October 18, 2017

Canadian arbitration and commercial litigation update

The court stated that the general test for determining whether to approve a third-party funding agreement is that the agreement should not be champertous or illegal

Ontario's new International Commercial Arbitration Act, 2017

Ontario's new International Commercial Arbitration Act, 2017, in force since March 22, 2017 updates previous legislation and introduces welcome changes to how international commercial arbitrations are conducted and to the law on enforcement of arbitral awards and agreements in Ontario.

The most significant feature of the ICCA, 2017 is its express adoption of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards as Ontario law.  The New York Convention requires that contracting states give effect to arbitration agreements and recognize and enforce foreign arbitral awards.  To enforce a foreign arbitral award in Ontario one must apply for recognition to the Ontario Superior Court of Justice.

The ICCA, 2017 also incorporates the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law in 1985, as amended in 2006.  Other noteworthy changes include the modernization of the definition of an "Arbitration Agreement", clarity to the scope of an arbitral tribunal to award interim relief such as the preservation of assets and injunctive relief, and confirmation of a 10-year limitation period for the enforcement of arbitral awards from the date they are made.

As arbitration is now the preferred dispute resolution procedure for many businesses, these amendments ensure that Ontario remains an arbitration friendly jurisdiction by promoting certainty and harmonization of legal standards for the recognition and enforcement of international arbitral awards.

Third-party litigation funding

Until relatively recently, third-party funding agreements in Canada would have been regarded as illegal as maintenance or champerty.  However, policy changes that recognize that the financial assistance of a third-party funder might be the only means for a litigant to achieve access to justice has resulted in greater acceptance of third-party funding agreements.

The recent decision in Houle v. St. Jude Medical Inc. is the latest development in the evolution of Canadian jurisprudence on the matter.  Houle is a class action.  The third-party funder, Bentham IMF, applied to the Ontario Superior Court of Justice together with the plaintiffs' class counsel for an order approving the litigation funding agreement. 

The court stated that the general test for determining whether to approve a third-party funding agreement is that the agreement should not be champertous or illegal. Also, it must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of the defendants.  The court described six questions that inform the test for assessing the reasonableness of a litigation funding agreement: 

  1. Can a court scrutinize the litigation funding agreement?
  2. Is third-party funding necessary to the case?
  3. Will the third-party funder make a meaningful contribution to access to justice or behavioural modification?
  4. Will the third-party funder be overcompensated for its risks in the case?
  5. Is the lawyer-client relationship protected from interference?
  6. Is the third-party funding agreement not illegal on some basis independent of champerty and maintenance?

The court concluded that the litigation funding agreement in question met all the criteria except for items four and five.  Regarding item four, it concluded that the appropriate level of compensation for the funder could only be determined at the end of the litigation.  The funder's share of the contingency fee seemed untypically and disproportionately high, structured as it was in a hybrid manner that combined a partial contingency fee with a fee for services retainer.  As for item five, the court expressed concern that the funder's termination rights under the agreement interfered with the plaintiffs' litigation autonomy.  It further characterized the litigation funding agreement as creating the impression that the class proceeding was being prosecuted more on behalf of the funder than on behalf of the class members.  The litigation funder has sought leave to appeal.

The decision reflects the general trend toward greater acceptance of litigation funding arrangements but not without judicial oversight to ensure the parties' interests are protected.

Livent Inc. v. Deloitte & Touche

Livent Inc. was a publicly traded company.  It brought popular shows including "Phantom of the Opera" and "Joseph and the Amazing Technicolor Dreamcoat" to theatres across North America.  In 1998, new management discovered serious accounting irregularities in its financial statements.  Trading in Livent shares was suspended.  The company’s founders Garth Drabinsky and Myron Gotleib were convicted of fraud.  As the trial judge in the action against Deloitte later found, Livent was "rife with fraud, which burrowed deep into the operation, involved senior management and extended well into most, if not all, levels of the accounting staff of the Company.”

Deloitte was Livent's auditors between 1989 and 1998.  In 2001, Livent, through its receiver, commenced an action against Deloitte alleging, among other things, that its audits between 1992 and 1998 were negligent. Livent alleged that Deloitte failed to detect the fraud, causing it to realize a value on its assets upon liquidation less than it otherwise would have.  The trial judge found in favour of Livent, awarding $84 million in damages plus interest against Deloitte.  The Court of Appeal for Ontario dismissed Deloitte's appeal.

Deloitte's appeal was argued before the Supreme Court of Canada on February 15, 2017.  It argued that the Court of Appeal erred by ultimately permitting a thoroughly fraudulent corporation, whose directing minds deceived both is auditor and its investors, to effectively be indemnified by its auditor for disproportionate losses suffered by stakeholders. The ruling, Deloitte cautioned, would encourage corporate auditors to resign an audit before they feel they can responsibly do so in order to minimize the risk of catastrophic loss and indeterminate liability. 

The case raises a number of issues including: (1) whether the plaintiff could advance a claim for damages relating to a breach of duty arguably owed to another entity.   Indeed, Deloitte argued that Livent is not claiming for its own losses, but rather is advancing a proxy claim, indirectly, for losses sustained by its creditors and investors that will be recoverable in Livent’s insolvency proceedings;  (2) the extent to which attribution of wrongdoing of senior management could defeat Livent's cause of action and the ex turpi causa defence; and (3) whether the unsettled theory of deepening insolvency (the artificial prolongation of a corporation's existence past the point of insolvency)  of damages is an acceptable measure of the plaintiff's loss.

Auditors, insurers, and class action counsel among others are keenly watching the Supreme Court of Canada for the release of its decision in this landmark case.