Ontario – securities commission exempts filer from filing even redacted copies of litigation funding agreements

In Stans Energy Corp. (Re), 2019 CanLII 36437 (ON SEC), the Ontario Securities Commission granted an exemption to a filer from filing two (2) litigation funding agreements despite the documents qualifying as material contracts under Ontario’s 51-102 – Continuous Disclosure Obligations.  To issue the exemption, the Securities Commission relied on (i) prior disclosure of key information, (ii) privilege and confidentiality issues which would be violated if further disclosure was made as well as (iii) not compromising the filer’s relationship with the funders.

Stans Energy Corp.’s (“Filer”) principal activities involved acquisition, exploration, development and operation of uranium and rare earth mineral properties. The Filer held an interest in certain mines, mineral resource properties and processing facilities in Kyrgyzstan.

Further to a demand in June 2012 by the Kyrgyz Parliament, followed by legal proceedings initiated in the courts of Kyrgyzstan, the Filer’s mineral property licenses (“Licenses”) were revoked.  Unsuccessful after exhausting its domestic litigation options, the Filer initiated arbitration in October 2013 against the Kyrgyz Republic (“Republic”) in connection with a legal proceeding initiated by the Republic in the Arbitration Court of the Moscow Chamber of Commerce and Industry (“MCCI Tribunal”).   Despite an initial award in the Filer’s favour, the Supreme Court of the Russian Federation in January 2016 upheld a lower court ruling setting aside that MCCI Tribunal award.  All domestic appeals were thereby exhausted.

In the Ontario Securities Commission (“OSC”) Decision (“Decision”), issued by Ms. Jo-Anne Matear, Manager, Corporate Finance, the OSC recorded the importance of the Licenses to the Filer and the limited scope of the Filer’s dispute resolution options.

6. The Filer’s Kyrgyz assets were its only material assets. While the Filer is pursuing prospective rare earth and rare metals projects in Russia, the Filer has no other significant mineral properties or projects and currently has no active cash-flow generating business.

7.  The Filer’s sole recourse to seek compensation from the Kyrgyz government is international arbitration”.

The Decision notes the Filer’s decision in May 2015 to initiate further arbitration against the Republic under the United Nations Commission on International Trade Law (“UNCITRAL”) rules which, by agreement with the Republic, were eventually administered by the Permanent Court of Arbitration.  See Stans Energy Corp. and Kutisay Mining LLC v. Kyrgyz Republic (II), PCA Case No. 2015-32. The Decision sets out some of the procedural steps taken by the parties to that arbitration.

The Decision notes that the Filer entered into two (2) litigation funding agreements (“LFAs”), the first in June 2015 and the second in March 2018.  See paras 10 and 14 of the Decision for more details.

The fact that the Filer entered into LFAs was disclosed by news release and key terms described without sharing commercially sensitive information as well as in filing material change reports (“MCR#1” and “MCR#2”).

The Decision identified privilege and confidentiality issues which could be violated if the LFAs were disclosed and held that further disclosure, even in redacted from, would not provide additional information material to investors.  The Decision also noted that additional disclosure would compromise the Filer’s relationship with the funders for both LFAs.  See paras 18-21.

urbitral note – First, it is worth stressing that the OSC expressly justified its exemption, in part, because of an intent not to compromise the Filer’s relationship with the funders should additional information be required.

This concern not to negatively impact the relationship between the funder and the party receiving the funding connects well with the purpose served by funding as recognized in the recent 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10.  In that case, the Supreme Court of Canada accepted that litigation funding agreements in the context of a Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (“CCAA”) process enabled preservation and realization of the value of a debtor’s assets.  The Supreme Court held that LFAs could be approved as interim financing in CCAA proceedings if the supervising judge determines that approval would be fair and appropriate.  In that case, the funded party’s claim was its principal asset.

Second, the limit on information required to satisfy disclosure obligations is recognized in the International Centre for Settlement of Investment Disputes’ (“ICSID”) February 28, 2020 Working Paper #4 and proposed (i) Rule 14 “Notice of Third-Party Funding” of its Arbitration Rules and corresponding Rule 12 of its Conciliation Rules and (ii) Rule 23 of its Additional Facility Arbitration Rules and corresponding Rule 21 of its Additional Facility Conciliation Rules.  Disclosure by Rule 14 and Rule 23 disclosure is made subject to the Tribunal’s discretion to “order disclosure of further information regarding the funding agreement and the non-party providing the funding pursuant to Rule 36(3) and Rule 46(3) respectively if it deems it is necessary at any stage of the proceeding”.

The rationale and range of concerns raised in support of disclosure of LFAs is set out in greater detail in ICSID’s August 2, 2018 Working Paper, Volume 3 at Rule 21 “Disclosure of Third-Party Funding” pages 129-138 and Rule 51 “Security for Costs” pages 226-236.  Volume 1 set out the SynopsisVolume 2 contained the Consolidated Draft Rules

Third, for a recent application of the role of LFAs in arbitration, see 1515474 Ontario Inc. v. Soocellus Ontario Inc., 2020 ONSC 270 paras 8(a), 12-13 and 40.  The decision of the Ontario Divisional Court upheld a decision in first instance granting relief in oppression litigation stemming from the parties’ disputes over the conduct of their dispute resolution. As with Stans Energy Corp. (Re) and 9354-9186 Québec inc. v. Callidus Capital Corp., the funded party’s claim was its principal asset.

