Third Party Funding Approved to Protect Class Action Plaintiffs against Adverse Costs
Written by Jason Squire, Andrew Sprung (Student-at-law) on November 7th, 2013
In Bayens v. Kinross Gold Corporation, 2013 ONSC 4974, Justice Perell granted an unopposed motion to allow the use of third party litigation funding in an Ontario class action. Trustees of the Musician’s Fund of Canada (the “Pension Fund”) brought a securities market misrepresentation claim against the Kinross Gold Corporation and its directors.
The Pension Fund approached Harbour Litigation Funding (“Harbour”), a private litigation funder from the UK, after being rejected for funding by the Ontario Class Proceedings Fund. The Pension Fund’s lawyers agreed to act on a contingency fee basis, but were not prepared to bear the additional risk of indemnifying the Pension Fund against adverse costs awards.
Harbour agreed to indemnify the Pension Fund in return for a fixed percentage of any net recovery in favour of the class. Specifically, Harbour indemnified the class for up to $1 million on the certification and leave motions in return for 7.5% of any net settlement achieved pre-certification, and it pledged another $5 million for a common issues trial in return for 10% of any settlement or award post-certification.
Defendants must be given notice of third party funding agreements, but in this instance Kinross did not oppose Harbour’s funding on the ground that it agreed to post security for costs.
In holding that the Pension Fund’s agreement with Harbour should be approved by the Court, Justice Perell focused on the role of class proceedings in enhancing access to justice and the particular problem posed by adverse cost awards in the class action context. “[S]ome form of funding for adverse costs is, as a practical matter, a necessity in most every class proceeding…[since] no ‘rational’ plaintiff in a class proceeding would risk an adverse cost award that would far exceed his or her potential recovery in the action”.
The legislature and the class action bar have attempted to address this problem in a number of ways. First, under the Class Proceedings Act,1992, the court can exercise discretion not to award costs to a successful defendant if it believes the “proceeding was a test case, raised a novel point of law, or involved a matter of public interest”. Second, a representative plaintiff can apply to the Class Proceedings Fund for litigation funding, which includes indemnification against adverse costs awards, in return for 10% of any settlement or award in favour of the class. And third, plaintiff lawyers have historically sometimes indemnified representative plaintiffs. However, “Class Counsel are no longer as willing to assume both the risks associated with a contingency fee agreement and also the risk of the indemnity for a catastrophically high adverse costs award.”
Thus, in cases such as this, where neither the Class Proceedings Fund nor the plaintiff lawyers are willing to indemnify the class, an option for mitigating the substantial litigation risk is to turn to third party funders. Justice Perell extracted several principles from the developing case law to guide the court in assessing funding agreements. These included, amongst others:
- “plaintiffs must obtain court approval to enter into a third party funding agreement”;
- to be approved, “the agreement must not compromise or impair the lawyer-client relationship” or interfere with the lawyer’s professional judgment;
- to be approved, the agreement “must not diminish the plaintiff’s rights to instruct counsel and control the litigation”;
- “the court must be satisfied that the agreement is necessary in order to provide the class with access to justice”;
- “the court must be satisfied that the agreement is fair and reasonable to the class”; and
- if the Class Proceedings Fund has refused litigation funding,” nothing can be taken from this fact”.
However, in addition to identifying these general guidelines, Justice Perell cautioned the class actions bar that the concept of third party funding is still “a work in progress” and subsequent cases may identify problems not yet considered.
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