Risky business: Ontario court provided conditional approval of a novel third-party funding agreement

The Ontario Divisional Court in Houle v. St. Jude Medical Inc. marks yet another development in the emerging law surrounding the role of third party litigation funding agreements in Canadian class proceedings. In the case, the Divisional Court upheld Justice Perell’s qualified approval of a novel third party litigation funding agreement, which included the following:

  • Approval of the third party funder’s recovery of 10% of the plaintiff’s award (if any),
  • Amendment of the agreement to provide that the third party had to seek court approval after the end of the case for any further compensation, and
  • Deletion of parts of the agreement that permitted the third party funder to withdraw its funding.

The Divisional Court’s ruling represents a further evolution in the developing battle ground surrounding third party funding agreements in the context of class proceedings, in respect of which we have previously written (in addition to our commentary from a defendant’s perspective, found here and here).

Background

In 2017, the plaintiffs, Shirley and Roland Houle brought a class action against the defendants, St Jude Medical Canada, Inc. and St Jude Medical Inc. alleging they negligently designed and manufactured cardiac defibrillator devices that were surgically implanted in the proposed class members.

Prior to applying for class certification, the plaintiffs asked the court to approve its third party funding agreement with Bentham IMF Capital Limited.

Unlike many third party funding agreements, Bentham agreed to pay 50% of the plaintiff’s counsels’ fee on a real time basis throughout the case. The agreement also stipulated that Bentham would receive 20%-25% of the plaintiff’s recovery. This is much more than the typical 10% often seen in these types of agreements.

On August 29, 2017, Justice Perell approved the litigation funding agreement subject to certain key amendments.

The danger of potential overcompensation

The Divisional Court accepted Justice Perell’s decision to pre-approve Bentham’s recovery of 10% of the plaintiff’s potential recovery, but to wait until the end of the case before determining if Bentham should be paid any additional amount (i.e., the additional 10-15% recovery contemplated by the terms of the original agreement).

In so doing, the Divisional Court expressed concern that Bentham’s compensation would be uncapped and not subject to any further court scrutiny. In this regard, it was noted that the eventual fee could prove to be unfair in the event that:

1. The parties overestimated the risk that the plaintiffs would not succeed, and

2. The plaintiffs or class counsel caved to Bentham’s pressure to settle.

Bentham argued that parties who receive the benefit of independent legal advice should be able to make commercial decisions. However, the Divisional Court reasoned that the protection of the interests of the 8,000 other class members trumped any such right. Similarly, the Divisional Court rejected the argument that Bentham needed certainty on its return, given the high level of uncertainty throughout the agreement.

Removal of Bentham’s right to unilaterally terminate

The Divisional Court also accepted Justice Perell’s decision to remove Bentham’s right to withdraw funding without court approval.

The Divisional Court was concerned with the various litigation covenants which stated that the plaintiffs and class counsel would pursue an efficient, affordable, and proportionate resolution of the proceedings. The Divisional Court worried that Bentham could threaten to withdraw its funding based on a perceived breach of any of these types of covenants. Rather than remove these terms, Justice Perell limited Bentham’s termination rights.

Justice Perell did note that these type of covenants may be preferable where the representative plaintiff has “little or no skin in the action” and is really only motivated by money. However, this was not such a case.

Take-aways

The decision illustrates the uncertainty that continues to surround the nature and scope of third party funding agreements in the context of class proceedings, and demonstrates the courts’ willingness to engage in a detailed review of any such agreement before approving its terms.

 

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Editors

Deborah Glendinning

Partner, Litigation

Sonia Bjorkquist

Partner, National Chair, Litigation

Éric Préfontaine

Partner, Litigation

Christopher Naudie

Partner, Litigation

Craig Lockwood

Partner, Litigation

Tristram Mallett

Partner, Litigation

Karin Sachar

Associate, Litigation