Canada: Open Bidding For Cy-Près Awards?

Last Updated: May 15 2014
Article by Angus T. McKinnon and Rebecca Case

It has been suggested by some that Justice Perell's recent decision in Carom v. Bre-X Minerals Ltd., 2014 ONSC 2507 ("Bre-X")[1], opens the floodgates to a competitive bidding process for cy-près awards before the Court, an institution ill-equipped to award grants, and is held out by some as one example of what is wrong with class actions.  However, a close reading of Justice Perell's reasons demonstrates that his ruling is in keeping with the law that a settlement approval judge can only approve or reject a settlement and that the ability to structure a settlement rests with the parties.  The parties can agree to leave specific elements to be administered or determined by the Court but there are responsibilities that Class counsel cannot delegate.  Only where the parties have given the Court authority to administer an already approved settlement and Class counsel have not fulfilled their responsibilities will the Court intervene.

A cy-près award is one where funds are not provided directly to the individual class members but are directed towards an alternate recipient that "approaches as nearly as possible" some form of compensation for class members.  This theory behind these awards is that the cy-près award will indirectly benefit the class members and will still advance other goals of class proceedings, in particular behaviour modification.  Despite this, cy-près awards have been controversial and it is a matter of debate whether cy-près awards advance the purposes and policies of class actions.  As a result, there has been much pressure for greater scrutiny of settlements involving cy-près awards.

In Bre-X, the plaintiffs proposed a cy-près award for the remainder of the funds being held under a previously approved settlement agreement.  It was likely that the cost of distribution would halve the remaining settlement funds and result in a recovery for class members of only 0.2 cents on the dollar.  In these circumstances, a cy-près award was considered appropriate.  Class counsel proposed that the funds should be given to the Access to Justice Fund operated by the Law Foundation of Ontario ("LFO"), a fund specifically created for cy-près awards. 

No class member objected to a cy-près award and the other parties on the motion took no position.  However, one class member intervened to request that the cy-près funds be paid to the Telfer School of Business at the University of Ottawa (the "University") where he was on faculty.  This proposal was forwarded to the LFO who agreed that it could be within the LFO objectives. Nonetheless, Class counsel did not recommend providing any of the cy-près award to the University.  Rather, they argued it would be fairer to provide the funds to the Access to Justice Fund and the University could then compete with other applicants for the funds through an institution which was equipped to address grant requests.

Justice Perell ordered that the cy-près award was appropriate and that 80% should go the Access to Justice Fund and 20% to the University.  Justice Perell grounded his authority to do this on the structure of the already approved settlement agreement.  That agreement provided that the funds should be distributed in accordance with directions given by the Ontario Court.  In addition, Class counsel agreed that both the University and the Access to Justice Fund were worthy recipients and in Justice Perell's opinion, concerns about unfairness to other worthy claimants were misguided.

Conceptually, there were three possible entities who might decide who would be the cy-près award recipient in this case:  1. Class counsel, 2. the LFO and 3. the Court.  Class counsel's argument that in reality the LFO was best situated to make such a selection was found by Justice Perell to be an improper delegation of their responsibility of selecting the ultimate cy-près award recipient.  Because the Court had authority to administer the funds, he was then able to order how the funds should be apportioned.

Justice Perell articulated that as part of the exercise of their responsibilities in determining the cy-près recipient, Class counsel should consider the views of members.  In his view, who would be better situated to identify a worthy recipient than the very individuals who are supposed to receive an indirect benefit.  Justice Perell emphasized that the benefit must not be self-serving requests that do not benefit all class members.  There may be many potential cy-près award recipients who would serve the collective interest of all class members in the context of the purposes of the particular class action but the ultimate decision rests with Class counsel.  Justice Perell indicated that normally, the court will not second guess this recommendation.

Here, as Class counsel had no reason to disqualify the University and, in fact, conceded that they were appropriate, their recommendation to give the funds to the LFO was really an abdication of their responsibility. In Justice Perell's view, Class counsel's failure to accommodate the request on the grounds of unfairness to other class members who had not expressed a view, was not valid. Had Class counsel rejected the University as not appropriate to serve the interests of a cy-près award, Justice Perell would not have second guessed Class counsel's recommendation.

This decision has opened the door in some circumstances for potential cy-près recipients to request consideration.  The decision has also now articulated that Class counsel has the burden of evaluating and determining the ultimate cy-près recipient.  Arguably, just as the Court is ill-equipped to determine who should receive a grant Class counsel, who are advocates, may not be best-situated to make these determinations.  Under this decision from Justice Perell it appears that they must become so.

[1] Mr. McKinnon was counsel to Deloitte Restructuring Inc. ("Deloitte"), the Trustee in Bankruptcy for Bre-X Minerals Ltd., on this motion.  Deloitte took no position on the motion with respect to the proposed cy-près distribution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Angus T. McKinnon
Rebecca Case
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