Canada: "Deplorable" Legal Fees Agreement "Settlement-Driven" And "Fundamentally And Profoundly Unacceptable"

Last Updated: December 10 2015
Article by Brian N. Radnoff and Rebecca Case

In a recent settlement and fees approval motion in McCallum-Boxe v. Sony, 2015 ONSC 6896, Justice Belobaba had to determine the reasonable amount of fees and disbursements to which plaintiff's counsel was entitled. This was an aspect of the parties' settlement agreement. To accomplish this task, he quite reasonably asked about the nature of plaintiffs' counsel's contractual entitlements. He was shocked to learn that there was no written retainer agreement, that the class was not obliged to pay any fees or costs, that there was no contingency fee arrangement and that class counsel intended to recover their fees "as part of the (hoped for) settlement". Class counsel further advised that it had similar arrangements in many of their class actions, which Justice Belobaba found disturbing.

The settlement arose in a consumer product class action regarding the rubber grips on some Sony PlayStation 4 video game controllers. It was alleged that the grips were deteriorating prematurely. The claim was for the cost of shipping that the class members had to pay to return their grips for warranty repair or replacement. In the end, the class action was much smaller than the several thousand class members anticipated and a settlement was reached for the 400 affected individuals in the modest amount of $8,000, in addition to small honoraria for the two representative plaintiffs.

As set out above, Justice Belobaba was advised that there was no written retainer agreement in this case. The retainer agreement is the foundation of the relationship between a lawyer and his/her client. In a class action, the legislature thought that a retainer agreement relating to fees and disbursements between the representative plaintiff and class counsel was so important that subsections 32(1) and (2) of Ontario's Class Proceedings Act, 1992, provide that it must be in writing, must state the terms under which fees and disbursement shall be paid, give an estimate of the expected fee, state the method of payment and that the retainer must be approved by the Court or it is not enforceable.

The absence of a proper written retainer agreement in a class action is in no one's interest.

Of primary concern to Justice Belobaba was the fact that the arrangement in this case was not in the best interests of the class. Without a retainer agreement regarding fees and compensation, he set out how class counsel would not be entitled to a share of any damages award at trial nor to any portion of any costs awards. He found that this provides the wrong incentive to class counsel who will be minimally committed to the class and may lead to sub-optimal settlements for the class. Justice Belobaba also found that a "glaring conflict of interest" was created as any amount that class counsel could negotiate for their fees was an amount that would potentially come out of the class members' settlement.

Additionally, although not discussed by Justice Belobaba, the absence of a proper retainer arrangement is not in the interest of the representative plaintiff or class counsel. While the nature of class actions may make it difficult to predict at the outset what might ultimately prove to be fair and reasonable fees for class counsel at the conclusion of the litigation, this does not mean that a written retainer agreement does not serve a useful purpose or that it should be viewed as unnecessary. A representative plaintiff should be extremely wary of any such proposed arrangement.

In the absence of a written retainer agreement there is no agreed document that provides guidance and assistance in understanding the link between the results obtained for the class and the fees charged by counsel. Additionally, absent a separate indemnification agreement, a representative plaintiff may not be protected from significant adverse costs awards in a "loser pays" jurisdiction. The representative plaintiff's costs exposure may create a wrong incentive for them and, ultimately, a conflict of interest between the representative plaintiff and the class. Further, the difficulties in instructing class counsel under an inappropriate arrangement means that the representative plaintiff might not able to meet his/her obligations to fairly and adequately represent the interests of the class. The absence of a written retainer agreement means the terms of the relationship between the representative plaintiff and class counsel are vague and it is unclear what each party's obligations and entitlements are or will be. Finally, if there is ever a dispute between class counsel and the representative plaintiff, the lack of a written retainer agreement means any disputes will be resolved against class counsel.

This is a sufficiently important issue that, in Ontario, a practice has developed on carriage motions to put the written retainer agreements required by the legislation before the Court. The Court and class are well served to consider the presence of a proper retainer arrangement on a confidential basis to ensure that this is done. The lack of a written retainer arrangement should be held against any counsel in a carriage battle as the Court's objective is to make the selection of counsel that is in the best interests of the class.

Finally, a non-written retainer agreement situation in a class action may not be favourable to the defendant. Although Justice Belobaba discusses how, given class counsel's incentives, the shrewd defendant may negotiate a small settlement with an attractive amount for legal fees and come out ahead, this does not necessarily reflect the full picture. Defendants may be required to engage in two separate negotiations, one to settle the class claim and one for counsel's fees. Moreover, the defendant will want to avoid the perception that the defendant is paying the lawyers at the expense of the class as this may potentially cause permanent reputational and brand damage to the defendant.

The presence of a proper written retainer agreement in a class action is therefore in everyone's best interest and should not be optional.

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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Brian N. Radnoff
Rebecca Case
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