Corporate cashflow management: Choosing the right finance partner

14th September 2020

In the first of a series of articles considering disputes finance solutions for corporate users in Australia, Sydney-based Senior Investment Manager Susanna Taylor discusses the early stage processes and considerations for achieving finance with the ultimate objective of protecting the value of the business from the impact of disputes costs.

With the effects of the global pandemic expected to dampen the levels of corporate activity in Australia, as well as the demand for dispute resolution services having increased by as much as 22% in recent years[1], it is expected that corporates in Australia will seek alternate ways, in line with recent ASX and global trends, to manage the legal costs and risk associated with pursuing, and in some cases defending, claims, in order to free up their cashflow and utilise their funds in the core profit-making functions of the business.

This article sets out some of the advantages involved in utilising disputes finance in the early stages of a dispute, while further articles in this series will take a deeper dive into the structure of dispute portfolio transactions including pricing and the financial benefits for claimants of unlocking their disputes assets.

Early assessment of a claim

While most funders will consider a claim for finance at any stage of the dispute, there are considerable benefits to involving a funder at the very point at which the dispute has crystallised, particularly in enabling the strength of a claim and the underlying evidence to be examined before too much time and money has been spent by the corporate on legal costs.

In assessing a claim in its preliminary stage, the funder will take a holistic view of the claim, seeking to identify the most efficient pathway to achieve a commercial outcome. The funder, who has unique experience of assessing hundreds of claims and their outcomes, can draw on past experience and analogous cases in order to suggest a particular strategy which might suit this particular claim.

In certain types of disputes, funders can also supply seed funding for claims still under investigation. The funder will fund these investigations and if the claim does not proceed, there is no obligation to repay this funding. Seed funding can be a valuable tool in the development of a claim and in helping to determine whether a claim is viable or not prior to making a decision to commit to litigating a claim (which of course can be a lengthy process involving extensive management time even if the costs are transferred to a funder).

While there are obvious benefits in approaching a funder early in the lifecycle of a claim, a funder can also be approached to assess claims at a later stage, even when a final hearing is imminent. A benefit of assessing a claim at a later stage is that there will be more information available to assist in evaluating the prospects and risks of the claim. The closer a claim is to its final determination however, the greater the risk that it will not succeed (as the chances of the claim resolving prior to determination will have decreased).

In assessing a claim, a funder will not only look at its merits but also at its commerciality. Funders have a particular expertise in assessing legal budgets and in costs management. They have the requisite experience to assess whether the budget set to run the claim through to resolution may be too high or whether it has possibly been ‘under-cooked’ based on the funder’s knowledge of budgets for similar types of claim. This review of a budget can be of particular assistance to a corporate claimant who may not be a repeat player in litigation regardless of whether funding is in fact ultimately utilised.

A different perspective

While there are obvious parallels between funders and law firms (most funders are inhabited by former disputes lawyers), funders do not in any way replace the legal representatives of the claimant and do not seek to interfere in that relationship. Funders approach a claim differently to lawyers and it is this difference in approach which can be of real value to a claimant. Lawyers are necessarily focused on the formulation of the causes of action and the process which will be undertaken to prosecute those causes of action, whereas a funder will take an bird’s eye view of the claim to consider on day one, the likely result for the client in monetary terms, the time which will be taken to achieve that result and any commercial imperatives to that result being obtained.

Funding is a commercial proposition involving a sophisticated assessment of the proportionality between the claim size and the budget and prospects of recovering the amount of the claim from the defendant. As such, in assessing a claim for funding, funders approach a claim from a different perspective to the claimant’s lawyers. This perspective can add an additional, and sometimes alternate, level of commercial thinking, particularly in relation to the following:

  1. Considering the proportionality between the budget and the potential damages and really drilling down into whether the assumptions used in relation to both of these elements are reasonable;
  2. Considering factors such as how a defendant is likely to seek to defend the claim, their resources available to do so and any obstacles to the reaching of a resolution of the claim; and
  3. A deep analysis of the ability of the defendant to the claim to pay the amount of the claim and any difficulties in relation to cross-border enforcement of a judgment or award.

