The Court of Appeal rejects unilateral addition by a judge to an executed settlement agreement on procedural grounds only

Can a judge unilaterally “rewrite” an executed settlement agreement that approves class counsel fees by lowering the amount payable and putting conditions on those fees, when neither party agrees to the changes? In Welsh v. Ontario,[1] the Court of Appeal held that the answer is “no”; however, the Court based its decision on a procedural error rather than the substance of the motion judge’s concerns that led him to put conditions on class counsel’s fees in the first place.

This class action, commenced in 2015, was certified on consent in 2016. About 4,500 former students of three provincial schools for the Deaf claimed that the Province was negligent in its management and operation of these schools, and breached its fiduciary duties stemming from “very serious allegations of physical, sexual and emotional abuse”.[2]

The parties arrived at a settlement through mediation in late 2017, and entered into a mutually agreed upon settlement agreement. As part of that settlement agreement, class counsel, Koskie Minsky, would receive $3.75 million – 25% of the $15 million settlement fund. There was also a reversion provision: if any amounts remained after payment of the fees, damages, and costs and the claims period had ended, the remaining funds were to revert to the Province.

In finalizing the matter, there were two separate motions at play: one to approve the settlement agreement and one to approve class counsel fees. At the motion to approve the settlement,[3] Perell J. expressed serious concerns about the merits of the settlement, but nonetheless approved it because it fell “within the range of reasonableness”.

With respect to class counsel fees, Perell J. found that the fees were unfair and unreasonable because only about 10% of the class would benefit from the settlement and the settlement was “disappointing”. As such, he approved class counsel’s fees on the condition that class counsel donate $1.5 million of its fees to a charity for the Deaf (the “Donation Condition”) approved by the judge, and the balance of those fees, $2.25 million, would be subject to a proportionate reduction depending on the reversion of settlement funds to the Province that have not been taken up by class members (the “Reversion Condition”). Perell J. did not allow parties to make submissions on the matter. Class counsel appealed the fee order.

On appeal, the fee order was set aside, and the matter was remitted for rehearing before a different judge. Class counsel’s submissions related both to the substantive and procedural errors of the decision. The Province took no position on the quantum of class counsel fees, but agreed that the motion judge erred in imposing the two conditions and in not allowing the parties to make further submissions. The Crown also submitted that the Reversion Condition, in effect, directed public funds to a third party that might have reverted to the Crown. An intervenor (a class member) argued that Perell J.’s order was fair and reasonable.

Writing for the Court of Appeal, Sharpe, Juriansz, and Roberts JJ.A. held that the motion judge erred by failing to give the parties an opportunity to make submissions to address his concerns related to the class counsel fees. The Court stated that the Donation Condition had the effect of adding material conditions to an executed settlement agreement without the parties’ consent, which was a legal error. “[T]he appropriate course of action would have been for him to allow the parties an opportunity to make submissions and, if they desired to do so, agree to change the terms of the settlement in order to address those concerns and obtain approval of class counsel’s fees.”

Perhaps significantly, the Court of Appeal focused only on the technical error of not allowing submissions from the parties. It did not undertake an analysis of the reasonableness of the class counsel fees or comment on whether the motion judge was right or wrong to criticize the size of class counsel fees relative to the benefits to the class.

The Court of Appeal also did not comment on the Reversion Condition. The decision does not state that the motion judge erred by adding a Reversion Condition, which would have had the effect of reducing the funds payable to the Crown at the conclusion of the claims period. The Court only states that imposing the Donation Condition materially altered the settlement agreement.

This narrow decision was perhaps a missed opportunity for the Court of Appeal to clarify that adding any material condition onto the payment of class counsel fees that has the effect of altering an executed settlement agreement – without submissions or consent from the parties – would be a legal error. Can motion judges unilaterally add proportionate reductions to class counsel fees based on class member take-up in settlements that incorporate a reversion provision, like Perell J. did in this case? Does such a provision constitute a “material condition”? Can a motion judge add a donation condition where it would not impact any reversion to the Crown? These questions are left unanswered.

[1] 2019 ONCA 41 [Welsh ONCA].

[2]Welsh ONCA, ibid at para 2.

[3] 2018 ONSC 3217 [Welsh ONSC].

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