When will an insolvency court not approve a litigation funding agreement?
In July 2018, JMX, a demolition company, entered into a contract with OPG for the demolition of the Lambton Thermal Generating Station. In February 2020, OPG formally notified JMX that it was in default of the demolition contract, which JMX denied. In April 2020, JMX and certain related companies filed an NOI. The NOI proceedings were subsequently converted into CCAA proceedings and, in September 2020, OPG terminated the demolition contract.
JMX registered a claim for a construction lien and subsequently perfected the lien by commencing an action against OPG. OPG counterclaimed against JMX. The JMX Group conducted a sales process in the CCAA proceedings and the successful bid was ultimately structured as a reverse vesting order pursuant to which, among other things, three Residualcos were added as applicants to the CCAA proceedings and acquired the lien action against OPG, a similar claim in Vancouver, as well as substantially all of the liabilities of the JMX Group, including the liabilities associated with the Lambton project. The Residualcos had no assets apart from the lien claims, and required litigation funding to pursue the litigation.
One the Residualcos (“Residual Contracting”) proposed that the funding to pursue the OPG litigation be provided by JMX pursuant to a litigation funding agreement and sought an order approving the agreement. OPG sought an order dismissing Residual Contracting’s motion or, alternatively, an order approving the agreement on condition that it be amended to indemnify OPG for any adverse costs award that might be made against Residual Contracting in the underlying lien action between Residual and OPG.
The general test for approval of a third-party funding agreement is that it “should not be champertous or illegal and it must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of the defendants”. Applying this test is an exercise of judicial discretion that involves the balancing of various factors to determine what is fair and reasonable in each case. Courts have evaluated five factors in considering whether litigation funding agreements should be approved within CCAA proceedings, although such factors are not exhaustive.
First, the funding agreement should not diminish the plaintiff’s right to instruct and control the litigation. Here, Residual Contracting would remain in control of the litigation under the oversight of the court-appointed monitor.
Second, the funding agreement must not compromise or impair the lawyer-client relationship or the lawyer’s duties of loyalty and confidentiality. There were no terms in the funding agreement that would compromise or impair the relationship between Residual Contracting and its counsel.
Third, the compensation under the funding agreement must be fair and reasonable. JMX would only be entitled to compensation in the form of interest on monies advanced at the rate of 6.5% per annum. There was no entitlement to a percentage of any damage award. This was so because JMX would benefit significantly from any satisfaction of the claims of its sub-contractors on the OPG project that was the subject of the lien action. JMX is a continuing business and needs to be able to engage sub-contractors on its new projects. Funding the OPG litigation, if successful, was one means of achieving payment of some or all such sub-contractor claims.
Fourth, the funder must undertake to keep confidential any confidential or privileged information. The terms of the funding agreement did not expressly contain a commitment to respect confidentiality and privilege. However, JMX agreed to amend the funding agreement to provide that it will comply with the deemed undertaking rule.
Fifth, the funding agreement must be necessary to provide access to justice to the plaintiff. This factor was the most important, and it is where Residual Contracting’s motion failed. Justice Wilton-Siegel found that Residual Contracting had failed to establish that the funding agreement was necessary to permit it to pursue the OPG litigation for two main reasons.
Residual had obtained financing to pursue the OPG litigation. It lacked only financing of any adverse costs award that may be ordered in that litigation, and it failed to establish that it could not obtain such funding through traditional third-party litigation financing. There was similarly no evidence that JMX would be financially incapable of funding any adverse costs award in the OPG Litigation. Given these considerations, Justice Wilton-Siegel could not find that it was more probable than not that JMX would be unwilling to provide an indemnity to Residual Contracting if required to do so in order to obtain court approval.
In any event, the terms of the funding agreement did not satisfactorily balance Residual Contracting’s access to justice and the protection of the legitimate interests of OPG. It excluded any obligation not only to fund any order for security for costs but, more significantly, to fund any adverse costs award. Given that Residual Contracting did not have any assets with which to satisfy any such award or order on its own, this was abusive to OPG. Consequently, the funding agreement was not fair and reasonable in its current form. Accordingly, the Court dismissed Residual Contracting’s motion.
Judge: Justice Wilton-Siegel
Counsel: Caitlin Fell and Sharon Kour of Weisz Fell Kour, together with Keith Bannon and Derrick Dodgson of Glaholt Bowles for the Residualcos; Seumas Woods, Linc Rogers and Caitlin McIntyre of Blakes for OPG; Harvey Chaiton of Chaitons for the Monitor, Crowe Soberman