“Champerty” is a somewhat obscure common law concept that can preclude a party from becoming involved in another party’s claim for the purpose of sharing in the fruits of the litigation. Although the origins of the rule against champerty are ancient, it continues to be important in Canadian law. In 2770095 Ontario Inc. v Morgan,[1] the Ontario Superior Court of Justice dismissed a plaintiff’s fraud action because the assignment of claims by a non-Canadian entity to an Ontario corporation (which had been created for the purpose of pursuing the claims) was champertous.
2770095 Ontario Inc. is notable as the latest Ontario court decision regarding champerty. This area of law is evolving and over the past twenty years, the strictures around champerty have loosened substantially, with Ontario courts finding that contingency fee agreements and litigation funding agreements may not be champertous.[2] Various methods to permit an injured party to share both the costs of litigation and the ultimate judgment have been permitted by statute and by the courts.
Although the plaintiff did not characterize the agreement at issue in 2770095 Ontario Inc. as a litigation funding agreement, the court considered these developments — citing as “instructive” that it was unlikely that a litigation funding arrangement would be approved by the court where the entity that allegedly had suffered the harm would receive only 3% of the recovery and also gave up control over all litigation decisions.[3]
It is also noteworthy that in 2770095 Ontario Inc. the court applied the prohibition against champerty despite the plaintiff previously having established a strong prima facie case of fraud in several preceding motions for extraordinary relief. The court concluded that “litigation efficiency or the desire to maximize a claim or to minimize risk is not a legitimate commercial interest sufficient to convert a champertous assignment into one that is valid”.[4] The court held that the assignment was “trafficking in litigation” and an abuse of the court’s process.[5]
In 2770095 Ontario Inc., the court summarized the key facts as follows:
Affinitas Medios de Pago S.A.P.I de C.V. is a corporation based in Mexico City, with international operations and a global reach. Affinitas is a payment facilitator helping its clients, on-line gaming merchants, integrate and manage their online sales. Affinitas signed a contract with ZedPayments, a company from the Philippines, to provide payment processing services. Affinitas concluded that ZedPayments had not transferred funds to Affinitas’ merchants as required. Moreover, Affinitas concluded that ZedPayments may itself have been fictitious and that Affinitas may have been the subject of a fraud carried out by a number of people, including several that lived in Ontario.[6]
Affinitas did not start an action in Ontario in respect of these facts. Instead, it assigned its claims to 2770095 Ontario Inc., a “special purpose vehicle” incorporated as what the plaintiff called a “convenient and appropriate vehicle to pursue payment” from the defendants.[7] Affinitas entered into an “Assignment of Claim Agreement” with 2770095 Ontario Inc., which assigned Affinitas’ claims in exchange for a 3% share of successful recovery.[8] The 3% amount was apparently the approximate amount that Affinitas would have received as a service fee on behalf of its merchants.
2770095 Ontario Inc. then commenced an action against certain defendants located in Ontario (ZedPayments was not a named defendant), and was successful in obtaining a number of interlocutory orders, including Norwich disclosure orders, Anton Piller search orders and Mareva asset freezing injunctions.[9] Certain defendants then moved for an order declaring that the assignment was invalid and sought to have the claim dismissed as an abuse of process.
The court granted the motion under rule 21.01(3)(d) of the Rules of Civil Procedure, which permits a defendant to move to have an action dismissed as an abuse of process.[10] The court concluded that the assignment was invalid for three reasons:
- the agreement did not validly assign a cause of action in tort because (a) the agreement assigned the cause of action itself, and not the fruits of the action, and was prosecuted in the name of 2770095 Ontario Inc. and not Affinitas; and (b) 2770095 Ontario Inc. had no connection to or interest in the action other than financial profit;[11]
- the agreement did not validly assign a cause of action in contract or debt because (a) the original dispute between Affinitas and ZedPayments did not concern a debt, and no cause of action in debt was assigned to or alleged by 27770095 Ontario Inc.;[12] and (b) as with the tort claims, 2770095 Ontario Inc. had no genuine pre-existing financial interest in the cause of action assigned; and
- the agreement was “not prompted by a desire to advance the cause of justice”[13] — 27770095 Ontario Inc.’s sole motivation was financial profit.[14]
In making these findings, the court also noted the lack of evidence regarding certain issues that it considered material, observing that there was no evidence that Affinitas was incapable of advancing its claims in its own name in Ontario,[15] and no evidence that the assignment was necessary to advance the cause of justice.[16]
2770095 Ontario Inc. is an important reminder to parties considering the assignment of claims that the common law rules of champerty remain operative in Ontario and can result in an action being dismissed prior to trial — even when a plaintiff has repeatedly demonstrated a strong prima facie case of fraud.
[1] 2023 ONSC 1924 [2770095 Ontario Inc.].
[2] Houle v. St. Jude Medical Inc., 2018 ONSC 6352 (Divisional Court); see also Houle v. St. Jude Medical Inc., 2017 ONSC 5129.
[3] 2770095 Ontario Inc. at para 91. In this case, the 3% amount was apparently the approximate amount that the foreign entity would have received as a service fee on behalf of its merchants.
[4] 2770095 Ontario Inc. at para. 88.
[5] 2770095 Ontario Inc. at para. 5.
[6] 2770095 Ontario Inc. at para. 1.
[7] 2770095 Ontario Inc. at para. 5.
[8] 2770095 Ontario Inc. at paras. 23-24.
[9] 2770095 Ontario Inc. at para. 4.
[10] 2770095 Ontario Inc. at para. 102.
[11] 2770095 Ontario Inc. at paras. 48-72.
[12] 2770095 Ontario Inc. at paras. 74-86.
[13] 2770095 Ontario Inc. at para. 47.
[14] 2770095 Ontario Inc. at paras. 92-95.
[15] 2770095 Ontario Inc. at paras. 2 and 88.
[16] 2770095 Ontario Inc. at para. 88.
