Conflicts and Buyer's Remorse in the Dugal Contract v. the Model

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This post continues our series contrasting the terms of the contract financing the Canadian shareholder class action in Dugal with the draft model. This one looks at the terms relating to conflicts of interest and buyer’s remorse.

Our draft model contract requires disclosure of myriad conflicts of interest and attempts to regulate them through various prohibitions and the imposition of a fiduciary duty. There is much less detailed on this issue. The Dugal contract has one section, Section 10, which is called “Good Faith Dealings”, which addresses conflicts in it part 10.1:

10.1 The Plaintiffs and the Funder will:

(a) act in good faith toward each other and be just and faithful in their dealings with each other in all matters arising out of or connected with this Agreement; and

(b) save as provided in this Agreement, not do or permit to be done anything likely to deprive any Party of the benefit for which the Party entered into this Agreement.

As noted in the other contract contrasting posts, the relative simplicity and narrowness of this provision may reflect the relatively narrow role of the funder: bearing the risk of adverse cost orders. That narrow role and the relatively limited control given the funder reduce the number of conflicts compared to an actively participating funder of the litigation itself.

Section 10.2 and 10.3 of the Dugal contract are purely focused on the Plaintiff’s good faith. 10.2 seeks to preserve the bargain in the face of contract invalidation, and seems primarily aimed at actions taken by a supervising judge. However it also works as a hedge against buyer’s remorse litigation. 10.3 appears to prevent buyer’s remorse litigation directly:

10.2 If this Agreement or any part thereof is annulled, avoided or held unenforceable the Plaintiffs will forthwith do all things necessary, including without limitation executing any further or other agreement or instrument, to ensure that the Funder receives any remuneration, entitlement or other benefit to which this Agreement refers or is contemplated by this Agreement. The Plaintiffs irrevocably agree that production of a copy of this Agreement shall be conclusive evidence of the Plaintiffs’ undertaking as set out in this clause.

10.3 The Plaintiffs will not seek any order from any court that may detrimentally affect the Funder’s rights under this Agreement other than with the consent of the Funder.

Both of these provisions transcend the class action/adverse cost order context of the Dugal contract, and theoretically could be included in financing contracts such as the model. Nonetheless we don’t believe they should be.

We believe Dugal’s 10.2 and 10.3 over-reach. It is not clear that plaintiff should bear the risk that the financing is illegal as a matter of law (10.2). And, while 10.3 forecloses buyer’s remorse litigation, it may shut down claims that most disinterested parties would find legitimate, not merely the stereotypical fact pattern of ‘thanks for the use of your money, we got a good result, but now we don’t want to pay you what you’re due.” Also,10.3 may give the funder control far beyond shutting down buyer’s remorse litigation; it is worded in such a way as to allow the funder to influence the strategy of the litigation counsel.

Although the draft model lacks provisions analogous to 10.2 and 10.3, it does provide protection against buyer’s remorse, namely a plaintiff minimum and the security structure of the deal. However, the Dugal contract certainly provides an alternative for parties who wish to bargain into these kinds of protectons.


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