The research is clear: The decision to use legal finance is most often one that law firms and clients make collaboratively. This, however, requires that law firms know how to answer questions about the tool. It is in that spirit that we’ve put together a brief guide to address these questions.
#1. How does legal finance work alongside existing client-lawyer relationships?
- Client confidentiality and privilege: Burford enters strict confidentiality agreements with clients, and a strong body of law has developed that protects communications between legal finance providers, lawyers and clients as attorney work product.
- Control of the litigation and settlement: Burford is a passive investor and does not control litigation strategy or settlement. Our transaction documents explicitly state that we do not control and we do not seek to exert indirect control by negotiating a right to abandon our investment commitment.
- Transaction structure: Legal finance can be provided either to a client (the commercial litigant) or to a law firm.
#2. Why should companies use legal finance—even if they have plenty of liquidity?
Legal finance means companies need not leave money on the table
Clients often fail to pursue recoveries due to cost concerns. Legal finance means clients need not leave money on the table: The finance provider assumes the cost and downside risk of pursuing claims, so that clients can maximize recoveries without risking the company’s capital.
Legal finance helps clients manage legal cost and risk with certainty
Even if clients have ample budget for pursuing recoveries, they may choose not to do so, given the uncertainty inherent in litigation and arbitration. Legal finance removes that unpredictability: It allows legal departments to reduce or cap legal spend and better control the timing of spend even though it’s nearly impossible to control the timing of the underlying litigation.
Clients are monetizing legal assets
Clients can also choose to monetize outstanding matters on a non-recourse basis in order to realize the cash from an anticipated recovery on an accelerated timetable, rather than trying to predict the timing and outcome of the litigation. Monetization allows companies to use the value of a litigation asset to unlock third-party capital that can be put to work by the company for a broad business purpose.
Companies can use legal finance to drive innovation across the legal department
Clients can use legal finance on a portfolio basis to offset the cost of defense-side litigation by bundling plaintiff and defense matters together, using the value of affirmative claims to finance to cost of litigating claims across the portfolio. Litigation often represents the largest portion of legal departments’ expense lines, so the potential to drive innovation is significant.
#3. Why does finding the right legal finance provider matter?
Given the high stakes and potentially years-long duration of commercial disputes, clients need to know that choosing the right legal finance provider is about much more than discussing the economic terms—and law firms should be extremely careful about assessing all factors when recommending a finance provider. Specific factors to consider include:
- Proof that the finance provider can meet the client’s financial needs: Because capital is often invested over time, clients must undertake financial due diligence on the funder to ensure it will have capital available when needed to meet its investment commitments— and that the fund’s structure will not drive a funder to seek an early exit from an investment to meet investor demands.
- Portfolio size and diversification: The size and diversification of the finance provider’s other investments should be considered. A small portfolio with only a handful of investments or over-concentration of capital in any one area makes the finance provider an inherently riskier partner.
- Ability to conduct investment diligence in-house: Law firms and clients should be cautious about finance providers that outsource their diligence process. First, outside lawyers looking at matters on a one-off basis cannot match the expertise of lawyers who review litigations for investment every day. Second, outside counsel review slows down the diligence process—and exposes clients’ matters to potential law firm competitors.
- Value-add: Although Burford is a passive investor, we provide feedback on investment throughout the underwriting process and as we monitor the matters in our investment portfolio. Some finance providers treat this as merely perfunctory and transactional. Burford’s team offers a value-add that many of our clients and law firms actively seek.
To learn more about Burford Capital, please contact: