Third Party Funding: A Short-Term Fad Or A Long-Term Trend That Is Here To Stay?

What is third party funding of litigation? At its most basic, it used to be the giving of money for a "piece of the pie". In exchange for advancing funds, the third party, who had no interest in the litigation, would receive a percentage of the award/judgment or some other payment as agreed. The initial focus of this funding was personal injury cases, and it then expanded to class actions. Now we are seeing third party funding for business disputes, breach of contracts and/or fiduciary duties, litigation involving securities fraud, anti-trust, intellectual property, tax disputes, bankruptcy, and international arbitration.

Now both plaintiffs and defendants are using third party funding. General Counsel and Chief Financial Officers embrace it as a tool of choice, to move costs and risks off balance sheets and to transform the litigation department into a profit centre. For companies, it releases their capital to pursue other priorities. Moreover, it can control costs, as lawyers work within budgeted commitments and focus on the strategy of the lawsuit.

The sources of funds are expanding, and include publicly traded financiers, private funds, hedge funds and individuals ("Funders"). And, these Funders are looking to be players in the Canadian litigation market.

In Canada, third party funding is still developing, and somewhat unregulated, but it is here to stay. Courts are relaxing rules and opening the door1 to such funding arrangements, and Canada is drawing its guidance from the UK, USA and Australia, where case law and regulations are more developed.

Is third party funding right for your litigation? Let us look at the steps that should be taken and the questions that should be posed to allow a litigant to find the right Funder. We will examine the issues that should be addressed with the third party funding agreement ("Agreement"), and the Court's perspective and this type of funding.

1. Due Diligence on the Funder While the Funder is performing its own due diligence on the lawsuit and determining if the litigation should be part of its portfolio2, the client/the lawyer should perform their own due diligence on the Funder.

You want to look at the Funder's creditworthiness. What is its record of accomplishment? Will it be financially able to bear the costs and risks of the litigation through to conclusion? The client/the lawyer does not want the funding to run out mid-stream. You will want to protect any confidential information. Is the...