Litigation funding can be the perfect solution to cashflow squeezes

The increased discussion over litigation finance is hardly surprising. The concerns over the Jackson Reforms and their implementation, coupled with a recession in which law firms had their cashflow dented, means that litigators are having to innovate to survive and to gain work from their competitors.

Even traditional institutional clients are looking for ways to reduce their legal fees with costs capping, fixed fees and the use of contingency fee arrangements, whether by conditional fee arrangements (CFAs) or even damages-based agreements (DBAs). The world has changed and only
those who adapt will survive and
pick up the work.

Some lawyers have been slow to change and to embrace a scheme that could help their business to grow. Others have been more innovative but, over the past couple of years, interest in litigation funding has increased considerably.

Litigation finance can provide the perfect solution. The use of funding gives a client the ability to minimise risk and has no negative effect on their cashflow or the cashflow of the law firm.

In a financial climate where clients are being careful about how, or even if, they spend their legal budget, dispute resolution teams need to consider all of the options available to them.

A contingent case load may be great for the client’s cashflow, but it is less so for the law firm. However, there are forms of litigation finance that can assist with this issue.

Litigation funding for work in progress

At Burford Capital, we are increasingly engaged by law firms to develop innovative ways of applying the principles of corporate finance to the practices of litigation and arbitration. An important area for such innovation involves the financing of firms.

One such financing solution for firms focuses on the funding of work in progress (WIP). WIP funding involves Burford providing a firm with capital that is secured against a portfolio of CFA or DBA cases. Burford’s investment unlocks cash tied up in WIP, allowing the firm to pay ongoing expenses and, at the same time, mitigate the firm’s risk in such arrangements.

How does it work?

Burford provides capital to the firm by way of an advance on the fees that the firm hopes to earn on a case or portfolio of cases (in practice, WIP funding is more attractive if the advance is spread across a pool of cases). Importantly, the security for the advance is limited to the fees earned on the portfolio. This means that only the firm’s fees received across successful cases are used to pay Burford. Such funding is non-recourse, meaning that, if the cases are unsuccessful, Burford receives no return on its investment and consequently the firm has nothing to pay.

The arrangement is solely between Burford and the firm – it does not encroach on the client’s damages. In fact, there are advantages to the client, which knows that the instructed firm is adequately resourced to drive the case through to a successful conclusion
and will not become overextended.

When is it appropriate?

• Firms that are already carrying a large number of CFAs and DBAs can find themselves with receivables outstanding that may be unpaid for years, causing cashflow difficulties. WIP funding helps to smooth the peaks and troughs of cash management.

• Firms may want to expand the number of CFAs or DBAs they take on and, in such instances, the funding provided by Burford would allow the firm to pay ongoing disbursements on cases, as well
  as the running costs of the firm.

• Firms looking to increase their profitability by taking more risk on cases are likely to find that a partnership with Burford is the
  safest way to take on increased litigation risk.

Key benefits

• WIP funding smooths out the firm’s critical cashflow in respect of CFAs and DBAs and so assists in managing the business more efficiently.

• Clients’ damages are not affected by WIP funding, as Burford’s return comes only from fees received by the firm. This means that the cash invested by Burford can be used
  to meet the needs of the firm.

• The investment in WIP made by Burford is non-recourse and, therefore, Burford is sharing the litigation cost risk that the firm
  has taken on.

 

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Case Study

A profitable and enterprising boutique firm had grown successfully by sharing litigation risk with clients on CFA deals. The financial year-end passed and, whilst profit could be taken out of the business, a small number of significant cases had not settled in the timescales anticipated, which potentially would cause a squeeze on cash.

Burford invested more than half a million pounds in the firm on a non-recourse basis, secured on a portfolio of six cases.

As the arrangement was between the firm and Burford, it did not impact on the client’s damages; Burford’s reward was taken from the costs recovered and the success uplift on the cases due to the firm.

For its part, Burford received its investment back, plus a competitive return that reflected the risks and the period it took for the case to win. The firm then took its agreed share of receipts. The surplus was shared between Burford and the firm. 

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Nick Rowles-Davies is a Managing Director of Burford Capital. He is admitted as a Solicitor in England and Wales, and the British Virgin Islands
and is an accredited mediator.

Nick has a wide range of experience in commercial and civil litigation issues and in private practice specialised in complex, high-value matters involving him in a number of reported cases in
the High Court, Court of Appeal and House of Lords.

He is regular speaker and
frequent media commentator on all aspects of the current costs regime, litigation funding and the impact of
the Jackson Reforms.

He is the author of Third Party Litigation Funding, to be published
in September 2014 by Oxford
University Press. 

nrowlesdavies@burfordcapital.co.uk