In my view, the increasing recognition of the importance of litigation funding agreements in Ontario is a rational and reasonable response to the stark realities faced by proposed representative plaintiffs in class proceedings, the so-called “sport of kings.” However, although the Ontario courts have made great strides in accepting and approving class action funding arrangements, the jurisprudence is still developing and there is still considerable progress to be made in order to even the playing field between representative plaintiffs and defendants.
On July 22, Perell approved the funding arrangement between the plaintiffs in their capacity as trustees of the Musicians’ Pension Fund of Canada and Harbour Fund II, L.P. In this class action, the Musicians’ Fund was not prepared to proceed without a contingency fee agreement and if it was exposed to adverse costs awards. Although class counsel was prepared to take on the risk of a contingency fee retainer, it was not prepared to indemnify the Musicians’ Fund from any adverse costs award.
Class counsel was already shouldering an enormous risk by fronting its time and the costs of disbursements. Given the prohibitive costs of securities litigation in Ontario, class counsel was not prepared to advance the litigation without a third-party indemnity agreement in place.
The motion for approval of the funding agreement was held in open court and the defendants were entitled to appear and make submissions. The defendants did not oppose the funding agreement provided it was a term of the order approving the agreement that Harbour would post security for costs. The court ordered Harbour to post security of costs on a staggered basis, from $300,000 before certification up to $2 million before the scheduled trial date.
In evaluating whether to grant the order approving the funding arrangement, Perell considered a number of principles, including:
• Plaintiffs must obtain court approval in order to enter into a third-party funding agreement. Third-party funding of a class proceeding must be transparent, and it must be reviewed in order to ensure there are no abuses or interference with the administration of justice;
• It is an acceptable term of a third-party funding agreement to require the third-party funder to pay into court security for the defendant’s costs (whether this should be a necessary term in every case has not been determined in the case law);
In my view, there are several potentially problematic features associated with the framework used to evaluate whether a funding arrangement is acceptable.
First, the defendant should be excluded from the motion to approve a funding arrangement. In order for the court to determine whether the terms of a funding arrangement are fair and reasonable and is in the best interests of the class, the case management judge and class counsel should be able to engage in a frank discussion concerning the availability of funding and the strengths of the case. This discussion should properly occur in the absence of the defendant.
In contrast, where a plaintiff seeks funding from the Class Proceedings Fund, if the defendant is asked to provide written submissions to the committee, the defendant is required to consent to the discontinuance of the proceeding without costs in the event the application for funding is refused.
Furthermore, the defendant is not entitled to make oral submissions to the committee, and is not entitled to any information about, or materials from, the plaintiff’s application. In preserving the fairness and confidentiality between the plaintiffs and the fund, this process (which does not require ratification or approval by the court) stands in stark contrast to a motion held in open court to consider private funding arrangements at which the defendant is entitled to receive materials from the plaintiff and to make submissions.
Second, the court should not require a third-party funder to pay into court security for the defendant’s costs. A requirement of this nature frustrates the legislative objective of access to justice by strongly discouraging prospective funders.
There is nothing in the Class Proceedings Act or in the common law that requires the party that bears the risk of adverse costs awards in class proceedings to demonstrate his or her capability to do so. Whether the proposed representative plaintiff, class counsel, or a third-party funder has agreed to pay for any adverse costs award is a distinction without a difference — none of these parties should be required to post security for costs.
These considerations aside, the acceptance by the courts of funding arrangements between class action plaintiffs and third parties represents a boon to access to justice, one of the primary rationales animating the CPA. Given the increasingly large adverse costs awarded by the courts in class proceedings, the approval of third-party funding arrangements is necessary to even the playing field for the sport of kings.