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Addressing common misconceptions about legal finance

  • Case law & ethics
July 20, 2023
Liz Bigham
2022 11 15 Burford Group2 22373 Web Sm

Innovation, risk management and cost containment aren’t just platitudes—they’re mandates for in-house legal teams. Burford’s 2022 Affirmative Recovery Programs Report reports three out of five GCs say their companies neglected to pursue meritorious recoveries due to cost. This shows in-house lawyers are leaving money on the table due to the cost implications of pursuing meritorious claims.

Legal finance is one tool that can help businesses manage legal risk and uncertainty, but it’s still not universally understood by corporate legal teams. This means that some in-house departments are not competing in a market that is increasingly using legal finance to unlock value for their companies. Senior in-house lawyers admit to varying levels of knowledge about legal finance, but many are hungry for more information—and many remain unsure about how it works. Below, we dispel the most common misconceptions and set the record straight on how in-house teams can benefit from legal finance.

Misconception #1: Legal finance is only used for affirmative litigation—not defense matters

Legal finance is used to provide capital to claimants and to finance defense cases. Defense-side legal finance comes in a variety of forms and structures. Most often, defense matters may be included as part of a portfolio where a single set of terms is used to finance a mix of cases, including plaintiff and defense matters.

Portfolio financing helps GCs manage the impact of litigation on balance sheets and risk profiles, and their companies benefit from lower-priced capital, given Burford’s ability to diversify risk across multiple cases. In addition to portfolio financing, Burford can also finance defense matters when there are counterclaims involved. As an example, in 2015 Burford helped a startup mount a vigorous defense and bring a counterclaim against the world’s largest razor company. In certain situations, Burford can even pay the entire cost of defending against a weak claim where our return is predicated on the company achieving a mutually predefined success.

Misconception #2: Legal finance is only for companies that can’t afford to pay legal fees out-of-pocket

Legal finance is used by companies that have litigation budgets—but recognize that tapping into that expense line is not always wise. Legal finance frees up capital that can be used to advance the business—including funding research and development and investing in marketing. Further, should a company have a sufficiently sizable claim, Burford’s capital may offset not just its litigation expenses, but also the expense line across the entire legal department. In short, there are both better uses of your capital than self-funding and real benefits to be gained from legal finance for even highly liquid companies.

Misconception #3: Legal finance is just for cost management—not risk management

Legal finance manages both the cost and risk of litigation. It is often risk that prevents companies from moving forward with meritorious claims. It comes as no surprise that few businesses are willing to pursue potentially lengthy and expensive legal matters with uncertain outcomes.

Legal finance gives businesses an alternative, enabling them to pursue claims with the confidence that they will have funding in place for the long haul—without harming balance sheets. Legal finance transfers litigation risk to the finance provider. Capital is provided on a non-recourse basis, with Burford earning its investment back and a return only if the matter resolves successfully; if a loss, there is no obligation repay Burford. By providing a pool of capital, financing can equip the firm to expand practice areas, grow contingency portfolios and open new offices—without added risk. In addition, funding can be provided at any stage of a proceeding, allowing companies to de-risk or monetize even outstanding judgments.

Misconception #4: Capital providers don’t have ready and transparent access to capital

Burford is the only NYSE and LSE dual-listed legal finance provider and we boast a long history of successfully funding both top law firms and companies.  With its own permanent capital, Burford can provide funding quickly and has the scale to provide more than $100 million in financing at once. Additionally, in 2022, Burford wrote almost a billion dollars’ worth of checks on behalf of our corporate and law firm clients—almost double the amount deployed just five years ago. Our scale and experience gives flexibility, stability and comfort to clients, especially those that may be new to the industry, since Burford is a committed long-term partner equipped to finance the most complex and lengthy litigation.

Misconception #5: Working with a finance provider raises litigation control and privilege concerns

When considering working with a legal finance provider for the first time, in-house leaders often have a handful of questions about using outside capital. They want to be reassured of two things: First, that they won’t have to cede control of litigation and settlement decisions to a legal finance provider; and second, that attorney work product remains protected.

Using legal finance does not alter control

When a client decides to work with Burford, the arrangement does not alter control of decision-making or attorney-client relationships. Burford structures all its arrangements to leave complete control of the underlying legal matter with the client. We are passive investors—we do not control strategy, settlement or other litigation-related decision-making. Our financing agreements are written to make explicit that we have no rights to manage the litigation in which we invest. We do not seek to stand in clients’ shoes.

Work product and privilege

GCs can also rest assured that legal finance, inclusive of case-related information shared with finance providers and details of financing arrangements, is protected as attorney work product. Burford takes great care to ensure that only relevant case information is exchanged between the client and the funder during the diligence process, where parties execute a confidentiality agreement that protects communications from discovery, and only after Burford and its counterparty have executed an NDA. Additionally, materials created for and provided to the potential financier as a consequence of the litigation are protected under the work product doctrine in the US and are considered privileged materials in many other jurisdictions.

What this means for businesses considering legal finance

Companies have an obligation to stakeholders to pursue the best solutions possible for their businesses. In-house leaders that take a small step to distinguish facts from fiction will achieve big results. Businesses are hunting for any advantage they can find: 1 in 10 GCs say their companies currently use legal finance, but more believe their competitors are doing so. Therefore, if they are not using legal finance now, they will be soon. While legal finance is sometimes misunderstood, it is becoming an increasingly commonplace form of corporate finance.