The Ontario Superior Court (ONSC) issued two back-to-back decisions on acceptable litigation financing agreements, both involving the same third party funder. While the ONSC continues to approve classic litigation financing arrangements, uncertainty remains as to whether third party financiers may profitably fund counsel fees in the context of class actions.

Classic funding schemes continue to receive unfettered court approval

In David v. Loblaw, 2018 ONSC 6469, Morgan J. approved IMF Bentham's funding agreement in a class action regarding the alleged price-fixing of bread without modifications, recognizing litigation financing as a potential tool for access to justice.

The litigation funding agreement was straightforward: Bentham agreed to pay adverse costs, disbursements and court-ordered security for costs. In return, it would receive 10% of the litigation proceeds net of its expenses. The 10% return was capped according to a sliding scale, increasing with the duration of the proceedings.

In reviewing the terms, Morgan J. highlighted several factors that made the funding agreement "fair and reasonable":

  • Claimants had sole right to direct proceedings and instruct counsel.
  • Bentham could only terminate the funding agreement with the leave of the court.
  • Bentham would pay costs up to the termination date.
  • Any assignments of the funding agreement had to be done with notice to all parties and court approval.
  • Claimants had received independent legal advice on the terms of the funding agreement.
  • The Court reviewed the unredacted funding agreement and was satisfied that Bentham's obligation to fund the litigation was sufficient to cover any adverse cost awards.

David is the most recent in a series of decisions where the ONSC accepted similar funding agreements.

Funding plaintiff counsel fees in class proceedings may attract judicial scrutiny

In Houle v. St. Jude Medical Inc., 2018 ONSC 6352, (Houle's appeal) Myers J. dismissed an appeal from Perell J.'s decision in Houle v. St. Jude Medical Inc., 2017 ONSC 5129, (Houle) to grant a nun pro tunc order, amending Bentham's funding agreement due to clauses that he deemed were overly broad and potentially unfair.

The funding agreement in Houle was novel in Canadian law: Bentham agreed to pay for 50% of the plaintiffs' counsels' fees throughout the case in addition to 100% of disbursements, adverse cost awards and security for costs. In exchange, Bentham would receive an uncapped ~20-25% of any judgment or settlement, depending on when the matter was resolved.

Myers J. affirmed Perell J.'s following concerns about the agreement:

  • provisions in the agreement "bel[ied] any assurances of the Houles having autonomy and having control over the action," particularly, the provision granting Bentham the right to terminate the agreement on ten days' notice in its sole discretion; and
  • risk of overcompensation given the high uncapped percentage of the proceeds.

Perell J. required changes to Bentham's funding agreement that would make it acceptable. He also pre-approved Bentham's recovery of up to 10% of the class recovery at outset of the case. At the end of the case, the court would determine if any further compensation would be appropriate. In doing so, Perell J. (1) pegged Bentham's return to the 10% levy received by Ontario's Class Proceedings Fund and (2) subjected Bentham's return to the same procedural mechanism used to assess lawyers' fees at the conclusion of class proceedings.

The appellants and Bentham argued that Perell J. erred because:

  • Ontario's Class Proceedings Fund receives a 10% levy of any awards or settlements in exchange for costs of disbursements and adverse costs. However, Bentham undertook higher risk than the Ontario's Class Proceedings Fund because it funded far more than adverse costs and disbursement, which justified more than a 10% return;
  • The assessment of the fairness of fees for a third-party funder is different than the assessment of lawyers' fees. While the assessment of the fairness of lawyers' fees requires consideration of the amount and quality of effort performed by the lawyers, the assessment of returns for loaned funds does not;
  • Insufficient weight was given to the fact that independently advised parties made a commercial decision at arm's length, providing an objective measure of the reasonableness of the proposed loan terms;

Myers J. disagreed.

Meyer J. affirmed that Bentham's compensation should be pre-approved at 10% with reserve. He distinguished Houle from another case where the full funding fee was approved at the outset of the case on the basis that litigation financiers have never funded plaintiff counsels' fees in return for an uncapped percentage return to the tune of ~20-25%. Moreover, courts must await the outcome to assess the reasonableness of lawyer fees. The same rationale applies to levies for loans used to fund legal fees.

Myers J. characterized the concern regarding the terms of the agreement "not just for the immediate parties but for some 8,000 absent parties whose interest are at play." As such, he approved Perell J.'s decision to (1) strike clauses allowing Bentham to withdraw from its funding obligation on its own assessment and (2) add court approval as a pre-condition to Bentham's withdrawal to guard against the "champertous fear of officious intermeddling".

Concomitantly, these additional terms increase the complexity of litigation funders' decision to lend by compounding the uncertainty of estimating litigation funding returns when financing counsel fees.

Houle already distinguished in non-class action matters

While Houle might leave litigation financiers guessing as to what courts might decide is a reasonable return on their capital at risk, a competing line of jurisprudence regarding the funding of counsel fees began in Quebec in early 2018.

In a CCAA proceeding, the Quebec Superior Court in 9354-9186 Quebec Inc. (Bluberi Gaming Technologies Inc.) v. Ernst & Young Inc., 2018 QCCS 1040, rejected the thrust of Perell J.'s decision in Houle. Michaud J. approved a litigation financing similar to the arrangement in Houle whereby Bentham paid a portion of the plaintiff counsel's hourly rates, in addition to disbursements and adverse costs.

The Houle and Blueberi decisions considered similar clauses in a Bentham agreement. While Perell J. found that some clauses were too broad, Michaud J. saw no issue. Michaud J. began by distinguishing Bluberi from Houle on the basis that it "was rendered in the context of a class action where the motivation and ability of the plaintiff to pursue the litigation are important." In CCAA proceedings, Michaud J. opined that "the objectives are different."

Michaud J. then found that Bentham's termination clause – also at issue in Houle – was reasonable in the context of CCAA proceedings:

"Taking into consideration the amount of time and money Bentham has invested so far [...], it is obvious that Bentham has no intention of terminating the LFA unless it perceives that it would not gain from it."

In a further divergence from his ONSC colleagues1, Michaud J. found that the decision as a "whole" did not "allow Bentham to exert undue influence in the litigation".

Effect of Houle's appeal may ripple across non-class action proceedings

An intervener in Houle's appeal requested that the Court circumscribe its reasons to class proceedings. The Court refused to grant the intervener's request. Myers J. explained that it was not for him to determine "how other courts might use this decision if it is ever argued before them by counsel." If the funding parameters in Houle applied to the litigation of private entities in Ontario, then the complexity and cost of financing litigation agreements for non-class proceedings would likely increase commensurably.

Footnote

1 Mr. Zarnett makes the same argument in Houle's Appeal at para 47. Myers J. expressly rejects it.

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