DIVISIONAL COURT FILE NO.: 543/17
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
SACHS, MULLINS, and MYERS JJ.
BETWEEN:
SHIRLEY HOULE and ROLAND HOULE Appellants
– and –
ST. JUDE MEDICAL INC. and ST. JUDE MEDICAL CANADA, INC. Respondents
– and –
NOMOS CAPITAL CORP. Intervenor
Margaret Waddell, lawyer for the appellants Benjamin Zarnett and David E. Lederman, lawyers for Bentham IMF Capital Limited
Eric S. Block and Richard Lizius, lawyers for the respondents Pat Flaherty, lawyer for the intervenor
HEARD at Toronto: June 8, 2018
F.L. MYERS J.
REASONS FOR JUDGMENT
The Appeal
1The appellants are representative plaintiffs in a proposed class action that is not yet certified. They sue the respondents for damages due to alleged negligent design and manufacture of some 8,000 cardiac defibrillator devices that have been implanted surgically in the appellants and proposed class members.
2By order dated August 29, 2017, Perell J. approved, subject to conditions, a litigation funding agreement among the appellants, their lawyers, and their proposed third-party funder Bentham IMF Capital Limited. The appellants and Bentham submit that Perell J. erred by imposing conditions on the court’s approval of the funding agreement. They ask this court to set aside the conditions and approve the third-party litigation funding agreement in full.
3Third-party litigation funding is a relatively recent and growing phenomenon in Canada. The law has so far recognized that third-party litigation funding can have a positive effect on access to justice. However, aspects of the third-party funding model raise concerns about third parties improperly meddling in litigation that does not involve them. The common law has always had concerns with the idea of strangers becoming involved in others’ litigation. The common law seeks to ensure that litigation does not become susceptible to interlopers finding ways to profit at the expense of the vulnerable and thereby harming not just the parties but the institution of civil justice. These concerns have historically been dealt with under the topic of the common law crime of “champerty.”
4While champerty is no longer a crime and its strictures have been loosened substantially over time, there remains a core concern about the potential risks of abuse to parties and to the administration of justice in champertous litigation arrangements. This concern motivates the court to proceed with caution when confronted with issues at the core of champerty.
5In this case, the proposed funding agreement offers features that have never been seen before in any reported Canadian case. This includes providing funding for 50 percent of the plaintiffs’ counsels’ fees on a real time basis throughout the case and the funding of 100 percent of disbursements with few, if any, restrictions. These proposed terms may make this new form of funding agreement quite attractive to class action plaintiffs and especially to their lawyers. But they come at a cost to the representative plaintiffs and to the uncertified class of potential plaintiffs. The cost includes both a monetary component and also an added element of risk to the sacrosanct independence and fidelity of the relationship between the plaintiffs and their counsel.
6Justice Perell reviewed the proposed funding agreement in his supervisory role as case management judge in this proceeding. Judicial supervision of class actions includes being mindful and supportive of efforts to enhance access to justice. But it also requires the court to protect the vulnerable interests of proposed class members and the interests of the administration of justice as an institution as already mentioned. Justice Perell recognized the novelty of the proposed agreement including both its potential benefits and possible risks. On balance, he was prepared to approve the proposed agreement subject to changes in some of the terms, changes that he found necessary to protect the representative plaintiffs and potential plaintiffs from risks of abuse including overpayment. He also saw fit to protect the integrity and independence of the relationship between the representative plaintiffs and their counsel from the champertous risk of intermeddling by the funder.
7Despite the very able arguments of counsel for the appellants and Bentham, in my view Perell J. did not make any error in articulating the applicable principles. Nor do I find that Perell J. was plainly wrong in proceeding as he did. To the contrary, I respectfully agree with him. Therefore, for the reasons that follow, the appeal is dismissed.
Standard of Review
8The process of weighing the benefits of third-party litigation funding against its potential champertous risks performed by Perell J. in this case is an exercise of judicial discretion.
9On this appeal, the appellants bear the burden of establishing that Perell J. made an error in the legal principles that he applied or that he exercised his discretion in a manner that was plainly wrong. Housen v Nikolaisen, 2002 SCC 33 at para. 10; Penner v Niagara (Regional Police Services Board), 2013 SCC 19 at para. 27. Whether I would have exercised the discretion to make every change or different changes than those made by Perell J. is not the issue. On an appeal, a motion judge’s exercise of discretion is subject to substantial deference.
The Litigation Funding Agreement
10The Houles are not in the financial position to fund the costs or disbursements of litigating this class proceeding.1 Nor are they able to bear the burden and risk of paying any adverse costs awards in favour of the respondents. The costs of mounting a products liability case such as this one are well beyond the ability to pay of most Canadians.
11The plaintiffs’ lawyers said that they were prepared to take the case on a contingency fee basis under which they would only get paid if the plaintiffs obtain a monetary recovery by settlement or judgment at the end of the litigation. As is common in contingent fee arrangements, the lawyers were willing to agree that they would not be paid in the ordinary course as the litigation proceeds, or at all, until the plaintiffs become entitled to recovery (if ever).
12However, the lawyers were not prepared or in a position to provide an indemnity to the Houles for any adverse costs awards that might be made in favour of the respondents in this case.
13The Houles retained counsel on a contingency fee basis under which counsel is entitled to 33 percent of any recovery in the lawsuit subject to court approval. The retainer agreement positively requires counsel to obtain litigation funding from a third-party lender who would agree to provide an indemnity to the Houles for any adverse costs awards that may be made against them. The Houles acknowledged in their retainer agreement that fees payable to a third-party funder might be paid on top of the 33 percent of their recovery that they have already agreed to pay to their lawyers.
14On July 28, 2017, the Houles, their lawyers, and Bentham agreed upon a term sheet setting out the basic terms and conditions of a litigation funding agreement. The Houles received independent legal advice concerning the term sheet from a lawyer who is experienced in class action litigation and familiar with litigation funding agreements.
