Alim Jessa, LL.B. with assistance in preparing this summary.