Traditionally, litigation funding has been a popular option for corporate claimants facing financial pressures who do not have sufficient capital reserves to commit to litigation which can be a long-term process. That is still true, particularly for corporates facing pandemic-related financial strain. However, in the last few years we have seen more and more companies leveraging litigation finance as a strategic means of mitigating risk and the impact of litigation on the company’s bottom line and reported financial performance.
Before looking at why there has been a shift towards the optional use of litigation finance rather than necessity, it is worth considering what litigation finance offers to companies. A litigation funder will pay some or all of the legal fees and disbursements involved in bringing a suitable legal claim. The funder will then be repaid those costs plus a return in the event of success (whether through a settlement or a final judgment/award). The funding is non-recourse, and so the funder will only be repaid its costs and will only receive its return from any proceeds successfully recovered from the Defendant.
With that in mind, litigation funding offers at least five big advantages for companies, even when they are not facing financial pressures.
1. Mitigating Litigation Risk
Risk management is a key feature of all business operations from building and maintaining risk registers to auditing and mitigating individual risks. Litigation risk is a category of risk that is difficult to predict in the longer term. Disputes often arise out of a series of factual circumstances which, if not resolved through negotiation, result in litigation or arbitration. Business disputes are almost inevitable at one point or another, but litigation can be risky and costly. As a result, companies with available capital on their balance sheet may still hesitate to pursue meritorious claims rather than deploying that capital into their day-to-day business. After incurring high legal costs, the company could still lose the case. In some jurisdictions the losing party may also have to pay the successful party’s costs which adds further to the financial risk. The Board and/or the CFO is unlikely to sign off on significant potential legal expenses when it may not be certain whether the claim will be successful and where there could be additional costs if the claim loses.
However, litigation finance offers a way to mitigate this risk. Litigation funding is non-recourse which means that Deminor’s investment will only have to be repaid if the case is successful. In combination with ATE insurance or by Deminor providing an indemnity, the risk of paying any adverse costs can also be mitigated. This means a corporate claimant will not have to pay the costs of litigating, and it will not run the risk of having to pay the other side’s costs (in jurisdictions where the loser pays the winner’s costs) in the event it loses.
Funders can also give companies further insight into the risk profile of the claim. Litigation funders review large numbers of cases in a wide range of jurisdictions across multiple business sectors. They have to analyse the risks of those cases and identify those with good prospects of success. Funders take a different approach to assessing cases to law firms. Not only does the case need to have good merits, but it must also have a strong economic basis. This means the potential damages must be sufficiently high to justify investment in the case and the Defendant must have sufficient assets in order to pay damages awarded against it. The Defendant’s assets must also be accessible if further enforcement steps are needed in order to secure payment. If a funder takes an independent, positive view of a company’s case, that is often a good indication of its prospects (both legal and financial). Funders need to fund cases that win, and a funder’s strategic assessment of the merits can assist a company in deciding whether it is worth pursuing a claim.
2. Taking Litigation Costs Off Balance Sheet
Legal fees incurred in financing litigation are recorded as liabilities on a company’s financial statements in addition to provisions that need to be recorded to account for future expenditure until case resolution. When cases can last for several years, litigation can have a longer-term impact on a company’s balance sheet and reported profits than expenses incurred in any particular financial year. Litigation funding means legal fees and all other litigation costs are borne by the funder and are removed from the company’s balance sheet without impacting financial performance. If the case is successful, then the revenue will boost a company’s top and bottom line without the investment of a company’s own funds in the case.
There are many sources of funding for litigation for business including traditional loans or the use of its own revolving credit facilities. However, all of these other funding structures require loan repayments to be recorded on the balance sheet and provisions to be taken for future expenditure. Litigation finance removes all litigation cost liability from a company’s financial statements.
3. Freeing Up Funds
Companies have many conflicting demands on their cash reserves, and they have strategic objectives with planned budgets for investment across their operations. Few organisations include generating revenue through litigation as part of their strategic objectives. As such, investment in litigation may come at the expense of achieving other objectives within the business during the course of the litigation. Litigation finance can be a solution allowing companies to continue to deliver on their objectives while also recovering damages due from third parties.
4. Providing Equality of Arms
Litigation finance helps to level the playing field when smaller companies are dealing with claims against large multinationals. Large defendants may be able to pursue expensive and lengthy litigation strategies and hire world class legal teams to outspend their smaller adversary. Litigation finance allows corporate claimants to access the high-quality legal resources necessary to fight and mitigate case strategies designed to protract proceedings and run down the resources of smaller companies.
5. Turning In-House Legal Teams into Income Generators
Legal claims are not recorded as contingent assets on company balance sheets primarily due to their contingent and uncertain nature. However, strong claims are business assets. Litigation finance can be a means to unlock the value in a company’s claims in return for a proportionate share of the gain. As such, damages won will go straight to the company’s top line without any downside liability against them.
Deminor provides funding to corporate claimants with meritorious cases that are likely to deliver a successful recovery for the claimant, and it can assist corporates in accessing the advantages of those claims. We provide our clients with the resources, focus, and legal expertise needed to successfully litigate and monetise their claims, and to offset their litigation risks.
Written on January 13, 2022 by
Emily O’Neill is General Counsel UK, David Walker is Senior Legal Counsel at Deminor.