When British Telecom recently announced the landmark US$45 million financing of a portfolio of cases, it signalled to savvy corporate lawyers that not only can litigation be converted into a revenue stream, it established litigation finance as a legitimate business tool and a valuable part of the armoury of a company’s in-house counsel and finance departments.
Corporate lawyers in the UK and the US have long recognised that litigation financing has matured into a corporate finance product, treating impending litigation like any other asset a company might possess and using it to unlock the value of pending litigation while mitigating risk and preserving cash flow.
Originally the preserve of impecunious plaintiffs, it has now grown globally to be seen as a valuable financial product in a company’s toolbox to be used by solvent and successful businesses as well as those without funds to pursue a legal claim.
Originating in Australia in the late 1990s, litigation finance primarily focused on insolvency matters. However, the landmark 2006 Fostif High Court ruling, stating that litigation funding was not an abuse of process, has seen the industry grow to be utilised in the context of commercial claims, class actions and international arbitrations.
Essentially the finance product assumes all of the financial risk of legal claims in exchange for a share of the amounts recovered, litigation finance has grown into a multi-billion-dollar industry globally. One that has moved away from its beginnings as a means of last resort to a product that has gained credibility in the world’s financial markets.
Traditionally, litigation has been viewed as a time-consuming, unpredictable and costly exercise with no guarantee of success. Additionally, most companies do not have in-house litigation departments and so tend to outsource this function. As a result, corporates may tend to avoid litigation or choose not to proceed even with meritorious cases due to a lack of in-house resources and the potential strain a lengthy court process can place on company cash flow.
So how does it work? The litigation finance company agrees to bear all of a plaintiff’s legal costs, which can include solicitors’ fees, barristers’ fees, charges for independent experts and court fees. The financer will also provide an indemnity to cover any adverse cost exposure of the plaintiff in the event of an unsuccessful claim.
In return, the financer will receive an agreed percentage of the recovered amounts plus repayment of all costs. It is also important to note that litigation finance is non-recourse to the plaintiff’s assets. The financer will only recover costs and fees if the plaintiff is successful in the litigation. If unsuccessful, the financer will bear all costs. This is why it can be such an attractive proposition for company CFOs. It is, in effect, a transfer of all of the risk of litigation.
So why have Australian companies been slow to take advantage of this? The answer is pretty simple. Australian companies are, for the most part, unaware that this product exists or can be utilised by them. With the bulk of Australian litigation finance companies focusing on the traditional market sectors of insolvency and class actions the product suite in Australia has not really moved on since its inception in the late 90s.
Without doubt, Australian in-house lawyers under enormous pressure not only to rein in costs, but also to create real value will increasingly look to litigation financing to fund litigation.
Patrick Moloney is the managing director of LCM Finance