15On August 10, 2017, the Houles, their lawyers, and Bentham executed the litigation funding agreement that is the subject of this appeal. The Houles received further independent legal advice before signing. After considering their independent lawyer’s advice, the Houles concluded that the proposed agreement was in their best interests and in the best interests of the class.
16The litigation funding agreement provides that it becomes effective only if it is approved by the court. It requires Bentham to pay:
a. up to 50 percent of the reasonable docketed time of the plaintiffs’ counsel;
b. the budgeted disbursements incurred by the plaintiffs’ counsel;
c. any court-ordered costs that may be assessed against the Houles; and
d. any security for costs ordered by the court.
17If the litigation is successful, then under the litigation funding agreement, Bentham will be entitled to receive:
a. 20 percent of the proceeds if the matter is resolved within 18 months;
b. 22.5 percent of the proceeds if the matter is resolved between 18 months and 36 months from the signing of the agreement; and
c. 25 percent of the proceeds if the matter is resolved later than that.
18As counsel will be paid 50 percent of their fees in real time under the litigation funding agreement, they no longer need to receive a full 33 percent of the plaintiffs’ contingent proceeds. Rather, the litigation funding agreement provides that the contingency fee payable to the plaintiffs’ lawyers would remain subject to court approval and would decrease to:
a. 10 percent of the proceeds, if the matter is successfully resolved within 18 months;
b. 11.5 percent of the proceeds, if the matter is successfully resolved between 18 months and 36 months from the signing of the agreement; and
c. 13 percent of the proceeds, if the matter is successfully later than that.
19The total fees payable to the plaintiffs’ counsel and its funder therefore range from 30 to 38 percent of the potential litigation proceeds in the action. The agreement does not require any separate reimbursement of the funder for the legal fees or the cost of disbursements that it funds.
20The litigation funding agreement may be contrasted with the funding provisions of the Class Proceedings Fund established under the Law Society Amendment Act (Class Proceedings Funding), 1992, SO 1992, c 7. The Fund will in some cases indemnify representative plaintiffs for adverse costs awards in return for 10 percent of the proceeds of the action plus reimbursement of any disbursements that it funds. The Fund does not pay anything to counsel for legal fees.
21For completeness and convenience, I include in the Appendix the text of several sections of the litigation funding agreement that were reviewed by Perell J., many of which are mentioned below. At risk of over-generalizing, most of these clauses can be seen as a recitation of what might be implicit or explicit terms of a normal retainer agreement between lawyer and client. By reciting them in the litigation funding agreement, the funder becomes a party to that relationship in that it obtains the entitlement to act upon and enforce rights that otherwise exist solely between the lawyers and their clients. While it can be fairly seen that the extension of these covenants to the funder is a manner of articulating the risk that it agrees to undertake and establishes the allocation of the benefits and burdens among the parties, Perell J. expressed concern with these clauses.
22Justice Perell found that these and other provisions bely “any assurances of the Houles having autonomy and having control and carriage over the action.” Rather, he found that the agreement gives the impression that the Houles and their counsel have promised to prosecute the action “as much, if not more, on behalf of Bentham than on behalf of the Class Members.” Justice Perell continued:
[91] Thus, for example, under clause 7.16 of the Litigation Funding Agreement, the Houles promise to use their best efforts to win the action and to collect any proceeds in cash as soon as practicable (see also clause 5.3). Further examples of promises that connote or denote that the Houles are working on behalf of Bentham and that negate the idea that they are in control of their own litigation are: (a) clause 7.1.1, where the Houles promise to conduct the action in a way that avoids unnecessary costs and delay and where they promise to provide full, honest and timely instructions to Class Counsel; (b) clause 7.1.2, where the Houles promise to co-operate with Class Counsel and to devote sufficient time and attention to conclude the action successfully; (c) clause 7.1.3, where the Houles promise to follow all reasonable legal advice given by Class Counsel in relation to the claims (see also clause 5.3); (d) clause 7.1.6, where the Houles promise to remain parties to the action; (e) clause 8.1.1, where the Houles promise and represent to Bentham that they will not take any steps that would adversely affect the claims or the recoverability of the Litigation Proceeds; and (f) clause 10.2, where the Houles promise to notify to Bentham of any event or circumstance that could reasonably be expected to give rise to a termination right. All of these promises are offensive to the idea that the Houles are dominus litus.
[92] In a similar way, the promises extracted from Class Counsel, which promises are made to Bentham about how Class Counsel should conduct the action denigrate the notion that the Houles are the genuine client. Rather, clauses 7.2.1, 7.2.2, 7.2.3, 7.2.5, 7.2.12, and 7.2.13, suggest that Class Counsel are serving the interests of Bentham with respect to the conduct of the action.
23Part 10 of the litigation funding agreement gives Bentham the right to terminate the agreement on ten days’ notice, if, in its sole discretion, it determines that there is a breach of any of the terms of the agreement. In addition, it is entitled to terminate the agreement unilaterally if:
10.1.5 - Bentham, acting reasonably, ceases to be satisfied in relation to the merits of the Proceedings; or
10.1.6 - Bentham reasonably believes the Proceedings or the Claims are no longer commercially viable.
24The importance of these two clauses is that they give the funder the right to terminate the agreement without any breach having been committed by the representative plaintiffs. Rather, the funder is entitled to act if it determines - well along the litigation path - that the risk it initially undertook has not panned out as well as hoped. There are no similar clauses entitling the representative plaintiffs to alter the funders’ entitlements if later in the litigation the likelihood of success increases and the funder’s risk is lessened.
25If Bentham terminates the funding agreement, it loses its right to receive a fixed percentage of the proceeds. Instead, it will only be entitled to be repaid from any recovery the amounts that it actually funded. There is uncertainty as to what happens to the funder’s obligation to indemnify the Houles for adverse costs orders on termination of the funding agreement. Under the terms of the agreement, it appears that the funder is only liable to indemnify the Houles for costs orders actually made before the agreement is terminated. If this is so, then if the funder believes that the case might be lost, it could terminate funding prior to the final costs award being made for the costs of the full action (including costs accrued well before the date of termination). The funder submits that it is not its intention to leave the Houles or any plaintiffs high and dry if a termination were to occur. I accept that submission at face value for the purposes of this appeal. If the agreement is brought forward again, this might be an area for clarification.
