Why pay legal costs?

As litigation specialists we can’t ignore the rise of litigation funding. Litigation was once shrouded in mystery. It’s now the growth area for private equity. Where else can one invest US$1M in something that potentially generates US$10M over a 3-4 year period?

Of course there are substantial risks involved in litigation. It is after all a form of non-recourse finance. Some investors take the view that funders have painted too rosy a picture of the upside of the business (see link). However, the fact remains that litigation funding is an extremely attractive way to generate substantial investment returns. In our view, that is only possible if the funder and those behind them have a proper system in place to ensure that the cases have a realistic prospect of success. In the cases that we have handled, funders want to see the handling lawyers take some of the risk of the litigation in exchange for a share of the proceeds. That is often because it’s generally our clients who bring in the funder and we are best placed to advise the clients on the prospects of success.

Funding opens up a new dimension in litigation. Many funded cases are “David and Goliath” type cases. By and large the funded party, or parties, are claimants who may not have cash readily available to pursue a claim. Alternatively, they may have committed their cash elsewhere or they want to keep the litigation costs off their balance sheet. In all cases however, there is a reluctance to abandon a potentially valid claim. Many of the case we see are approaching time bars so the pressure is on the claimant to do something or lose the option of bringing a claim. Another trend we have seen is that Magic Circle lawyers representing big corporates are well versed in using all available means to drag out litigation thus making the funding arrangements uneconomic. Not only is this good business for Magic Circle firms who charge on a time cost basis but it’s also a deliberate tactic to persuade claimants and their funders and lawyers to back down and accept a smaller settlement. We see a lot of cases where clients sue for US$20M only to be offered US$2M when the legal costs for the corporate are probably another US$2M. On the corporate side it’s a good deal to pay US$4M to get rid of a potential exposure of US$20M. Our job is to push back against this practice and get a better deal for clients. In our experience, funded cases need to be handled by aggressive lawyers who understand the market and are able to front up to the larger firms. This is where we have had a considerable measure of success.

It is now common for us to discuss funding options with all our clients. We have very close connections with a number of the big litigation funders which has opened up lines of credit for potential clients. We expect that funding will become more prevalent over time. It is also clear to us that law firms like ours need to consider taking some of the risk of litigation rather than proceeding on the time cost model. Our experience is that taking risk and ownership of cases incentivises the lawyers to get the best possible result for the client. The future is funding and funding will change how lawyers operate in the future.

BDM is a specialist shipping law firm offering high quality legal advice and representation at a reasonable price.  Please follow us on social media by clicking below.