Court Supervision of Funding Arrangements in Canada

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Commercial litigation funding is still nascent in Canada, particularly in the field of class actions.  The first known third party funding arrangement in a class action occurred in the mid-90s, when a plaintiff and his counsel organized a syndicate of investors to fund the litigation in return for a share of the eventual settlement.  The arrangement was approved by the case management judge, without issuing reasons for decision.  At about the same time, a similar investment scheme was proposed in another class action; in this case, however, Justice Winkler (currently Ontario’s Chief Justice), found that the arrangement constituted champerty and maintenance, and could not be approved.

Over a decade later, individual syndicates gave way to commercial funding firms and thus the funding of class actions as a viable industry emerged.  Whether commercial funding of class actions occurred prior to this time without defendants or the court being aware of it is impossible to determine.  Beginning in 2009, however, plaintiffs have disclosed the existence of a proposed funding arrangement to the judge supervising the class action, and judges have accepted that they have the jurisdiction to approve or reject the agreement based on the best interests of the class.  Although two funding agreements were judicially approved on an ex parte basis in Alberta[1] and Nova Scotia,[2] class counsel in Ontario sought court approval of an indemnity[3] agreement with an Irish funder, and did so on notice to the defendant in order to increase the probability that the judge would be comfortable approving the contract.  In this case, the judge rejected the funding contract on the basis that it may potentially overcompensate the funder and therefore be champertous.

Lawyers interviewed for a study of commercial litigation funding in 2012 were unanimously of the view that, unlike a law firm’s other banking arrangements, the involvement of a third party funder, and its contractual relationship with the representative plaintiff, must be disclosed to and approved by the class action judge.

The class action bar is starkly divided, however, on the question of the scope and timing of the approval motion.  In the same study, most lawyers maintained that the agreement should be submitted to the judge for approval early in the action.  One lawyer argued that it would be more appropriate to disclose the agreement at the end of the litigation, concurrently with class counsel’s fee.  The role of the defendant in the approval hearing is even more controversial.  The majority of the lawyers interviewed claimed that divulging any details of the funding agreement to the defendant undermines the plaintiff’s strategic advantage in obtaining such support.

Whatever the views of counsel, a recent decision of the Ontario Superior Court of Justice has (for the time being) settled the procedural question.  In Fehr v. Sun Life, the plaintiffs moved for directions regarding the procedure for approval of a funding arrangement.  The plaintiffs argued that the hearing of the motion should be closed to the public, argued without notice to the defendant, and that all documents for the motion be sealed, all on the basis that the funding agreement disclosed elements of their litigation strategy and was therefore subject to solicitor-client and litigation privilege.

The motions judge disagreed.  Justice Perell found that in the context of class actions, the terms of both counsel’s retainer agreement and the associated third party funding agreement are not privileged and must be promptly disclosed to the court. The agreement has no effect if not judicially approved.  He further held that in the context of an adversarial system of justice, the defendant’s views about the agreement provide the Court with useful information.  Justice Perell’s rationale is clearly stated (at para. 89):  “Third party funding of a class proceeding must be transparent and it must be reviewed in order to ensure that there are no abuses or interference with the administration of justice.”

The potential abuses referred to in Fehr were previously discussed in another Ontario case, Dugal v. Manulife.  In this case, Justice Strathy (now a Court of Appeal judge) discussed concerns about the incitement of litigation by a funder; officious intermeddling in the conduct of the litigation by the funder; financial exploitation of the class members; the sufficiency of assets on the part of the funder; and controls over the disclosure of the defendant’s proprietary information to the commercial funder.  Justice Strathy was comfortable approving the contract in Dugal because of provisions in the contract, among others, which safeguarded the representative plaintiff’s ability to instruct counsel without interference from the funder. Justice Strathy, like Justice Perell after him, both grounded the court’s jurisdiction to approve and then continue to monitor the funding arrangement in class proceedings legislation. In effect, the judges act as proxies for the class members in approving the contract between the funder and the representative plaintiff.

In determining that the funding agreement was subject to court approval, Ontario judges have also confronted the question of disclosure.  Justice Perell rejected the plaintiff’s argument that the agreement was privileged.  Consequently, “because there is no privilege in the third party funding agreement, then as a matter of best practices, an applicant for third party funding should not include extraneous and otherwise privileged information in a third party funding agreement” (para. 142).  Justice Perell also rejected the submission that the approval motion ought to be conduct in camera and ex parte, finding that the interests involved were insufficient to depart from the open court principle.  In a curt response to the plaintiff’s complaint that disclosure of the agreement would dampen commercial litigation funding of class actions and thus inhibit access to justice, Justice Perell stated: “As for Bridgepoint [the funder], if it does not wish to disclose its pecuniary interest in the litigation, then Bridgepoint should do its business in another less transparent or more disinterested forum” (at para.155).

The U.S. appears to be one such “less transparent” forum, at least for the time being.  Conversely, Australian funders have opted for full public disclosure of their agreements.  Such transparency is generally welcome by the Canadian bar and commentators alike, even if the obligation to disclose the contract to the defendant is significantly less popular.  In the absence of regulatory oversight by securities commissions, insurance regulators or consumer protection statutes, judicial oversight is perceived to be a necessary safety measure in a steadily burgeoning industry.


[1] Hobshawn v Atco Gas and Pipelines Ltd. (May 14, 2009), Action 0101-04999 (Alta. Q.B.) [unreported].

[2] MacQueen v Sydney Steel Corporation (October 19, 2010), Action 218010 (N.S.S.C.) [unreported].

[3] Ontario has a cost-shifting rule in class actions. An indemnity by a third party funder ensures that the representative plaintiff and/or her lawyers are not exposed to the risk of adverse costs.

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