Justice Perell’s Decision
26Justice Perell commenced his legal analysis by correctly setting out the current state of the law of champerty as follows:
[49] In Ontario, up until relatively recently, third-party funding agreements would have been regarded as illegal as maintenance or champerty, which is a particular kind of maintenance, namely maintenance of an action in consideration of a promise to give the maintainer a share in the proceeds or subject matter of the action: Buday v. Locator of Missing Heirs Inc. (1993), 1993 961 (ON CA), 16 O.R. (3d) 257 (C.A.) at pp. 262-63.
[50] In Ontario, the law of champerty and maintenance still applies under the ancient An Act Respecting Champerty, R.S.O. 1897, c. 327. The public policies supporting the torts of champerty and maintenance are the goals of discouraging unnecessary litigation prompted by a non-party stirring up strife in order to profit from it and of preventing a non-party from meddling and perhaps controlling somebody else’s litigation.
[51] The elements of a claim of champerty are: (1) the defendant for an improper motive (officious intermeddling) provides assistance to a litigant in a lawsuit against the plaintiff; (2) the defendant has no personal interest in the lawsuit; (3) the defendant's assistance to one of the litigants is without justification or excuse; and, (4) the defendant shares in the spoils of the litigation: Smythers v. Armstrong (1989), 1989 4301 (ON SC), 67 O.R. (2d) 753 (H.C.J.); Trendex Trading v. Credit Suisse, [1982] A.C. 679 (H.L.); Oseco Inc. v. Jansen (1989), 1989 4068 (ON SC), 71 O.R. (2d) 151 (H.C.J.); George Biro Real Estate Ltd. v. Sheldon, 1964 130 (ON SC), [1965] 1 O.R. 49 (H.C.J.).
[52] The law in Ontario, however, has developed and evolved so that supporting another's litigation is not categorically illegal and, thus, contingency fees and third-party funding of litigation became a possibility. The policy change was the recognition that the financial assistance of a third-party funder might be the only means for a litigant to achieve access to justice.
27After reviewing the case law, Justice Perell summarized issues that courts have articulated when considering approving third-party funding agreements:
[63] A review of the above case law reveals that to approve a third-party funding agreement, the court must be satisfied that: (a) the agreement must be necessary in order to provide access to justice; (b) the access to justice facilitated by the third-party funding agreement must be substantively meaningful; (c) the agreement must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of the defendants; and (d) the third-party funder must not be overcompensated for assuming the risks of an adverse costs award because this would make the agreement unfair, overreaching, and champertous: The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, supra; Bayens v. Kinross Gold Corporation, supra; and Berg v. Canadian Hockey League, supra.
[64] Further, a review of the above case law reveals that the third-party funding agreement must not interfere with: the lawyer-client relationship; the lawyer’s duties of loyalty and confidentiality; or the lawyer’s professional judgment and carriage of the litigation on behalf of the representative plaintiff or class members: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra. The representative plaintiff must retain the right to instruct and control the litigation and the representative plaintiff must not become indifferent in giving instructions to class counsel in the best interests of the class members: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra.
28In the ensuing paragraphs Perell J. listed several additional elements that should be considered on a motion to approve a third-party litigation funding agreement. Justice Perell synthesized all of those elements and the relevant case law and set out the test for the approval of third-party litigation funding agreements as follows:
[71] The general test for determining whether to approve a third-[party] funding agreement is that the agreement should not be champertous or illegal and it must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of the defendants. The underlying or overarching issue presented by the Houles’ motion for approval of the tripartite agreement among the Houles, Class Counsel, and Bentham is that of determining what principles or what factors should the court use to decide whether to approve a particular third-party litigation funding agreement.
[72] I say a “particular” third-party funding agreement because deciding whether to approve a third-party funding agreement will depend upon the particular circumstances of each case. A fact-based analysis is required because what is acceptable; i.e. what is approvable in one case may not be approvable in another case. Each and every class action raises its own concerns.
29Perell J. was clear that the balancing of what is fair and reasonable is an exercise of discretion that will turn on the particular facts of each case. In each case the court will consider which factors are most apt on the facts. Justice Perell then turned his attention to the particular factors that he found persuasive in this case.
Necessity of Third-Party Funding
30The appellants take exception to Justice Perell considering as a factor in the approval balance the necessity of third-party funding. Justice Perell called this the “paramount factor.” Ms. Waddell submits that given the acceptance of class proceedings over the past 20 years, the only thing that should have to be said to show that third-party funding is necessary in a proposed class action is that counsel will not fund an indemnity for adverse costs rulings as they have said in this case. Anything more, she argues, risks an incursion into the lawyer client relationship and threatens to require disclosure of privileged information.
31Justice Perell was satisfied that this was a case in which third-party funding was necessary to provide access to justice, so there is really no need for this court to consider the matter further especially since the danger highlighted by counsel for the appellants did not occur. No disclosure of privileged information was required by Perell J. or formed any part of his assessment of the applicable test generally. The appeal is from the order rather than the reasons. In keeping with the cautious and incremental development of the common law, the question of whether the necessity element is paramount or should be relaxed will have to await a case in which the issue factors directly into the outcome.
The Motive of the Funder – The Risk of Overcompensation
32The parties all agree that under the law of champerty an important component of the assessment of an agreement that gives a share of litigation recovery to a third-party is the fairness of the amount of that payment. Under the law of champerty, this falls under the rubric of the assessment of the motive of the funder. An abusive funder asks for too much. So, what is a fair quantum in this case?
