Answer ... (a) Single case fees and expenses
Fees and expenses finance is capital provided on a non-recourse basis to pay for the fees and expenses (eg, lawyers’ fees, expert fees, other case expenses) associated with a single commercial litigation or arbitration, in exchange for an entitlement, normally consisting of:
- a return of the original invested amount; and
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either or a combination of:
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- a multiple of the invested amount; or
- a percentage of the ultimate award or settlement.
Because of the non-recourse nature of the funding, neither the firm nor the client is exposed to downside risk if the case loses. This allows law firms and clients to remove the cost and risk of pursuing valuable claims. Fees and expenses financing is the most well-known legal finance product among corporate counterparties, with just under half (44%) of general counsel saying that they were very aware of fees and expenses financing, according to recent independent research.
(b) Monetisation of claims, judgments and awards
Monetisation is the acceleration of a portion of the value of a pending commercial claim or uncollected judgment or award, or a portion of an expected fee entitlement, which creates immediate liquidity for the company or law firm without waiting for legal processes to resolve or collection to occur. Pending claims, judgments and awards often represent vast latent value to businesses. Pending claims carry a tremendous amount of uncertainty as to both outcome and timing. Companies typically use monetisation to generate immediate working capital and lock in a minimum benefit regardless of outcome or duration, reducing risk. As one assistant general counsel, litigation, of a health insurance company explained in independent research conducted in 2022: “[Monetisation] is appealing for accountants and the finance team, who can book it immediately rather than when a judge or arbitrator issues a decision. The certainty is appealing, but so is the risk-sharing. The time value of money is inherent in any litigation matter.” Monetisations may also be used by law firms, which can use books of contingency cases to accelerate expected fees and create liquidity. (The acceleration of uncollected fee entitlements where no litigation risk remains is covered in section 1.3(e).)
(c) Portfolios
Portfolio finance gathers multiple individual matters into a single funding vehicle. There are several advantages of doing so. First, capital can be used to fund the underlying matters or to provide operating capital for a law firm or company, meaning that it can be used to reduce costs or enhance liquidity. Second, the matters within the portfolio can be a mix of affirmative claims and defence matters. Third, the diversification of risk across multiple cases generally lowers the cost of capital relative to single case financing. Fourth, in situations in which a portfolio facility is in place, the process to secure funding for an individual matter can be faster than in single case funding situations. As with other forms of litigation finance, capital is typically provided on a non-recourse basis, meaning that the legal finance provider assumes downside risk and earns its investment back and a return only in the event of the successful resolution of one or more of the disputes.
Portfolio finance is typically used by companies to shift the cost and risk of litigation and arbitration claims off the balance sheet and to relieve legal expense budget pressure. Companies can also use portfolio finance to better time cash flows relating to their legal departments, using liquidity from a high-value monetisation of a claim in a portfolio to fund defence and other legal needs. And because money is fungible, working capital preserved by using litigation finance for pursuing cases in a portfolio can be used for any corporate purpose, including funding of defence matters and other legal needs. Portfolio finance is typically used by law firms to mitigate risk, increase capacity to grow practice areas and increase competitiveness by taking cases on contingency, allowing the firm to compete for work where the client is unwilling or unable to pay hourly fees.
Types of portfolios include the following:
- Fees and expenses portfolios: Portfolios in which multiple matters are gathered in a single facility for the purposes of funding lawyers’ fees and expenses; these can include existing cases, future cases or a combination of both.
- Expenses-only portfolios: Portfolios that address the financial burden that paying case expenses out of pocket can place on law firms which take on high-stakes commercial litigation on a contingency basis. Although many firms are willing to risk some of all of their fees, they are often unwilling to spend the firm’s money on case-related out-of-pocket expenses, which can account for a substantial percentage of case costs. Portfolio finance alleviates the burden of expenses increasing dramatically over the duration of the case, helping to manage risk and cash flow.
- Monetisation portfolios: Portfolios that provide substantial upfront capital which can be used either for legal fees and expenses or for other operating purposes, collateralised by substantial existing books of litigation at a variety of stages in the litigation process, with additional cases of varying sizes and profiles. Monetisation portfolios are built around ‘anchor cases’ that are large or close to maturation.
- Risk-share portfolios: Risk-share portfolios are suited to companies that wish to pursue additional recoveries without exceeding their optimal risk profiles; or to law firms that want to invest in new business or expand their portfolios of at-risk (eg, contingency, discount/uplift) matters. Risk-share portfolios typically consist of at least four or five large cases that either can all be identified at the outset or can be added on a going-forward basis, with capital being used to pay a portion of fees or expenses as they are incurred.
(d) Enforcement and asset recovery
Companies often fight long and hard to get to a positive judgment or award in commercial litigation and arbitration. But those judgments are only as valuable as the paper they are written on if the other party doesn’t pay. Those that require enforcement can take years to collect and cost many millions more than a party has already spent getting to a positive judgment. According to independent research conducted in 2020, 70% of in-house lawyers reported that their companies have unenforced judgments valued at $20 million or more.
Asset recovery experts can help companies and law firms to overcome the factual and legal hurdles that stand in the way of recovering money where a favourable judgment or award has been made, but the opponent hides assets or otherwise delays payment or fails to pay. Essentially, asset recovery delivers actionable intelligence and transforms judgment debt from ‘legal paper’ into cash.
In addition to asset recovery expertise, funded enforcement of a judgment or award can remove the cost of the enforcement process by funding the fees and expenses of enforcement, in exchange for an entitlement from the amount ultimately collected consisting of:
- a return of the invested capital; and
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either or a combination of:
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- a multiple of the invested amount; or
- a percentage of the ultimate amount recovered.
Legal finance providers can also advance a portion of a pending judgment or award, as described in section 1.3(b). Monetisations solve the ‘timing problem’ by providing immediate liquidity to companies with judgments or awards in exchange for an entitlement from the amount ultimately collected, consisting of:
- a return of the invested capital; and
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either or a combination of:
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- a multiple of the invested amount; or
- a percentage of the ultimate amount recovered.
(e) Other
- Post-settlement finance: While commercial legal finance companies mostly finance matters where litigation risk remains, in the United States they can also help to accelerate the payment of legal receivables. For law firms, the legal finance provider can purchase a portion of the firm’s outstanding receivables, generating revenue regardless of when clients ultimately pay bills.
- Claims purchases: In limited circumstances, including bankruptcy and certain antitrust matters, clients may be able to sell their claims outright, generating immediate liquidity and transferring the cost and risk of continued pursuit of a claim to the legal finance provider.