With Whom do the Financial Risks and Burdens of Class Proceedings Lie?

Topics:

Aug 29, 2013

Class proceedings legislation aims to increase access to justice for potential litigants. People with small claims can band together to clear the financial hurdles to litigation, namely:

  1. The cost of paying class counsel;
  2. The cost of out-of-pocket disbursements in the course of litigation; and
  3. The cost of paying the defendant its costs if the class action is not successful.

Ordinarily, the representative plaintiff does not pay the bills or the costs awards. So who pays?

Class Counsel Can Act On Contingency

In certain circumstances, class counsel will agree to pay the plaintiff’s disbursements and to work for a contingency fee: a payment or percentage out of any eventual damages award. This covers the plaintiff’s cost of retaining counsel, but does not cover the risk of having to pay the defendant its costs if the action fails. And such costs awards can be large. Class counsel will sometimes agree to indemnify the plaintiffs against an adverse cost award, but there are times where class counsel will not take on the risk of such an indemnity.

Class Proceeding Funds Provide Funding

Several provinces have class proceedings funds (e.g. the Ontario Class Proceedings Fund and the Fonds d’aide aux recours collectives in Quebec). A representative plaintiff may apply to the Fund, which will pay the disbursements and cover any adverse cost awards in exchange for a set percentage of the final award. The payment to the Fund out of any net recovery is compensation for the risk born by the Fund during the litigation process. These funds do not pay class counsel’s fees. Their funding is limited to disbursements and adverse cost awards. These funds, however, have limited resources to grant funding and, consequently, must reject some applications.

Third Party Litigation Investor

If neither class counsel nor a provincial fund is willing to bear the financial risk of an adverse cost award, the representative plaintiff can reach out to a third-party litigation investor, who will agree to cover adverse costs awards for a percentage of the final recovery. Third-party funding indemnifies against potential adverse costs awards. To date, it has not covered disbursements  or class counsel fees. It is unclear whether such coverage will be permitted by Canadian courts in the future. In third party-funding arrangements the rate of return is negotiated and the funding agreement requires court approval.

When Is Court Approval of a Third Party Funder Granted?

In Bayens v. Kinross Gold Corporation, the Court explained its approach to third-party funding agreements. In essence:

  • Court approval of the third-party funding agreement must be obtained by the plaintiff. This can be done before certification and the decision is binding on the class.
  • The third-party funding agreement must be promptly disclosed to the court and does not come into effect without the Court’s approval. The agreement must be transparent and is not a privileged document.
  • A third-party funding agreement must not compromise or impair the lawyer/client relationship, the lawyer’s professional judgment, or the lawyer’s carriage of the litigation. The agreement must not diminish the representative plaintiff’s rights to instruct counsel and control the litigation.
  • The court must be satisfied, before approving the agreement, that insulation from an adverse costs award does not make the plaintiff indifferent and result in a diminished commitment by the representative plaintiff to advance the action on behalf of the class.
  • The third-party funding agreement must be necessary to provide the plaintiff and the class members access to justice.
  • It is not necessary to first apply to the Class Proceedings Fund for funding. However, if an application was made and not granted, no adverse inference should be drawn from the fact that the Class Proceedings Fund was not prepared to provide litigation funding.
  • The court must be satisfied that the agreement is fair and reasonable to the class.
  • The third-party funding agreement must contain a term that the third-party funder is bound by the deemed undertaking and is also bound to keep confidential any confidential or privileged information.
  • It is acceptable for a third-party funding agreement to require the third-party funder to pay into court security for the defendant’s costs.

This case is another example of the trend of third-party funding agreements. As the Court explained, however, the law in the area is a work in progress and subsequent cases may identify new problems.

Stay tuned.