Canada: Ontario Court Approves Litigation Funding Agreement Prior To Certification In Proposed Class Action

On March 21, 2011, Justice Strathy of the Ontario Superior Court of Justice released interim reasons in Dugal v. Manulife Financial Corporation¹ conditionally approving a litigation funding agreement entered into between the plaintiffs and a foreign third party corporation. This is the second time that such an agreement has been considered in Ontario and the first time that one has been approved.

The plaintiffs in the proposed class action allege that Manulife Financial Corporation made misrepresentations regarding its risk management practices in public disclosure documents, which had the effect of artificially inflating the value of its stock. Subsequently, when the market became aware of Manulife's actual practices, the value of Manulife's securities plummeted, causing damages to the plaintiffs who had purchased Manulife's securities during the class period.

Prior to concluding that the funding agreement should be approved, Justice Strathy considered:

Jurisdiction

In an earlier decision, Metzler Investment GMBH v. Gildan Activewear Inc.,² Justice Leitch concluded that the court should not exercise its discretion when an action had not yet been certified and class members have not been given an opportunity to present their views.

The court in Dugal disagreed and found that its broad jurisdiction under section 12 of the Class Proceedings Act, "to make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination" was not dependent on an action having been certified. The court took a practical approach in its analysis of this issue when it recognized that part of the court's responsibility in a class action is to protect the rights of prospective class members, where the most important right is the right to advance a class proceeding.

Thus, Justice Strathy concluded that to postpone the decision to after the certification hearing and seek the views of all class members, could well result in the end of the proceeding, because the plaintiffs would not be able to withstand an adverse costs award on certification.³ Accordingly, noting that the funding agreement in this case was at least acceptable to a representative group of class members, the court found that it had jurisdiction to assess whether the funding agreement was fair and reasonable.

Funding Agreements Not Necessarily Champertous

The funding agreement entered into between the plaintiffs and Claims Funding International PLC (CFI) provided that CFI would indemnify the plaintiffs against their exposure to an adverse costs award in return for a seven-percent share of the proceeds of any recovery in litigation, subject to a variable cap based on the timing of any settlement. The defendants argued that such an agreement was contrary to public policy and champertous (e.g., unlawful on the basis that CFI was moving a lawsuit in order to take part in the gains).

The court determined that a litigation funding agreement was not necessarily champertous after considering the jurisprudence with respect to contingency fee agreements, the acceptance of funding agreements in other jurisdictions and the goals of the CPA.

Justice Strathy likened litigation funding agreements to contingency fee agreements, which have previously been found not to be prohibited by the law of champerty and maintenance and which have been recognized to improve access to justice for litigants. Given that contingency fee agreements must be reviewed by the courts for the reasonableness and fairness of the fee structure, the court determined that this should also be the case with respect to litigation funding agreements. An assessment of fairness would therefore require an examination of the percentage of recovery payable to the funder and whether or not there was a cap on the amount that was payable. Indeed, in Metzler, the only other case in Ontario to consider the funding agreement issue, the court declined to approve a funding agreement on the basis that it was too early to determine whether or not it was reasonable (because there was no cap on the amount of the award).

Additionally, the court took note of the fact that litigation funding agreements have been approved in other Canadian jurisdictions (e.g., Alberta and Nova Scotia), England and Australia.

Most importantly, Justice Strathy recognized that one of the main goals of the CPA is to provide access to justice to large groups of claims that cannot economically be pursued individually. Because "no rational person would risk an adverse costs award of several million dollars to recover several thousand dollars,"⁴ the reality is that potential representative plaintiffs still face a significant barrier to litigation. Currently, aside from a litigation funding agreement to address one's exposure to costs consequences, plaintiffs are left with only two options – attempt to obtain an indemnity from class counsel, or apply for funding from the Class Proceedings Fund, the former of which is not always an option and the latter of which may be rejected.

Based on the above considerations, the court in Dugal conditionally approved the agreement between the plaintiffs and CFI because:

The court imposed two conditions on its approval of the agreement – that CFI provide evidence it has the capacity to satisfy any costs award that might be made and the parties to the agreement develop guidelines as to how they will ensure confidential information is treated appropriately.

Through Justice Strathy's decision in Dugal, Ontario courts have opened the door to litigation funding agreements. This may be a significant benefit for class action plaintiffs and their counsel who, to-date, have tended to indemnify representative plaintiffs against adverse costs awards. Practical questions remain, however, such as whether such funding will only be available to those plaintiffs with the very best prospects of success and whether such an arrangement will be a consideration for the court in making an award of costs or class counsel fees. Presumably, the appropriateness of the funder's rate of return will need to be determined on a case by case basis.

In any event, parties seeking to take advantage of this new development in Ontario should be mindful that only carefully drafted litigation funding agreements, which are fair and reasonable, and which safeguard the administration of justice, will be approved by the courts. The importance of engaging experienced and reputable counsel in this regard cannot be overstated.

Footnotes

1. Dugal v. Manulife Financial Corporation, 2011 ONSC 1785 [Dugal]

2. Metzler Investment GMBH v. Gildan Activewear Inc., [2009] O.J. No. 3315 (S.C.J.) [Metzler]

3. Dugal, supra note 1 at 17

4. Dugal, supra note 1 at 28.

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