How litigation funding can work for Corporates
Promoted by Augusta Ventures.
Litigation funding enables companies to monetise valid commercial disputes while preserving capital, mitigating litigation risk and reducing management time.
A conundrum facing many companies with a commercial dispute is whether they should litigate or ignore the claim. We believe that litigation funding offers a viable solution to this.
For example, assume a company has completed $2 million worth of work and the client is refusing to pay, giving rise to a breach of contract claim. Further, the company is confident that it has a good claim. In these circumstances, it is reasonable to assume that the company would seek to enforce its rights.
However, there are several impediments to litigation. Foremost among these is the high cost (a typical Supreme Court action can cost upwards of $300,000). There is also:
- the potential of an adverse costs order, meaning the company could lose a total of say $600,000;
- the opportunity cost of both management and in-house legal time dealing with the claim rather than focusing on core business; and
- tying up cashflow which could otherwise be used to generate revenue.
Faced with these issues it is easy to see why a company may decide to ignore a claim. On the other hand, successful pursuit of our example claim may give rise to recovery by the company of part or all of the $2 million damages, benefiting the company’s cash flow and its bottom line.
Introducing a litigation funder into the decision-making process removes these concerns. A litigation funder undertakes detailed diligence on a claim. If it has legal merit and the defendant has the means to pay for any recovery, they enter into a funding agreement with the company and the law firm (selected by the company).
Funding is provided on a non-recourse basis – if the claim is unsuccessful, the funder loses its capital while the company has preserved its capital. The funder pays for adverse costs insurance as part of the funding to protect the company in the event of an adverse costs order.
The funding agreement sets out the terms on which the funder will pay for the costs of running the claim (legal fees, counsel costs, disbursements and insurance premium). Where there is a successful resolution, the funder receives its capital back and a success fee from the award with the company receiving the balance.
The funder’s success fee is understandably of interest to corporate claimants. Many funders charge a percentage of the gross or net recovery, typically 20–30 per cent of the award amount. The Augusta approach is different. Augusta charges a multiple of deployed funds. There are several benefits to this approach. The success fee is unambiguous as it is calculated on the costs of the litigation rather than the amount of the award (which may vary considerably). A further benefit is the fee is charged on funds deployed. For instance, if the amount of funding required to trial is $300,000 and the case resolves with $150,000 being deployed, the Augusta success fee is charged as a multiple of the $150,000 only.
The benefits to the company from litigation funding are clear:
- Alignment of interest – Augusta only receives its capital back and a success fee if the claim resolves successful.
- Cashflow – The company does not fund the matter and in-house counsel does not need to request funds from the chief financial officer to prosecute the claim. This allows the company to increase its legal spend on litigation without impacting on cashflows.
- Risk mitigation – Adverse cost risk is managed by insurance, so it should not be necessary to note litigation as a contingent liability in the firm accounts. Additionally, risk of own litigation costs is removed.
- Reduces management time – Augusta monitors the case with the law firm selected by the company. As part of this, Augusta agrees on a case budget with the law firm and the company and monitors the progression of the matter to ensure that invoices are in line with the agreed budget. Control over the conduct of matter remains with the company.
- Confidence in case merit – Augusta can provide additional comfort to in-house counsel on the merits of the case as funding is subject to careful due diligence.
- In-house counsel can be converted from a cost centre to a ‘notional profit centre’ where successful case resolutions can be notionally offset against the cost of in-house counsel.
Augusta is happy to consider funding commercial claims seeking damages over $1 million and will fund legal costs up to around $8 million. If you would like further information on how funding can help your company, please call us on (02) 8311 0555.