THIRD PARTY FUNDING OF CLASS ACTIONS Steve ... - Norton Rose

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THIRD PARTY FUNDING OF CLASS ACTIONS
Steve Tenai & Nicholas Saint-Martin 1
Third party funding describes the practice of a stranger to the litigation agreeing to fund
some aspect of a case in return for a share of any damage award or settlement. There are
a number of international corporations, both public and private, the business model of
which revolves around funding litigation for profit, especially class action litigation.
Canadian class actions have very recently attracted the attention of these firms. In the
last two years, we have seen courts in Alberta, Nova Scotia and Ontario asked to approve
third party funding agreements.
Questions arise whether third party funding for litigation is counter to common law and
statutory 2 doctrines of maintenance and champerty. Moreover, how such agreements are
structured can raise other public policy concerns.
Maintenance and Champerty
Maintenance refers to the giving of assistance or encouragement to one of the parties to
litigation by a person who has neither an interest in the litigation nor any other motive
recognized by law as justifying interference. Champerty is a particular kind of
maintenance. More specifically, it refers to maintenance of an action in consideration of
a promise to give the maintainer a share in the proceeds or subject matter of the action. 3
In McIntyre Estate v. Ontario (Attorney General), 4 the Ontario Court of Appeal described
maintenance and champerty as follows:
Maintenance is directed against those who, for an improper motive, often
described as wanton or officious intermeddling, become involved with
disputes (litigation) of others in which the maintainer has no interest
whatsoever and where the assistance he or she renders to one or the other
1 Steve Tenai is a partner in the litigation group at Ogilvy Renault LLP in Toronto. Nicholas Saint-Martin
is an associate in the litigation group at Ogilvy Renault LLP in Toronto. This paper was prepared for the
8th National Symposium on Class Actions (Osgoode Hall: April 28-29, 2011). The authors would like to
thank Hoori Chitilian, Student-at-Law at Ogilvy Renault LLP, for her contribution to this paper.
2 An Act respecting Champerty, R.S.O. 1897, Chapter 327 [Champerty Act], which provides that, “All
champertous agreements are forbidden and invalid.” Maintenance and champerty were also common law
criminal offences in Canada until 1953 when common law offences were abolished under section 9 of the
Criminal Code. At common law, maintenance and champerty remain torts making the third party liable to
the defendant to the action for special damages suffered as a result of the third party’s financial assistance,
including the costs of defending the lawsuit, and a plaintiff to set aside the arrangement.
3 Buday v. Locator of Missing Heirs Inc. (1993), 16 O.R. (3d) 257 (C.A.) at 262-263.
4 McIntyre Estate v. Ontario (Attorney General) (2002), 61 O.R. (3d) 257 (C.A.) [McIntyre].

parties is without justification or excuse. Champerty is an egregious form of
maintenance in which there is the added element that the maintainer shares in
the profits of the litigation. 5
Motive is a crucial element in determining whether assistance to litigation by a third party
constitutes maintenance or champerty. It is only when a person has an improper motive
(which motive may include, but is not limited to, officious intermeddling or stirring up
strife) that maintenance may arise. 6 There can be no maintenance if the alleged
maintainer has a justifying motive or excuse. 7 As such, our courts have not found
financial assistance to constitute maintenance or champerty in circumstances where the
motive for such assistance was held to be proper (e.g. charity and compassion, legitimate
common interest and pre-existing commercial interests in litigation 8 ). The funding of
class actions with a view to profit does not fall within any of those previously accepted
circumstances. However, our courts have noted that the type of conduct that will be
found to constitute maintenance and champerty may evolve over time, so as to keep step
with the fundamental aim of protecting the administration of justice from abuse. 9
Concerns Raised by Third Party Funding
i. Trafficking in Litigation
Critics of third party funding of litigation see it as a form of “trafficking in litigation”
given that the funder’s only motivation in participating in the litigation is to derive profit.
Concerns over trafficking in litigation and litigation becoming a commodity have
grounded certain conduct being deemed contrary to the public interest and impermissible.
For example, courts have not permitted the assignment of causes of action for a nonpersonal
tort to a stranger who has no pre-existing interest in the litigation but is only
interested in securing a profit from such litigation.
In Trendtex Trading Corporation v. Credit Suisse (HL), 10 the House of Lords addressed
the public policy arguments against trafficking in litigation. Trendtex involved the
assignment of a cause of action by Trendtex Trading Corporation, a Swiss company,
against the Central Bank of Nigeria (“CBN”) to Credit Suisse, Trendtex’s largest creditor
in a sale of a large amount of cement. The cause of action arose as a result of CBN’s
failure to honour a letter of credit for the purchase. Credit Suisse was assigned the action
5 Ibid. at 265-266.
6 Ibid. at 268.
7 Ibid.
8 Poonam Puri, “Financing of Litigation by Third Party Investors: A Share of Justice?” (1998) 36 Osgoode
Hall LJ 515 at 529-530.