33There are a few places to look for guidance as to what is already considered fair recompense in this context. The Fund is a statutory funder. When it provides an indemnity for adverse costs awards, it takes 10 per cent of the recovery plus disbursements. In addition, case law has developed around counsels’ contingency fees so that some judges now accept presumptively that counsel can ask for 33 per cent of the plaintiffs’ recovery in return for undertaking the risk of funding the case. Cannon v Funds for Canada Foundation, 2013 ONSC 7686, at para. 11. In a commercial matter that did not involve a class action, a judge rejected a proposed funding agreement while hypothesizing that in the right case up to 50 per cent recovery might be appropriate in return for third-party funding. Schenk v. Valeant Pharmaceutical International Inc., 2015 ONSC 3215 at para. 17.
34Counsel referred us to several cases where third-party funding agreements have been approved in class actions to date. All involve proposed recoveries of 10 per cent or less. No case has approved or considered a recovery of 20 to 25 percent for a third-party funder. However, no third-party funder has proposed to fund the payment of 50 per cent of counsel’s fees as is proposed in this case.
35Justice Perell was concerned that the proposed share of the plaintiffs’ future recovery that is allocated to Bentham under the agreement may be too high. At para. 84 of his decision he wrote:
In the case at bar, Bentham will be rewarded more than the Class Proceedings Fund levy, and unlike the cases where third-party funding agreements have been approved, Bentham’s recovery is uncapped and its eventual recovery may be unfair and disproportionate because the recovery cannot be adjusted by the scrutiny of court approval. The eventual value of the contingency fee might be unfair and disproportionate for a variety of reasons; visualize: (a) a high reward to the third-party funder could be unfair, if it turned out that the risk was overestimated or not real and there was a provident settlement or judgment against St. Jude of which the third-party funder took a disproportionately high share; or (b) a high reward to the third-party funder could be unfair, if it turned out the risk was real, but the Houles or Class Counsel caved to the pressure and there was an improvident settlement that essentially cheaply licensed the wrongdoing without providing meaningful compensation to the Class Members or meaningful behaviour modification of St. Jude.
36To protect the plaintiffs and the administration of justice from the risk of allowing champertous overcompensation, Justice Perell exercised his discretion to pre-approve a recovery of 10 percent and to reserve until the end of the case the determination of the quantum of any further compensation. He reasoned as follows at para. 87 of his decision:
The answer does not involve altering the contingency fee scheme of the Litigation Funding Agreement. Rather, the answer is for the court to treat Bentham in the same fashion as it would treat the Class Proceedings Fund and to make the balance of Bentham’s share of the contingency fee subject to subsequent court approval. In other words, the balance of Bentham’s contingency fee claim would be treated in the same way as Class Counsel’s share of the contingency is treated. Under this approach, the right to a contingency fee agreement is approved, a part of the contingency fee is pre-approved (10%), but the eventual amount of the fee will have regard to the actual outcome of the case. In this way,
Bentham is protected for taking on the risk (because it will not do worse than the Class Proceedings Fund would have done) and the Class Members are protected from overcompensating Bentham because the court must approve the balance of the contingency fee.
37The appellants and Bentham argue that Perell J. erred in equating the risk being undertaken by the funder in this case with the risk undertaken by the Fund. Here Bentham has agreed to pay far more than the Fund would pay and its recovery includes disbursements whereas the Fund is repaid for disbursements on top of its 10 percent share of the plaintiffs’ recovery. More fundamentally, the appellants and Bentham argue that Perell J. erred in principle by failing to approve the full fee at the outset as was done by Strathy J. (as he then was) in Dugal v Manulife Financial Co., 2011 ONSC 1785.
38In McIntyre Estate v. Ontario (Attorney General), 2002 45046 (ON CA), the Court of Appeal considered the assessment of the fair compensation of lawyers under contingency fee agreements. At para. 34, the Court noted that the fundamental aim of the law of champerty is to protect the administration of justice from abuse. The Court held that the risk of abuse can be abated by the adoption of an appropriate regulatory scheme. The court held:
[79] The fee structure in the proposed agreement is related to the amount of money that is recovered on behalf of the respondent. The fee structure has no relationship to the amount of time spent by the lawyers, the quality of the services provided, the level of expertise of the lawyers providing the services, the normal rates charged by the lawyers who provide the services, or the stage of the litigation at which recovery is achieved. Under the terms of this agreement, the respondent would be obliged to pay the lawyers the same amount of fees if the litigation is settled early in the process as she would if the same amount of money was recovered after a lengthy trial and appeal. In addition, the agreement raises the prospect of double recovery for the lawyers [page282] -- fees from the respondent as well as costs recovered from the defendants in the action. There is no way of telling at this point whether
the fees that would be paid to the lawyers under this proposed agreement would be reasonable and fair. When an agreement like this one is structured so that the fees are based on a percentage of the recovery, the determination of whether the fees are reasonable and fair will normally have to await the outcome of the litigation. [Emphasis added.]
39The appellants and Bentham argue that Perell J. erred equating the assessment of the fairness of fees for a third-party funder with the assessment of lawyers’ fees. As noted by the Court of Appeal, the assessment of the fairness of lawyers’ fees requires a consideration of the amount and quality of effort they performed for the client. There is also a risk reward built into a contingency agreement reflecting the contingent outcome. Lenders, by contrast, generally do not provide any services beyond the initial decision to lend and the advance of the funds as agreed.
Their remuneration does not turn on a later assessment of how much they did or how well they did it. The appellants and Bentham refer to the decision of Strathy J. in Dugal at para 33 where he held:
(g) While it is true that one may not be able to say, with absolute certainty, that there is no possibility that the funding agreement might result in a "windfall" recovery to CFI, the possibility of such a recovery, when balanced against the probability of protracted litigation and a somewhat speculative result, is a factor that a commercial risk-taker must take into account in determining the amount of its compensation. The assessment of the risk can always be defined with greater precision when more information is available, but the fact of the matter is that the plaintiff asks for a decision now. When an insurer sets a life insurance premium, it does not say to the assured"We'll wait and see how you are doing in a couple of years." It fixes the premium based on the current state of knowledge, recognizing that the applicant may die the next day or live to be 101.
