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Fine balance needed by courts in third-party litigation funding

Tuesday, August 20, 2019 @ 8:43 AM | By Peter Spiro

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Peter Spiro
The first time that third-party funding was approved for an Ontario class action was Dugal v. Manulife Financial Corp. [2011] O.J. No. 1239. Justice George Strathy took a deep look at the nature of class actions and decided to approve it.

Justice Paul Perell agreed with this conclusion in Fehr v. Sun Life Assurance Co. of Canada [2012] O.J. No. 2029. He also laid down in very categorical language the rule that an application for third-party funding has to be approved by the court in advance.

Several years later, Justice Perell has taken the court’s supervision of the process one step further. Previously, the view was that the judge could either approve the litigation funding agreement or not. In Houle v. St. Jude Medical Inc. 2017 ONSC 5129, Justice Perell took the innovative step of directing the plaintiff and its funder to make specific changes to the funding agreement.

Houle is a class action on behalf of people claiming that a medical device implanted to correct heart problems was negligently made and distributed. This is high-risk litigation. It requires many expensive medical and scientific expert witnesses. Even if the devices were defective, it does not necessarily follow that the defendant was legally negligent.

The litigation funder, Bentham IMF Capital Inc., was not asking for the usual seven per cent of the winnings. The plaintiff side had devised an unusual hybrid, in which the funder, Bentham, would take on a larger than usual share of the risk. Bentham would pay a portion of class counsel’s fees based on hours billed, regardless of the outcome. In exchange, Bentham would get a much larger share of the damages awarded to the class, rising to as much as 25 per cent if it took 36 months or longer to resolve the claim.

In addition, and most significantly, the agreement gave Bentham the unusual right to terminate the agreement at any time of it “ceases to be satisfied in relation to the merits of the Proceedings.”

Based on his knowledge of the economics of class actions, Justice Perell took a favorable view of the aspect of the agreement where Bentham was willing to pay class counsel for its work regardless of the outcome:

“[79] … The novelty of the hybrid retainer that combines a partial contingency fee with a fee-for-services retainer strikes me as a positive factor. I agree with the sentiments of Class Counsel eloquently expressed during argument that this approach which partially protects the financial and human capital of class counsel may expand the roster of firms prepared to assume the risks of class action litigation. My own anecdotal observation is that given the expense and forensic risks of class action litigation, class counsel firms are few and those firms take on only a fraction of the cases that would gratify the goals and policies of the class action regime.”

However, he was concerned that, in some scenarios, the formula in the agreement would lead to Bentham receiving an unjustifiably large share of the total award. The agreement was not necessarily bad, but it could turn out that way. Therefore, Bentham’s reward should be made subject to court review at the end of the proceedings, just as in the ordinary situation class counsel’s fees were subject to court review:

“[87] The answer does not involve altering the contingency fee scheme of the Litigation Funding Agreement. Rather, the answer is for the court to treat Bentham in the same fashion as it would treat the Class Proceedings Fund and to make the balance of Bentham’s share of the contingency fee subject to subsequent court approval….”

Justice Perell’s greatest concern was that provisions of the agreement, and particularly the right of Bentham to terminate, would interfere with the decision-making power of the class representatives and their counsel. If Bentham chose to terminate, it would not be realistic for the case to continue. Effectively, Bentham would have the ultimate authority in running the case. Justice Perell decided that Bentham should be put under the same obligations as class counsel in this regard:

“[98] The answer is to make any termination subject to court approval. Under the Class Proceedings Act, 1992, the discontinuance or settlement of a class action requires court approval.… Class Counsel is not able to abandon the action without approval to get off the record, and Bentham should not be in a better position.”

In concluding, Justice Perell laid out an ultimatum. Either the plaintiffs and Bentham would return in 60 days with an agreement that incorporated his directions, or the motion for funding approval would be dismissed.

Bentham appealed to the divisional court. Justice Frederick Myers, for the panel in Houle v. St. Jude Medical Inc., 2018 ONSC 6352, rejected Bentham’s argument that the court should not interfere in a freely negotiated commercial contract. Justice Myers noted the special nature of a class action, which obligates the court to represent the interests of the class members who cannot communicate their opinions to class counsel:

“[41] [Bentham’s counsel] argues forcefully that Perell J. failed to give enough weight to the fact that independently advised parties made a commercial decision at arm’s length. That, he argues, should provide objective satisfaction that the proposed loan terms are reasonable. While that may well be the case in a standard commercial loan, here, the court is concerned not just for the immediate parties but for some 8,000 absent parties whose interests are at play. In addition, this loan is funding legal fees that can only be assessed at the end of the case. The fees cannot be made non-reviewable by shifting payment and the contingent outcome to a third party lender.”

“[51] …The law will continue to be concerned to protect vulnerable parties whose recovery is the subject of the proposed bargain. It will continue to be concerned with the potential for harm to the administration of justice that could accrue if the court is seen to allow third parties who are not parties to the litigation to profit unduly from or unreasonably control that litigation. The common law will continue to evolve incrementally as each case comes forward.”

“[52] In this case, Justice Perell applied the proper principles and provided a roadmap to the parties if they wish to proceed under the proposed type of arrangement….”

The divisional court supported Justice Perell’s reasoning and dismissed the appeal.

The fact that this kind of supervision by judges is in force will encourage funders to come to court with reasonable agreements. However, a fine balance needs to be drawn here. If court supervision is overly heavy-handed, it may deter funding companies from operating in Ontario. That would reduce the ability of class actions to redress wrongs committed against consumers by deep-pocketed adversaries.

This is the second of a two-part series. Read part one: Champerty in third-party litigation funding.

With a background in economics, the gig economy, and the underground economy, Peter Spiro is counsel to Monkhouse Law in employee class actions. 

Photo credit / guirong hao ISTOCKPHOTO.COM

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