Baroch v. Canada Cartage: The Impact of Litigation Funding Agreements on the Reasonableness of Class Counsel’s Fees

In Baroch v. Canada Cartage, 2021 ONSC 7376, Justice Belobaba provided insight into how Ontario courts may interpret the amended Class Proceedings Act with respect to assessing class counsel fees. As litigation funding becomes increasingly common in Ontario class actions, it is now a codified factor for the Court to consider when assessing the reasonableness of a contingency fee arrangement.

The Inherent Risk of Class Actions and Corresponding Contingency Fees

Class action lawsuits are risky endeavours. Ontario courts have consistently held that class counsel’s contingency fees, which can be significant, are justified by the risk class counsel undertakes.[1]

“Fair and reasonable” legal fees must be approved by the Court.[2] Prior to the amendments to the Class Proceedings Act, the criteria for “fair and reasonable” were set by common law. In Brown, Justice Belobaba held that when assessing whether legal fees were fair and reasonable, the risk incurred and the results achieved were the most important factors.[3] Justice Belobaba further observed that between the two, “risk incurred” most justifies class counsel’s fees.[4]

Ontario courts identify two main forms of risk for class counsel. The “primary risk” is the risk of non-payment.[5] Given that class actions are typically funded on a contingency basis, class counsel only get paid if they receive a favourable judgment or settle the action. If a class action is not certified, or if the action is dismissed on the merits after many years of litigation, class counsel will not receive payment for the time invested.[6] Additionally, to the extent that prosecuting the case requires disbursements, class counsel would be unable to recover those costs.

The second risk is adverse costs awards. Class counsel frequently provide the representative plaintiff with an indemnity against adverse costs awards.[7] As Justice Strathy (as he then was) noted in Dugal, it would not be rational for representative plaintiffs to pursue litigation in which the potential risk dramatically outweighed the potential reward.[8]

Ontario courts have generally held that a 33% contingency fee arrangement is presumptively valid (with settlement amounts under $40 million) based on the risk assumed by class counsel[9] and that this approach is important for access to justice by incentivizing law firms to take on class actions.[10]