Overview

Litigation funding – the provision of capital by a third-party in connection with a litigation or arbitration – is an increasingly important tool for both finance and legal professionals in Canada. Clients and law firms of all sizes – national, regional, boutique – have accessed funding in respect of valuable commercial claims.

Here are some of the economic, business, and operational rationales for using funding.

Sober Underwriting

Litigation or arbitration is a business transaction in and of itself, which requires reviewing the strengths and weaknesses against the costs and benefits. A funder undertakes an objective assessment of the investment opportunity from both a legal and business perspective. The funder's feedback on a case supplements the litigation team's take on the legal merits.

Access to Justice...

Litigation or arbitration ought to be resolved on the merits instead of on which side has more resources at its disposal. In many circumstances, a claim will die on the vine without resources behind it. Funding helps ensure that economic imbalances do not guide outcomes.

...With Flexibility

Funders commit capital based on the anticipated outcome of the particular case, not on budgetary constraints or opportunity costs. Consequently, the funded party – whether a claimant or a defendant – may engage counsel and experts of their choice regardless of ability to pay.

P&L Boost

Commercial litigation finance capital is typically not a loan. As a non-recourse investment, there is no repayment obligation and the funder is only entitled to a share of contingent proceeds. Whether the funding eliminates expenses or also provides working capital, the cashflow and accounting benefits to the funded party are substantial. Plus, the claimant should retain the lion's share of any litigation or arbitration proceeds.

For law firms, litigation funding is a form of corporate finance that is both non-recourse and non-dilutive to the partners. Often, the availability of funding converts a party without resources into a source of revenue and valuable experience for lawyers. Where a law firm has a mild or moderate appetite for risk, funding can accommodate partial contingency arrangements.

Mitigate Fee Fatigue

Many parties lose financial steam partway through the litigation or arbitration process. Funding can bridge the shortfall and keep the case going through to a final resolution. Moreover, when litigation counsel raises funding with a client the lawyers acknowledge and seek to ameliorate budgetary pain points.

Growth Capital

Every dollar of the funder's commitment is a dollar now available to the client. Not only does that show up on the P&L but the funded business can deploy that freed-up capital as it sees fit, now instead of later, and the company still gets a majority of the litigation or arbitration proceeds with little downside risk, if any.

A meritorious claim is an asset with contingent value. Canadian courts have likened such a claim to a "pot of gold".1 A funder may commit more capital than only the legal fees and expenses: a party can accelerate the process by monetizing a portion of the claim at any stage of the litigation or arbitration. That capital can then be used for any purpose including funding new business initiatives, paying down debt, or saving for a rainy day.

Expanding The Brain Trust

In addition to capital, an experienced funder offers the availability of strategic advice and reactions, if and as requested by the funded party, throughout the lifecycle of the dispute-resolution process. A reputable funder will never seek to control the funded matter.

Takeaway

Third-party funding provides many benefits to lawyers and to parties with commercial litigation and arbitration claims. Management, financial officers, and in-house counsel at all manner of organizations as well as external litigation teams ought to consider these benefits.

Footnote

1. 9354-9186 Quebec Inc. v. Callidus Capital Corp., 2020 SCC 10 at para. 11. See also Re Crystallex, 2012 ONCA 404 at para. 4.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.