Why more Canadian corporates are turning to Litigation Funding
Litigation is expensive and hugely time-consuming for both plaintiff and defendant alike. While Canada boasts a wide and deep range of legal expertise amongst its domestic law firms, rising legal costs and increasing litigation appear to be inextricably linked. Therein lies the tension between the noble concept of societal access to justice and the realities of funding an actual lawsuit.
It was against this backdrop that Canada’s first litigation funding arrangements were conceived in the class actions arena. From 2010 onwards, Canadian class actions have been funded through a combination of contingent legal fees (payable only on success) from boutique and specialist law firms coupled with non-recourse funding from the private sector. The net effect of this funding was to move the burden of legal and financial risk from the shoulders of a single class representative (often a regular citizen of limited means) onto the balance sheets of professional funders such as Augusta.
In the absence of relevant law, it was left to class action judges to determine the scope of the ancient doctrines of ‘champerty and maintenance’, which until then had severely restricted third-party participation in lawsuits. Successive and sensible jurisprudence has since paved the way for litigation funding to be both legal and acceptable in a much wider range of circumstances and to break out of the class actions arena.
Today the uses of litigation funding in Canada, go way beyond the class actions space and include insolvency, construction, general litigation, intellectual property defence, insurance, aboriginal and arbitration, to name a few. While mostly plaintiff focussed, Augusta is also exploring defendant side arrangements, particularly in a municipality setting. Augusta has been active in Canada since 2017 and opened our first office in January 2019. In our first year, the office received over 100 enquiries for funding across a range of cases.
At the core of litigation funding are the dual concepts of risk-sharing and non-recourse investment. For Canadian corporations, the idea of swapping some upside in their claim for a reduction in their legal outlay is appealing. In effect, the funder defrays relevant corporate legal expense, thereby increasing the corporations operating cashflow. Furthermore, the funder's investment is effectively off-balance-sheet for the corporation. This is particularly attractive for companies with relatively high net debt. Companies can redeploy their working capital tied up in the legal budget to other areas of the business where it is needed. This is of particular interest to corporations funded by private equity and venture capital investors.
Pricing of litigation is often in the range of X2 to X3 on a money multiple basis on a single case and lower for portfolios of cases. On average, funders lose about 20% to 25% of their cases which obviously reduces the net returns as these investments have no recoverability. Ironically, the aforementioned arcane concepts of champerty and maintenance ensure Canadian corporations keep control over their lawsuit, such that any funder remains a passive participant in the litigation. Given this, litigation funding offers companies a good opportunity to lower the risk of litigation, free up cash and maintain control over their business.