A few weeks ago was a dire week in the global financial markets, following the US Federal Reserve’s pessimistic warnings about the slow economic growth ahead. Both big and small businesses are suffering alike. Whether because of drastic government bailouts, cuts to shareholder dividends, or increased debt, preserving cash has become an equalizing objective for all enterprises. For forward-thinking international arbitration lawyers, this creates an opportunity.
We have written extensively about the array of tools available to help manage legal risk exposure and cash-flows for claimants pursuing arbitrations, both in terms of commercial and investment treaty arbitrations. Never have these options been more relevant than in the current economic climate. Even the most conservative corporate enterprises, who have traditionally elected to self-fund their lawyers on a billable hourly rate basis, ought to now be rethinking their short to medium-term strategy, both for existing disputes and new matters that they may be contemplating.
Such financial uncertainties provide dispute lawyers with a significant opportunity to add value. So, let’s recap on some of the key fundamentals that lawyers ought to be making their clients aware of.
Third-party funding for litigation and arbitration is by now a well-understood concept. In summary, a third party provides funding for the ongoing legal fees with the funder’s recourse limited to receiving a share of the damages, if the case prevails. Lose and the funder loses its investment with no fees payable back to the funder. This immediately alleviates the cash flow requirement for the claimant. Many larger businesses have traditionally been sensitive to the size of a litigation funder’s share of the proceeds but at the moment, an immediate cash injection could well be more important than conceding a share in a long-term contingent asset which has no balance sheet recognition. Taking away the cash drain of expensive litigation could free up anywhere from $1m to $20m of cash reserves (depending on the case budget) and there may be no better time than now to consider such an option.
Portfolio finance – creating liquidity today
For larger enterprises, the demands on their cash might be multiplied by the fact they have a portfolio of live matters, as well as new prospective claims. This is where things potentially become more interesting from a CFO perspective. When looking at portfolios, greater flexibility can often be applied, and importantly with more favourable overall economics for the business.
With a portfolio of claims, a suitable investment fund partner can advance not only the required cash flow requirements for the entirety of the portfolio but also a portion of the prospective claim value for all of the cases in the portfolio. In exchange, the fund is granted a priority return of its investment and thereafter an agreed portion of the proceeds recovered across the portfolio albeit with the company still retaining the majority. As per a single one-off litigation finance transaction, the company retains ownership and control of the claims and the funding remains non-recourse.
For a large business, this is significant. Depending on the accounting standards applied, it may well be that litigation claims are not ascribed value on the balance sheet since it is contingent upon a successful outcome. However, any proceeds paid by the investor to the company brings forward value that could be treated as revenue. This could be a welcome boost for any large business currently seeking to mitigate uncertainty and shore up shareholder confidence. It’s a creative way for lawyers to help their business clients raise a different form of capital.
By way of example, the investors TheJudge work with have the capability of providing facilities of this type for up to $500m, a not insignificant sum even for very large enterprises.
Arbitration Awards – a saleable asset
As is common with international arbitration, just achieving an award is often only half the battle. The route to collection could see further rounds of litigation around the world. Claimant award holders outlook on such collections may have changed since February this year. It might be that the immediate impetus to keep spending on the dispute to generate a recovery has lessened due to other more immediate priorities or perhaps there is renewed vigour to try to accelerate the recovery, even if at a discount. Again, there is a very specialist market of investors who are actively seeking opportunities to purchase awards, whether in whole or in part. As before, this immediately brings forward revenue for the claimant award holder, as well as freeing up time to focus on other business priorities. Our typical target range for such monetisations involves awards of at least USD $25m in value. We’ve yet to see the upper cap in the available capital supply, since we have investors who, either solely or working as part of a syndicate we put together, can readily advance sums in the hundreds of millions USD should the face value of the award be large enough.
Insuring external counsel’s fees – removing risk in uncertain times.
In addition to finance options, we’ve built our reputation over the past 20 years in arranging insurance to cover a claimants’ legal fee exposure, both for litigations and arbitrations. This is a highly specialised market, but it is a market that all disputes lawyers need to understand and be able to explain to their claimant clients.
These specialist insurers can insure a claimant’s historic and/or ongoing legal fees against the risk of an adverse outcome. So, for any clients who have been self-funding to this point and who would rather not go down the litigation finance route, such insurance policies can be an ideal solution to mitigate the risks of an adverse outcome in the dispute. If the case loses, the insurer reimburses the company for the legal fees/expenses they’ve paid their external counsel. What’s more, like funding, the insurer’s return is often largely contingent upon a successful outcome. Meaning the majority of the insurer’s premium is simply not payable if the case were to lose. Furthermore, the cost of insurance is usually a fraction of the cost of funding.
Portfolio legal expenses cover – complete risk mitigation
As per funding options, insurers can also cover a portfolio of claims, whether arbitration or litigation. This essentially provides immediate certainty that notwithstanding the outgoing legal spend, the downside risk of an adverse outcome is removed, which in the current climate might be a welcome solution by both legal and finance teams.
Insurance for adverse costs (cost shifting).
The demand for adverse costs insurance in international arbitrations has been on the rise in the past 2-3 years, particularly in investor-state arbitrations where tribunals seem increasingly willing to entertain respondents concerns over security for costs. Insurance in this scenario is far more cost-effective than having a funder pay the security.
While many large enterprise business claimants may not face security for costs issues, they nonetheless still carry the exposure risk of an adverse costs award against them if they lose their case. If a corporate claimant faces an adverse cost bill for $3-10m following an unsuccessful hearing and subsequently learns it was a risk that could have been readily covered by insurers, they may not be best pleased. However, their displeasure will be compounded if they then discover that the majority of the premium wouldn’t have been payable following the loss. When cash is king, it would be costly for a CFA to be ignorant of insurance for adverse costs.
A bumpy road ahead – but one full of opportunity for lawyers.
The gloomy economic picture ahead provides a considerable opportunity for lawyers. The available market tools allow lawyers to completely modernise their ability to deliver solutions to all types of clients, whether those battening down the hatches to preserve cash, those seeking to mitigate any future financial shocks or those who are using the opportunity to explore a new financial model for running their disputes portfolio going forward; the opportunity exists, now.
Please remember that the above examples are simply just the basics. Most arrangements are bespoke and several of the options detailed above can be combined into a hybrid package to best meet the client’s objective.
Finally, the above has been focused on market solutions lawyers ought to be discussing with their clients. In our next update, we will focus on the law firm side and specifically how law firms can deliver alternative fees whilst utilising elements of financial instruments described above behind the scenes.
Do you have a prospective opportunity you would like to discuss?
Speak to our team who will be happy to discuss specific options tailored to your client’s needs.