Dugal versus the Model; Final Odds and Ends

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This post concludes our analysis of the terms of the litigation finance contract used to insure the risk of adverse cost orders in a Canadian shareholder class action (Dugal) and the draft model, and briefly touches on several topics: champerty, fiduciary duties, and dispute resolution.

First, the financing contract was entered into in November, 2010, about three months after the litigation was filed. In addition, only a portion of the proceeds of the litigation are being pledged, rather than an explicit transfer of control over the litigation. These two factors mean the arrangement should avoid champerty issues in New York (the law of the draft model).

Second, a point we should have noted in our post looking at how the Dugal contract handles conflicts of interest: subsection 2.5 explicitly disclaims a fiduciary relationship between the parties, where as the model recommends creating one. The lack of such a relationship is perhaps less troublesome in the Dugal scenario because the financial involvement is more limited, the contract contains a good faith provision, and the judge plays a supervisory role.

Third, the dispute resolution provisions are very different. While both contracts embrace the courts instead of arbitration (Dugal chooses Ontario and the draft model New York, with each choosing the related substantive law as well), the model assumes a separate litigation would be filed, while Dugal appears to treat such disputes as ancillary to the funded litigation. Specifically, subsection 14.1 of the Dugal contract says:

14.1 Disputes arising from this agreement shall be determined upon a motion before the Court on Notice to the Parties to this Agreement.

In the contract’s recitals, the “Court” is defined as the “Ontario Superior Court of Justice”, which is the court hearing the class action. While perhaps the term means that any lawsuit arising out of the contract would have to be filed in that court, it seems more likely that the aggrieved party would simply file a motion before the judge hearing the class action, seeking a ruling resolving the contract dispute. If so, does that mean the defendant becomes aware of the contract dispute? [If anyone familiar with such contract phrasing would like to weigh in, please do.]

In addition, it is unclear how this provision interplays with one we flagged in an earlier post. Section 10.3 says “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.”  Does this provision prohibit plaintiff from raising a contract dispute without the funder’s permission? If not, why not?

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