4th April 2016

Is litigation a forgotten asset of your business?

At a glance

Although an increasing number of businesses are now aware that they can use their company’s litigation as security to obtain third party funding for the purposes of pursuing that litigation, over two-thirds of businesses are completely unaware that they can also use their litigation assets as collateral for general corporate finance. Michael Axe explains what business need to know about utilising their “forgotten” litigation assets.

Over the last few years, there has been an increased awareness in the business community of the availability of third party “litigation funding”, which is an arrangement between a client and a specialist funding company, where the funder agrees to fund some or all of the client’s legal costs and liabilities in exchange for an agreed share of the proceeds recovered in a successful case.

However, a recent survey conducted by The Lawyer and Burford Capital has revealed that 67% of those surveyed were not aware of the existence of “litigation finance” and so had never even explored this option.

So how does “litigation finance” differ from “litigation funding”?

Fundamentally, “litigation finance” is simply a form of corporate financing.  Just as with most other forms of corporate financing, the company provides collateral to a third party to secure financing which can then be used by the company for general corporate purposes – the only difference with litigation financing is that the collateral provided is the company’s litigation case(s).

The common misconception is that litigation assets can only be used to obtain funding to pay for the client’s own legal costs and liabilities (as is usually the case with traditional “litigation funding” arrangements as described above), but this is not the case with “litigation finance”.  By using its litigation assets as collateral for general corporate financing, a company can obtain funds that do not have to be used to pay for legal costs and disbursements related to the litigation itself.

How does “litigation financing” work in practice?

Although the funds provided do not need to be used to pursue the litigation itself, the financing is still tied to the outcome of the litigation, meaning that the funder is paid a return based on an agreed share of the proceeds recovered in a successful case.  Importantly, litigation financing is still “non-recourse”, meaning that if the case is unsuccessful, the client does not need to repay the funder.

The potential advantages offered by litigation financing are therefore clear; in return for giving the funder a share of any proceeds recovered at the end of the case, companies can obtain funds today that they might not otherwise have been able to obtain until the end of a litigation, or – if the case is ultimately unsuccessful – that they might never have been able to obtain.  Companies can therefore use litigation financing to unlock the value of their litigation assets now, rather than at the end of a long litigation case, and then use those funds for corporate purposes unrelated to the litigation itself.

A wide variety of funding options

There are arguably more alternative funding and financing options available to companies today than ever before.  For example, in addition to “litigation funding” and “litigation financing” as summarised above, there is also:

  • “litigation portfolio financing”, where a funder provides funding linked to multiple claims rather than just one. Often, funders will offer better terms for portfolio financing, as it enables them to better spread their own risks
  • “stage-specific litigation funding”, where the funding is only used for a specific stage of the litigation, rather than the whole case
  • “recourse financing”, where an interest-only loan is provided over a fixed term, to be repaid at the end of the term or the conclusion of the litigation (whichever is sooner). This option is sometimes attractive as it can prove less costly to the company in the long run (as the company only pays the interest on the loan, rather than giving up a share of the proceeds recovered at the end of the case), although the loan is repayable even if the litigation is eventually lost
  • “conditional fee agreements” or “CFAs”, where your lawyers are paid nothing at all during the course of the proceedings or if you lose (if it’s a “full” CFA), or are paid some fees at a discounted rate during the course of the proceedings but nothing further if you lose the case (if it’s a “discounted” or “partial” CFA), in return for a percentage uplift on their fees if the case is won
  • “after the event insurance” or “ATE insurance”, which is insurance cover against your potential liability to pay the other side’s legal costs if you lose the case (and it may also cover some of your own third party expenses, such as Court fees, counsel’s or expert’s fees)
  • “damages based agreements” or “DBAs”, where your lawyers are paid a share of the proceeds recovered at the end of the case if you win, rather than being paid during the course of the case based on the time spent on the matter.

Nick Rowles-Davies, MD of Burford Capital and one of the leaders in the field of litigation financing, adds:

“The evolution of third party litigation funding to litigation finance is evident.  More and more frequently, litigation finance is being used in other ways: to monetize pending legal claims to raise capital for other corporate purposes, for example, or to fund portfolios of matters. This growth in portfolio financing is indicative of a maturing in the field of litigation finance more broadly.  It speaks to the fact that firms and clients need solutions not only for singular instances of financial need, but also for reducing risk and cost across a range of litigation matters.  Portfolio financing addresses this need and as 2016 progresses, this will no doubt come further into the light.”

At RB, we work with both in-house counsel and company executives to assess analytically the potential risks and rewards of a company’s litigation assets, so that informed decisions can then be made as to their future progression, including the most suitable available forms of funding.  Our QUANTUM package includes several funding options designed to help reduce the risk in commercial litigation, and is intended to be flexible enough to meet our client’s funding needs in a variety of situations.

For more information on this or any other issue relating to litigation funding and financing, please contact Michael Axe on +44 (0)1293 558549 or speak to your usual contact in the Commercial Disputes Team.

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.