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.
The process of seeking and securing funding can and should be straightforward. Getting a quick decision from a funder is possible by being prepared and anticipating what issues a funder will focus on.
Because cases, clients, and lawyers are unique, and each litigation funder has its own criteria for investing in an opportunity, it is difficult to generalize about how the intake and diligence process will unfold. Nonetheless, here are some tips and insights from a funder's perspective.
The Funnel
Commercial litigation funders differ in investment approach and appetite, but generally every funder screens its pipeline of deal opportunities and narrows them down to those opportunities that are worth pursuing: the so-called funnel. Criteria may vary funder to funder, but the following are some common categories that tend to determine whether a potential deal is of interest:
- Economic parameters. Ballpark estimates for how much funding is required and how much is at stake in the dispute. This exercise is more of an art than a science, but viable initial inputs are required. Some funders are more creative than others at crafting terms that accommodate the possibility of non-monetary relief. Be prepared to address the law firm's and litigant's willingness to share risk by deferring fees, co-funding, or otherwise aligning incentives. Not all funders require the law firm to agree to a partial contingency fee component; some funders accommodate the specific needs of lawyers.
- Subject matter. Some funders focus on certain kinds of disputes or legal claims, or on certain industries.
- Jurisdiction, governing law, procedural framework. Some funders focus on litigation or arbitration in certain jurisdictions, governed by certain law, or subject to certain procedures.
- Credit risk and collectability. Many "successful" litigants have experienced the unpleasantness of a pyrrhic victory; funders will (if funding a claimant) consider at a very early stage the probability of recovery.
- Legal merits. An investment opportunity must pass a "smell-test" assessment of the merits at a high level, and it should have a relatively high likelihood of success on the merits to make it to further review and diligence. Funders do not invest in frivolous or speculative cases.
- Duration. Some funders examine at an early stage the likely duration to recovery under various scenarios.
Threshold Issues
Consider any threshold procedural or substantive legal characteristics of the opportunity that will give rise to a binary risk: limitation period, jurisdictional challenge, notice requirements, etc. Proactively address and assess the risk presented by any such issue.
Peeling the Onion
Once an opportunity proceeds past the initial intake stage, a funder considers dozens of quantitative and qualitative characteristics in a prioritized fashion when conducting due diligence.
The funder and prospective counterparty will enter into an appropriate non-disclosure agreement to protect any confidential or other non-public information.
Funders have varying standards for when they are willing to offer non-binding term sheets, following more or less detailed review. It is also routine for a funder to ask for an exclusivity period before devoting more resources to intensive due diligence.
A Deeper Dive
The funder will work with the lawyers and prospective funded party, and possibly outside experts, to delve into more granular information about the potential investment such as a refined budget to validate the amount of funding commitment, the attitudes and objectives of the parties to the case, the underlying factual and legal framework, a deeper dive into the legal merits and either expected or actual defences, the anticipated quality of and availability of evidence, theories and ranges of damages, and many other features.
Deal Terms
A funder typically seeks a multiple of its invested capital or a percentage of the recovery or a formula that incorporates both elements. The return may also depend on duration to recovery, and a priority return of the invested capital is standard.
Most funders provide capital at various stages of a dispute-resolution process: before a claim commences, after a final judgment, award or settlement, or anytime in between.
Some commercial litigation funders craft bespoke terms that reflect the characteristics of the claim, the underlying theory of damages, and the specific needs of the client and the law firm. For example, one law firm may be more willing and able to defer a portion of its fees in exchange for a partial contingency arrangement. Similarly, different clients have different appetites and capacity for sharing risk alongside a funder.
A prudent funder knows that alignment among the parties (law firm, client, funder) is essential to ensuring a mutually acceptable outcome. The client should receive the lion's share of any proceeds upon a favourable resolution. To mitigate moral hazard, the consequences of relieving a party of exposure to a particular risk, the client should have realistic expectations regarding the outcome of the dispute and be materially invested – in one sense or another – in the outcome of its claim.
It Takes Two to Tango
When choosing a funder, a prospective funded party and the litigation team will have several considerations beyond the economic terms. Different funders take different approaches to monitoring their investments post-closing as funds are deployed: some expect more or less detailed ongoing reporting from the lawyers; some provide more or less valuable strategic perspectives supplementary to the knowledge and expertise of the litigation lawyers; some bring more or less business acumen to the table; some generally have a lighter or heavier touch throughout the duration of the dispute.
Although a funder may play an advisory role, the client – with the advice of counsel – should control decisions regarding strategy and settlement.
Takeaway
No funders are exactly alike, but there are general trends in operational practices among funders. The process of seeking and securing litigation or arbitration funding ought to be efficient when a prospective counterparty and the litigation team anticipate and know what interests a litigation funder.
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.
