Germany is Europe’s largest economy and one of the most established and preferred arbitration venues for both domestic and international matters. Yet companies bringing claims in Germany have limited access to the alternative fee and funding arrangements that are often essential for pursuing costly and high stakes commercial litigation and arbitration.
Below, we take five minutes to discuss how companies considering or engaged in commercial litigation and arbitration in Germany can better manage the associated cost and risk.
The German market is ripe for new capital and legal risk management tools
While legal finance has been a part of the German (and greater DACH) market for over twenty years, it has until recently been defined by single matter funding for cash constrained clients, often based on the statutory fee tariff. Today, funders like Burford provide a range of solutions, including financing claim portfolios, purchasing claims, monetising the value of unpaid awards and judgments, helping corporates (blue chip or Mittelstand) take litigation costs off the balance sheet and supporting law firms in using legal finance as a marketing and new business tool. These new tools allow companies and firms to fully leverage the value of their legal assets.
German companies can accelerate recoveries and eliminate risk with monetisation
A monetisation arrangement is one in which a funder advances a portion of the potential award on a non-recourse basis, meaning that the company owes nothing in the event of an unsuccessful resolution. This arrangement allows companies and firms to remove downside risk and control the timing and certainty of cash flows, thereby enhancing liquidity and providing capital otherwise unavailable until the resolution of the matter. This allows for an immediate inflow of cash that companies and firms can use for any purpose, including working capital. And because the capital typically is provided on a non-recourse basis, the company or firm is obligated to repay the investment only if and when the underlying matter resolves successfully.
Traditional funders may be challenged to secure the upfront capital required to execute a monetisation of big-ticket arbitration and litigation matters. With access to permanent capital and a track record of success, Burford is unique in its ability to monetise claims of all sizes including claims valued at or over €100 million.
By definition, monetisation will require a special quality of finance provider. Many well-capitalised finance firms lack the expertise or the willingness to provide a lump sum investment for a legal claim because they lack the expertise to value that claim; conversely, few specialist legal funders have the capital to monetise significant claims. Only Burford offers vast permanent capital and expertise - expertise to both value a claim and, where sought, to help advise the client on strategies for successfully resolving the claim.
It is important for companies to work with a finance provider with valuation expertise and talent, and with sufficient resources to provide the requisite capital. And when timing is of the essence, working with a provider that has access to its own permanent capital (as Burford does) helps ensure the process moves swiftly and smoothly.
Legal finance helps companies and firms make the most of their capital
Often a preferred alternative to litigation, arbitration is still a lengthy and expensive process, and parties frequently overlook duration risk (time to resolution). Legal finance alleviates that risk by assuming it on behalf of the company, allowing companies and firms to enhance liquidity and control the timing of cash flows relating to their commercial litigation and arbitration assets.
The German Arbitration Institute (DIS) reported that disputes have increased by over nine percent from 2019 to 2020 and the total value has increased from €1.6 billion in 2019 to €2.6 billion 2020. As arbitration in Germany continues to rise, it’s essential that parties understand the threat of duration risk and the value of retaining capital and generating a better return elsewhere in the business.
Asset recovery services can help German companies enforce awards and judgments
Seldom do parties think about enforceability at the outset of a matter and too often judgment debtors fail to pay. Considering the additional cost and risk required, parties often opt to leave the judgment unenforced. According to Burford’s latest research, 75% of large company financial officers reported unenforced judgments worth $20-$100 million in 2020.
Burford’s global asset tracing and corporate intelligence team helps clients and firms address enforcement challenges. Our team can be engaged at any stage in the matter, offering a contingent solution, which provides asset recovery services on a financed basis in exchange for a share of the recovery and a fee-based advisory solution, which provides services on a consultancy, fee for service basis, with the client retaining the full benefit of any recovery.
Germany is ready for the new wave of legal finance
Once a niche tool for law firms, legal finance is now just another corporate finance tool that helps companies and firms enhance liquidity, manage risk and realise the value of otherwise highly illiquid assets. With the right legal finance provider, German companies and firms can better identify, evaluate and manage the value of their litigation and arbitration assets. And monetisations, by providing a liquidity boost to corporate clients, are a valuable tool for law firms to know about and communicate to their clients as they continue focusing on clients' needs.