9 McIntyre, supra note 4 at 268.
10 [1981] 3 All E.R. 520 (HL).
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y Trendtex, as Credit Suisses’ only substantial prospect of payment lay in the litigation
succeeding. Later, Credit Suisse received an offer from an undisclosed third party to
purchase the cause of action. The agreement stated that Trendtex did not oppose the sale,
it released to Credit Suisse its residual rights of action against CBN, Trendtex had no
further interest in the action and Trendtex would deposit 90 percent of its shares to Credit
Suisse in exchange for Credit Suisse agreeing to pay off the remaining creditors of
Trendtex.
After the undisclosed third party settled the action against CBN, Trendtex brought a
claim in England against Credit Suisse on the basis that both the agreement assigning the
action to Credit Suisse and the subsequent agreement selling the action to the undisclosed
third party were void as constituting an assignment of a bare cause of action and
constituted maintenance and champerty.
The Court determined that the introduction of the undisclosed third party into the
litigation rendered the agreement void under English law. The agreement’s overt purpose
was to enable the sale of the cause of action to the undisclosed third party, which had no
genuine commercial interest in the claim, for profit. This, according to the Court,
constituted trafficking in litigation and was contrary to public policy:
The vice, if any, of the agreement lies in the introduction of the third party. It
appears from the face of the agreement not as an obligation, but as a
contemplated possibility, that the cause of action against CBN might be sold by
Credit Suisse to a third party, for a sum of $800,000. This manifestly involved
the possibility, and indeed the likelihood of a profit being made, either by the
third party and possibly also by Credit Suisse, out of the cause of action. In my
opinion this manifestly “savours of champerty”, since it involves trafficking in
litigation, the type of transaction which, under English law, is contrary to public
policy. 11
Such policy concerns have been echoed in Canadian courts. Trendtex was discussed at
length by Cullity J. in Operation 1 Inc. v. Phillips 12 in which the defendant moved to stay
the proceedings as champertous and an abuse of process. Originally, an action was
brought in 1982 by the defendant against the plaintiff in respect of a mortgage default.
The defendant then sued to enforce judgment. A power of sale ensued and releases were
subsequently executed. In 1999, the plaintiff’s successor, Newbury, later revived the
plaintiff corporation for the purpose of pursuing a surplus earned on the sale by the
defendant, which Newbury alleged was obtained through fraudulent representations made
when the power of sale was realized. Newbury offered another entity, Del,
indemnifications and a share in the profit from the action.
11 Ibid. at 524.
12 [2004] O.J. No. 5290 (Sup. Ct. J.).
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Justice Cullity granted the motion and ordered the proceedings stayed against the
defendant on the basis that the agreement between Del and Newbury was tainted by
maintenance and champerty. He added that there was:
[N]o evidence that litigation was anything more than a profit-making enterprise
by a plaintiff who had no pre-existing interest in the subject matter of the dispute
and purchased the claims from a person who had shown no intention of enforcing
them.
Applying the House of Lords’ decision in Trendtex, Cullity J. observed:
This, in my view, was not merely a case of officious intermeddling by persons
who had no pre-existing interest in the right of action, it was an egregious
attempt to "traffic" in litigation in the sense in which the English courts - and the
Court of Appeal in McIntyre Estate - used the term.
ii. Conflicts of Interest
Opponents of third party funding raise concerns that a third party’s involved in funding
litigation will strip the plaintiff of control over the direction of the litigation. A funder
may feel entitled to have a say in the direction of the litigation and seek to influence the
conduct of the litigation or settlement discussions. For example, one indemnification
agreement for which court approval was recently sought included as a term that the
plaintiff had to accept and follow the lawyers’ reasonable legal advice, seeking to turn the
solicitor-client relationship on its head. 13
Moreover, lawyers representing the plaintiff may find themselves in a conflict between
the plaintiff’s interest and the funder’s interest, particularly in circumstances where the
funding agreement is structured enabling the funder to terminate funding at any time.
Fearing termination of funding, litigation may be conducted with a view to ensuring the
funder’s, rather than the plaintiff’s, interests are satisfied. 14 In a recent case, Gildan
Activewear, in which court approval was sought of a third party funding agreement
providing for indemnification for costs, the Court accepted the ability to terminate a
funding agreement without cause created the potential for the appearance of conflict:
In addition, the defendants raise a valid concern arising from the fact that as
presently drafted, the Indemnification Agreement permits CFI to terminate
its obligations at any time on seven days notice. The plaintiff is correct in its
submission that the Agreement does not create a conflict in interest amongst
CFI, the plaintiff and class counsel because everyone is advantaged by the
13 The agreement was amended to remove this term following objection raised by the defendants prior to
the hearing of the motion for approval of the funding agreement.
