Ontario Court Approves Litigation Funding Agreement Prior To Certification In Proposed Class Action

On March 21, 2011, Justice Strathy of the Ontario Superior Court of Justice released interim reasons in Dugal v. Manulife Financial Corporation1 conditionally approving a litigation funding agreement entered into between the plaintiffs and a foreign third party corporation. This is the second time that such an agreement has been considered in Ontario and the first time that one has been approved.

The plaintiffs in the proposed class action allege that Manulife Financial Corporation made misrepresentations regarding its risk management practices in public disclosure documents, which had the effect of artificially inflating the value of its stock. Subsequently, when the market became aware of Manulife's actual practices, the value of Manulife's securities plummeted, causing damages to the plaintiffs who had purchased Manulife's securities during the class period.

Prior to concluding that the funding agreement should be approved, Justice Strathy considered:

1. Whether or not the court had jurisdiction to approve an agreement where the class had not yet been certified; and

2. Whether or not a litigation funding agreement offended the law of champerty and maintenance, by making the administration of justice more easily subject to abuse.

   Jurisdiction

   In an earlier decision, Metzler Investment GMBH v. Gildan Activewear Inc.,2 Justice Leitch concluded that the court should not exercise its discretion when an action had not yet been certified and class members have not been given an opportunity to present their views.

   The court in Dugal disagreed and found that its broad jurisdiction under section 12 of the Class Proceedings Act, "to make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination" was not dependent on an action having been certified. The court took a practical approach in its analysis of this issue when it recognized that part of the court's responsibility in a class action is to protect the rights of prospective class members, where the most important right is the right to advance a class proceeding.

   Thus, Justice Strathy concluded that to postpone the decision to after the certification hearing and seek the views of all class members, could well result in the end of the proceeding, because the plaintiffs would not be able to withstand an adverse costs award on certification.3 Accordingly, noting that the funding agreement in this case was at least acceptable to a...