Managing the risk and cost of litigation is a challenge for many businesses. They may forgo meritorious and potentially profitable litigation due to budgetary pressures — either because they do not have the resources to litigate, or because they choose to direct their capital elsewhere. Businesses and their counsel in the U.S., U.K., Australia and most recently Canada have a new tool to pursue litigation: commercial litigation funding.
Q1: What type of claim is right for commercial litigation funding and what are the investment criteria?
A commercial litigation funder will fund all types of litigation or arbitration, including claims relating to breach of contract, breach of duty, intellectual property and insolvency.The claim should have good prospects of success and a defendant able to satisfy ajudgment. The budget should be approximately one-tenth of the realistic claim size to ensure that, on success, the litigant receive sthe majority of any recovery. A funder will undertake due diligence to ensure the case is strong and also consider factors such as how the litigation is to be managed, exposure to court-ordered costs, and the likely time to resolution.
Q2: What can a litigation funder provide and how does the funder get paid?
Litigation funders typically cover all or a portion of legal fees and disbursements, as well as court-ordered costs. Funders may also provide working capital, enabling a litigant to maintain or expand its business during litigation. The funding is non-recourse,so the funder is paid only on the successful resolution of the case. The funder’s fee maybe a multiple of the invested amount or a percentage of the resolution sum. If the case is lost, the funder receives no return, and will pay any court-ordered costs. Funding enables a litigant to pursue a case without cost or risk.
Q3: Why would a well-capitalized client use litigation funding?
Sophisticated companies use external sources of capital to finance many parts of their business and see litigation funding as a financing and risk management tool to monetize litigation assets. Since a funder pays the legal fees and disbursements, capital is freed up for other parts of the business.Further, because litigation funding is non-recourse and the funder typically covers any costs if the litigation is unsuccessful,the potential downside of pursuing litigation is removed. Increasingly, shrinking budgets can mean that plaintiff-side litigation is left on the table. Litigation funding enables such claims to be pursued without impact on the budget.
Q4: Is there any judicial guidance on funding of single-party commercial actions in Canada?
In Schenk v Valeant Pharmaceuticals
, Justice McEwen examined the terms of the litigation funding agreement and found that there was “no reason why such funding would be inappropriate in the field of commercial litigation.” He further held that funding agreements are acceptable if the funder does not stir up litigation, does not control the litigation, and takes a reasonable return. Schenk
also provides guidance on certain ethical issues, including the funder attorning to the court's jurisdiction and a funder's termination rights.
Q5: Who controls the proceedings where a litigation funder is involved?
With a reputable litigation funder, the client controls the litigation. The funder will require updates on key developments and ask to be consulted on important decisions in order to monitor its investment. Where the litigation funder is an experienced ex-litigator, the funder can be used as a strategic sounding board. This consultative process is often considered valuable by clients and their lawyers.
Q6: Must the plaintiff obtain courtapproval of a litigation fundingarrangement?
The prevailing view is that court approval is not required outside the class action and insolvency contexts, where the court has an established supervisory role. This approach was confirmed by the recent decision in Seedlings v. Pfizer Canada Inc
., where Case Management Judge Tabib held that there was no need to seek court approval, as "the manner in which [a plaintiff] chooses to fund a litigation it has every right to bring is of no concern to the Court or to the Defendant."
to learn more about funding for business litigation.