Litigation Funding up for Discussion Again

The Ontario Superior Court of Justice recently released its decision in Houle v St. Jude Medical Inc., 2017 ONSC 5129 [Houle]. In it, Justice Perell conditionally approved a litigation funding agreement between the representative plaintiffs, class counsel and Bentham IMF Capital Inc., a global litigation funding company.

The court’s decision in Houle has important implications for parties to class actions, as well as general litigants interested in seeking third-party funding for their lawsuits.

Champertous Agreements

Until relatively recently, the use of third-party funding agreements in Ontario was considered illegal as a form of maintenance or champerty.

Champerty is a particular kind of maintenance whereby a third-party provides assistance to a litigant in consideration of a promise to give the third-party, or “maintainer”, a share in the proceeds or subject matter of the litigation.

The torts of maintenance and champerty still exist in Ontario and are supported by the public policy of discouraging unnecessary litigation and preventing a non-party from controlling or otherwise becoming unnecessarily involved in another’s litigation. However, the law began to change in Ontario as a result of the court’s decision in McIntyre Estate v Ontario (Attorney General), [2002] OJ No 3417 [McIntyre].

Following McIntyre, the law in Ontario has begun to develop as policy has shifted in recognition that the financial assistance of a third-party funder may be the only means for a litigant to access justice. As such, third-party funding agreements are no longer categorically illegal in Ontario.

The Decision

In Houle, Justice Perell reviewed the development of the case law concerning third-party funding agreements in Ontario and provided a set of factors a court must consider in deciding whether to approve a funding agreement. In particular, Justice Perell held:

(a)    the agreement must be necessary to provide access to justice;

(b)    the access to justice facilitated by the third-party funding agreement must be substantively meaningful;

(c)    the agreement must be fair and reasonable and protect the interests of the defendants; and

(d)    the third-party funder must not be overcompensated in its agreement.

Justice Perell also makes clear that a third-party funding agreement must not interfere with the lawyer-client relationship, the lawyer’s duties of loyalty and confidentiality, or the lawyer’s professional judgment and carriage of the litigation.

In Houle, Justice Perell ultimately found that the proposed funding arrangement between the parties could result in Bentham, the third-party funder, being overcompensated. As such, the fourth requirement was not satisfied. Justice Perell’s decision was grounded in the concern that Bentham’s recovery from the litigation was uncapped and could result in an unfair or disproportionate windfall at the expense of class members.

Justice Perell also found the third-party funding arrangement interfered with the lawyer-client relationship and the representative plaintiffs’ ability to control the litigation. Under the proposed agreement, it appeared as though the prosecution of the class action was undertaken on behalf of Bentham, rather than the class members.

Finally, Justice Perell was critical of the termination provision in the funding agreement, noting that Bentham had the sole discretion to terminate the agreement based on what it perceived as breaches.

To remedy the above deficiencies, Justice Perell proposed that Bentham’s fee be capped at 10%, with any balance of its fee subject to court approval. Likewise, Justice Perell held that court approval of any termination of the funding agreement would effectively mitigate the potential injustices in the current funding agreement.

Implications

Ultimately, Justice Perell did not approve the proposed litigation funding agreement in its current state. However, he did leave open the possibility of approval if certain deficiencies were remedied.

The conditional approval of the funding agreement in Houle is another step in the ongoing development of third-party litigation funding cases in Canada. The decision indicates the courts’ increased willingness to allow third-party litigation funding agreements where they will help achieve access to justice while balancing the protection of vulnerable litigants.

Involving third-party funders can be an important step to achieving justice, especially in the realm of class action litigation. To protect class members’ interests, and to negotiate a fair agreement with a third-party funder that a court will look favourably upon, it is prudent to engage experienced counsel.

Milosevic Fiske LLP will continue to follow the development of this case as the plaintiffs have currently appealed Justice Perell’s decision.

By: David Cassin

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