In the most recent Ontario decision on third-party litigation financing, Justice Perell provides further guidance concerning the circumstances in which such funding arrangements will receive court approval.

In Houle v. St. Jude Medical Inc., 2017 ONSC 5129, Bentham IMF Capital Inc. (Bentham), an Australian-based litigation financing firm, entered into a financing agreement with Mr. and Mrs. Houle, plaintiffs in a proposed class action alleging negligent manufacture and distribution of implantable cardiac defibrillators and failure to warn of rapid, premature battery depletion.

Pursuant to the agreement, Bentham committed to pay, on a non-recourse basis:

  1. the disbursements incurred by class counsel up to a prescribed amount, after which amount class counsel would fund the disbursements;
  2. any costs assessed against the Houles;
  3. any security for costs; and
  4. 50% of the reasonable docketed time of class counsel up to a prescribed maximum amount.

The architecture of Bentham’s contingency fee was straightforward: the later the stage at which the action is resolved, the larger the contingency fees that Bentham would receive. Bentham’s payout ranged from 20% to 25% of the proceeds depending upon when the matter was resolved. A retainer agreement with class counsel mirrored those terms of the litigation funding agreement, also providing for a higher fee recovery for class counsel the later the case is resolved.  Combined, Bentham and class counsel’s contingency fees ranged between 30% to 38% of the litigation proceeds.

Justice Perell reviewed existing case law concerning the circumstances in which third party funding agreements have been approved in the class action context.  According to Justice Perell, in general, such agreements must not be champertous or illegal, and must be a fair and reasonable arrangement that facilitates access to justice while protecting the interests of the defendants.  In the class action context, such arrangements may be justified as a matter of expediency.

The principles that must be satisfied in order for a court to approve a third-party funding agreement were enumerated as follows:

  1. The third-party funding agreement must have procedural, technical, and evidentiary requirements that enable the court to scrutinize the agreement. This includes evidence of the plaintiff’s receipt of independent legal advice about the agreement, disclosure to the court of the retainer agreement with class counsel and the third party funding agreement, and the willingness and ability of the third-party funder to post security for costs;
  2. The third-party funding must be necessary;
  3. The third-party funder must make a meaningful contribution to access to justice or behaviour modification;
  4. The litigation funder must not be overcompensated given the particular circumstances of the case for assuming the litigation risks, in whole or in part. Justice Perell characterized this as the “penultimate-predominant factor”, because over-compensation moves the funder into the role of a champertor.
  5. The funding agreement must not interfere with the lawyer-client relationship, including retention by the plaintiffs of autonomy, control and carriage of the litigation; and
  6. The funding agreement cannot be not illegal on some basis independent of champerty and maintenance.

Upon review, the Bentham funding agreement failed the fourth and fifth conditions. It ran the risk of overcompensating Bentham and interfered with the lawyer-client relationship.

In determining that Bentham ran the risk of being overcompensated, Justice Perell took issue with the fact that Bentham’s recovery was uncapped, leaving open the possibility that Bentham could be rewarded more than the Class Proceedings Fund levy and that its ultimate recovery may be unfair and disproportionate because it could not be adjusted by the scrutiny of the court.

In addition, various provisions of the funding agreement were found to unduly interfere with the lawyer-client relationship and the Houles’ autonomy as the genuine plaintiffs, leaving the impression “that the Houles and Class Counsel have promised to prosecute the proposed class action as much, if not more, on behalf of Bentham than on behalf of the class members”.  His Honour noted, however, that certain of the clauses that were objectionable in this case would not necessarily be offensive in other class actions, such as where the representative plaintiff had been recruited and had little “skin in the game”, because his damages were trivial and the behaviour modification goal might be better achieved by accepting the involvement of a non-party with an entrepreneurial motivation to pursue the wrong-doer. This was not such a case.

While the agreement was not approved by the court, Justice Perell indicated that he would be prepared to approve it if the objectionable features that he identified were addressed.

The author would like to thank Saam Pousht-Mashhad, student-at-law, for his contribution to this article.