Canada: Disputes Funding in the COVID-19 Pandemic Environment
The COVID-19 global pandemic is forcing businesses of all shapes and sizes to pursue alternate sources of funding to ensure the advancement of pending claims, to bring new claims arising out of the pandemic and to enhance cash flow where possible to survive. Understanding the range of dispute funding options available is critical to assess whether and, if so, how such funding can be leveraged to help a business weather the current COVID-19 environment – and what is yet to come.
– COVID-19 impact on solvency
Many businesses have experienced a dramatic reduction in cash flow and working capital as a result of the recent global economic shutdown. Insolvency is on the rise, as is bankruptcy. Whilst some losses experienced during this period will lie where they fall, many have already and will continue to give rise to disputes. A meritorious claim in the hands of a nearly insolvent company may well be a vital part of its return to financial health. Similarly, a meritorious claim in the hands of a bankrupt party may represent the only asset capable of ensuring a meaningful recovery for creditors. In Canada, third party funding (TPF) (also known as disputes funding or litigation finance) was on the rise prior to the COVID-19 pandemic. A recent judgment of the Supreme Court of Canada has cemented the availability of TPF in Canada to help unlock the value of claim assets for companies in distress and their creditors (by confirming that third party litigation funding agreements can be approved as interim financing in bankruptcy proceedings (9354-9186 Québec inc. v Callidus Capital Corp., 2020 SCC 10). The timing of the Court’s release of this judgment has proved providential, as businesses dramatically impacted by the recent economic shutdown seek out alternative sources of financing to weather the pandemic.
– How can disputes funding help address the solvency crisis?
TPF generally speaking is the process whereby a third-party funder, which has no direct interest in a dispute, funds the legal costs for one of the claimants. It is rare for defendants to obtain funding, although sometimes this is made available, for example, as part of funding a portfolio of claims and defences. TPF often works alongside its insurance brethren, before the event (BTE) and after the event (ATE) legal costs insurance, which insure the risk claimants face of adverse legal costs. Many funders require funded parties to obtain such insurance and, in some instances, also require their external legal counsel to work on a conditional fee arrangement (CFA) in order to share some of the risk.
TPF is usually provided to claimants on a non-recourse basis, meaning that if the claim is unsuccessful, the funder loses its investment and has no recourse against the funded party. If the claim is successful, the funder recovers its investment as well as a success fee (usually calculated as either a multiple of the sum invested or a percentage of the damages awarded, whichever is the higher). Many funders also offer products designed to alleviate strain on working capital.
Topics: Litigation Finance, COVID-19, Canada, Insolvency
Work cited: Alison G. FitzGerald, Alexa Biscaro, and Martin Valasek, June 25, 2020