14 “It puts the lawyer in the position of being beholden to a third party expecting a return. What happens
when there’s a settlement proposal? What if the funders want to settle and the client doesn’t?”, Alan
Lenczner as quoted in “Litigation as an asset class”, The National Post (26 March 2008), online: The
National Post, http://www.nationalpost.com.
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higher the settlement or award. However, this termination provision creates
the potential for the appearance of conflict because CFI’s withdrawal from
the Agreement exposes the plaintiff to an adverse costs consequence which
in turn exposes class counsel pursuant to its undertaking. While I agree with
the plaintiff that class counsel has a “greater stake” in this litigation than CFI,
as presently drafted the Agreement creates a potential circumstance wherein
CFI could influence the decision making within this litigation to fulfill its
own motivations. That could amount to officious intermeddling and could
create the potential for this litigation to be influenced by extraneous interests
and agenda. The ability to terminate the Agreement without cause should
therefore be deleted with the result that CFI may only terminate its
obligations if the plaintiff fails to fulfil its obligations under the Agreement
or appoints different lawyers to replace the present lawyers as the Agreement
now provides. 15
It also noted provisions in the funding agreement requiring the plaintiff to invite the
funder to any settlement discussions should be deleted. In doing so, Justice Leitch
appears to have accepted the defendants’ submission that the funder’s participation in
settlement negotiations should give pause to the Court. 16
iii. Confidentiality
Third party funders will want full access to all information relating to the litigation in
order to assess the ongoing viability of the litigation. Beyond raising questions as to the
use for which such information is being sought (i.e. whether to influence the direction of
the litigation), concerns about a defendants’ right to ensure confidentiality are engaged by
such agreements.
Our courts have acknowledged those concerns. For example, in Gildan Activewear, the
Court agreed that the defendants were entitled to insist that settlement discussions remain
confidential between the parties to the litigation. Therefore, the Court held that the
funding agreement in that case could not require the plaintiff to require its counsel to
immediately report on the details of any settlement discussions. 17 Most recently, in
Manulife, the Court agreed with the defendants’ submission that there needed to be some
reasonable controls on the provision of information to the funder and that appropriate
guidelines needed to be established to recognize the interests of both the funder and the
defendants. 18 However, in contrast with Leitch J. in Gildan Activewear, Strathy J. in
15 Metzler Investment GMBH v. Gildan Activewear Inc., [2009] O.J. No. 3315 (Sup. Ct. J.) at para. 60
[Gildan Activewear].
16 Ibid. at paras 53 and 58.
17 Ibid. at para. 59.
18 Dugal v. Manulife Financial Corporation, 2011 ONSC 1785 at para. 36 [Manulife].
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Manulife held it was reasonable that information be provided to the funder concerning
settlement offers. 19
iv. Encourages Frivolous Litigation
A further argument raised against third party funding is that it encourages frivolous
litigation. Opponents of third party funding argue that third party funding permits
plaintiffs and their counsel to offload the risk of litigation and therefore encourages them
to be able to pursue cases of questionable merit in the hopes of extracting a settlement. 20
Litigation funders base funding decisions on the present value of their expected return.
The likelihood of a lawsuit’s success at trial is only one measure of expected return. The
likelihood of a settlement is another measure. The preponderance of class actions that are
certified are settled. The potential damages in a class action may create strong incentives
to settled even where the ultimate merits of the case are questionable. 21
Finally, the approval of contingency fees in Canada and the availability, in certain
jurisdictions like Ontario and Quebec, of statutory funds for class actions already provide
a means for access to justice without the need for the risks posed by third party funding.
Canada has experienced for decades robust class action litigation without any third party
funding.
Consideration of Third Party Funding Agreements Outside of Canada
Maintenance and champerty have been abolished as crimes and torts in a number of
common law jurisdictions outside of Canada such as England and Wales and parts of
Australia. Nonetheless, any rule of law as to the cases in which a contract involving
maintenance or champerty is to be treated as contrary to public policy or otherwise illegal
remains. Therefore, the issue in those jurisdictions is framed more in regard to whether
the arrangements are contrary to public policy.
In Arkin v. Borchard Lines Ltd, the trial judge commented that, “[i]t is indeed highly
desirable that impecunious claimants who have reasonably sustainable claims should be
enabled to bring them to trial by means of non-party funding” and further that it is
“highly desirable in the interests of providing access for such claimants to the courts that
non-party funders … should be encouraged to provide funding, subject always to their
being unable to interfere in the due administration of justice…” 22 The Court of Appeal
19 Ibid.
20 see e.g. John Beisner et al., U.S. Chamber Institute For Legal Reform, “Selling Lawsuits, Buying
Trouble: Third-Party Litigation Funding in the United States”, (2009) at p. 5-7 [Beisner].
