Unlocking Value in Commercial Disputes

by: Issues: March/April 2024. Categories: Finance, IBJ Insights, and Strategy.

As it becomes more challenging and expensive to access capital, Canadian businesses are looking for strategic ways to unlock value. When doing this, they typically list their monetizable assets, but often overlook affirmative commercial disputes. That is a mistake. After all, when a company has a claim it could bring against another party, the litigation can be an asset.

Most companies think about litigation as a liability. With an uncertain duration and outcome, it can feel like too big a risk to invest a company’s own money into litigation. Companies also may not even have cash on hand to fund court cases, or their money may be allocated to other business priorities (such as R&D, business expansion, and defense-side litigation). As a result, even when they know they are on the right side of a dispute, the leadership team or board may deem it too risky, too time-consuming, and too expensive to pursue it in court.

Yet there is a way to pursue disputes with minimal impact on cash flow and balance sheet. External financing has long been the smart strategy to fund major business activities and projects, and the same strategy can be used to fund litigation claims. In other words, as part of a strategy to drive value from disputes, business leaders deploy litigation financing to turn claims into assets, achieving cash positive results.

When funding major commercial disputes, litigation financing (or funding) covers the legal fees, expert testimony, and other expenses involved in a large court case. It is used in a variety of situations, such as contract breaches, the breakdown of a joint venture, and the theft of corporate opportunities or intellectual property. This ensures the company’s important claims are litigated as robustly as possible, without dipping into company funds. Peace of mind is ensured by the fact that litigation funding is provided on a non-recourse basis: the funder’s return on investment only comes as a portion of a settlement or award in the case. If the claimant does not win its case and get paid on the judgment, they don’t need to repay the funding.

Furthermore, because litigation funders only realize a return if the cases they fund succeed, their objectives closely align with those of their funded clients—and that’s where the extended value of litigation funding comes into play.

In addition to funding a case, the best litigation financing firms provide specialized skills that deliver an extensive list of benefits to their clients, including:

Rigorous, unbiased evaluation of a case’s merits: Before funding a case, the litigation funder must assure themselves the case is very strong, and to do that they need a smart, experienced team. Omni Bridgeway leads the litigation funding industry in Canada, and our team is made up of former Supreme Court clerks and Bay Street lawyers with exceptional litigation experience, who are adept at conducting deep due diligence on a claim. This allows us to offer clients a thoroughly considered, unbiased perspective on the claim’s likely outcome. This level of analysis and due diligence is at the core of our process. It is not an out-of-pocket cost for our clients, yet it can provide significant insight for a business deciding whether to pursue a major dispute.

Assessment of the defendant’s ability to pay: A funder’s assessment of a dispute goes beyond the strengths of the case itself. Critically, a funder looks to confirm that the defendant is in a financial position to pay if there’s a successful judgment or award. This ensures that both the company and the funder can see the path to a positive financial outcome at the end of the case.

Enforcing judgments from unwilling parties: The final step in realizing value from a litigation claim is judgment enforcement. Even if they have the means to pay, there are some defendants who look to avoid their legal obligations. At Omni Bridgeway, we have a specialized global team made up of lawyers, economists, financial experts, business intelligence, and asset-tracing professionals with deep expertise in tracking assets and inhibiting asset-hiding activities to recover what’s owed to our clients. These services are available for cases we have funded and also where a company has independently obtained a judgment or award but is now facing roadblocks to getting paid.

As litigation funding grows in popularity, we’re seeing an expansion in the set of Canadian business stakeholders—across all industries—who find value in this strategy. This trend is being led by forward-thinking external litigators and corporate advisors who are helping clients see past budget constraints so they can pursue important claims. But general counsel are increasingly driving litigation funding after smartly recognizing it can position their departments as a revenue centre within their companies that can deliver real value.

Simply put, litigation financing is a good way to do business that offers benefits from multiple angles.

