Litigation finance, as a concept at least, has been around. But a host of new players with creative leveraging strategies are now paving the way for what could become a force in the profession.
THE LEGAL WORLD IS CHANGING and in unexpected ways. Take third-party litigation funding, which used to be the domain of personal injury lawyers and class action firms. In Ontario, encouraging litigation for a share of the recovery — a practice known as “champerty and maintenance” — is still banned, although recent jurisprudence has made allowances for instances where funding facilitates access to justice.
This shift in perception has paved the way for new players, along with new types of clients and some surprising new champions, including corporate defence litigators. “There’s been almost a seismic shift in the last 18 to 24 months,” says Naomi Loewith, a former litigator at Lenczner Slaght Royce Smith Griffin LLP for 10 years before joining Bentham IMF Capital Ltd., a global litigation funder.
She is not alone. Maureen Ward, a corporate and commercial litigator at Bennett Jones LLP in Toronto, calls litigation funding “great” and predicts “it’s going to become increasingly mainstream in Canada, especially on large, complex commercial cases.”
Geoffrey Holub, a litigator at Stikeman Elliott LLP in Calgary, says litigation funders “are filling a void” in the Canadian litigation market. That may be because, where funders here used to help cover cost awards, indemnify plaintiff and occasionally fund disbursements, many now pay full legal fees. And rather than confining themselves to class actions, they have become increasingly involved in funding private commercial cases.
Third-party funders are finding a wealth of clients in commercial arbitrations, which can be very expensive up front. Holub, for example, had a client in the oil and gas industry that wanted to arbitrate what it felt was an unfair expropriation before the International Chamber of Commerce. The ICC requires parties to post substantial advance costs up front, cost that can run north of $1 million.
“Often the hardest pill for a company to swallow is finding the funding to move forward,” Holub says. “In litigation, you can spread out that cost over a longer period of time and it’s easier to fund because you’re really only carrying your legal-team fees, and that can be paid on a monthly basis ... But in an ICC arbitration, if you don’t pay in advance, the claim doesn’t go anywhere.”
One of his colleagues knew someone socially who worked at the Toronto office of Bentham, an Australian funder with offices in several financial centres including Toronto, and suggested Holub arrange for introductions. The oil and gas company and Bentham came to an arrangement and the litigation was out of the gate.
Given that third-party litigation funding is still “a relatively new experience in Calgary,” Holub admits to some early trepidation. Was he concerned that the funder would try to influence the client on their prosecution strategy? “That would have been a thought.” But early on he realized that his worries were unfounded. “It’s been made very clear to us that the funding entity does not get involved in that. They leave that up to counsel.”
Moreover, he realized that there were clear advantages to having outside litigation counsel. “I was pleased to discover how much diligence was performed by the litigation-funding entity. Obviously this is a big investment for them and they really do undertake a comprehensive diligence program on the merits of the case. That surprised me a little bit.” The exercise in early due diligence, he says, helps the litigator really understand their case comprehensively.
In regular litigation where the client pays monthly from the get-go, he says, sometimes you discover the merits of the case as it unfolds. But you can’t do that in a case where the client is seeking funding, he says, because the funding is typically dependent on the diligence of the litigation funder. “So you really need to be organized, you need to understand your case — the damages implications, the case-law implication — at an early point, because someone’s asking you. That’s a positive factor.”
Holub expects the use of third-party funders to grow, especially in extractive industries like oil and gas and mining that are extremely capital intensive. “Think of companies here that hold leases in the oil sands for instance. Those are not yet developed, and development of those types of assets are long-term and extraordinarily capital-intensive. If they get into a dispute where they need to pursue a claim, they may not have the cash flow. They have assets they may be able to borrow against, but if you’re going to be using your borrowing room to pursue litigation, it’s probably the least effective use of your capital.”
SIDEBAR: A New Class of Investment?
In today’s ultra-low interest rate environment, money managers are keeping a close eye on litigation finance.
COMPANIES like THE ONE Holub is representing, which operate in extractive industries — miners, oil and gas companies — are prime candidates for third-party litigation financing, says Ezra Siller, managing director of Nomos Capital, a Toronto-based litigation funder and former litigator at Torys LLP. “A lot of companies may use cash on hand to develop a new asset or project, so if a claim arises during this process, they may have to make a choice between engaging in their court business or pursuing the business objective.”
Mining and oil and gas are both also sectors where there is a significant disparity between the juniors and the seniors. Many transactions involve a large brand-name company doing a deal with a junior to take a project to the next stage. If a dispute arises, there is a built-in disparity of financial resources that may require the smaller company to get creative when it comes to funding any litigation, he says.
