Law Times

Law Times • JuLy 24, 2017 Page 11 www.lawtimesnews.com Companies use third-party litigation funding BY JUDY VAN RHIJN For Law Times T raditionally, litigation loans have been the purview of class action plaintiffs and individu- als fighting against large insur- ance companies. Lately, a trend is emerging that sees corporations using third-party litigation funding as a mechanism to take the pres- sure off their legal budgets. At the same time, investment firms are viewing the area as a target. Lawyers are concerned that viewing litigation as an asset, and litigation funding as a ve- hicle for profit, takes away from the fundamental goal of provid- ing access to justice. "More lawyers are talking about third-party financing as a potential option and not just for class action plaintiffs and in- dividual personal injury cases," observes Karin Sachar of Osler Hoskin & Harcourt LLP in To- ronto. "Historically, that has been the sweet spot," she says. "Now, it has become more of an option in commercial mat- ters. Commercial litigators are open to new and innovative so- lutions for clients." According to David Leder- man of Goodmans LLP in To- ronto, the market started to open up after the decision in Schenk v. Valeant Pharma- ceuticals International Inc. 2015 ONSC 3215 with Justice Thomas McEwen's review of a litigation funding agreement and his subsequent statement that he saw "no reason why such funding would be inappropri- ate in the field of commercial litigation." Lederman says there is real progress in the industry. "Funders are educating the market in a way not done even two years ago. Corporate Can- ada are not professional litiga- tors," he says. "They want to get on with their day jobs. Why not out- source the risk?" Sachar says sophisticated commercial litigants are trying to manage financial risk associ- ated with litigation. "When deciding whether to start litigation, it may be helpful to box some of the unknowns by leveraging third-party funding," she says. "Large commercial clients represent a higher risk in terms of funding. They require a big- ger investment, but there is the potential for a bigger return." This trend runs parallel with the growing tendency to view litigation in accounting terms and even as an investment. "Litigation is either an as- set or a liability," states Lincoln Caylor of Bennett Jones LLP in Toronto. "To a plaintiff, it's an asset; to a defendant, it's typically a liabil- ity. If it's a public company, they have to report the cost of it on the balance sheet." Caylor says that as in-house counsel become more aware of the option, they may wish to take the risk off the books. "That's the cost of the asset," he says. "Even a large, successful pub- licly funded corporation may not need outside funding, but their preference is to take the risk off the balance sheet at a fixed cost." Caylor refers to the depth of experience in the litigation funding market. "The funders spend a lot of time analyzing the cases. It's like exploratory mining or drilling for oil," he says. "Litigation is treated the same way." Taking this one step further, it's possible to view a company's litigation department as an asset to a company. "They have a claim plus an adverse risk," says Sachar. "They transfer the risk to a third party, allowing the litiga- tion department to frame itself as an asset, not a cost centre." Tania Sulan, chief investment officer of Bentham Canada, says this financially oriented view is a "nuanced point." "People are still trying to get their heads around it," she says. "There is a lot of pressure on corporate legal budgets. There is the cost of their proper work, their regulatory compliance and defending litigation. If they opt in to plaintiff-side litigation, it's an investment and a risk. If you lose, you lose the amount you invested and pay the other side's costs. But if you look at pursu- ing litigation, you can decide to monetize that." Taking this approach even further, the next step is to view litigation funders as investment targets. "On the business side, profes- sional litigation funding gives corporations and law firms a way to shed risk from their bal- ance sheets," Caylor says. It also means that for inves- tors "rather than betting on one-off lawsuits, the large-scale backing of whole portfolios of cases will allow money to be de- ployed faster for more consistent returns." Lederman says he can see why investment managers see litigation as one possible avenue. "However, if that's the way it's being framed and profit is the purpose of the emerging in- dustry, it's going off course. You don't want a third party coming in to stir things up for the chance of a profit," he says. "I understand why that would make people feel a little queasy. Litigation funding is a good model that ensures that a litigant can pursue their case. It is essen- tial to keep access to justice as its purpose." Balmoral Wood Litigation Finance is a Toronto-based in- vestment firm that considers liti- gation finance to be an "alterna- tive asset" that is attractive. Edward Truant, a principal of FOCUS David Lederman says 'litigation funding is a good model that ensures that a litigant can pursue their case.' 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