The global addressable market for litigation funding is estimated to be up to US$100 billion, particularly with the challenges most companies faced due to the economic effect of Covid-19 pandemic. With a squeezed legal budget, insolvent companies with credible claims against third parties may consider litigation funding alluring for their strong legal claims.
The economic impact of Covid-19 and the debilitating effect of the intermittent lockdowns in different cities in Canada and elsewhere have brought untold hardship on businesses, particularly small and medium enterprises. The question on everyone’s lips is where to turn to as many businesses plan to reopen while cautiously being optimistic about the future.
Even though the Canadian government has provided numerous supports to businesses, which brought cases of insolvencies down recording the lowest in 20 years, one would wonder what happens to other businesses that were not able to survive. Many businesses benefitted from such palliative programs as the Canada Emergency Business Account, as part of the country’s Covid-19 Economic Response Plan. As a result, in 2020, business insolvencies were down 24 per cent compared to 2019 which brings such insolvencies to its lowest since 1987.
While we often focus on successes recorded at the top of the ladder, where will those below the ladder who fell through since the beginning of the pandemic turn to? Who will assist such businesses to provide the much-needed funding to pursue genuine claims they might be having against third parties? Whether insolvent businesses plan to bring action for genuine legal claims or even if they have been sued by creditors, where will they get the required funding for the legal proceedings?
Litigation funding seems to be key here. Businesses could turn their legal claims into revenue-generating assets with financing from a litigation funder. After agreeing on the key terms and conditions in a Litigation Funding Agreement, businesses do not need to bother about funding while pursuing their claims. However, such businesses may need to agree to share the outcome of the recovery with the litigation funder. Despite the high percentage many litigation funders usually request for, businesses with strong legal claims could also demand for a non-refundable upfront initial sum upon executing the contract.
Despite the English common law doctrines of maintenance and champerty, litigation funding has come to stay in many jurisdictions across the world, including Canada. Litigation funding may be regarded as the most important development in the global litigation landscape in the 21st century. With the distress being faced by businesses and companies across the world as a result of the pandemic, the relevance of litigation funding cannot be overemphasized.
Litigation funding is now more relevant today than before. This is seen in the accelerating demand for litigation funding from businesses across the world. Though there has been a string of cases where judicial approval has been accorded to litigation funding in Canada, the sector remains largely unregulated, but it is functionally properly under the extant laws.
Of course, one key eligibility criterium often considered for litigation funding is strong prospect of the legal claim, as no funder would allow its investment to go down the drain. On the flip-side, the funder would also consider the ability of the opposing party to pay the claim if the recovery process is successful to avoid a pyrrhic victory situation. Finally, some litigation funders set a minimum for the anticipated judgment relative to the amount being requested. In some cases, some companies have stipulated that the anticipated judgments must exceed 10X of the amount being requested.
An insolvent business may not have any asset left as collateral for litigation funding. So, there is a need to ensure proper negotiation of the terms and conditions of the Litigation Funding Agreement. In circumstances where a business has a strong claim with a high probability of recovery, there should not be any need to post any collateral. Again, as these rules are not necessarily cast in stone, any business seeking to benefit from litigation funding should consider seeking proper advice to ensure it gets the maximum benefit from the deal.
Distressed businesses could consider seeking for proper advice on the available opportunities to ensure they are able to maintain legitimate action against third parties to recover certain claims. This could be a very important lifeline for such businesses in an uncertain period of protracted pandemic and a situation exacerbated by several virulent variants of concern of the Covid-19 virus.
In difficult times like this, every business must ensure it future proofs its operations through proper strategies and risk mitigants that will protect them from the throes of future pandemic and economic crisis. Businesses should adopt strategies that would not only turn their legal claims into income generating assets but could in some cases provide them with extra liquidity upfront while they continue to navigate their ways out of the murky waters of the pandemic. Above all, businesses should ensure they consider litigation funding as part of their overarching business legal risk management policy. This will be useful in times of need when there are legal claims to be pursued.