Date posted: 28/01/2020 5 min read

Why well-resourced companies use litigation funding

Dispute resolution finance, aka litigation funding, helps corporates transfer risk and improve corporate profit margins.

In Brief

  • Companies of all sizes are increasingly using dispute resolution finance to leverage claims as assets.
  • Funding is non-recourse and most commercial funders assume the risk of paying any adverse cost orders.
  • Litigation expenses are taken off the company’s balance sheet. If the case is won, revenue can be recorded without having incurred any downside costs or risk along the way.

Historically, dispute resolution finance (also known as litigation funding) was used by parties that lacked the financial means to pursue their commercial disputes. But recently, there has been a notable shift. Much of the dispute resolution finance market today is aimed at financing claims of solvent and financially stable corporations of all sizes, from small to large multinationals.

What is dispute resolution finance?

Dispute resolution finance generally involves a commercial funder agreeing to pay some or all of the claimant’s legal costs and disbursements, including any adverse costs and security for costs. Funding is non-recourse, so the funder is only paid its costs and a return from any proceeds obtained if there is a successful recovery (by settlement or judgment).

Benefits for companies – de-risk your balance sheet and P&L

Some well-capitalised companies with potentially valuable claims do not pursue them, or see them through to their most valuable stage, because litigation can negatively affect a company’s bottom line.

“Some well-capitalised companies with potentially valuable claims do not pursue them… because litigation can negatively affect a company’s bottom line.”
Andrew Saker CA

Under accounting rules, a company’s litigation expenditure, such as legal fees and court costs, are typically recorded as expenses as incurred and have a negative impact on earnings. That means a large ongoing litigation can have a significant impact on a company’s profits.

Meanwhile, a potential recovery cannot be recognised as future income and contingent assets cannot be recognised in a company’s Statement of Comprehensive Income. Income can typically only be recognised on successful completion of the litigation.

Dispute resolution finance can help solve these issues and boost corporate profit margins:

Mitigate costs: By using a funder’s money to pay for the litigation, companies take litigation expenses off-balance sheet. They become the funder’s expenses. And if the claim is successful, revenue can be recorded without having incurred any downside costs or risk along the way. Dispute resolution finance therefore helps transform litigation from an expense to a cash-generating asset.

Transfer risk: Most commercial funders assume the risk of paying any adverse cost orders (the other side’s costs) if the case is unsuccessful. A funding arrangement may also reduce litigation risk by helping the company fund the best-possible counsel for the case and ensure that a matter is pursued to its maximum possible return.

Strategic know-how: Dispute resolution finance companies retain experienced former dispute lawyers who are experts at identifying claims with merit and strategies for maximising success.

A current example – financing engineering company

So what sort of companies are accessing this service? One of IMF Bentham’s clients is an engineering company that is pursuing a claim against three major energy companies.

Its team invented and patented technology for transporting enriched natural gas via high-pressure pipeline from Canada to the US market. It licensed that technology to the energy companies, but a dispute arose when the technology was allegedly used outside the scope of the licences, without authorisation or financial compensation.

The claims were longstanding, but the business told IMF Bentham that the practice’s “significant due diligence, capital at risk, and proven track record” validated its confidence that a successful outcome could be reached.

Sophisticated and well-resourced companies are increasingly seeking dispute resolution finance to monetise disputes, transfer risk and save their own capital for business as usual. It’s a service that ensures the company’s interests are protected and meritorious claims are pursued.

Read more:

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