How litigation financing works

Q: Clients increasingly ask us about the benefits of third-party financing. As the world's leading legal financier, how would you answer this?
A: Third-party financing is a risk management tool. As litigation and arbitration matters grow, so, too, do the expenses. Oftentimes, a client may have a strong case, but not the funds to pursue it. Or perhaps the client has the funds, but is not willing to take on the risk or the negative accounting impact. This is where third-party financing comes in.
By investing in the asset value of legal matters, the external capital provider shifts the costs and risks of the proceedings. This alleviates budget pressures and leads to a better outcome for risk management, accounting, and financial reporting. Third-party financing can reduce the negative accounting impact that proceedings have on operating profits and allow clients to pursue revenue-generating claims.
Simply put, third-party financing makes better business sense.

What factors does Burford consider when deciding to finance a matter?
We look at legal receivables (whether arising from pending claims, resolved claims, or law firm activity) as financeable assets. Based on the value of those receivables, we construct financial solutions for single matters, portfolios of matters, or even bespoke vehicles.
In assessing legal receivables, we often cooperate with high-quality counsel like Schoenherr. They help us seek out meritorious matters, which facilitates our investment decisions. In cooperating with firms like Schoenherr, we are better placed to assess the relevant factors. These factors include risk profile likely duration, and the balance of financing costs to the amount awarded that will provide a return on our capital investment and, more importantly, also satisfactory compensation for the client.

Does Burford accept financing requests from disputing parties directly?
Most certainly. However, some clients prefer to approach us via law firms (such as Schoenherr), which may already have a relationship with us and will be well-placed to provide an overview of the status of the matter. This may make it quicker and easier for us to decide on a financing request. As a matter of fact, we increasingly invest in portfolios and facilities for law firms and corporations.

Does it matter which law firm represents the client?
One of the relevant factors for a financing decision is the chance of success. Representation by high-quality law firms such as Schoenherr will generally improve that chance. In that sense, legal representation is certainly also a factor highly relevant to our decision.
Also, while third-party financing is rapidly becoming more commonplace across Continental Europe, there are particularly interesting opportunities further to shape the concept in Central and Eastern Europe. Schoenherr’s established position in that region naturally puts it in a prime position significantly to contribute to that.

Does Burford leave the case strategy to the lawyers?
Absolutely. We are a passive provider of external legal capital and do not manage or control the cases in which we invest. We do of course expect to be kept informed about progress on the matter on a regular basis. For example, if we are financing a case where Schoenherr is acting as counsel, we will not intervene in the case strategy. We are simply there to finance and alleviate the cost burden for the client. We also do not get any rights to control the settlement of a matter. This remains in the client's hands entirely.

Does third-party financing affect the attorney-client relationship?
Not at all. Clients can rest assured that we take on a passive role as an outside investor who does not in any way alter the attorney-client relationship or put the work product at risk. We trust the lawyers and law firms with whom we work. We do not seek to substitute their role or intervene in their work product. The policy underlying the work product doctrine and the court decisions that have thoroughly considered the matter permit third-party providers of capital to access the work product without any waiver of work product protection. 

How much would Burford typically invest in a matter?
It would be unusual for us to invest less than USD 2 million in a single matter, and our average investment is more than USD 10 million. This is the amount of capital we are investing, not the size of the total case damages, which thus need to be considerably larger. This is also why portfolios are an attractive solution for financing smaller claims. There is no upper limit on the amount we can invest, and we have previously committed USD 100 million in one investment.

Does Burford provide financing at any stage of a matter?
Yes. We come on board when the client wants us to. This means at any stage of the litigation or arbitration cycle. We have invested in cases during the commencement stage, as well as at pre-trial, pre-appeal, and post-judgment (enforcement) stages.

What happens if a client's matter is not successful?
Our capital is almost always non-recourse. This means that we will only collect a return on our investment if the outcome of the matter is successful. Clients will feel comfort in knowing that they will not be in debt to us should the underlying proceedings not turn out to be a success. 

Can successful clients recover their third-party financing costs from the losing party?
The Essar v Norscot decision seems to be pointing in that direction, but there are still many open questions. The treatment of third-party financing is still developing, and varies across jurisdictions.

Thank you for the interview.

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This article was up to date as at the date of going to publishing on 10 December 2018.