The risky business of investing in lawsuits

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When lawyers in Canada take on a case such as the proposed class action against scandal-plagued Sino-Forest Corp., they usually assume a multimillion-dollar risk: If they lose, the lawyers are on the hook not only for their own costs but also for the other side's defence.

But in the case of Sino-Forest, if the $9-billion case launched by class-action firms Siskinds LLP and Koskie Minsky LLP goes down in flames, the plaintiffs' lawyers will simply send the bill to an address in Ireland.

That's because of a "third-party litigation funding" arrangement, approved by a court last month, with Dublin-based Claims Funding International (CFI) PLC. The firm, which specializes in financing lawsuits, has agreed to cover any adverse costs if the case were to fail. In return, CFI will receive up to 7 per cent – capped at $10-million – of a judgment or settlement.

"The reality is that this litigation is extremely expensive," said Dimitri Lascaris of Siskinds, one of the lead lawyers on the case against Sino-Forest. "It's become kind of cliché, but it is true … that the defendants generally have vastly superior resources than the plaintiffs."

It's the latest in a handful of high-stakes class actions in Canada to seek help from a growing number of international and domestic litigation funders that hope to profit from the outcome.

Plaintiffs' lawyers say the arrangements level the playing field when they take on big corporate defendants with seemingly limitless cash for legal fees.

But critics say this kind of deal needs to be scrutinized to ensure it doesn't warp the court system by, for example, influencing plaintiffs to refuse to settle a case, or stirring up frivolous litigation.

In Canada, until recent years, litigation financing was mostly confined to personal injury cases, in which victims of car accidents seek controversial high-interest loans in order to fight for more benefits from insurance companies.

But a series of court rulings in Ontario and other provinces have approved litigation funding arrangements for major class actions, providing they stipulate that the plaintiffs, not the funders, are in charge. And litigation funding has become more common in large lawsuits in Britain, Europe, Australia and the United States.

While the Sino-Forest case is being financed by an international player, Canada has an emerging domestic litigation financing business.

Toronto-based BridgePoint Financial Services Inc., a leader in the field, started funding its first complex class actions in Canada in 2009.

But one of its deals became the subject of a recent court battle about whether the defendants have a right to see the financing arrangement.

In a decision last month in a proposed class action against Sun Life Assurance Co. of Canada, Mr. Justice Paul Perell of the Ontario Superior Court ruled that an arrangement with Bridge Point must be disclosed and scrutinized in court, despite an attempt by the plaintiffs to have it approved behind closed doors. (In other cases, including Sino-Forest, plaintiffs have allowed their funding agreements to be disclosed in court.)

Won Kim of Kim Orr Barristers P.C., the plaintiffs' lawyer in that case, said exposing this kind of funding deal threatens to unfairly give defendants too much information about the plaintiffs' strategy, and should not be allowed.

"If I am going to war, and I have guys giving me bullets, why do I tell the defendants I have 10 bullets in my gun?" Mr. Kim said.

While private third-party litigation funding may be growing, it will likely remain controversial. Critics cite concerns about the effect of outside money on the litigation process, and the legal concept of "champerty and maintenance," or the stirring up of litigation with money, which dates back to medieval times.

Jasminka Kalajdzic, an assistant professor at the University of Windsor law school and co-author of a recent paper on litigation funding around the world, called "Justice for Profit," said the concerns about the influence of funders on the justice system are real.

"It would be naive to accept that the funder makes a decision to indemnify a representative plaintiff against potentially millions of dollars of adverse costs – in some cases will also inject millions of dollars into the litigation itself – and then take a completely passive back seat role in the way that the litigation unfolds," Ms. Kalajdzic said.

Ontario already has a publicly provided litigation funder, called the Class Proceedings Fund, which offers to cover adverse cost awards and finances other expenses for cases filed in the public interest, in exchange for a 10 per cent cut of any settlement or award. (Ms. Kalajdzic sits on the panel that evaluates cases that apply for funding.)

As a result, private litigation funders in Ontario are encouraged to keep their rates under that 10-per-cent threshold. Lawyers who use this kind of financing say funders charge 5 to 7 per cent, depending on the stage of the litigation. This leaves more money for the class-action plaintiffs if the case is successful.

The plaintiffs' lawyers who are increasingly relying on this funding say the terms of their agreements ensure that funders will not exercise undue influence. And, they say, these deals are necessary in the modern world of expensive litigation to ensure claimants get access to the justice system.

"Champerty and maintenance is a doctrine that was developed in the 11th and 12th centuries to deal with lords stirring up litigation against the king and against other lords, and buying off judges and buying off litigants," said Kirk Baert of Koskie Minsky, Mr. Lascaris's co-counsel in the case against Sino-Forest. "We're not talking about that."