21 Ibid.
22 [2005] 1 W.L.R. 3055 at para. 16 (C.A.). The case involved a professional funder who had agreed to
fund expert evidence for a claim being brought by an impecunious plaintiff. The plaintiff was wholly
unsuccessful and the question was whether the funder could be held liable for the costs of the successful
defendant. The trial judge held that if professional funders were to be subject to non-party costs orders,
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acknowledged the potentially beneficial role provided by third party funding in ensuring
access to justice but it drew a distinction between the funding arrangement before the
Court and funding agreements that placed the funder in effective control of the litigation,
thereby running afoul of policy considerations against champerty. 23
In contrast, the High Court of Australia has held that it is not contrary to public policy for
a commercial funder to not only finance but also to control the litigation. Campbells
Cash and Carry Pty Ltd. v. Fostif Pty Ltd. 24 was an opt-in representative proceeding on
behalf of small tobacco retailers against tobacco wholesalers seeking a refund of license
fees previously declared invalid. The funding agreement conferred significant powers
over the litigation on the funder. In particular, the funder: (a) sought out the claimants
through an extensive advertising and marketing campaign; (b) retained the solicitor to act
for the claimants; (c) instructed the solicitor in relation to the conduct of the proceedings
(the solicitor was not to directly communicate with the claimants); (d) had the unilateral
power to settle the claims with the defendants (provided the amount of the settlement was
not less than 75 percent of the amount claimed); (e) would receive up to one third of any
recovered amounts; and (f) would retain any amounts awarded to the claimants for costs.
A majority of the Court did not find the funding arrangement to constitute an abuse of
process. The fact that the funder sought out those who may have claims, offered terms
which gave it control of the litigation and enjoyed the prospect of a significant profit
were not found to be elements on their own or in combination giving rise to being
contrary to public policy or leading to any abuse of process. Three of the judges for the
majority of the Court commented that, “Many people seek profit from assisting the
processes of litigation. That a person who hazards funds in litigation wishes to control
the litigation is hardly surprising.” 25 They rejected the argument that an overarching rule
of public policy against such funding agreements should be formulated premised on fears
about adverse effects on the litigation process or fears about the “fairness” of the bargain.
With respect to the latter, they commented that there was no ascertainable objective
standard against which fairness is to be measured, nor should courts be relieving persons
from bargains otherwise untainted by infirmity. 26 The Court further commented that any
concerns relating to the administration of justice could be addressed through existing
doctrines of abuse of process and the existing rules governing lawyers’ duties to the
there would be no such funders to provide access to the courts to those who could not otherwise afford it.
The Court of Appeal disagreed. Although the Court of Appeal did not dispute the importance of helping to
ensure access to justice, it did not agree with the trial judge that a commercial funder should not be liable at
all for costs. It held that a professional funder, who finances part of a claimant’s costs of litigation, should
be potentially liable for the costs of the opposing party to the extent of the funding provided.
23 Ibid. at paras. 38-40.
24 [2006] HCA 41.
25 Ibid. at para. 89.
26 Ibid. at para. 92.
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Court and to clients without the need for an overarching public policy rule prohibiting
such arrangements. 27
In finding the proposed funding arrangement as an abuse of process, the minority of the
Court highlighted concerns over “trafficking in litigation” stating:
[…] The purpose of court proceedings is not to provide a means for third
parties to make money by creating, multiplying and stirring up disputes in
which those third parties are not involved and which would not otherwise
have flared into active controversy but for the efforts of the third parties, by
instituting proceedings purportedly to resolve those disputes, by assuming
near total control of their conduct, and by manipulating the procedures and
orders of the court with the motive, not of resolving the disputes justly, but
of making very large profits. Courts are designed to resolve a controversy
between two parties who are before the court, dealing directly with each
other and with the court: the resolution of a controversy between a party
and a non-party is alien to this role. Further, public confidence in, and
public perceptions of, the integrity of the legal system are damaged by
litigation in which causes of action are treated merely as items to be dealt
with commercially. 28
Preceding the decision in Fostif was the Supreme Court of Appeal of South Africa’s
decision in Price Waterhouse Coopers Inc and Others v. National Potato Co-operative
Ltd, 29 which found that “an agreement in terms of which a person provides a litigant with
funds to prosecute an action in return for a share of the proceeds of the action is not
contrary to public policy or void.” 30
The plaintiff, National Potato Co-operative Ltd (“NPC”) had entered into an agreement
with Farmer Indemnity Fund (Pty) Ltd (“FIF”) through which FIF agreed to provide
financial assistance to NPC to enable it to pursue its claim against the defendant,
PricewaterhouseCoopers (“PwC”), in exchange for 45 percent of the proceeds derived
from the action.
27 Ibid. at para. 93.
28 Ibid at para. 266. See also QPSX Ltd. v. Ericsson Australia Pty Ltd. (No. 3) [2005] FCA 933, an earlier
decision of the Federal Court of Australia relating to patent litigation in which the applicants entered into a
funding agreement with a commercial funder to pay legal costs and disbursements up to a specified limit
and to indemnify the applicants in respect of adverse costs orders to a specified limit. The Court noted that
the integrity of the Court’s primary function may be compromised where litigation is conducted in order to
serve the interests of a stranger to the controversy before the court (see para. 50). It did not find the funder
in that case to be managing the litigation.
