A recent decision from the Ontario Superior Court of Justice has ruled for the first time that a third party can fund a plaintiff’s class action lawsuit in this province. In a short decision, Justice Strathy held that a foreign litigation funding company could indemnify the plaintiffs from their exposure to a potential adverse costs award in exchange for a cut of any money recovered from litigation, thus clearing the way for the class action to proceed without the fear of a significant costs award being made against the representative plaintiff. The decision to allow third party funding – a first of its kind in Ontario – has significant implications for class members, class counsel, and defendant companies that may now find themselves subject to increasing numbers of class actions.
The plaintiffs in Dugal v. Manulife1 allege that Manulife Financial Corporation (“Manulife”) made misrepresentations concerning its risk management practices which artificially inflated the value of its stock causing significant loss for investors. The plaintiffs, who include large public investors such as the Canada Pension Plan Investment Board, the Ontario Teachers’ Pension Plan Board and OMERS Investment Group, are currently seeking to have the action certified as a class proceeding.
In theory, representative plaintiffs in class proceedings bear the burden of covering costs awards made in favour of a defendant should the class action ultimately prove unsuccessful at trial. In practice, a representative would never accept the job if they might end up individually liable for millions of dollars in costs. To date, two realities have solved this problem: (a) class counsel often provide an indemnity to cover the defendant’s costs if unsuccessful at trial; and (b) plaintiffs can apply to the Law Foundation to have any adverse costs awards indemnified by the Class Proceedings Fund (the “Fund”).
The plaintiffs in Dugal sought approval for a third option.
the funding agreement
The plaintiffs had struck an agreement with Claims Funding International PLC (“CFI”), an Irish company that specifically funds international litigation, whereby CFI would in indemnify the plaintiffs against any adverse costs award in return for a 7% share of the proceeds of any settlement or judgment in the action (the “funding agreement”). The funding agreement capped the commission payable at $5 million if resolution occurred prior to filing a pre-trial conference brief and a $10 million thereafter. CFI also committed to paying $50,000 towards the plaintiffs’ disbursements.
The funding agreement also made it clear that while the representative plaintiffs were to provide instructions to class counsel, CFI must be kept in the loop regarding any significant issue in the proceeding. Further, class counsel was required to respond to any reasonable requests for information made by CFI.
the defendants’ concerns
The defendants raised three major concerns with regards to the proposed funding agreement. First, the defendants argued that the agreement was “champtertous” as it involved meddling by an uninvolved party, encouraging a lawsuit for its own gain. Second, given that CFI holds no assets in Canada, they argued that the agreement failed to provide any assurance that CFI would be able to satisfy an adverse costs award if the defendants were successful. Finally, the defendants were concerned that the funding agreement did not provide adequate protection for their confidential information which might ultimately be disclosed to CFI in the course of litigation.
the court conditionally approves the funding agreement
Despite these concerns, Justice Strathy conditionally approved the funding agreement with CFI. Recognizing the importance of access to justice, Strathy J. reasoned that funding agreements of this nature promote the advancement of meritorious claims where plaintiffs would otherwise be unable to withstand the risk of loss. Further, there was no evidence that CFI had stirred up, incited or provoked the litigation in such a way that qualified as champtertous. The commission payable and corresponding caps were also deemed to be reasonable.
However, the court did listen to two of the concerns advanced by the defendants. First, CFI was ordered to provide security in order to demonstrate that it would be able to cover any potential adverse costs awards. Second, the court held that guidelines needed to be established concerning the sharing of confidential information with CFI in order to recognize the legitimate interests of both CFI and the defendants. Subject to these conditions being satisfied, Strathy J. approved the funding agreement.
The decision is significant in that it opens the door to third party funding of class actions in Ontario and provides plaintiffs with a new avenue from which to seek funding. No longer will representative plaintiffs be limited to seeking indemnification from their own counsel or the Fund. As Justice Strathy pointed out, these types of funding arrangements have the potential to “affect the integrity of the litigation process and the due administration of justice.” They certainly do have implications for all parties involved, not the least of which is for defendants who should expect, with the advent of the availability of third party funding, to be the target of more class action proceedings.