Siller, who also clerked at the Ontario Court of Appeal, is seeing larger corporations in all kinds of areas also turn to litigation financing. “It’s not only the smaller guy using it. Increasingly, when they’re dealing with their legal spend, businesses have to decide whether they want to deploy their capital into growing their business or using it to pursue the litigation. The extractive industries is just a subset of businesses where it’s more and more rational to get some of those legal expenses off the balance sheet and not have to engage in that false dichotomy. Because there’s now a way to both pursue the claim and continue exploration efforts.”
As litigation financing starts to grow and mature, Nomos, one of the most recent Canadian funders on the market, is not particularly drawn by class actions, and while it would not rule out funding one it’s more attracted to straight commercial claims.
“I think that’s an area that’s been quietly growing,” says Siller. “There’s not a lot of visibility because these are typically private arrangements between the claimant and the funder, so there’s no need for court approval, which makes it difficult to get a clear view on how extensive this kind of litigation is from the court decisions. But anecdotally, people are very interested, and law firms in particular are starting to see the value for this kind of service for their clients who are uncomfortable with legal expenses when they’re bringing claims.”
IF CORPORATE LAW FIRMS ARE starting to become interested in using third-party funders, it’s about time, says Myriam Seers, a senior associate in the litigation group at Torys LLP. Seers has had clients use litigation funding for at least five cases, and acted on many more as the funder’s advisor. She’s done ones where the client has financed the entire case. Asked about the difference, from counsel’s point of view, she says using a funder has many advantages, including the participation of a partner “that’s very experienced in litigation to bounce ideas off of.” They don’t control the process, the client does, she stresses, “but they’re there to provide input, which is quite helpful as counsel. And they can provide a level of financial sophistication you don’t always have access to.”
Seers’s practice area specializes in investor-state arbitrations, in which private companies have a right to bring a claim against foreign governments. She has never used a third-party funder in an all-Canadian case, but she expects that it will become increasingly common.
The UK has been using private-company litigation funding for 20 years, she says; the US for at least a decade. In the new Canada-EU free trade pact, there are even provisions involving third-party funding and what needs to be disclosed to the tribunal, what doesn’t. “So it’s getting quite sophisticated now. But call up 12 random litigators on Bay Street and ask if they have been on cases where clients have used third-party funders, and I bet they’ll all say no.”
MAUREEN WARD OF BENNETT JONES isn’t one of them. Ward worked on two files where the client was using third-party litigation funding and one file “where I was seeking funding by engaging with three different funders to see what terms they would give. I went down quite a road with each of them, and it turned out it was such a large case and the merits were really in question because of the novelty, so it ended up not getting funding.”
Still, she calls it an education on how not all funders are alike, and “how the terms are different and what they can mean for the plaintiff, the funder and the file. It was a good experience doing that.” Ward is a fan because, like Siller, she sees litigation finance as helping companies deploy their capital more usefully than in litigation.
“We’ve all seen cases that we think have merit but where the client just didn’t want to take the risk, no matter how small. Everyone worries about money, especially someone at a desk who is being pressured to keep their costs down — in-house counsel, for example. You’re going to worry about dollars and cents no matter how big you are so I think litigation funding is a great new thing that provides access to justice not just for the little guy, but also for sophisticated commercial parties.”
the door was opened to the use of funders in mainstream litigation in the summer of 2016 when Ontario Superior Court Justice Thomas McEwen wrote in Schenk v. Valeant that “I see no reason why such funding would be inappropriate in the field of commercial litigation.” It was shortly after that that Bentham IMF opened its Canadian office, although Naomi Loewith insists the funder had been looking at Canada for many years and “it was just a great confluence of circumstances.”
Bentham’s focus is on commercial litigation, “very much the type of cases we did at Lenczner Slaght,” and in Canada, it does not work on cases where the lawyer is on pure contingency fee. While an average of 10 or 15 cases cross Loewith’s desk every month, Bentham has so far taken two. The amount of due diligence the funder puts into deciding whether to fund a case can range from 10 to over 200 hours. Bentham will often interview the clients and their witnesses as part of its evaluation.
In Australia, where contingency fees are illegal, the firm pays 100 per cent of the legal fees plus disbursements and costs. In the US, where contingency fees are widely used in commercial litigation, Bentham will often enter into “risk-share” agreements with the law firm where the firm gets paid part of its fees with the remainder as a contingency fee. In Canada, “we’re open to both.”