40Rather than analogizing to lawyers’ fees and assessing the risk at the end of the case as in McIntyre, Strathy J. likened a third-party funder to a life insurer charging a premium at the front end. In Dugal, the third-party funder was to receive 7 per cent of the plaintiffs’ recovery subject to an upper limit in return for an indemnity for adverse costs orders and funding of $50,000 towards disbursements. The funder in Dugal did not fund 50 per cent or any of counsels’ legal fees as is proposed in this case. Neither was its potential recovery unlimited with no cap as is the case here.
41Mr. Zarnett argues forcefully that Perell J. failed to give enough weight to the fact that independently advised parties made a commercial decision at arm’s length. That, he argues, should provide objective satisfaction that the proposed loan terms are reasonable. While that may well be the case in a standard commercial loan, here, the court is concerned not just for the immediate parties but for some 8,000 absent parties whose interests are at play. In addition, this loan is funding legal fees that can only be assessed at the end of the case. The fees cannot be made non-reviewable by shifting payment and the contingent outcome to a third-party lender.
42The appellants and the funder argue that lenders need certainty of return to base their decision to lend. Yet in light of the nature of the proceeding, Bentham has not agreed to fund its loan with certainty. In paras. 10.1.5 and 10.1.6 of the funding agreement, it reserves to itself the right to reconsider the risk of advancing funds well into the litigation. Moreover, even if the lender’s proportion of recovery was fixed, its effective rate of return on the loan cannot be assessed until the uncapped quantum of recovery is settled upon or ordered at the end of the case. One cannot identify a maximum potential payment at the outset and consider its fairness as was the case with the capped recovery proposed in Dugal. This proposed third-party funding agreement and the subject matter litigation simply do not allow for certainty of input or outcome as between the parties to the loan. Furthermore, unlike other commercial arrangements, there are broader interests at play with third-party funding agreements that the court must weigh and consider that are fundamental to protecting the administration of justice from harm. It is not an error in principle or clearly wrong to insist that third-party lenders sacrifice some certainty, while at the same time being assured of a certain percentage of the recovery, so as to protect vulnerable non-party class members from abuse and consequent damage to the administration of justice.
43I do not see anything in Dugal that bound Perell J. to approve a rate of recovery at the outset. Justice Strathy held that on the facts of the capped and much more modest recovery proposed before him, unconditional approval was appropriate in that case. Justice Perell recognized a similarity to the Fund but allowed for differences to be established once the outcome is known. While the Court of Appeal was speaking about lawyers’ fees in McIntyre, its assessment that determining the reasonableness of recovery needs to await the outcome applies with equal force to a loan being used to fund legal fees whose uncapped repayment may vary from a modest to a disproportionate rate of recovery.
44It is agreed by all that the motive of the funder is an element in assessing whether the proposed agreement violates the laws of champerty. All also agree that assessing motive includes a consideration of the fairness and reasonableness of the proposed fees to be paid to the funder. In this case that assessment involves some room for hindsight for the reasons stated. It cannot therefore amount to an error in principle for Perell J. to have found that, on the facts of this case, assessing the fairness and reasonableness of the full compensation to be paid to the third-party lender could only take place once the outcome is known.
The Litigation Management Covenants
45As has been discussed, Perell J. identified several covenants that Bentham required to manage its risk by ensuring that the litigation was conducted in an expected and defined manner. Most of the clauses express statements that restate the obvious desire of the plaintiffs and their lawyers to pursue an efficient, affordable, and proportionate resolution of the proceeding. Justice Perell was less concerned with the substance of the commitments than with the fact that by making them part of the funding agreement, Bentham obtained a contractual right to enforce obligations between lawyers and their clients. While the terms of the agreement eschew any notion that the funder is to control the litigation, it cannot be denied that were the funder to threaten to withdraw its funding based upon a perceived breach of any of these covenants, it would have an effective weapon to enforce its view about the conduct of the litigation regardless of whether its view is shared by the representative plaintiffs or their lawyers.
46The appellants and Bentham argue that the litigation funding agreement has a ten-day notice period during which the appellants could run to court if they disagree with an assertion of breach by the funder. However, it is not at all clear that absent a specific basis to do so in the contract, the court has the ability on a motion in a class action to weigh and make a final determination in respect of an allegation of breach of contract between representative plaintiffs and a third-party. Moreover, clauses 10.1.5 and 10.1.6 do not turn on allegations of any breach of contract by the representative plaintiffs. Rather, they simply allow Bentham to put the agreement to an end based on its own subjective determination of the status of the case subject to a test of reasonableness. Even if there is a procedural mechanism to review the issues between the Houles and Bentham under s. 12 of the Class Proceedings Act, 1992, for example, there is little for the court to review under those two clauses. Absent transparent unreasonableness, they simply allow the funder to determine to effectively end the litigation regardless of the views of the representative plaintiffs, their lawyers, or the court.
47Mr. Zarnett argues that the court is to look at the agreement as a whole. It should not be considering individual clauses to see if each may allow illicit intermeddling. Rather, he argues that one should consider the overall beneficent purpose of the agreement and recognize the commercial realities inherent in funding a massive and risky undertaking like products liability litigation. This is a case where the representative plaintiffs have serious claims - claims that they need funding to advance. They have obtained independent legal advice and their lawyers support the agreement. On this basis, Mr. Zarnett argues that Perell J. ought to have approved the agreement as presented.
48I disagree. Justice Perell assessed the impact of the litigation management clauses as follows:
[93] Therefore, in my opinion, clauses 5.3, 7.1.1, 7.1.2, 7.1.3, 7.1.6, 7.2.1, 7.2.2, 7.2.3, 7.2.5, 7.2.12, 7.2.13, 8.1.1 and 10.2. are overly broad and intrusive. These clauses interfere with the lawyer and client relationship and with the Houles’ autonomy as the genuine plaintiff of the proposed class action. The [lawyers’] Retainer Agreement reveals that much less intrusive provisions could be substituted in a way that was fair to the Class Members and also fair in protecting Bentham’s investment in the litigation. I direct that before the Litigation Funding Agreement can be approved the above clauses should be deleted and replaced. Corresponding amendments are also required to clause 10.4, which describes the consequences of termination.
