Litigation finance 101: Best practices for commercial litigation and arbitration

The use of outside capital in the legal industry is becoming increasingly widespread. Indeed, our latest research (http://www.burfordcapital.com/blog/2016-litigation-finance-survey/) shows that use of litigation finance increased four-fold between 2013 and 2016. And yet, many lawyers and clients still lack direct experience with a tool that leading GCs call “essential.” Below, we offer a primer on litigation finance—what it is, how it works, and other factors lawyers should consider.

Litigation finance defined

With litigation finance, a litigant or law firm uses the asset value of commercial litigation or arbitration to secure capital from a third party, either to finance the litigation or for other business purposes.

In its most common form, litigation finance pays the fees and costs associated with a single commercial litigation or arbitration matter, in exchange for a portion of the ultimate award or settlement. Most often, this approach helps clients that can’t afford or don’t want to pay their lawyers by the hour. Rather than pressuring its law firm of choice to take on this cost and risk, or being forced to work with a different firm, litigation finance effectively acts as a hybrid or “synthetic contingency” that bridges the gap between client and firm.

Increasingly, litigation finance is used to solve other capital needs and is akin to specialty corporate finance. Law firms and businesses of all sizes, from startups to Fortune 500 companies, use litigation finance to move cost and risk off corporate balance sheets; free up capital for other business purposes; and improve accounting outcomes, risk management and financial reporting. A particularly fastgrowing area of litigation finance is portfolio-based finance, where multiple matters (including a mix of plaintiff- and defense-side cases) are combined in a single cross-collateralized financing arrangement.

How litigation finance works

• Typically, a litigant or law firm seeking financing contacts Burford in connection with commercial legal claims or related legal fee receivables.
• Financing can be provided at any stage of the proceeding–for pending claims, claims on appeal or legal receivables awaiting payment.
• Burford uses the value of those legal assets and receivables to craft capital solutions based on financing a single case, a portfolio of cases, or another structure that is customized to meet the client’s or law firm’s needs.
• Terms and structures vary. Burford will provide capital of $1 million or more, including investments of more than $100 million, usually on a non-recourse basis (meaning our return is tied to the successful outcome of underlying cases).
• Our capital may be used to pay fees and expenses associated with a case or for entirely different business purposes.
• This diligence and transacting process usually takes 45 to 60 days, but we can move much faster if needed. In some cases, we have provided capital less than a week after learning of an opportunity.

What litigation finance costs

As a general matter, pricing for litigation finance will be in proportion to the level of risk and stage of the litigation. At Burford, we rely on an in-house team of experienced commercial litigators to evaluate potential investments. In deciding the terms of litigation finance transactions, our team considers the risk profile, merits of claims and defenses, likely duration and many other factors.

Although terms and structures vary, Burford’s capital is almost always non-recourse—meaning we don’t earn an investment return if the underlying litigation is unsuccessful. We are extraordinarily flexible and approach every investment with terms tailored to meet clients’ needs.

Any terms offered by a litigation finance provider will be highly specific to the underlying matter or matters. Indeed, litigants and law firms should be skeptical of “off-the-shelf” terms offered prior to diligence, as the ultimate pricing will almost always vary (sometimes significantly) from initial terms.

Common questions about litigation finance

Lawyers without direct experience often have questions about the ethics of litigation finance and the role of the finance provider.

In short, Burford or any other litigation financier is as a passive, outside investor who in no way alters the attorney-client relationship. Litigation financiers have no rights to manage the litigation in which they invest, and they do not stand in clients’ shoes. Just as a leasing company does not tell you how to drive your car, a litigation financier doesn’t drive the litigation. Nor does it get any rights to control settlement of the litigation, which remains wholly in the litigant’s purview.

Lawyers also regularly ask about the interaction of litigation finance and the protection of attorney work product. Parties seekingfinancing often disclose work product to potential financiers; otherwise, it’s unlikely financing would be forthcoming. Fortunately,several decisions (http://www.burfordcapital.com/blog/blog-work-product-protection-for-litigation-finance/) have recentlyconfirmed that work product shared with a litigation financier under a confidentiality agreement remains protected from discovery or disclosure.

Finally, lawyers also might ask about any other laws or rules that might restrict commercial litigation finance. The overwhelming legislative and judicial trend is toward greater acceptance of litigation finance. In particular, the ancient common law doctrines of champerty, maintenance and barratry are of decreasing relevance in modern legal practice. They have been completely abolished in many jurisdictions, and even in those jurisdictions where they still exist in some form, they do not interfere with litigation finance as practiced by Burford.