29 [2004] ZASCA 64.
30 Ibid. at para. 52.
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The Court found in favour of the upholding the agreement and commented that the need
for the rules of maintenance and champerty had diminished, if not entirely disappeared. 31
Southwood A.J.A. relied on the enactment of the Contingency Fees Act 66 of 1997 in this
respect, which permitted lawyers to undertake speculative actions for their clients through
“no win, no fees” agreements. 32 He also remarked that this approach was consistent with
s. 34 of the Constitution, which protects the right to access to justice, and the
constitutional values enshrining the freedom to contract. 33
In the United States, federal and state legislation is for the most part silent on the question
of third party funding of civil litigation. There is no nationwide consensus on whether
the doctrines of maintenance and champerty should be abolished or whether third party
litigation funding should be allowed. 34 However, third party funding has become
increasingly available to US litigants in recent years. 35 At least three states – Maine,
Ohio and Nebraska – have enacted legislation to regulate third party funding. 36 However,
these statutes appear to apply primarily to loans in personal injury actions rather than
commercial suits. 37
Ontario courts have been critical of the type of direct involvement in the prosecution of
the case the majority of the Court in Fostif was prepared to allow of funders. For
example, in Smith v. Canadian Tire Acceptance Ltd., the Court was critical of the conduct
of the Borrowers’ Action Society (“BAS”) and its founder, Mr. Larry Whalen. 38
Essentially, Mr. Whalen and the BAS had solicited funds from the potential plaintiffs of a
class action by promising returns proportionate to the amount contributed, above the
amount claimed for damages.
The Court in its decision commented that the conduct of Mr. Whaley and BAS in
attempting to financially gain from the action amounted to maintenance and champerty.
Specifically, “their conduct in instigating, promoting, controlling and raising funds to
31 Ibid, at para. 32.
32 Ibid, at paras. 41-42.
33 Ibid, at paras. 43-44.
34 Beisner, supra note 20.
35 UK, Review of Civil Litigation Costs: Preliminary Report, Volume 2 by Lord Justice Rupert Jackson
(London: Her Majesty’s Stationery Office, 2010).
36 The three statutes are: Maine Consumer Credit Code Legal Funding Practice, Me. Rev. Stat. tit. 9-A, §12
(2009); Nebraska Nonrecourse Civil Litigation Act, Neb. Stat. Ann., § 25-3303 (West 2010); and Non-
Recourse Civil Litigation Advances, Ohio Rev. Code Ann. Tit. 13, § 1349.55 (West 2008).
37 Jason Lyon, “Revolution in Progress: Third Party Funding of American Litigation” (2010) 58 UCLA L
Rev 571 at 575.
38 Smith v. Canadian Tire Acceptance Ltd (1995), 22 O.R. (3d) 433 (Gen Div.). See also Smythers v.
Armstrong (1989), 67 O.R. (2d) 753 (H.C.J.).
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support this lawsuit was improper.” Winkler J. was clearly disturbed by the fact that
Mr. Whaley and the BAS made extravagant claims with respect to the returns investors
would receive without having obtained a legal opinion regarding the propriety of the
scheme. Ultimately, Mr. Whaley and the BAS were found to be the real plaintiffs in this
action and costs were awarded against them.
Canadian Courts’ Consideration of Third Party Funding Agreements
Over the last two years, Canadian courts have been asked to approve third party funding
agreements in four separate class actions.
In May 2009 and October 2010 respectively, judges in Alberta 39 and in Nova Scotia 40
approved third party funding agreements. Unfortunately, no reasons were issued by
either court. Both approval motions proceeded on an ex parte basis.
In Ontario, court approval of third party funding agreements for class actions has recently
been considered by our courts on two occasions.
i. Gildan Activewear
In Gildan Activewear, 41 the plaintiff (a German financial institution) entered into a costs
indemnification agreement with an Irish company, Claims Funding International (“CFI”),
whose main business was funding litigation in return for a percentage of any recovery.
Pursuant to the agreement, CFI would pay any adverse costs award in exchange for 7
percent of any net settlement or monetary judgment in the proposed class proceeding.
The agreement was conditional upon court approval. The plaintiff moved for such
approval in advance of any certification hearing (or motion for leave under Part XXIII.1
of the OSA) seeking an order that would be binding not only upon the plaintiff but any
class that may be certified in the action.
The defendants argued that the agreement should not be approved because the form of
financial assistance in this case constituted champerty, as it introduced a stranger to the
litigation motivated simply by profit. It was argued that the Court should not allow the
“trafficking of litigation” for profit. Moreover, the defendants contended that since
plaintiff’s counsel had already agreed to indemnify the plaintiff for any adverse costs
award, the agreement with CFI was really a form of insurance for plaintiff’s counsel and
should not be funded by class members. Finally, the Court’s ability to bind putative class
members and extinguish their ability to raise claims in champerty prior to certification
was questioned.