[94] To be candid, some of these clauses in the Litigation Funding Agreement would not necessarily be offensive in other class action cases, where it actually might be preferable transparently to allow Class Counsel alone or in partnership with a third-party funder to control the litigation. In cases where the representative plaintiff has been recruited and he or she has little or no skin in the action because his or her damages are trivial, the behaviour modification goal of class proceedings might be better achieved by accepting the conspicuous involvement of a non-party who has an entrepreneurial motivation to pursue the wrongdoer. To be candid, in some cases, it is pretentious for the court to play an ostrich with its head in the sand to ignore the reality that the entrepreneurial class counsel is more interested in pursuing the wrongdoer than is the genuine plaintiff with a cause of action. The case at bar is, however, not one such case. The Houles are genuine plaintiffs, and the Class Members have good reason to pursue compensation for their injuries.
49Justice Perell was alert to the overall purpose of the agreement, the terms of the agreement, and the general place for these types of agreements and this agreement in particular in the class action space. He assessed the problem and provided an answer that in his view would satisfy his concerns:
[97] There is, however, a straight-forward answer to the problems of the termination provision in the case at bar.
[98] The answer is to make any termination subject to court approval. Under the Class Proceedings Act, 1992, the discontinuance or settlement of a class action requires court approval. In normal litigation, once a defendant has entered a defence, the plaintiff cannot withdraw or discontinue without leave of the court. The third-party funder should be treated in a similar fashion, and its termination of the agreement should be subject to court approval. In my opinion, there is nothing unfair in imposing this requirement. In this regard, it should be recalled that after its own due diligence and evaluation of the risk, Bentham undertook to provide the funding and to assume the risk in consideration of what in the case at bar is a contingency fee equal to or greater than the contingency fee for Class Counsel. Class Counsel is not able to abandon the action without approval to get off the record, and Bentham should not be in a better position. (I observe that any motion for approval to terminate should be heard by a judge other than the judge case managing the action and the motion should be heard without notice to the defendant who is not a party to the Litigation Funding Agreement.)
[99] Thus, more precisely, in the case at bar, clauses 10.1.2 (which is redundant), 10.1.5 and 10.1.6 should be deleted, and clause 10.1 should be revised to read:
10.1 By Bentham. Subject to court approval, Bentham will have the right to terminate the Agreement upon ten (10) days' written notice to Claimants from and after the occurrence of any of the following events, so long as such event is continuing at the end of the ten (10) day period:
10.1.1 Any material breach by Claimants of a provision in the Agreement;
10.1.2 The Lawyers seek to withdraw or do withdraw from the Proceedings;
10.1.3 Either of the Claimants becomes insolvent or becomes subject to any proceeding in respect of voluntary or involuntary bankruptcy, winding-up, dissolution, liquidation, arrangement or compromise with creditors, or appointment of any Person with powers similar to a receiver, and the Court does not grant an order permitting the Claimants to continue in their capacity as representative plaintiffs, or the court does not grant an order replacing the Claimants with another representative plaintiff;
50By removing the two clauses that allow Bentham to withdraw funding on its own re- assessment of risk and adding a court approval process, Perell J. was satisfied that the funder would be protected from the risks it needed to be protected against and the administration of justice would be protected from the champertous fear of officious intermeddling. Striking this balance is a difficult and sensitive exercise. Absent an error in principle or an exercise of his discretion that was clearly wrong, this court owes deference to the motion judge’s conclusions on these issues.
Summary
51The law of champerty has evolved. It no longer treats third-party litigation funding agreements as automatically unlawful. The class action industry and the court have started down the road toward defining aspects of the funding relationship that can enhance access to justice in appropriate cases. It is too early to say that every class action automatically needs a third-party funding agreement or that any particular form of agreement is always good or always bad. As the industry grows and new forms of transactions emerge, they will be considered on their merits with due input from the affected parties. The law will continue to be concerned to protect vulnerable parties whose recovery is the subject of the proposed bargain. It will continue to be concerned with the potential for harm to the administration of justice that could accrue if the court is seen to allow third parties who are not parties to the litigation to profit unduly from or unreasonably control that litigation. The common law will continue to evolve incrementally as each case comes forward.
52In this case, Justice Perell applied the proper principles and provided a roadmap to the parties if they wish to proceed under the proposed type of arrangement. His analysis discloses no error in principle and the decision that he reached is not clearly wrong.
53The appeal is therefore dismissed.
The Intervenor’s Request
54The intervenor is a business that provides third-party litigation funding in contexts other than just class actions. It asks us to limit expressly the applicability of this decision to class actions. There is no question that the facts of this case involve only the funding of a particular proposed class action under a particular third-party litigation funding agreement. In my view however, despite the intervenor’s invitation, it is not for me to say in advance how other courts might use this decision if it is ever argued before them by counsel. The precedential effect of this decision, if any, is for future counsel to argue and for future judges to decide.
Costs
55Counsel advised that they have agreed that the successful party should be entitled to its costs fixed at $10,000 all-inclusive. Therefore, the appellants and Bentham are jointly and severally required to pay costs to the respondents in that amount. The intervenor did not seek and is not entitled to costs.
F.L. Myers J.
I agree Sachs J.
I agree Mullins J.
Release Date: October 25, 2018
APPENDIX
5. PART 5 - CONDUCT OF PROCEEDINGS AND SETTLEMENT
5.1 Conduct of Proceedings and Right to Settle. Subject to the provisions of this Part 5, Claimants will have the sole and exclusive right to direct the conduct of the Proceedings and to settle the Proceedings.
5.2 Communication of Settlement Offers. Claimants will communicate to Bentham the amount and terms of any Settlement offers within one (1) Business Day following receipt of the offer, and advise Bentham of all Settlement offers proposed to be made by Claimants.
5.3 Commercially Reasonable Efforts of Claimants. Claimants undertake to use commercially reasonable efforts to prevail in the Proceedings and to collect the Litigation Proceeds as soon as practicable. Claimants further undertake to take into consideration the advice of the Lawyers when evaluating whether any Settlement offer or proposal should be made or accepted.
