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.