This extra insight from a funder can be extremely valuable to a corporate in conducting its own assessment of the risk associated with its claim.

LCM’s selection criteria

The process of achieving funding can vary according to the approach of different funders and how the case is presented by a claimant to a funder.

The five key criteria which LCM applies when conducting its assessment of a case are applied across the globe and are as follows:

  1. There must be proportionality between the size of the claim and the budget. Regardless of whether funding is involved, no one should be pursing a claim worth $5M if the costs to do so will be $4M.
  2. The claim must have clear prospects of success and not be based on any novel principles of law.
  3. The claim should be based on documentary rather than oral evidence.
  4. The defendant must have the capacity to pay the amount being sought.
  5. There must be a sound legal team in place with the relevant expertise in order to run the claim.

LCM’s selection process is that it will conduct an internal assessment of a claim as against these five criteria. If it is satisfied that the claim meets these criteria, it will offer commercial terms for funding. These terms are only one page and allow LCM and the claimant to determine whether they can reach commercially acceptable terms. The terms for funding are bespoke for each claim and take into account the individual requirements of the claimant and the particular features of the claim. The terms offered may involve LCM funding all or some of the costs associated with the claim depending on these requirements.

If a commercial agreement is reached, the parties will enter into a formal Litigation Funding Agreement (LFA). This LFA may be conditional in that LCM may require further due diligence to be done (at its cost) in relation to the claim. If the outcome of this further due diligence is positive, then funding becomes unconditional and LCM agrees to fund the claim to its conclusion. If LCM does not proceed to provide unconditional funding, the costs spent on due diligence are not repayable to it.

The above process is not intended to be a lengthy one and once LCM has all of the information it requires in order to make its assessment, the aim is to make a decision as to whether terms will be offered within four weeks.

The ongoing role of the funder

Once a claim is being funded by LCM, the costs and risk associated with that claim are transferred from the corporate to LCM. LCM will meet the ongoing costs of the claim and will provide an indemnity for adverse costs should the claim be unsuccessful. This leaves only upside for the corporate in pursuing the claim to its conclusion. The role of the funder is a passive one, being only to pay invoices and receive monthly reports from the lawyers. The reason for LCM having an ‘experienced legal team’ as one of its key criteria, is that it is the claimant’s lawyers who have the relevant expertise to run the claim and LCM is not involved in the day-to-day conduct of the claim; LCM’s involvement is generally limited to monitoring the budget for the claim and the expected timeframe for a resolution of the case. The funder, like the client, is focused on the claim resolving at the lowest cost within the shortest timeframe. However, as a repeat user of litigation and because all of LCM’s investment managers are former litigation lawyers, if a client would like LCM’s input on strategic or commercial matters, it is more than happy to provide it.

Once funding a matter, LCM has committed to providing finance until the claim completes. However, if the claimant wishes to terminate the agreement early, it can do so subject to the payment of a break fee. This provision is important in giving claimants complete commercial flexibility to resolve their claims on the terms which they see fit.

Key takeaway

An approach by a corporate to a litigation funder to assess a claim can present a number of strategic benefits in addition to the obvious financial benefits. A funder can provide a view at an early stage as to both the merits and commerciality of a claim before a corporate commits to litigating the claim and can provide a unique perspective. The process which the funder undertakes in order to assess a claim for funding can reveal aspects which may not otherwise have been considered.

If a claim is funded, the whole of the financial risk of the claim can be transferred from the corporate to the funder. Additionally, this gives rise to the potential for a number of the corporate’s disputes to be considered under one rolling facility, known as portfolio financing. The next article in this series will explore portfolio arrangements in more detail, including LCM’s assessment of the corporate’s cases, pricing and the structure, terms and wider cashflow and risk-management benefits of utilising this type of facility.

[1] Australia: State of the Legal Market 2019 (Thomson Reuters)

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