Canada: Court Approves Third-Party Financing For Putative Class Action

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Class Actions, June 2009

For the first time, a Canadian court in Don Hobsbawn v. ATCO Gas and Pipelines Ltd. (ATCO) has approved a private third-party financing arrangement to fund a putative class action. The plaintiff and BridgePoint Financial Services Inc. (BridgePoint), a non-party financial institution, applied, on an ex-parte basis (without notice and hearing from the other side), and were granted an Order by the Honourable Mr. Justice S. A. Lovecchio in the Alberta Court of Queen's Bench approving not only the retainer agreement between the representative plaintiff and his counsel but an indemnity agreement between the plaintiff and BridgePoint to fund the lawsuit. The financing arrangement has been sealed, so the details of it are not currently public.

The nature of the ATCO action is the same or similar to that in Garland v. Consumers' Gas Co. (1998), 3 S.C.R. 112, decided by the Supreme Court of Canada. The facts in Garland were that Consumers' Gas, a gas utility, billed its customers a late payment penalty for payments received after the due date specified in its invoices, calculated at 5% of the unpaid charges for that month. The penalty was implemented by Consumers' Gas in 1975 following a series of rate hearings conducted by the Ontario Energy Board. The representative plaintiff in that class action commenced an action on behalf of a large number of Consumers' Gas customers alleging that the penalty violated section 347 of the Criminal Code because, for a significant number of customers each month, it constituted an allocation of interest at a rate exceeding 60% per year.

The allegations in the Statement of Claim in ATCO are similar. It alleges that ATCO has, since January 1, 1982, charged late payment penalties in violation of section 347 of the Criminal Code. In addition, it alleges that ATCO did not comply with certain sections of the Canada Interest Act requiring an express statement setting out the yearly rate of interest to which the late penalty is equated.

While the substantive nature of the claim is not novel, the fact that the representative plaintiff was able to obtain approval by the court of third-party financing will no doubt send a chill to defendants in proposed class action proceedings.

Under class action and other proceedings in Alberta, unsuccessful plaintiffs must generally pay the taxable costs and disbursements of a defendant in circumstances where a claim is struck out or otherwise dismissed. This differs from the "no-costs" regime implemented by class proceedings legislation in most other provinces. While the taxable costs regime was not developed to fully indemnify a defendant for its costs, the stated intent of that regime in Alberta has been to provide a 40-50% form of costs indemnification. That partial indemnification has been said to reflect an attempt to balance two conflicting interests. One argument is that if a party is successful in defending a claim, it is unfair to require the successful party to bear the costs incurred in defending the action. The competing argument is that if the unsuccessful party is required to bear the costs of a successful defendant, litigants may be unduly hesitant to commence a claim and assert their rights (even if valid). The partial indemnification practice as it exists in Alberta is a compromise of those positions and is intended to give some consideration for each of the conflicting policy considerations. Historically, the ability to collect costs from an unsuccessful plaintiff has acted as a factor in reducing the number of unmeritorious cases being commenced or otherwise prosecuted. Procedurally, the ability of defendants, in some cases, to require plaintiffs to post security for costs or be exposed to increased cost sanctions following formal offers have also been very useful tools in managing actions for defendants.

The absence of cost consequences creates, in effect, a "free-option" to plaintiffs in commencing an action. It is undeniable that without facing cost sanctions, plaintiffs are more readily able to commence and maintain actions against defendants. The ability of a plaintiff to obtain indemnification for costs by a third party who was otherwise a stranger to the dispute defeats the important policy considerations of providing a costs sanction to unsuccessful litigants, and seems to be at odds with the intentions of the Alberta legislature which chose to retain the costs regime in the Class Proceedings Act.

Historically, the ability of a third party to fund a lawsuit has been prevented by virtue of the imposition of a public policy against a stranger funding or otherwise "stirring up" litigation. The tort of "maintenance" prevented an officious intermeddler – a stranger to the cause of action without any previous commercial connection – from inciting litigation. "Champerty" is a form of maintenance in which the stranger maintains an action in return for a payment conditional upon success in the lawsuit or based upon a percentage of recovery in the lawsuit.

The question of whether an arrangement to fund a lawsuit is champertous turns upon the specific circumstances of the case, and it is for the court to determine whether the stranger to the action is stirring up or inciting litigation. While the details of the agreement between BridgePoint and the plaintiff in this matter remain undisclosed, it is noteworthy that this action appears to have lain dormant for nearly eight years following its original filing on February 28, 2001, until very recently.

This decision in ATCO raises the concern that the express decision of the Alberta legislature to maintain the normal cost consequences in a class proceeding, rather than follow the lead of other provinces by setting up a no-costs regime, has been further eroded. While funding by a third party does not prevent a successful defendant from receiving its partial payment of costs following disposition of the matter, it does fail to address the very valid policy reasons behind making unsuccessful plaintiffs liable to pay for such costs directly. If the representative plaintiff is not exposed to cost consequences directly, then more marginal claims may be commenced and prosecuted. The decision further raises questions about the torts of maintenance and champerty and how those issues will be dealt with in Alberta.

Given that the Order was obtained on an ex-parte basis, it arguably has less precedential value. It will be interesting to see what the result would be if such an application was made on notice and in circumstances where the defendant was vigorously objecting to the relief claimed. We can expect that such an application will arise soon.

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