Fourth, B.C.’s updated International Commercial Arbitration Act RSBC 1996, c 233, in effect since May 2018, refers at sections 36(3) and 36(4) to “third party funding” in terms of public policy regarding grounds for refusing to recognize and/or enforce.  Section 36 addresses the grounds for refusing recognition or enforcement of an arbitral award.  After listing those grounds familiar to international practitioners, B.C.’s 2018 amendments to section 36 anticipate and pre-empt parties claiming that “third party funding” is contrary to “public policy”.

36 (1) Recognition or enforcement of an arbitral award, irrespective of the state in which it was made, may be refused only (b) if the court finds that (ii) the recognition or enforcement of the arbitral award would be contrary to the public policy in British Columbia.

36(3) For the purposes of subsection (1) (b) (ii), third party funding for an arbitration is not contrary to the public policy in British Columbia.

36(4) In subsection (3), “third party funding”, in relation to an arbitration, means funding for the arbitration that is provided

(a) to a party to the arbitration agreement by a person who is not a party to that agreement, and

(b) in consideration of the person who provides the funding receiving a financial benefit if the funded party is successful in the arbitration”.

Mr. Angus Gunn, Q.C. partner at Eyford Partners, co-chaired an Arbitration Advisory Group (“AAG”) which recommended this change, as well as others, to B.C.’s International Commercial Arbitration Act. See the mention of the AAG’s contribution in the April 12, 2018 B.C. Legislative Assembly’s Official Report of Debates (“Hansard”) at 3:00 p.m.

Hon. D. Eby: We’ve been fortunate in the province. I imagine the member is aware that there’s an advisory group that predated our government, which we continued through after transition, and it is quite an esteemed group. We’ve got a member of the B.C. International Commercial Arbitration Centre. We have top arbitrators and counsel who work on international arbitration in the province. We have a bencher from the Law Society. We have the second vice-president of the Law Society.

One of the members on this advisory committee is Henri Alvarez, who was on the initial committee that brought in the first version of this law in British Columbia in the ’80s, the one that we’re updating here today. The co-chairs of the committee were Jonathan Eades, who’s a counsel within the Ministry of Attorney General — he has an extensive international arbitration background personally, and it’s been a pleasure to get to know him and his expertise on this issue — and Angus Gunn, Queen’s Counsel, who is well known here in British Columbia, both nationally and internationally, for his arbitral expertise.

So we’ve been quite fortunate in being advised by leading practitioners in B.C. and people with international experience as well, on this, in coming up with this bill“.

The AAG‎ also prepared and recommended reforms which contributed to this year’s upcoming repeal and replacement of B.C.’s domestic arbitration legislation Arbitration Act, RSBC 1996, c 55 by the adoption of Bill 7-2020 : Arbitration Act, in force later this year.

The following is the excerpt from the Hansard at 3:50 p.m. explaining the changes noted above was not strictly based on the UNCITRAL Model Law.

Hon. D. Eby: This amendment is based off of Hong Kong’s legislation. It’s needed in order to provide clarity concerning the acceptability of third-party funding in the international commercial arbitration world. Third-party funding is when a person who is not a party to the arbitration agreement provides funding to a party who is a party to the arbitration agreement in return for a financial benefit if the funded party is successful in the arbitration.

This type of third-party funding is acceptable in international practice because it enhances the possibility of claimants being able to enforce arbitral rights for which they bargained in international contracts. It’s also a common form of risk sharing — access to final dispute resolutions promoted through risk sharing. Similar risk-sharing funding agreements occur in some domestic disputes.

The effect of the amendment will be to signal that British Columbia recognizes the use of third-party funding as a commercial practice in international dispute resolution. It will remove challenges to an arbitral award on the basis that a third party provided funding to a party who was otherwise successful in the arbitration.

Third-party funding is common in international commercial arbitration and in some domestic legislation in British Columbia. Not including a provision which confirms that third-party funding is not contrary…. There’s a double negative there. Including a provision which confirms that third-party funding is in conformity with public policy. Other jurisdictions have a provision like that.

See? I tried to solve the double negative to make it clearer, and I made a mess of it.

If we didn’t have this, it could disfavour British Columbia as a venue for international commercial arbitration because this is a practice that is accepted quite broadly in the international arbitral world.

Fifth, for a recent decision on a more bespoke form of litigation funding, see the Arbitration Matters note “Oppression remedy grants party control of dispute resolution covered by litigation funding agreement” which commented on 1515474 Ontario Inc. v. Soocellus Ontario Inc., 2020 ONSC 270. In that decision, Ontario’s Divisional Court upheld an order granting a shareholder control of the conduct of ongoing litigation.  Post-sale of G’s shares in F Co., G retained non-voting shares in F Co. with a right to receive net proceeds in F Co.’s litigation so long as G provided litigation funding and met other financial terms.  F Co.’s eventual decisions to reduce activity in the litigation, to seek an end to it and to mediate so as to “accept the best reasonable offer we are able to negotiate” combined to qualify as oppression justifying the grant of litigation control. The order sought to rectify for breach of G’s reasonable expectations created by the sale of G’s shares in a company engaged in litigation but, unlike other oppression remedies, limited the grant of control to the conduct of litigation and not overall operations of F Co.