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Third-party litigation funding: a new tool for construction disputes

Angela Gismondi
Third-party litigation funding: a new tool for construction disputes

Third-party litigation funding is a relatively new tool growing in popularity that can be used to assist owners and contractors in the construction industry in managing the costs and risks associated with significant disputes and claims.

Gowling WLG recently held a panel discussion at its Toronto office billed Third-Party Funding: A Risk and Cost Management Tool for Commercial Claims as part of an educational session on international and domestic arbitration.

"Up until the last couple of years litigation funding has been little known in Canada and where there has been activity in the litigation funding space in Canada has been personal injury and class action realms," explained Tania Sulan, chief investment officer of Bentham IMF Canada.

"On a very high level, third party funders typically cover all or part of the legal costs and disbursements associated with litigation or arbitration." "It’s a smart way for a company to pursue litigation or an arbitration which is inherently risky without any risk to cash flow, or if the case is ultimately unsuccessful because the funder will pick up any adverse costs. Secondly, it really assists companies with their resource allocation," said Sulan.

She explained 80 per cent of applications for third-party funding come through law firms. Funding companies conduct a primary analysis of the case and enter into a non-disclosure agreement early on to protect privilege and confidentiality.

Emily Slater, director of Burford Capital’s underwriting and investment arm in New York, explained companies in the construction and mining industries may have multiple cases and third-party funding allows them to get certainty on what their litigation spend is going to be. She added both construction owners and contractors are using the third-party funding services.

"On mega contracts where there may be a dispute between a subcontractor and contractor we’re seeing parties come to us that are major companies that may be the main contractor on the project or may be the subcontractor," said Slater. "To us, what makes a difference is the strength of claim and the potential recoverability. In those construction disputes there is almost always a counter claim so it’s just looking at the whole package together."

Slater discussed the due diligence process in which a third-party funder will decide whether or not to support the dispute based on the merits of the case, the value of the claim, the relative budget, time to completion and recoverability from the other party.

"When a party is seeking litigation finance, one of the most important pieces to put in place is getting an assessment of what we think the cost of litigation is going to be and what the potential upside is since the funder will provide non-recourse capital for fees and expenses, but of course wants in return a recovery from potential proceeds from the case," said Slater.

"We need to get a sense if the case is big enough to support the payback of our investment in the case. We really want the client to have a substantial return if the case goes well for us and if the lawyers are participating in risk sharing, for the lawyers to have a good return as well."

Fighting litigation is costly, especially if you are paying lawyers by the hour which is still the norm for litigation and arbitration, explained Tom Price, a partner at Gowling WLG in the U.K.

"There are relentless bills and uncertainty and litigation funding effectively takes that away from you," he noted.

Mark Crane, a partner at Gowling WLG in Toronto, explained sharing risk with a third-party funder allows parties to fully participate in the arbitration process without needing to be concerned about risk, costs and other funding pressures.

"Sometimes it’s not so much about the cost of litigation but the transparency and the certainty of it," Crane noted. "I think it provides an opportunity for accessing justice because for some, litigation funding may be about ironing out monthly cash flow, for others it would just be they otherwise would not be able to robustly participate in the process."

In terms of disclosure, Crane said there is an expectation in the courts in Ontario that if a party enters into a third-party funding agreement, it is brought to the attention of the court.

"You want to have transparency and be open that there is a third party funder involved," he stated. "In the event you don’t disclose it and you get an award and you seek to enforce it, I think it gives rise to a potential argument from a losing party that the award shouldn’t be enforced because there wasn’t disclosure."

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