The last two posts laid out what a material breach by either party is. The question then is, what happens if a party commits such a breach? While the question cannot be too narrowly and definitively answered, because parties should have available to them any remedies available at law or equity, we believe that consequences in addition to such remedies would correctly align incentives.That is particularly true given the hypothetical nature of the damages from breach.
Consequences of Plaintiff’s Material Breach
As we noted in our post about a funder’s right to terminate for cause, a plaintiff’s failure to disclose material information prior to the sale of Litigation Proceed Rights could be grounds for a securities fraud claim. However, for that claim to stick, the Claim likely must be concluded; the Litigation Proceed Rights have no value otherwise. It is hard to see how damages can be calculated simply because the Funder’s Expected Value is diminished. Even in a common law fraud claim, calculating damages prior to the Proceeds realization is tricky unless the only measure of the damages is the money invested in reliance on the fraud.
To strengthen Plaintiff’s incentive to avoid a material breach, the draft model contract imposes a dire consequence, namely de-funding:
[7.1.4 Consequences of Material Breach by Plaintiff: If the Plaintiff commits an incurable material breach under 7.1.1 or 7.1.2 or fails to timely cure material breach as defined therein, Funder is entitled to an immediate refund of all of its Investment remaining in the Litigation Account and is entitled to keep its Litigation Proceed Rights. Funder shall have no further obligations under this Agreement other than the provisions that explicitly survive the termination of this Agreement. This provision shall not limit Funder’s other remedies at law or equity.
220.127.116.11 If the existence of a material breach is disputed by the Plaintiff the Disputed Refund provisions of the Escrow Agreement governing the Litigation Account shall apply.]
[7.1.4 Consequences of Material Breach by Plaintiff: If the Plaintiff commits an incurable material breach under 7.1.1 or 7.1.2 or fails to timely cure material breach as defined therein, Funder may seek damages from said breach at law or equity.]
Consequences of Funder’s Material Breach
Plaintiff can be jeopardized by Funder’s material breach in ways that go beyond the value of the Claim. For example, if the Funder shares Proprietary Information with competitor (or with an investor weighing whether to invest in Plaintiff or a competitor) the resulting damage to Plaintiff could be wholly unrelated to the Claim, even though traceable to the Funder’s investment in the Claim. Similarly if the Funder’s disclosure of privileged information results in waiver, then the damage to Plaintiff may exceed the four corners of the Claim; it depends on what information is discovered as a result. Last, if the Funder is unable to invest when required (a situation that cannot arise if Accelerated and Supplemental Investments are not used, unless the Funder fails to give timely and effective notice of termination at a Milestone) the Claim will not be jeopardized if the Plaintiff can find alternative financing quickly enough. However the terms of that financing may be damaging, in that they could be significantly more expensive than would have been available to Plaintiff if the Funder had been able to honor its commitments.
For these reasons, and the general difficulty in quantifying the damages resulting from the material breaches, the draft model contract requires the Funder to take a total loss, in addition to facing whatever remedies may be otherwise available at law or equity:
[7.2.4 Consequences of Material Breach by Funder: If Funder commits an incurable material breach under 7.2.1 or 7.2.2 or fails to timely cure a material breach as defined therein, Funder’s Litigation Proceed Rights are cancelled and Funder must promptly return its Litigation Proceed Right Certificates. This provision shall not limit any other remedies Plaintiff may have in law or equity.
18.104.22.168 If Funder disputes the existence of a material breach the Disputed Rights provisions of the Escrow Agreement governing the Proceeds Account shall apply.]
[7.2.4 Consequences of Material Breach by Funder: If Funder commits an incurable breach under 7.2.1 or 7.2.2 or fails to timely cure a material breach as defined therein, Plaintiff may seek damages at law or equity.]