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First published in the Ontario Bar Association, March 2020.

Third-party funding (“TPF”) has gained traction in several Canadian jurisdictions. An increasing number of counsel and parties alike appreciate the value of non-recourse legal financing and its role in alleviating financial burden and mitigating risk. Thanks to these and other advantages of TPF, it is no surprise that parties engaged in (voluntary and mandatory) mediation have been able to leverage their being funded in numerous ways.

Ordinarily, a claimant accepts both the upside and the downside risk that a legal proceeding entails: if the party succeeds, it receives some form of compensation while it may also be entitled to all or part of its legal costs, depending on the applicable cost allocation rules. On the other hand, if it loses, it – typically – must pay.

With TPF, litigation risk shifts fundamentally. In the simplest of examples, assume that a funder has agreed to defray 100% of the legal fees and disbursements as well as pay any adverse cost award and receive a healthy return that translates into a percentage of the proceeds. When the funded party wins, it does have to share in the winnings with the funder, but should it fail, the funded party can rest assured that the funding provider will “foot the bill” without any recourse to the former (maybe save for certain contractual breaches). From the funded party’s perspective, this is a powerful proposition since the claimant does not have to bear any downside risk while it gets to benefit from the upside. Therefore, the size of that upside is likely the only variable that keeps a funded party up at night.

 

Of course, being sensitive to commercial realities, a professional funder will try to hedge some of its risk by defraying part of incurred legal fees, paying only for disbursements while counsel are on full contingency for their fees, undertaking to cover an adverse cost award up to a certain limit, et cetera. Also, on many occasions corporate entities may have the means to prosecute claims, yet they select to do so off-balance sheet to free up capital for other mandates without foregoing potentially sizeable litigation receivables. That said, irrespective of the negotiated funding arrangement and the precise reason for obtaining TPF, the funded party always stands to benefit from the significant change to its litigation-related risk exposure.

There is no doubt that the above remarks hold true in a mediation setting as well. But TPF is much more than a “financial buffer”. The following points briefly discuss (in no order of importance) the main benefits of TPF to parties involved in mediation:

  • A funded party gearing up for mediation has had the benefit of an extra “brain” screening its case. Indeed, a professional funder will not make an investment decision without thoroughly scrutinizing a case and drilling down on potential issues beforehand. A multitude of investment criteria need to be satisfied, notably sensible economics and legal budgets, recoverability/enforceability not likely to be severely hindered, well-thought and effective strategy, strong merits, less strong defences, reasonably high settlement prospects, high-calibre counsel, reasonable claimants, to name the most essential.
  • A funded party that walks into the mediation room knows that one more player besides its counsel “has its back”. In fact, the financier’s role following the provision of funding is broader than that of a sounding board. Throughout mediation talks, it is common for a party and its counsel to confer with the funder. The latter is uniquely positioned to offer an experienced, unemotional and well-balanced view at key junctures in the process, even if the parties’ tempers have begun to flare. By the same token, a funder will only share rather than attempt to impose its own opinions; this is a delicate line to tread, but sophisticated funders should be able to rise to the occasion, shed any doubts on who ultimately calls the shots (i.e. the client), and strive to keep all stakeholders’ interests aligned.
  • Wishing to send across a message, funded parties often voluntarily divulge the existence of TPF to their adversaries at the start of the mediation. Funders might even attend mediation meetings as silent observers. This way the party signals that is confident about the merits of its case and that it is in it for the long haul. A prudent defending party will factor in the physical or metaphorical presence of a funder and carefully evaluate any strategically disclosed details of the funding agreement. The product of said evaluation might be an earlier settlement, which typically is in everyone’s best interest.
  • As a follow-on point, TPF may also incentivize a funded party to actively pursue a speedy settlement. Funding agreements often contain a sliding scale of funder repayment. Thus, an agreement may provide for a lower money multiple or percentage of proceeds should the case settle by way of mediation compared to a win in court or arbitration proceedings. Separately, funders tend to favour a successful outcome early on over a potentially more lucrative yet volatile result several years down the line.
  • Is it possible for a party preparing for mediation to take advantage of a situation where TPF is not secured?The short answer is “absolutely”. Most legal professionals irrespective of practice area have come across parties with somewhat unrealistic expectations. At times, in an honest endeavour to not feud with the client, some lawyers might find themselves simply refraining from steadfast criticism of a client’s “wishful thinking” and instead tirelessly working toward a positive outcome. Funders typically seek a no-nonsense interaction with the client and perform various sanity checks prior to pushing ahead with a TPF deal. Therefore, a funder will not tiptoe around topics such as expected quantum, likelihood to get an opponent to agree to mediate or settle otherwise, ability to recover money from the respondent, potentially inefficient strategies or problematic arguments, and so forth. A receptive party will acknowledge that each case is idiosyncratic and graciously accept constructive feedback. A wise party, along with their counsel, will spare no effort in making their case as airtight as possible, possibly in a continued effort to obtain funding from a different provider.

The above points manifest that TPF is well suited to mediation and financiers themselves rejoice at the prospect of a funded dispute being settled via mediation. Perhaps the convergence of mediation and TPF are not discussed as extensively as, for instance, the co-existence of TPF and litigation or arbitration. This is not because TPF plays a limited role in the mediation process but rather due to that much mediation occurs prior to or alongside those dispute resolution methods. As in other legal processes, third-party funders can bring great value to mediations by assisting funded parties financially as much as legally and psychologically.