Third-party dispute finance — the new normal
Promoted by IMF Bentham.
Businesses are under pressure to do more with less and are turning to third-party finance to outsource legal dispute costs and risks. IMF Bentham explains how.
Litigation, Arbitration and alternative dispute resolution are one of the largest categories of legal expense for businesses in Australia and one of the most likely areas of work to be outsourced to external legal advisers1. It is therefore not surprising that businesses are curious about the global trend towards using external finance for commercial legal disputes. Creative leadership teams are exploring new financing models to pursue their legal rights, unlock the monetary value in disputes and de-risk their balance sheets.
Around the world, sophisticated businesses are already reaping the benefits of using third-party finance for disputes. In Singapore, international parties now confidently use third-party finance to pursue their commercial rights through arbitration. In the UK, Europe and the USA, businesses and law firms use third-party funds for individual commercial disputes as well as entire portfolios of claims. A recent study2 indicates 92 per cent of in-house lawyers have either already used third-party dispute finance, or view it as increasingly important in their armoury.
For private practitoners in Australia, it is important to understand this product and service which is changing the market, so you can competently and confidently advise your clients of their options.
For in-house counsel, your executive is looking to you for creative solutions to reduce expenses, and third-party dispute finance is a tool to turn costly legal claims into revenue-generating assets — transforming your legal department from cost to pro_ t centre.
We interviewed Clive Bowman (chief executive Australia/Asia) and Julia Yetsenga (chief financial officer) at IMF Bentham, Australia’s leading third-party dispute financier, to understand how third-party finance works for businesses.
How have businesses previously funded legal disputes?
Commercial disputes can run for years, drawing heavily on a business’s resources. Businesses have traditionally funded legal disputes themselves. Some have even foregone legitimate claims to avoid the expense and risk. Even well-capitalised businesses, with valuable claims can be reluctant to pursue their rights because:
- their litigation budgets are typically finite or diminishing and are often reserved for defences, not plaintiff claims
- external legal costs are recorded as expenses in their financial statements and present a ‘drag’ on profits and share price
- they sometimes _ nd it hard to properly value their claims, and so elect to preserve capital for strategic projects or business-as-usual
Why would a business use third-party dispute finance?
Third-party dispute finance helps solve the above issues. Instead of businesses using their own money to pursue claims, they are now outsourcing their legal costs and risks to third-party financiers like IMF Bentham. Partnering with IMF Bentham, allows businesses to:
- pursue legal claims and, at the same time, assign capital to other priorities
- leverage legal claims as ‘assets’ and unlock potential revenue in claims
- finance disputes without impacting the bottom line, effectively taking dispute-related expenses ‘off-balance sheet’
- avoid the need to provide security for costs
- transfer the risk and expense of Adverse Costs orders to IMF Bentham
- level the playing field
- retain their preferred, leading, legal representation
What does it mean to take legal expenses ‘off-balance sheet’?
When a business funds its own disputes, external legal costs are recorded as expenses of the business, directly impacting profit. Whereas, when IMF Bentham is engaged, we pay the legal costs directly and they do not affect the business’s profit margin.
How do disputes become revenue-producing ‘assets’?
IMF Bentham covers the costs of running the dispute, along with downside risks such as adverse costs orders. Our finance is ‘non-recourse’ which means we are only paid if the claim is successful. If the claim is unsuccessful, the business pays nothing. With costs and risks outsourced to IMF Bentham, businesses can regard their disputes as ‘assets’ which will produce revenue upon a successful resolution.
What types of claims are suited to third-party finance?
Third-party finance can be used to cover legal costs for:
- Single commercial claims - financing can cover all costs, including briefing law firms, barristers, expert witnesses etc
- Disbursements or part of the costs
- Operational costs - in addition to financing claim(s), IMF Bentham can finance the operational costs of a business, pending resolution of dispute(s)
- Seed financing - up-front finance to explore whether a claim is worth pursuing
- Adverse costs and security for costs orders - protecting the business from the ‘down-side’ risks of litigation
Is finance available for entire portfolios?
Absolutely. Many businesses have more than one potentially valuable claim. IMF
Bentham can bundle contingency claims into a financed portfolio (e.g. claims across business units or over a period of time). Portfolios of cross-collateralised disputes can also attract more favourable pricing.
Where can I find out more about third-party financing?
We are available to discuss your needs and answer your questions:
Contact: Clive Bowman, chief executive
02 8223 3567