39 Hobsbawn v. Atco Gas and Pipelines Ltd., (May 14, 2009) Calgary 0101-04999 (QB).
40 MacQueen v. Sydney Steel Corporation, (October 19, 2010), Halifax 218010 (SC).
41 Supra note 15.
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Justice Leitch agreed with the defendants that the funding agreement in issue was not
required to ensure “access to justice”. The plaintiff was a German investment company,
part of one of Germany’s oldest banks, and had itself purchased over $4 million of Gildan
shares during the proposed class period. Furthermore, it had acted as lead plaintiff, or
otherwise sought to serve as lead plaintiff, in at least half a dozen securities class actions
in the U.S. The defendants argued that this was not a case in which the plaintiff could not
afford to pursue the litigation without the funding agreement. Moreover, the plaintiff’s
stated position that it was not prepared to proceed with the litigation if it was personally
exposed to adverse costs awards was addressed by the fact that plaintiff’s counsel had
already agreed to indemnify the plaintiff for any costs award and had further provided an
undertaking to the defendants (as part of settling a motion for security for costs) to pay
any costs award not satisfied by the plaintiff. Nonetheless, Justice Leitch also agreed
with plaintiff’s counsel that it was proper for the plaintiff to be concerned about exposure
to costs noting:
This plaintiff is not impecunious and may well have the means to pursue
litigation. However, I do not find it improper that it seeks to reduce the risks
which a class proceeding exposes them to. While class counsel has provided
an undertaking to pay any costs order against the plaintiff, which the plaintiff
does not pay within sixty days, that undertaking is in favour of the
defendants and is not therefore an indemnification of the plaintiff because it
does not relieve the plaintiff of its primary obligation for such costs. 42
Justice Leitch determined that third party funding agreements are not per se champertous.
However, she noted that the motive for entering into such an agreement is an important
factor a court must consider in determining whether a particular agreement is
champertous. 43 While Leitch J. noted that it is not improper for a plaintiff to reduce the
risks to which a class proceeding exposes them, 44 she adopted the prior reasoning of the
Ontario Court of Appeal in McIntyre 45 —a case dealing with lawyer contingency fee
agreements—in which it determined that a fee agreement that so over-compensates such
that it is unreasonable or unfair is an agreement with an improper purpose. 46
The Court was not prepared to defer to the plaintiff’s business judgment as to the
reasonableness of the fee—which might be the case if the plaintiff or plaintiff’s counsel
was assuming the liability for the commission payable to CFI—given that the
commission would be recovered on any net settlement or judgment for class members.
42 Ibid. at para. 67.
43 Ibid. at para. 63.
44 Ibid. at para. 67.
45 Supra note 4.
46 Gildan Activewear, supra note 15 at paras. 68 and 69.
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Nor did Justice Leitch find determinative comparing the proposed 7 percent commission
against the 10 percent levy under the Class Proceedings Fund. 47
Justice Leitch ultimately concluded that it was impossible for the Court to undertake at
such an early stage of the proceeding the necessary assessment of whether the proposed
costs indemnification agreement would amount to “over compensation” and be
unreasonable and unfair to those who will bear its expense. The Court noted that the
compensation to be paid to CFI is completely related to the amount of money that is
ultimately recovered. It bore no relationship to the amount of money paid by CFI, the
period of time during which those monies were outstanding, the degree of risk assumed
by CFI or the extent of its exposure to costs. Moreover, there was no cap on the amount
of compensation payable to CFI. 48 The claim in Gildan Activewear pleaded damages of
$500 million. Consequently, the Court dismissed the plaintiff’s motion finding it could
not now declare that the agreement did not engage maintenance or champerty. She did
not, however, foreclose that the agreement might be approved at a later stage.
Finally, Justice Leitch also agreed with the defendants that the Court should not exercise
its discretion under section 12 of the CPA to make the declaration sought binding upon
putative class members when the action had not yet been certified and class members
have had no opportunity to have their views presented. As such, she indicated that she
would not have been prepared in any case to make a declaration binding upon class
members at this stage of the proceeding. 49
The plaintiff was granted leave to appeal this decision 50 but the basis for granting leave
was hardly supportive of the plaintiff’s position. Justice Little noted that there was good
reason to doubt the correctness of Justice Leitch’s comment that third party funding
agreements are not per se champertous. He added that, “[t]hird party funding agreements
may well be per se champertous.” 51 In a subsequent decision 52 concerning a related
motion for leave to appeal arising from a second motion by the plaintiff to approve an
amended funding agreement with CFI, Justice Little commented that “surely Madame
Justice Leitch is correct in delaying the decision as to whether or not a particular
agreement is to be challenged until formation of the Class.” 53
47 Ibid. at para. 70.
48 Ibid. at para. 71.
49 Ibid. at para. 28.
50 Metzler Investment GMBH v. Gildan Activewear Inc. (9 March 2010), London 58574CP (Sup. Ct. J.).
51 Ibid. at para. 6.
52 Metzler Investment GMBH v. Gildan Activewear Inc. (6 April 2010), London 58574CP (Sup. Ct. J.).
53 Ibid. at para. 8.
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No appeal was ultimately heard, as the parties subsequently reached a settlement in the
overall action.
