Patrick Moloney, Managing Director LCM Finance
One size doesn’t fit all – Litigation Finance has moved on from being just a “one trick pony”
When litigation finance started in Australia in the late 90’s no one could have foreseen that it would become the multi-billion-dollar global industry that it is today. However, with hindsight, it’s easy to see why it is.
Litigation can be time consuming, unpredictable, costly and with no guarantee of success. Why take on all of that risk if there is a financing option available that mitigates all of that that for a share in the potential “upside”? A finance product that covers all of the costs associated with bringing a case to conclusion, in return for a percentage of the recovered amounts. One that is also non-recourse to the claimant’s assets if the case is unsuccessful, so no “downside”.
Due to this classic model, litigation finance was originally based around impecunious or insolvent plaintiffs, as well as class action claims. These plaintiffs would generally require a fully financed arrangement, whereby the litigation finance company agreed to fund all of that plaintiff’s costs (including solicitors’ fees, barristers’ fees, charges for independent experts, court fees, provision of an indemnity to cover any adverse cost exposure and any other costs associated with the claim) in return for an agreed percentage of any amounts recovered.
However, as the industry has continued to develop, more and more sound companies are seeking third party funding as a means of managing their disputes. Put simply, in the context of the financial goals and pressures faced by every business, the option of “no downside” in return for a “share of the upside” often represents an extremely attractive proposition.
Having a litigation finance company in your corner can also provide a host of intangible benefits. For in-house counsel, having a partner with honed expertise in managing the complex and time consuming litigation process can provide great time and cost (and stress!) efficiencies. Experience has also shown that funding can add legitimacy to claims and provide a path to early settlements. After all, no-one would make an investment in a project deemed frivolous or as having little chance of success. Additionally, the involvement of that investor can be an important tool in discouraging an opponents’ lengthy drawn-out strategies or “deep pocketing” efforts.
As a result, litigation finance has globally progressed to be viewed as a valuable and credible product, and the industry has grown in leaps and bounds. In Australia, following the landmark 2006 ruling that litigation funding was not an abuse of court process, that growth has only accelerated.
With the evolution and sophistication of litigation finance companies’ client base has come a more sophisticated product suite. Progressive litigation finance companies have recognised the need for varied solutions that can adapt to the changing needs of today’s businesses and markets. A litigation financer has now become essentially an investment fund. One that only invests in litigation, or companies such as law firms that are associated with litigation. With that in mind the scope for potential investment opportunities and products has become much larger.
In addition to the traditional fully financed model, litigation finance products can include finance for specified cost sums, finance for disbursements, finance for experts, finance of security for costs or finance of appeals and judgment enforcements. For example, a plaintiff could be confident in their claim and be willing to accept the risk of an adverse costs order if they are unsuccessful. However, for the sake of ongoing cash flow, that plaintiff could require finance for ongoing costs of litigation. By further example, a company could have an ongoing relationship and fee arrangement with their solicitors and could, therefore, only require top-up funding to meet the external disbursements that those solicitors incur. Further again, a company could be willing and able to fund its own action, but following a defendants’ application for security for costs may require funding just to address that security requirement. These are but a few instances in which a litigation finance company could provide an invaluable service.
As a result of the changes in the products offered and the risks associated with those products, the industry has also seen greater flexibility in the fee structures on financing arrangements. Although these rates will often depend on the level of investment required, the finance returns will generally range from 15% to 40% of amounts recovered. However, some financers are also willing to look beyond the percentage model and structure their returns in other ways that may be better suited to the plaintiff and the particular case at hand.
Originally viewed as something for the impecunious plaintiff and being rooted in class actions, litigation finance has grown to have a much broader uses. Here at LCM for example, the majority of our caseload is in the area of commercial litigation. The same is true elsewhere and that is why the financing options available in Australia are now expanding to reflect those market needs.
One of the key areas of growth have been within the corporate sector. As outlined, companies who might have traditionally avoided litigation because of financial, time, risk or expertise limitations have been quick to take advantage of the litigation finance model.
Earlier this year in the UK, British Telecom announced a landmark deal, whereby it financed a USD$45million portfolio of its cases. The interesting part of this deal was that British Telecom, who easily possess the resources to fund these cases themselves, chose instead to pursue a financing option. This is reflective of the recognition that, with no absolute guarantee of success, the time, cost and other resources to be used in pursuing these cases could be better deployed elsewhere within the business. Selling off a portion of the potential “upside”, with no recourse to British Telecom’s assets if the claims were unsuccessful, made sound commercial sense.
Law firms that have taken on cases on a “no win no fee” basis have also been quick to take up the benefits offered by litigation finance. By financing a portfolio of cases, law firms can monetise work in progress, manage risk and secure an ongoing revenue stream. In the US especially, this has also been taken one step further and law firms can secure debt facilities based on work in progress to allow for business development and expansion strategies.
With the ongoing growth of the industry, the success of listed litigation finance companies on the stock markets and more listings to come, it is easy to see why the industry has moved on from its relatively low-key start and is poised to become a much larger and more mainstream part of the professional services industry here in Australia.