7. PART 7 - COVENANTS OF CLAIMANTS
7.1 Co-operation of Claimants. At all times during the term of the Agreement, Claimants will:
7.1.1. Conduct the Proceedings in a manner that avoids unnecessary costs and delay and will provide full, honest and timely instructions to the Lawyers;
7.1.2 Co-operate with the Lawyers in all material matters pertaining to the Proceedings and will devote sufficient time and attention as is reasonably necessary to prosecute and conclude the Proceedings successfully;
7.1.3 Follow all reasonable legal advice given by the Lawyers in relation to the Claims and the Proceedings in the best interests of the Class;
7.1.4 Co-operate with Bentham including by being reasonably available at Bentham's reasonable request to discuss the operation of the Agreement by phone or email or in person;
7.1.5 Provide full assistance and co-operation to the Lawyers and Bentham in relation to opposing, taxing, assessing or resolving any application for security for costs or any Defendant's Costs Order.
7.1.6 Remain party to the Proceedings until Final Resolution or Termination of the Agreement;
7.1.7 Use best efforts to prevail in and pursue the Proceedings and to collect any Litigation Proceeds in cash as soon as practicable.
7.2 Co-operation of Lawyers. At all times during the term of the Agreement, Lawyers will:
7.2.1 Conduct the Proceedings efficiently and effectively;
7.2.2 Immediately inform Bentham of any information, circumstance or change in circumstances likely to affect the Claims or any issue in the Proceedings relating to the recoverability of any Litigation Proceeds;
7.2.3 Act in furtherance of Claimants' obligations under the Agreement at all times.
7.2.4 Maintain a record of all funding provided by Bentham of which they are aware under the Agreement.
7.2.5 Use best efforts to prevail in and pursue the Proceedings and to collect any Litigation Proceeds in cash as soon as practicable;
7.2.6 Continue to act for Claimants even if the maximum amount of the Litigation Funding Amount has been reached. If the Litigation Funding Amount is exceeded, Lawyers are responsible for all Over-Budget Fees and Disbursements, which shall be paid only from the Lawyers' Return.
7.2.7 Provide to Bentham, as and when requested by Bentham, a copy of any material document or filing made or obtained in the Proceedings by way of discovery, subpoena or any other lawful means, subject to: (a) Bentham's confidentiality obligations under the Agreement, including the deemed undertaking of confidentiality applicable to Bentham pursuant to Part 6 of Exhibit A; (b) Lawyers' reasonable judgment with respect to preservation of all legal privileges of Claimants; and (c) compliance with court orders or other legal restrictions on the sharing of information.
7.2.8 Keep Bentham fully and continually informed of all material developments with respect to the Claims and the Proceedings, no less often than once every three (3) months unless waived by Bentham, subject to the Lawyers' reasonable judgment with respect to preservation of all legal privileges of Claimants.
7.2.9 Within one (1) Business Day, inform Bentham of any application for Security for Costs made by Defendant;
7.2.10 Within one (1) Business Day, inform Bentham of any Court Ordered Costs or of any circumstances which might reasonably give rise to an order for Court Ordered Costs;
7.2.11 Immediately inform Bentham and the Claimants of all Settlement offers or offers to engage in an alternative dispute resolution process received from any Defendant;
7.2.12 Promptly enter into and do all that is necessary to effect any reasonable Settlement, if, in the Lawyers' best judgment the Settlement is in the best interests of the Class, and to enforce any Settlement reached with respect to the Proceedings or the Claims;
7.2.13 Cause any Litigation Proceeds to be received or recovered as quickly as possible, promptly enter, enforce and execute on any judgment obtained in the Proceedings in all appropriate jurisdictions.
7.2.14 Receive all Litigation Proceeds into the Trust Account and comply with Part 3 of this Exhibit A.
7.2.15 Promptly pay out of the Trust Account all amounts payable to Bentham under the Agreement, once such funds are payable, in accordance with the provisions in the Key Terms pursuant to Article 3 thereof titled "Returns and Payment Waterfalls". Only once the Bentham Return and the Lawyers Return are fully paid may Lawyers pay the balance out of the Trust Account to or for the benefit of Claimants, unless otherwise ordered by the court; and
7.2.16 Provide commercially reasonable assistance and co-operation to Bentham in relation to opposing, taxing, assessing or resolving any application for Security for Costs or any Court Ordered Costs and ensure any costs order that is not an order for Court Ordered Costs that is being funded in accordance with this Agreement, is paid in accordance with its terms.
7.3 Ongoing Truth and Completeness of Representations and Warranties. Claimants' representations and warranties to Bentham in the Agreement will remain true, correct and complete at all times during the term of the Agreement.
7.4 Not a Solicitor Client Relationship. Nothing herein will create a solicitor-client relationship between Lawyers and Bentham, and it is understood that Lawyers' professional obligations are owed exclusively to Claimants.
8. PART 8 - REPRESENTATIONS AND WARRANTIES
8.1 Claimants' Representations, Warranties and Covenants. The Claimants, jointly and severally, represent and warrant to and covenant in favour of Bentham that:
8.1.1 The Claimants have not taken and will not take any steps or execute any documents which would materially or adversely affect the Claims or the recoverability of the litigation Proceeds;
8.1.2 The Claimants have not engaged and will not engage in any acts or conduct or make any material omissions, agreements or arrangements that would jeopardize Bentham's right to receive the Bentham Return in respect of the Claims or the litigation Proceeds;
8.1.3 The Claimants are not insolvent or subject to any proceeding in respect of voluntary or involuntary bankruptcy, winding-up, dissolution, liquidation, arrangement or compromise with creditors, or appointment of any person with powers similar to a receiver;
8.1.4 The Claimants disclosed or have made available to Bentham all material documentation and other Information and facts in their possession or control relevant to the Claims or the Proceedings;
8.1.5 There is no Information or facts in the knowledge, possession or control of the Claimants that is or is reasonably likely to be material to Bentham's assessment of the Claims or the Proceedings that has not been disclosed to Bentham;
8.1.6 The Claimants believe that the Claims are meritorious;
8.1.7 Except for the Proceedings, no litigation has been commenced by or against or, to the best of its knowledge, is threatened against the Claimants which may materially and adversely affect the Claims or the recoverability of the litigation Proceeds;
8.1.8 The Claimants have the full capacity to bring the Claims, pursue the Proceedings and direct the Lawyers;
8.1.9 The Claimants have not failed to disclose to Bentham any fact or fact of which they are aware that would, if Bentham had been so advised, be reasonably expected, individually or in the aggregate, to have led Bentham not to enter into this Agreement;