Canadian firms aren’t interested “quite yet” in doing US-style deals where the most common arrangement is a 50-50 risk share. The law firm gets paid 50 per cent of its fees from the funder as the case progresses, and carries the remaining 50 per cent as work-in-progress. If the case is successful and results in an award, she says, “the law firm takes a 20-per-cent contingency fee, the funder takes a 20-per-cent return, and the client takes 60 per cent — which is in line with common contingency fee arrangements for commercial matters in the US.”
Canadian firms, being newer to the game, are more conservative. “In Canada, often what we’ve seen interest in is where the law firm wants to get paid 70 per cent of its fees, for example, and they’ll take the last 30 per cent as a contingency fee.” That means the firm carries 30 per cent of the case as work-in-progress, and it gets paid 70 per cent monthly. If the case is successful, the firm will receive not just the remaining 30 per cent but also a success bonus.
Loewith says a lot of top law firms are already giving their best clients a 10- or 20-per-cent discount in exchange for repeat business, “so a 30-per-cent discount in exchange for a big cheque at the end of the day is actually a pretty natural progression.”
WITH THE ADVENT OF MAINSTREAM commercial litigation funding, traditional litigation funders are starting to see some competition from unexpected sources.
Take Crystallex International Corp. In 2002, the Canadian miner acquired the rights to develop the Las Cristinas gold deposits in Venezuela. After trying to obtain the necessary permit for years, Venezuela denied Crystallex the permit in 2008 and subsequently announced that it would operate and develop Las Cristinas itself. Crystallex went to court and did battles in several jurisdictions, but it ran up against a financial wall when $100 million of defaulted notes matured around Christmas 2011 and it was unable to pay.
Crystallex put itself under the Companies’ Creditors Arrangement Act (CCAA) — and then it did something interesting. On the advice of its US law firm, Crystallex hired an investment banker to canvass the market and conduct an auction to get the best deal it could on a debtor-in-possession (DIP) loan to continue with its legal fight. Presumably that included litigation funders, but at the end of the day, it was New York-based Tenor Capital Management — a New York hedge fund — that put up $36 million for the Canadian company to pursue the US$3.4-billion arbitration. In return, it was reported Tenor got 35 per cent of any award or settlement, two of five Crystallex board seats and a say in the choice of an independent director.
Since Crystallex’s only asset was its claim against the outcome of the arbitration, while technically providing DIP financing, the hedge fund was really providing litigation financing, says David Byers, a senior partner at Stikeman Elliott LLP in Toronto and counsel to the court-appointed monitor in Crystallex.
Byers says that, while Tenor, as the funder, played no role in the actual arbitration, it remained quite involved during the proceedings. “It was a high-risk investment, and they wanted to make sure their money was well spent.
“So they had a budget that had to be complied with, and they were observing the status of the arbitration and they were very interested in it throughout.”
At the end of the day, Byers sees third-party litigation financing as necessary. “Without the litigation funding, Crystallex would not have been able to preserve the only asset of the company and pursue its arbitration claim.” He says if a client came to him tomorrow and asked about using a third-party funder to finance their case, he would have no hesitation in suggesting they consider it as an option. The only real downside, he says, is that it’s “not the cheapest way to go.”
Andrew Kent, co-chair of financial services and insolvency at McMillan LLP, who acted for Crystallex, says hedge funds are typically looking for returns of five, six or seven times their investment. Regular litigation funding generally offers a return closer to double or triple the original investment, which he believes many hedge funds and private-equity funds will see as too low. He sees insurance companies, a Lloyds of London, for example, as more natural competitors in the field, adding they’re already deep in the game in the UK.
In fact, earlier this year, Kent and a couple of other senior players from McMillan sat down at the firm with two “independent brokers” who had flown into town to meet and discuss litigation funding. They made it quite clear they have access to the UK insurance market to cover the cost of any funding they were willing to put up. “They are fronting for unknown insurance companies; it could be anybody. The insurance world has its own grey markets, but these people have insurance-company support and they’re out there looking for suitable pieces of litigation. They are actively soliciting opportunities in Canada.
“As the market matures and gets bigger, I see insurers as a logical source of funding. This is a developing market. For them to play a major role, they’re going to have to take on enough deals to make it an attractive source of funding and for them to be able to spread out their risk. This may not work [in Canada] if they don’t do enough deals, so it remains to be seen how it plays out. Insurers are coming to this market, but where it goes we’ll only see over time.”
In other words, the way litigation is funded is going to keep evolving. The only real question is by who and how.
Sandra Rubin is a Toronto-based writer and strategic consultant.