This post looks at the financial terms of the funding contract that financed the Dugal case (see last post), to highlight important similarities and differences with the model.
By reading Dugal’s recitals and provisions 4.1 and 4.2, we see that the funder is only directly investing $50,000, which is for “out of pocket expenses incurred by the Plaintiffs in the proceeding”. The funder is not financing the conduct of the claim itself, in contrast to the terms of the draft model contract. However the funder is bearing the risk of adverse cost orders throughout the conduct of the claim. Notably, that risk is not absolute; it is mitigated to the extent that the plaintiff receives any beneficial cost orders during the conduct of the claim. That is, the funder only owes an adverse costs order sum net of beneficial cost orders received prior to the adverse cost order.
The Dugal definitions section includes three noteworthy funding terms. The funder is entitled to a “Commission”, which is 7% of the “Net Resolution Sum”, up to a maximum cap. This structure differs in three ways from the draft model. First, the percentage is fixed, whereas the model allows a plaintiff to sell more or less; second, the model imposes no cap outside of the plaintiff’s minimum; and third, the amount the funder invests is in no way connected to the amount it ultimately receives. Indeed, it is possible the funder will pay only Cdn $50,000 to receive Cdn $10,000,000; or pay much more and receive Cdn $5,000,000. (Those payouts are the commission caps depending on whether the case advances past the plainiffs’ pre-trial conference brief or not.) The draft model, in contrast, relates upside potential to investment size through the sale of Litigation Proceed Rights. (Of course, the funder can pay the Cdn$50,000 plus adverse cost order(s) and receive nothing, just as Litigation Proceed Rights may prove worthless.)
Another difference is the concept of “Net Resolution Sum” versus the model’s “Proceeds.” Because the Dugal funding does not finance the conduct of the claim, when the proceeds come in they first pay fees, disbursements, taxes, and administrative expenses. Only amounts net of that total are available to be disbursed to the Plaintiff and funder. Under the draft model contract, all such sums are paid for by the Funder (and probably litigation counsel) through their purchase of Litigation Proceed Rights. Thus when the proceeds come in, the only amount that remains to “net” against them are taxes. By selling shares in the proceeds, the model puts the burden of taxes on the plaintiff, which we believe incentivizes the plaintiff to structure settlements in tax-optimal ways.
Another way the Dugal funding contract’s money terms differs from the draft model’s relates to how the total proceeds are calculated. Seeking to minimize claim commodification, the draft model explicitly excludes the monetary value of remedies not intended to be convertible to cash, such as injunctive relief. Although the Dugal case was a securities fraud claim brought by investors, making the likelihood of non-cash remedies relatively small, the contract included provision 7.3 which said “If the Resolution Sum is not money, the monetary value of the Resolution Sum received will be calculated by reference to the reasonable market value of the Resolution Sum. The Resolution Sum shall then be distributed, and any Commission paid, in proportion to its equivalent monetary value.” The underlying definition of “Resolution Sum” includes “the gross amount or amounts, or the value of any goods or services, for which the Claim or part of the Claim” is resolved in favor of the Plaintiffs. On our read of the Dugal contract, in the unlikely scenario where there was some remedy that was non-cash–perhaps additional disclosures, or corporate governance reforms–the contract would require its pricing and inclusion in the disbursement to funder. As a practical matter that might simply prevent the plaintiffs from pursuing such remedies.
Finally, the last parallel in the funding terms is staged funding. That is, the Dugal contract allows the funder to opt out of financing appeals, whether offensive or defensive. If the funder opts out, they give up any share of any proceeds that result from the appeals they otherwise would have been entitled to.