8.1.10 The Recitals stated on page 1of the Agreement are true and correct.
PART 10 TERMINATION
10.1 By Bentham. Bentham will have the right, in its sole discretion, to terminate the Agreement upon ten (10) days' written notice to Claimants from and after the occurrence of any of the following events, so long as such event is continuing at the end of the ten (10) day period:
10.1.1 Any material breach by Claimants of a provision in the Agreement;
10.1.2 Any representation or warranty made by Claimants in this Agreement or in any document provided at any time to Bentham in connection herewith is, in any material respect, either incorrect or misleading;
10.1.3 The Lawyers seek to withdraw or do withdraw from the Proceedings or fail to comply, in any material respect, with any of Claimants' reasonable instructions;
10.1.4 Either of the Claimants becomes insolvent or becomes subject to any proceeding in respect of voluntary or involuntary bankruptcy, winding-up, dissolution, liquidation, arrangement or compromise with creditors, or appointment of any person with powers similar to a receiver, and the Court does not grant an order permitting the Claimants to continue in their capacity as representative plaintiffs, or the court does not grant an order replacing the Claimants with another representative plaintiff;
10.1.5 Bentham, acting reasonably, ceases to be satisfied in relation to the merits of the Proceedings; or
10.1.6 Bentham reasonably believes the Proceedings or the Claims are no longer commercially viable.
10.2 Information from Claimants. Claimants will provide written notice to Bentham of any event or circumstance that could reasonably be expected to give rise to a termination right pursuant to Clause 10.l promptly (but in no event more than five (5) Business Days) after becoming aware of the event or circumstance.
10.3 By Claimants. Claimants will have the right, in their sole discretion, to terminate the Agreement upon ten (10) days' written notice to Bentham from and after a failure by Bentham to fulfill (i) Payment of part of the Litigation Funding Amount, (ii) payment of any Court Ordered Costs or (iii) payment of any Security for Costs in accordance with the terms of this Agreement, so long as such failure is continuing at the end of the ten (10) day period and such failure to fulfill payment is not the subject of a continuing dispute undertaken by Bentham in good faith.
10.4 Consequences of Termination.
10.4.1 If Bentham terminates the Agreement pursuant to any of Clauses 10.1.1 to 10.1.4 of this Exhibit A, then Bentham will continue to be entitled to the Bentham Return out of any Litigation Proceeds recovered by Claimants, paid in the order of priority provided for in Article 3 of the Key Terms.
10.4.2 If Bentham terminates the Agreement pursuant to Clause 10.1.5 or 10.1.6 of this Exhibit A, or if Claimants terminate the Agreement pursuant to Clause 10.3 of this Exhibit A, then Bentham will not be entitled to the Bentham Return but will instead be entitled to be paid an amount equal to the Expended Litigation Funding Amount out of any Litigation Proceeds recovered by Claimants, paid in the order of priority provided for in Article 3 of the Key Terms.
10.4.3 If the Agreement is terminated pursuant to Article 4.2 of the Key Terms, and no new funding agreement is entered into with Claimants' new lawyers, then Bentham will be entitled to be paid an amount equal to the Expended Litigation Funding Amount out of any Litigation Proceeds recovered by Claimants, paid in the order of priority provided for in Article 3 of the Key Terms.
10.4.4 All obligations of Bentham under the Agreement will cease on the date the Termination becomes effective, other than obligations accrued prior to that date. Such accrued obligations include:
10.4.4.1 Payment of any outstanding Legal Fees, Disbursements, Court Ordered Costs and Security for Costs payable by Bentham pursuant to the Agreement incurred up to the date the Termination becomes effective;
10.4.4.2 Payment of any court ordered Security for Costs (which, for the avoidance of doubt, relates only to Security for Costs which are ordered after the date Claimants sign the Agreement but before the date the Termination becomes effective); and
10.4.4.3 Payment of any Court Ordered Costs where the Costs Order or the obligation of the Claimants to pay Court Ordered Costs is made prior to the date the Termination becomes effective.
10.4.5 Upon any Termination, Bentham will be entitled, in order to protect its own interest in relation to the Agreement, to keep copies of the Confidential Information provided to it pursuant to the Agreement, subject to Bentham's ongoing obligations pursuant to Clause 6.1 of this Exhibit A (Implied Undertaking of Confidentiality), Clause 6.5 of this Exhibit A (Non-Disclosure of Information) and Clause 6.7 of this Exhibit A (Confidentiality Procedures).
10.4.6 The following are continuing obligations and survive Termination, subject to the further conditions set out above in this Clause 10.4 Part 6 of this Exhibit A (Confidentiality and Provision of Documents), Part 7 of this Exhibit A (Covenants of Claimants), Part 11 of this Exhibit A (Governing Law) and Part 12 of this Exhibit A (Notices).
10.5. Continued Performance. Unless and until the Agreement is terminated under this Part 10, each Party will continue to perform its obligations under the Agreement notwithstanding the existence of any dispute among the Parties.
13. PART 13 - ACKNOWLEDGEMENTS
13.2 Subject to Part 5, by executing the Agreement, Bentham acknowledges that Claimants are the sole persons with authority to direct Lawyers with respect to the Proceedings and possess the exclusive authority to make all decisions relating to the Proceedings, provided that Claimants considers Lawyers' reasonable advice with respect to any such decision.