ii. Manulife
The issue of third party funding was most recently considered in February 2011 in a
proposed securities class action involving Manulife Financial Corporation. 54 The
plaintiffs sought court approval of a third party funding agreement (with the same
commercial funder as in Gildan Activewear) under which the funder would indemnify the
plaintiffs against their exposure to costs awards and pay $50,000 toward the plaintiffs’
disbursements in return for 7 percent of any favourable judgment or settlement. Unlike
the agreement in Gildan Activewear, this commission was subject to some form of a cap
– namely $5 million if the resolution occurred at any time prior to the plaintiffs’ pre-trial
conference brief and $10 million if the resolution occurred at any time thereafter.
Justice Strathy approved the funding agreement for the following reasons:
54 Supra note 18.
55 Ibid. para. 33.
56 Ibid. para 29.
57 Ibid. para. 32.
a. The funding agreement helped to promote one of the most important goals of
the Class Proceedings Act of providing access to justice. Strathy J.
commented that that goal would be illusory if access to justice were deterred
by the prospect of a crushing costs award to be borne by the representative
plaintiff or counsel. In that regard, he reasoned that third party indemnity
agreements can avoid individuals with potentially meritorious claims not
bringing them because they are unable to withstand the risk of loss. 55 The
possibility of indemnities from class counsel did not, in his mind, address
access to justice concerns, instead describing such agreements as imposing
“onerous financial burdens on counsel” that “risk compromising the
independence of counsel.” 56 He further commented that funding under the
Class Proceeding Fund was not guaranteed, as one’s application may not be
accepted and if accepted, the fee is an inflexible 10 percent of the recovery. 57
The fact that one of the proposed representative plaintiffs, the Trustees of the
Ironworkers Ontario Pension Fund, had previously served, or sought to serve,
as representative plaintiffs in other class or representative proceedings without
any apparent third party funding agreement is not addressed in the Court’s
reasons or otherwise appears to have been raised juxtaposed against its
evidence that it was not prepared to act as representative plaintiff in this action
if left exposed to potential adverse costs awards. 58
58 e.g. Ironworkers Ontario Pension Fund v. Research In Motion Ltd., [2007] O.J. No. 4535 (Sup. Ct. J. –
Comm. List); In Re Bausch & Lomb Incorporated Securities Litigation, 244 F.R.D. 169 (W.D.N.Y. 2007).
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. Strathy J. noted that the plaintiffs had demonstrated a clear intention to
proceed with this litigation before the third party funder had been introduced
such that there was no evidence of the funder stirring up, inciting or provoking
this litigation within the meaning of the term “moved” in s. 1 of the
Champerty Act. 59 In doing so, the Court did not expressly comment on the
evidence led by the plaintiffs that they were not prepared to act as
representative plaintiffs in this litigation if left exposed to potential adverse
costs awards.
c. The indemnification agreement was found to leave control of the litigation in
the hands of the representative plaintiff and did not permit “officious
intermeddling” in the conduct of the litigation by the funder. The agreement
provided that: “class counsel are required to advise the funder of any
significant issue in the proceeding, including the prospects of success, strategy
and quantum; class counsel are required to respond to any reasonable request
by the funder for information about the proceedings; the plaintiffs must
conduct the proceeding in a manner that avoids unnecessary costs and delay
and must provide full and honest instructions to class counsel; and the funder
acknowledges that the representative plaintiffs are to instruct counsel and that
counsel’s duties are to the plaintiffs and not the funder.” Strathy J. interpreted
these provisions as simply allowing the funder to receive appropriate
information about the progress of the litigation, consistent with its need to
manage its own financial affairs (such as posting reserves).
d. Justice Strathy commented that the 7 percent commission payable to the
funder was generally reasonable and in line with the 10 percent commission
payable to the Class Proceeding Fund. Further, Strathy J. also determined that
the commission cap was reasonable and was a fair reflection of the potential
downside risk facing the funder ($10 million in costs). The Court’s reasoning
was very likely influenced by the evidence that the defendants had
communicated to the plaintiffs estimating defence costs of $10 million.
