Third-party funding of class actions is gaining traction in Ontario, following a trend that began in Australia about a decade ago.
The move sees a funding organization help cover the costs of class action litigation and indemnifies plaintiffs of any costs awarded against them. In exchange, the funder receives a portion or percentage of the award in successful class actions.
A need for a funding mechanism was identified leading to the Law Foundation of Ontario establishing the Class Proceedings Fund in 1992. Nearly two decades later, private funding organizations started to make their way into the Canadian market.
“It just makes good sense as class counsel to spread the risk and, certainly from the plaintiffs’ point of view, being assured that there is somebody there that will cover off their potential cost exposure,” says Margaret Waddell, a Toronto-based class action lawyer and partner with Paliare Roland Rosenberg Rothstein LLP. “It’s very reassuring and certainly helps in providing access to justice in the sense that one of the risks in litigating is, of course, the risk of bearing an adverse cost award, which a representative plaintiff would have.”
A third-party funder was approved by an Ontario court for a class action for the first time in Dugal v Manulife Financial Corporation in 2011, and a handful have followed since. In Dugal, in exchange for guaranteeing the plaintiff’s costs, the funder was granted 7 per cent of any settlement, which the court capped at a maximum of $5 million.
Class actions funding must always be approved by the court at the outset, prior to any class proceeding, allowing the judge to vet any deal involving a third party and weigh in on the portion or percentage the funder receives in return.
The role of the commercial funders helps fill the gaps between cases supported by the not-for-profit, self-perpetuating Class Proceedings Fund, says Kevin O’Brien, a litigation partner with Osler Hoskin & Harcourt LLP. Applications made to the fund are not always successful.
Both approaches were borne by an identified need. The risk of having to pay ever-increasing awards made against a plaintiff in a failed class action or certification fell to the plaintiff’s lawyer. With award sizes increasing, there was a hesitation by lawyers to take on cases.
“And then you had real issues of access to justice because you had people who weren’t able to find plaintiff’s counsel to bring their claims forward,” says O’Brien. “Someone really needed to fill that gap.”
Outside funding offers a sort of insurance that the representative plaintiff and their lawyers will not be responsible for damages should a court decide against them. The idea is that those considering pursuing class actions will not be discouraged by the prospect that they may face a large bill should they be unsuccessful in their action.
“The economics of class actions is such that they involve risk, and this type of agreement is a way of mitigating or sharing the risk among the representative plaintiffs, the class counsel and a third party,” says Aaron Dantowitz, a Toronto partner with Stockwoods LLP. “It takes the plaintiff’s counsel off the hook as well and doesn’t put them in the position where they are having to indemnify the representative claim.
“I think it’s clear from the early cases that courts were prepared to entertain this type of agreement and to approve them on certain conditions.”
The downside is that the class gives up a portion of the recovery amount to the funder.
Third-party funding is also seen as a way to help make an otherwise unaffordable case accessible to the class.
The idea of class actions is that individual rights and interests may be vindicated collectively when litigating on an individual basis would not be worth it from a financial standpoint, says Arthur Zeilikman of Vaughan-based labour, employment and business law firm Zeilikman Law.
A law firm may invest years of human resources time as well as a great deal of money to carry a case to its ultimate conclusion.
“The funding of class actions can be extremely costly and, as such, important developments in the law may be forgone due to economic factors.
Accordingly, third-party litigation funding may provide access to justice and promote development in the law,” says Zeilikman.
Waddell observes that the process of having a third-party funder involved can have some additional benefit to the plaintiffs’ lawyers. Counsel for the prospective funder also serves as an additional set of eyes on the case and may raise additional points or questions.
“It gives you an opportunity to do that and assess those issues the funder is raising and work them through hopefully before you need to deal with them before opposing counsel. I always find it a very useful exercise to do a funding application if only on that basis,” she says.
Because third-party funders are seen as having a clear role in class actions, O’Brien believes they are here to stay. He also sees the potential for them to take on a standard form, which lays out what provisions need to be put in place so that the class members are protected.
And the message to plaintiffs’ lawyers involved in cases in which third parties are providing funding is that the lawyer does not serve two masters but continues to serve only the plaintiffs.L