  • Funding business activities: Just as leaders would use outside sources of capital to pay for an expansion or an R&D project, they see the value of seeking external funding for a court case.
  • Gathering a variety of perspectives: Leaders know the importance of seeking multiple perspectives on any critical business issue, and litigation funders give them exactly that on a commercial dispute—an unbiased and informed point of view.
  • Establishing budget certainty: Leaders seek to establish budgetary certainty wherever possible, and litigation funding helps to do that for a legal proceeding.
  • Protecting reputation: A company’s cash position should not determine whether leadership takes the right steps to safeguard its reputation. Litigation funding helps businesses resolve problems and assert meritorious legal rights when the stakes really matter.

Litigation financing can also offer significant value to restructuring and M&A teams. If a company is undergoing a restructuring, it might emerge that a piece of litigation is in play. Working with a litigation funder can unlock the value of a claim in circumstances where it might otherwise go unrealized. This can enhance the value of a restructured asset or generate a recovery for creditors and investors. A litigation asset, of course, can be difficult for M&A transaction counterparties to value, and a funder can allow the claim to be spun out of the deal and treated separately, or in some instances a funder may be prepared to purchase the litigation asset outright. There are many ways that litigation financing can be deployed to ensure disputes don’t stand in the way of a merger or acquisition.

 “Litigation funding can generate money that might otherwise be left on the table, and can do so without weighing down a business’s P&L. But there’s more to it than dollars and cents.” 

Omni Bridgeway has helped businesses use litigation financing to fund a wide variety of scenarios, including:

Winning and collecting what’s owed: An international resources company had a business counterparty renege on significant royalty payments. While the case against the breaching party was strong, the company was skeptical the defendant would pay its judgment obligation. We agreed to fund the litigation and make funding available for judgment enforcement proceedings should they become necessary. Ultimately, our client enjoyed a successful outcome, without tying up its own capital in legal fees, and with the comfort of knowing that it had offset the risks associated with bringing the claim.

Monetizing litigation to simplify a privatization deal: Pengrowth Energy Corporation, formerly a public company in the resources sector, was engaged in litigation to compel a multi-million-dollar payment for a broken deal. During the course of the litigation, the company was taken private, and Pengrowth shareholders were to receive payment for their shares and a contingent value right regarding the litigation. Wishing to avoid delay and uncertainty as to the outcome of the litigation, the shareholders sought to monetize the litigation. Omni Bridgeway purchased the litigation asset, providing the shareholders with an immediate payout.

Funding a lawsuit to benefit insolvency creditors: We are funding an action in the context of an insolvency, where it’s alleged that a lender engaged in predatory behaviour that ultimately triggered the insolvency of Bluberi, a gaming company. The insolvency court approved our funding of Bluberi’s lawsuit. That decision was confirmed unanimously by the Supreme Court of Canada, which noted that “Bluberi’s litigation claim is akin to a ‘pot of gold’” that can be secured—with our help—for the ultimate benefit of the company’s stakeholders and creditors.

With businesses facing increasing cost pressures, it’s clear that more C-suite leaders and board members should explore the value of litigation funding as part of a business optimization strategy. After all, it can generate money that might otherwise be left on the table, and can do so without weighing down a business’s P&L. But there’s more to it than dollars and cents.

Business leaders I speak with who are engaged in litigation are often motivated by reputation, principle, and a sense of doing what’s right. They don’t want to see their company taken advantage of or its reputation tarnished in any way. As a result, they appreciate the fact that litigation funding enables them to litigate a case thoroughly, using the best counsel for the job, while demonstrating to stakeholders that the company’s reputation in the market is being protected.

 A business leader’s attention is pulled in many, many directions, and it can be tempting to avoid court cases since they’re time-consuming and expensive, not to mention risky, and may distract leaders from focusing on driving growth. But forward-thinking leaders recognize that part of making the right decisions for their company is monetizing assets as much as possible and using smart strategies to do so.

With litigation funding, major commercial disputes are no longer something to be avoided. Instead, they can be strong sources of revenue that can be pursued without affecting the balance sheet.

Whatever position you’re coming from—whether you’re a litigator, an in-house lawyer, a C-suite leader, or a member of the board—spreading the word about litigation finance within your company can be a great way for you to create value, avoid leaving money on the table, and ensure a robust pursuit of your major disputes.

About the Author

Paul Rand is the managing director and chief investment officer of Omni Bridgeway Canada, where he leads the team and oversees Omni Bridgeway’s investment management and due diligence. With….Read Paul Rand's full bio

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