Canada: What are the chances of getting funding?
According to commentators, in any given year, more applications for third party funding are rejected than accepted. In the present period of economic uncertainty and disruption, this is unlikely to change. Businesses in certain sectors suffering from multiple shocks, such as oil and gas, may face a greater challenge in making the case for third party funding due to uncertainties such as the price of oil. This uncertainty may make it more difficult for funders to gauge the merits of a claim, in particular the value of any likely recovery and the solvency of the defending party, whether a private company or a state, and therefore likelihood of recovery of a judgment or award.
Similarly, changes in law in response to or in connection with the pandemic may impact a funder’s merits assessment. States may adopt changes to the legal framework applicable to a contract or an investment, leading to uncertainty in respect of the status of a company’s rights and their vindication. Inconsistent judgments or awards on contract interpretation, such as in respect of force majeure clauses and other doctrines such as frustration of contract, may also create uncertainty.
For companies seeking to pursue third-party funding, careful consideration of the above factors and due diligence prior to applying for funding will assist in ensuring a company’s best chances of success. Legal counsel with experience in third-party funding and the type of claim being considered can help guide a company in weighing its options and preparing its best case for funding, as well as identifying appropriate funders. The nature of the funder and how and from where their investment capital is raised is another key piece of the puzzle. Funders backed by private equity and those who have just completed significant capital raising rounds are more likely to be actively pursuing opportunities for investment and may therefore have a higher risk tolerance.
As many third-party funders are seeking to shift their investments to portfolios, there may also be an opportunity for multiple claims to be included within a portfolio. Portfolios enable funders to spread their risk by cross-collateralizing claims: the more diverse the claims, the lower the risk to the funder. The criteria for this type of funding is similar to the criteria discussed above in respect of individual claims but within a portfolio, a funder may be more willing to take on a higher risk claim if it is balanced by a diverse set of other matters, lowering the overall risk presented to the funder and potentially lowering the cost to the funded party. There is also the potential of including defences in addition to claims.
Careful consideration of proposed funding terms, once a successful application for funding is made, is essential not only to ensure funding can and will deliver the relief a company needs but also to address other matters as well.
Topics: Litigation Finance, Financial Risk, Canadian Finance Market
Work cited: Alison G. FitzGerald, Alexa Biscaro, and Martin Valasek, June 25, 2020