Strathy J. observed that based on the current state of affairs before him in
which the defendants professed every intention of mounting an aggressive and
expensive defence, the financial terms of the indemnification agreement were
a fair reflection of risk and reward, further noting:
While it is true that one may not be able to say, with absolute certainty,
that there is no possibility that the funding agreement might result in a
“windfall” recovery to CFI, the possibility of such a recovery, when
balanced against the probability of protracted litigation and a
somewhat speculative result, is a factor that a commercial risk-taker
must take into account in determining the amount of its compensation.
The assessment of the risk can always be defined with greater precision
59 Manulife, supra note 18 at para. 33. For a discussion on the term “move” in this regard, see McIntyre,
supra note 4 at para. 41.
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when more information is available, but the fact of the matter is that
the plaintiff asks for a decision now. When an insurer sets a life
insurance premium, it does not say to the assured, “[w]e’ll wait and see
how you are doing in a couple of years.” It fixes the premium based
on the current state of knowledge, recognizing that the applicant may
die the next day or live to be 101. 60
In applying the latter reasoning, the Court indirectly disagreed with the view
taken by Leitch J. in Gildan Activewear that the reasonableness of the
proposed commission could not now be evaluated. Nor do Strathy J.’s
reasons expressly reconcile his conclusion with the views of the Ontario Court
of Appeal in McIntyre which held, “[w]hen an agreement like this one is
structured so that the fees are based on a percentage of the recovery, the
determination of whether the fees are reasonable and fair will normally have
to await the outcome of the litigation.” 61
e. Justice Strathy remarked that plaintiffs’ counsel could be expected to
discharge their duties to the plaintiffs, the class and the Court without being
influenced by the funder, and there would be court supervision of the parties
to the agreement.
Strathy J. also considered whether the Court could grant an order approving the funding
agreement and binding putative class members before the class had been certified. He
was satisfied the Court had jurisdiction to approve the agreement as part of the Court’s
inherent jurisdiction to control its process. On whether the Court should exercise that
jurisdiction and make a binding determination of the rights of class members prior to
certification, Strathy J. observed that the plaintiffs had sought to address the concerns
raised by Leitch J. about class members having an opportunity to be heard by giving
notice of the agreement to a representative cross-section of class members. Regardless,
the Court commented that to postpone the decision to post-certification, when the views
of class members can be sought, could very well spell the end of the proceeding, because
the plaintiffs could not withstand an adverse costs award on certification:
While I recognize that the views of class members are important and deserve
consideration in appropriate cases, a part of the court’s responsibility in class
actions is to protect the rights of prospective class members. One of the most
important of those rights is the right to advance a class proceeding. To
postpone the decision to post-certification, when the views of class members
can be sought, could very well spell the end of this proceeding, because the
plaintiffs cannot withstand an adverse costs award on certification. In my
view, exercising the Court’s supervisory jurisdiction over the proceeding, I
am entitled to put myself in the shoes of prospective class members and ask
whether the proposed agreement is fair and reasonable. For the reasons that
60 Manulife, supra note 18 at para. 33(g).
61 McIntyre, supra note 4 at para. 79.
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follow, I find it is. The fact that it is acceptable to a reasonably representative
and informed group of prospective class members is by no means
determinative, but it is an important factor I have considered in coming to
this conclusion. 62
The Court’s reasoning on jurisdiction appears to treat the approval of funding agreements
as a procedural matter rather than recognizing it also entails extinguishing the substantive
rights of class members under common law and statute for champerty. Our courts have
previously noted determinations of substantive law cannot bind class members prior to
certification. For example, in Holmes v. London Life Insurance Co., 63 the Court noted
that the decision concerning an application brought pre-certification would not bind the
proposed class. Furthermore, in McNaughton Automotive Ltd. v. Co-operators General
Insurance Co., 64 on an appeal from an application for statutory interpretation being
brought on behalf of proposed class members in which both the plaintiff and the
defendant insurance company were content to have the application heard prior to the
certification motion, the Ontario Court of Appeal cautioned against putting the
“substantive cart before the procedural horse”. 65
Conclusion
Judicial consideration of third party funding agreements for class actions is very much at
a nascent stage. In the small number of decisions to date on third party funding for class
actions in Canada, apart from the doubt raised by Justice Little in granting leave to appeal
in Gildan Activewear, Canadian courts have not viewed indemnification agreements and
other forms of financial assistance for disbursements by a commercial funder as being
per se contrary to public interest and champertous. Instead, our courts appear prepared to
view such agreements as being capable of promoting access to justice. However, our
courts have also shown they are prepared to carefully scrutinize the particular terms of
those agreements to protect against the funder participating in the direction of the
litigation, prevent conflicts and other abuses, and ensure the reasonableness of the
proposed commission or fee.
62 Manulife, supra note 18 at para. 17.
63 Holmes v. London Life Insurance Co., [2000] O. J. No. 3621 (Sup .Ct. J.).
64 McNaughton Automotive Ltd. v. Co-operators General Insurance Co., [2001] O.J. No. 2312 (C.A.).
65 Ibid. at para. 36.
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