Ontario class counsel are increasingly entering into third party funding arrangements to hedge against the risks of adverse costs awards. Though the concept of third party funding remains a "work in progress", the current state of the practice was recently reviewed and summarized by Justice Perell in Bayens v. Kinross Gold Corporation, 2013 ONSC 4974.
The Kinross proceedings involve a securities market misrepresentation claim by trustees of the Musician's Pension Fund of Canada (the "Pension Fund"). Though counsel for the plaintiff agreed to accept the retainer on a contingency basis, they were not prepared to indemnify the Pension Fund against adverse costs awards in the class proceeding.
After an application for funding was rejected by the Class Proceedings Fund of the Law Foundation of Ontario, class counsel approached an established private litigation funding group headquartered in the United Kingdom, Harbour Litigation Funding Limited ("Harbour"), with experience in litigation investments. Harbour agreed to indemnify the Pension Fund against adverse costs awards up to $1 million on the motions for certification and leave to commence a secondary market securities claim and up to a further $5 million in respect of adverse costs arising from a common issues trial. In exchange, Harbour is entitled to receive 7.5% of any net recovery if the action is settled prior to certification or 10% of the net recovery if the action is resolved thereafter.
Among other things, the Class Proceedings Act, 1992 is intended to enhance access to justice in circumstances where there are inadequate economic incentives for individual plaintiffs to proceed. Though the upfront cost of retaining counsel is the most fundamental barrier to the commencement of a class action, the risk of an adverse costs award is a further barrier that will almost always overwhelm the prospective rewards for a representative plaintiff. The traditional workaround is for class counsel to accept the matter on a contingency basis and to assume the risk of an adverse costs award. However, the prospective upside of a class action does not always outweigh the risks of an adverse costs award. This is particularly true in circumstances where, as in the Kinross proceedings, the claim involves complex securities market misrepresentation claims where the quantum of an adverse costs award could be in the millions.
Although the legislature has taken some steps to mitigate the prospect of an adverse costs award (through the establishment of the Ontario Class Proceedings Fund and by providing Judges with statutory discretion to consider costs in light of the class context), the risk of an adverse costs award continues to threaten the viability of some class proceedings before they even reach the pleadings stage. In these types of circumstances, third party indemnity agreements provide a means of mitigating the risk of an adverse costs award in exchange for a stake in the plaintiff's recovery, if any.
In Kinross, Justice Perell reviewed the terms of the proposed third party agreement and made the following general observations, among others:
third party funding agreements are not categorically illegal on the grounds of champerty or maintenance;
plaintiffs must obtain approval before entering into third party funding agreements;
third party funding agreements must be promptly disclosed to the court and cannot come into force without court approval;
to be approved, the third party agreement must not compromise or impair the lawyer / client relationship or the lawyer's professional judgment;
to be approved, the third party agreement must not diminish the representative plaintiff's rights to instruct and control the litigation;
before approving a third party agreement, the court must be satisfied that the agreement is necessary to provide access to justice; and,
before approving a third party agreement, the court must be satisfied that the agreement is fair and reasonable to the class; and,
it is acceptable to require the third party funder to pay into court security for the defendant's costs.
The third party funding agreement in Kinross was approved without opposition from the defendants. Justice Perell noted that the lack of opposition was linked to the class plaintiff having been ordered to post security for the defendant's costs in that case.
Though the practice is still in its infancy, courts are aware that third party funding could significantly affect the risk-reward analysis of class counsel and representative plaintiffs. One question to ask is whether courts should, in assessing fees, consider whether class counsel has assumed the risk of an adverse costs award or whether they have offloaded that risk to a third party? Given that the cost of third party funding is paid from the class' recovery, the willingness of counsel (or lack thereof) to expose itself to the risk of an adverse costs award would seem to merit some judicial consideration in the assessment of counsel's fees.
In the interim, the continuing message from Ontario courts is that class counsel should tread lightly in this area and only enter into third party agreements where outside funding is truly necessary.