In 2016, I received notice of a settlement of a class action commenced in California against Uber in relation to an “airport fee toll” that Uber customers were being charged. The notice identified me as a potential member of the class – needless to say, I was confused. And then I recalled that I had taken an Uber in August 2014 to the San Francisco Airport. Online research informed me that I was not the only person affected by the class action surprised to receive notice of its existence. Class actions are commenced left and right in the United States. That is not the case in Canada. Why? Three words: Adverse Cost Consequences.
Adverse cost consequences exist to deter the commencement of frivolous or vexatious claims. These consequences require the losing party to a lawsuit to pay the winning party’s legal costs. Adverse cost consequences are onerous in standard litigation involving individual plaintiffs and defendants. They are exponential in class actions.
How can representative plaintiffs in class actions take on such risk exposure? Often, class counsel will indemnify representative plaintiffs against adverse cost awards as part of their contingency fee agreements. Sometimes, however, class counsel are incapable of being exposed to adverse cost consequences themselves. This is where third party funders come in.
Third party litigation funding is a financing arrangement characterized by a commercial funding party providing indemnification against adverse cost awards to representative plaintiffs in exchange for a portion of the litigation proceeds. Historically, the statutory and common law doctrines of champerty and maintenance were a bar to third party litigation funding. Maintenance seeks to prevent third party involvement for an improper motive, while champerty is specific type of maintenance where the third-party profits from the litigation. As litigation costs continued to rise over the course of the last decade, third party litigation funding has become increasingly accepted in Ontario.
The first class proceeding in Ontario to obtain court approval of third party funding was Dugal v. Manulife Financial Corporation, 2011 ONSC 1785 (CanLII), in which the Superior Court of Justice explicitly recognized that third party funding provided access to justice to the plaintiff class.
In Bayens v. Kinross Gold Corporation, 2013 ONSC 4974, Justice Perell established the following principles about third party funding in the context of class actions:
- Third party funding agreements are not categorically illegal on the grounds of champerty or maintenance, although it may be determined that a specific agreement is illegal depending on its terms;
- Plaintiffs must obtain approval before entering into third party funding agreements;
- A third party funding agreement must be promptly disclosed to the court, and reviewed by the court to ensure that it does not interfere with the administration of justice. The agreement itself is not a privileged document, and the agreement cannot come into force without court approval;
- The court has the jurisdiction to make an approval order binding on the class prior to certification of the class;
- To be approved, the third party funding agreement must not:
- Compromise or impair the lawyer and client relationship; the lawyer’s duties of loyalty and confidentiality; or the lawyer’s professional judgment and carriage of the litigation on behalf of the representative plaintiffs or the class members; or
- Diminish the representative plaintiff’s rights to instruct and control the litigation.
- Before approving the agreement, the court must be satisfied that:
- The representative plaintiff will not become indifferent in giving instructions to class counsel in the best interests of class members;
- The agreement is necessary in order to provide the plaintiff and the class members access to justice;
- The agreement is fair and reasonable to the class;
- The access to justice facilitated by the third party funding agreement remains substantially meaningful and that the representative plaintiff has not agreed to over-compensate the third party funder for assuming the risks of an adverse costs award;
- It is not necessary to have first applied to the Class Proceedings Fund for funding before seeking approval for a third party funding agreement;
- To be approved, the third party funding agreement must contain a term that the third party funder is bound by the deemed undertaking rule and to keep confidential any confidential or privileged information; and
- It is acceptable for a term of the third party funding agreement to require the third party funder to pay security for the defendant’s costs into court.
In Berg v. Canadian Hockey League, 2016 ONSC 4466 (CanLII), the Ontario Superior Court of Justice reinforced the principles as set out in Bayens but acknowledged that these principles were not exhaustive when it came to the assessment of third party funding agreements. The court also held that there are certain circumstances under which litigation funding agreements should be kept confidential from the defendant.
The courts have been careful to clearly delineate the parameters between which third party litigation funding agreements will be approved to ensure that access to justice is preserved and enhanced, and will continue to do so as the jurisprudence on third party litigation funding develops.
In fact, Shirley and Roland Houle will be seeking Court approval of the third party litigation funding agreement they have entered into with Bentham IMF, the Canadian subsidiary of Bentham IMF Capital Limited, on August 22, 2017. Spark LLP will be live tweeting the approval hearing using the hashtag #HouleApproval. Follow along!
Samantha was the first employee lawyer to join Spark LLP, joining the firm in early 2017. She assisted with the firm’s litigation matters for two years before deciding to leave and join a mid-sized Bay Street firm.