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Canadian court decisions may cut costs, class actions

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OTTAWA—Canadian companies and their insurers should gain some protection from the costs of fighting class action suits and from frivolous class action suits in Quebec as a result of two recent court decisions, experts say.

The court rulings are expected to decrease Canadian organizations' susceptibility and financial exposure to class action lawsuits by eliminating "risk premium" payments, also known as "cost premium" payments, to plaintiff lawyers in Ontario that take on cases where there is a risk that their fees may not be paid and raising the threshold for class action certification in Quebec, widely regarded as Canada's most plaintiff-friendly jurisdiction.

In Walker vs. Ritchie, the Supreme Court of Canada in Ottawa overturned a lower court's order that a losing defendant's insurer make a payment to the plaintiffs' lawyer, which was payable in addition to their legal fees. The additional fee was intended to reward the plaintiff lawyers for taking a case involving a poor plaintiff that began before Ontario permitted contingency fee arrangements and when there was a risk that they may not be compensated for their work.

According to the Oct. 13 ruling, however, the risk of nonpayment was not a relevant factor in determining the legal cost award that should be paid by the losing party under Ontario's "loser pays" legal system.

The decision overturns an increasingly common practice by Ontario judges to award risk premiums on top of the award of regular legal costs, lawyers say.

The Walker case was appealed to the Supreme Court by a unit of Zurich Insurance Co., which was ordered by the trial judge to pay the cost premium to the plaintiffs' lawyer. While the dollar amount, $192,000 Canadian ($170,496), was not a significant figure for Zurich, the potential for cost premiums being awarded in other cases was sufficient reason for the insurer to appeal the award, said Earl Cherniak, a partner with Lerners L.L.P. in Toronto who represented Zurich. "It was a very serious problem for insurance companies," he said.

A Zurich North America spokesman in New York said the company was pleased with the court's decision.

In its ruling, the Supreme Court also noted that awarding cost premiums on top of damage awards and regular lawyer fees raised the possibility that defendants would be pressured to settle cases even if they had solid defenses, which would in turn encourage plaintiffs to pursue claims with little merit.

Although the case involved a personal injury dispute, it has significant implications for class action disputes, legal experts say. Since the Supreme Court ruled that it was inappropriate to award cost premiums in a personal injury case, the court would be less likely to think it was appropriate to award such premiums in a class action lawsuit because of the compensation mechanisms featured in the province's class action legislation, said Mark Gelowitz, a partner in the litigation department of Osler, Hoskin & Harcourt L.L.P. in Toronto. "Given what the Supreme Court said in Walker, it seems unlikely they would take a different view in the class action context," he said.

The Walker decision will affect cases that were in the court system before the contingency fee law was passed.

The first cost premium awarded in a class action lawsuit came in a securities case, Kerr vs. Danier Leather in May 2004, when the plaintiff lawyers were awarded $1 million Canadian ($888,889). The decision to award a cost premium in a class action lawsuit raised significant concerns for defense lawyers, their clients and their insurers.

"I don't think it was a concern that it would become automatic, but I think it was a concern that (cost premiums) could be available at all," said Gordon McKee, a partner in the litigation department at Blake, Cassels and Graydon in Toronto.

The Ontario Court of Appeal overturned the Danier Leather decision due to the trial judge's incorrect analysis of the company's disclosure obligations (BI, Jan. 2). While not ruling on the decision to award a cost premium, the Court of Appeal said it doubted that a premium could be properly awarded in a class action proceeding because there are other mechanisms to deal with the risk of litigation.

Meanwhile, a Quebec Court of Appeal decision raised the threshold for certification of class actions.

In Bouchard vs. Agropur Cooperative, the court ruled that a plaintiff that wants to initiate a class action against several defendants must have a cause of action against each defendant. The ruling was the first time the province's Court of Appeal addressed the issue of whether a plaintiff could launch a class action against several companies in a given industry even though the claimant only did business with one of them.

"It's certainly great news for corporate defendants," said Yves Martineau, a partner in the litigation group of the Montreal office of Stikeman Elliott, who represented one of the defendants in the case. The plaintiffs have 60 days to seek permission to appeal the case to the Supreme Court.

Before the decision, Quebec's lower courts had been split on whether a plaintiff had to have legal standing to sue each individual defendant or if a claim could proceed simply on the basis that the plaintiff had a contractual relationship with at least one of the defendants and that they engaged in similar practices.

Under the Court of Appeal ruling, "you can't just hold an entire industry hostage," said Silvana Conte, a Montreal-based partner in Osler's litigation department and co-chair of its national class actions specialty group.

Quebec became a popular jurisdiction for plaintiffs' lawyers when the province amended its code of civil procedure in January 2003 to simplify the class action certification process. The amendments included the removal of the need for a class action plaintiff to file any evidence in support of certification and the elimination of an automatic right to cross-examine a plaintiff in advance of a certification hearing--instead, defendants had to ask a judge for permission to cross-examine a plaintiff and that was infrequently granted.

"It became a quasi-slam dunk for plaintiffs to get class actions certified in Quebec," said Robert Torralbo, a partner and the chair of the litigation group at Blake, Cassels and Graydon in Toronto.

In the Bouchard decision, the Court of Appeal reminded lower court judges that allowing a class action defendant to cross examine the plaintiff is important because it can help determine whether a claim is frivolous, whether the class has the legal standing to sue or whether the plaintiff adequately represents the class, Ms. Conte said. "It will be interesting to see what's going to happen from now on, but I think the court realized that the amendments needed to be reined in a little," she said.

The decision may level the playing field by broadening the line of defense for class action respondents, lawyers say. "Basically, I think our certification rules will be more fair to defendants if this message from the Court of Appeal is well-received," Mr. Martineau said.

The decision brings Quebec more in line with other provinces although it still has a relatively low certification threshold compared to other Canadian jurisdictions, lawyers say.

Walker vs. Ritchie (Supreme Court of Canada 45) (31001), Oct. 13

Bouchard vs. Agropur Cooperative et al. (Quebec Court of Appeal) 200-09-005067-050, Oct. 18