Suing Is Canada's New Asset Class as Investors Bet on ClaimsBy
Australia’s IMF Bentham funds litigation for cut of the action
Targets commercial litigation, restructurings, insolvencies
Investors are moving into Canada to capitalize on an untapped opportunity: financing lawsuits.
IMF Bentham Ltd. is looking to finance commercial litigation in the country, as well as restructurings and insolvencies, as part of the Australian firm’s global expansion. The company has looked at 225 prospective cases since opening a Toronto office in January 2016 under the banner Bentham IMF Canada. It’s financed six commercial litigation cases since July, and has two more cases in front of its investment committee, according to Tania Sulan, chief investment officer for Canada.
“Even mid-sized companies -- who has got a couple of million dollars of disposable cash that they can put towards a litigation dispute? It’s just not accessible to the vast majority of companies,” she said in an interview.
Litigation financing has existed for years in Australia and the U.S. but not in Canada due to a widely held interpretation of a provision of common law that says third parties can’t fund and profit from litigation. Bentham began to receive applications to fund Canadian cases as far back as 2014, she said.
But it was a 2015 civil suit involving Valeant Pharmaceuticals International Inc., in which a Ontario court judge ruled that he couldn’t see why third-party financing would be inappropriate, that opened the door for players like Bentham to Canada. In 2017, Bentham and one of its clients voluntarily disclosed their financing agreement in a case before the Canadian Federal Court, and the presiding judge said the court had no jurisdiction to approve or block the arrangement.
In litigation financing, the investor agrees to cover the plaintiff’s legal costs in exchange for a cut of the financial reward if the claim is successful. If their client loses, Bentham gets nothing. Furthermore, in Canada, Bentham is on the hook for at least part of the other side’s legal costs if their client doesn’t win, an additional risk that discourages companies from pursuing claims, Sulan said. Bentham is a publicly traded company that funds its cases through shareholder money.
The potential for lucrative returns hinges on picking the right cases to back. Bentham looks for claims where the potential award is at least 10 times the cost of the lawsuit, with a typical investment of C$500,000 ($405,000) to fund a contract dispute in Ontario, Sulan said. Bentham doesn’t target a specific percentage return but generally aims to get its investment back plus two times the invested amount, she said.
The firm has yet to finance a restructuring or insolvency claim but that kind of financing is expected to be a key part of their business, she said. In such a case, the financing might be used for a trustee to pursue claims on behalf of creditors or to allow a struggling company pay its lenders while it makes a claim against its suppliers.
“Many cases just would never get off the ground without the support of a litigation funder,” she said. “If there’s meritorious litigation that’s not being pursued because the litigant can’t afford it, then we have a role to play.”
A potential challenge for Bentham expanding into Canada is the fact that there is less case law compared with other jurisdictions, meaning that expectations for legal outcomes can be less certain, according to Kyle Kashuba, a partner in corporate restructuring and litigation at Torys LLP. Typically most litigation cases settle before going to trial, a less risky outcome, he said by phone from Calgary.
“If I’m on the other side of a case where it’s purely a finance exercise, you might rely on that a little bit more and say ‘OK, we’ll see you at trial,”’ he said. “There’s an uncertainty any time you go to trial.”
But Canada’s similarity to Australia’s common law system is a primary reason why Bentham decided to expand here, Sulan said. There are currently two other lawyers working in the Toronto office with plans to add more, she said.
Leanne Williams, a restructuring partner at Thornton Grout Finnigan LLP, said that she could see interest in third-party litigation financing in a case where there is a serious legal issue such as fraud.
For example, her firm acted for Hollinger Inc., the former holding company at the center of Conrad Black’s newspaper empire that filed for bankruptcy in 2007. The advisers implemented a unique fee structure and appointed a litigation trustee to pursue claims against the company’s former directors. The recoveries in Hollinger were “quite successful” and if third-party financing had been in Canada at that point, it might have been a good fit for a litigation funder, she said.
“A small group of creditors might not want to fund that potential litigation because they already have a lot of losses and they don’t want to throw good money after bad,” she said. “I think that’s something that people probably would have looked at.”
— With assistance by David Glovin