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5 minutes on... Duration risk of commercial litigation and arbitration

One of the most important factors for CFOs to consider when evaluating the risk and reward for commercial litigation and arbitration is duration—the length of time it will take to file a case, reach a settlement, make it through litigation (and appeal) and ultimately get paid. Since they are not typically lawyers, CFOs may not be as keenly aware of time as a variable in litigation assets as they are in other areas of the business. They should know that time to resolution can be:

  • 3.86 years for a resolution in an ICSID matter plus an additional 13.3 months between the close of a final hearing and issuance of an award (Procedural Issues in International Investment Arbitration, 2018)
  • 26 months for an ICC arbitration to reach a final award (ICC report, 2019)
  • 16 months for an LCIA arbitration to resolve plus an additional three months to produce awards (LCIA report, 2015)
  • 2 years for a commercial matter in the US to reach trial (Lex Machina, 2018)
  • 1.4 years for a commercial matter in the US to reach summary judgment (Lex Machina, 2018)
  • 35.5 months for a US District Court case to get through appeals (Federal Court Management Statistics, Dec 2020)

In other words: Litigation does not mean “we win, we get paid”; it means “we win, we wait”.

As a result, CFOs need to consider the impact of having working capital spent on litigation out the door for a potentially long period of time and the risks they take that the company’s financial circumstances might change drastically in the three or more years they’re waiting for matters to resolve. Can they afford to have their working capital tied up? If the answer is no, they should consider how to finance their recoveries. But even if they can afford it, they should ask: Could the capital generate a better return elsewhere in the business? If the answer is yes, again, they should consider some form of financing, whether fees and expenses or monetization.

In essence, in litigation as elsewhere, CFOs should consider the time value of their money and where can they get the best return for it.

How CFOs can use legal finance to eliminate duration risk 

Legal finance fixes the issue of duration risk by taking on that risk for the company. It allows CFOs to enhance liquidity by controlling the timing of cash flows relating to their commercial litigation and arbitration assets. Because capital is provided on a non-recourse basis, legal finance eliminates the claimant’s downside risk and makes the provider’s recovery contingent on a successful outcome.

Depending on the CFO’s needs, legal finance offers two main products: Fees and expenses financing and monetization.

Fees and expenses

When companies pay the fees and expenses needed for a recovery effort to move forward, they are spending working capital that won’t generate a return for years—and of course might result in a complete loss. The cost of spending $10 million to win a $100 million award is greater if it takes several years to get paid. Instead, CFOs can finance fees and expenses: Burford pays fees and expenses to the client’s firm of choice so that the recovery can proceed and is only repaid when and if the company wins.

Monetization

Legal finance can be used to accelerate the timing of cashflows from a pending claim or award. So, if a company has a $100 million claim, Burford can provide an immediate advance on a portion of the claim. Rather than waiting for a matter to resolve, CFOs can unlock the value of their legal assets on their schedules, not the courts’. The benefit is that the company gains immediate working capital when it can most benefit the business.

Worked example

Suppose Burford accelerates $75 million to a company now based on the value of a pending claim that might resolve in three years. The company, rather than waiting three years, invests that $75 million in the business. Assuming a growth rate of 12% for their industry, the benefit the company would realize is likely be a far higher number than the portion of the upside they would share three years from now when the matter resolves successfully—at which time the company could expect additional upside. Further, because the $75 million is not a loan, it need only be repaid when and if the matter wins, and the CFO would get to keep and use that working capital for the business even if it loses.

Conclusion

Legal finance solves the duration problem by reducing or removing costs to the business now and by accelerating working capital from legal assets that can be immediately invested in the business. In short, it enables CFOs to realize otherwise invisible assets without delay.