Investment Counsel Corner, Tip of the month: DON’t bury the bad Facts
Every case has weaknesses. Funding is about understanding those weaknesses and accepting the risks that remain. In our experience, funding applications that acknowledge weaknesses upfront inspire far more confidence than those that present only the strengths.
Experienced funders will identify the difficult aspects of a case during diligence, whether they are flagged or not. The difference is in how the conversation begins. When a legal team highlights a weakness and explains how they plan to address it, they demonstrate a clear understanding of the risks. When, however, an issue only emerges later through our own review, the natural question is whether the legal team really have confidence that it can ultimately be addressed.
Some of the most common omissions we see include incomplete evidence, perhaps relating to date of knowledge and limitation issues; potential alternative counterfactuals that have not been considered by an expert; a lack of robust examination of the causal link between breach and damages; unhelpful case law; and issues around enforcement and the creditworthiness of a litigation target. In one particular matter, we were not told that the claimant was on the verge of insolvency. That had significant implications both for the counterfactual arguments and for how any funding arrangement would need to be structured.
None of these issues is necessarily fatal. Each may be entirely manageable during the course of the litigation. What matters is that they are acknowledged and accompanied by the legal team’s considered assessment, preferably in instructed counsel’s opinion. Discovering them ourselves can suggest that they have been overlooked, that the team lack confidence in their ability to address them, or that the cost of dealing with them has not been factored into the budget.
There is also a practical consideration. When we identify a material issue that was not included in the original application, the process slows down. Further information may change the picture originally presented, rather than simply confirming or expanding on points already made. The subsequent explanation may ultimately be entirely satisfactory, but momentum can be lost.
The strongest applications present the case candidly, give the difficult facts their proper weight and explain how they will be addressed. A claimant who has confronted the weaknesses in their own position is generally more credible than one who appears not to have done so.
We are not concerned by the existence of a weakness. We are concerned when it only comes to light during diligence.
Bob Knock, Investment Counsel
