The cost and risk of pursuing high-stakes commercial litigation and arbitration can weigh heavily on legal department budgets, company earnings and even share prices. In cost-shifting jurisdictions, there’s another inherent risk: Being liable for your opponent’s costs if you lose. Beyond the scores or hundreds of millions at stake in technically and evidentially complex matters, claimants who lose face liability for the millions of dollars that respondents have spent in defending their claims.
Although outside finance is already widely used by multinational corporations to offset the risk of pursuing high-stakes claims, the industry has heretofore offered imperfect solutions to address the added risk of adverse costs in “bet the company” disputes.
It’s not that solutions have been lacking. After-the-event (ATE) insurance can protect against the risk of having to pay an adverse costs order if the policyholder loses its claim. The premium for these policies is either payable upfront, or, in the event of a successful resolution, the premium is paid from sums recovered in the case.
The issue has been the availability and ease of securing ATE solutions for the high-cost, high-stakes matters that are prime candidates for litigation finance. Most ATE products have either been limited to matters with a far lower risk profile or have required claimants to make separate applications for funding the adverse costs coverage and the matter itself. So, for example, a claimant that needed £5 to £10 million in adverse costs coverage might not be able to get a big enough ATE policy—or be required to undergo two diligence processes, one with an insurer and one with a funder, resulting in a longer and more burdensome process.
To remove this burden and fill a clear need in the marketplace, Burford launched Burford Worldwide Insurance, a wholly-owned insurance company that specifically provides ATE insurance for the most complex and high-value disputes where Burford is also providing funding.
Burford Worldwide Insurance addresses the enormous demand that exists amongst large corporations to deal with adverse costs risks in cost-shifting jurisdictions and arbitral centers around the world. From a single provider, companies can receive financing for the costs of pursuing the dispute, and—as part of the same package—also receive insurance to protect against the risk of paying out a large sum for adverse costs. No other legal financier in the world is able to provide an in-house comprehensive solution to legal risk and costs. Although it represents a shift, Burford also builds on its prior mid-market ATE experience writing some 50,000 policies for claims with costs under £3 million.
To help illustrate the benefits of Burford’s comprehensive facility, below we set out a case study in which a hypothetical company considers the different ways it can address the costs and risks of commencing a complex and high-value arbitration.
Case study: Complex construction arbitration1
ACME Co is an infrastructure company that won a tender process for a $500 million engineering, procurement and construction (EPC) contract to carry out the refurbishment of an aging refinery plant owned by the national oil and gas company in a Middle Eastern country (the Employer). Once ACME Co commenced work, it suffered delays due to the discovery of additional problems and late Employer approvals on scope changes. As delays and costs mounted, relations between ACME Co and the Employer deteriorated. With 50% of the work done, ACME Co advised that its completion date would need to be extended by a year. Without engaging in negotiations, the Employer issued a notice of termination and demanded that ACME Co and its sub-contractors immediately exit the site.
ACME Co had invested $300 million in the project, was liable to numerous sub-contractors and still had equipment on the site. As a publicly listed company, ACME Co was obligated to report its substantial losses on the project, and therefore sought a means to recovery. Given the complexity and size of the claim, ACME Co’s GC forecast the total cost to arbitrate to be $20 million over the course of five years, with an estimated potential recovery range of $30 million (if the Employer was found to have validly terminated the contract) up to $400 million in damages.
ACME Co’s GC recommends moving forward with the claim but needs to consider the negative impact of arbitration spending on a budget already under stress as well as on ACME Co’s P&L and market value. Furthermore, ACME Co’s GC is concerned with the risk of adverse costs in the event the claim is unsuccessful, which she estimates at $20 million for the defendant’s costs.
After ACME Co’s external counsel recommends the company consider using outside finance to defer the costs of the arbitration, the GC receives the following proposal from Burford:
- Burford will pay the entire cost of the $20 million legal budget and disbursements
- Burford will put in place an adverse costs insurance policy with a $20 million cover and pay the upfront premium associated with such policy
- In exchange, if the arbitration is successful, Burford’s investment will be returned, as well as an agreed profit, all indexed to sums recovered from the Employer
After receiving the proposal, the finance team at ACME Co concludes that litigation finance eliminates the need for ACME Co to choose between sacrificing company profits or foregoing a valuable legal claim that will potentially bring a significant sum of cash into the business. Instead, ACME Co can pursue a profit-generating legal claim while enabling the company to realign budgets so that more cash can be allocated to value-increasing activities—effectively turning the legal department from a cost center to a profit center.
With litigation finance & ATE insurance
Creation of a legal claim
Claim cannot be recorded as an asset on the balance sheet
Stock analysts do not account for potential value of legal claim
|The legal claim asset worth approximately $70 million cannot be recognized||
Opportunity to monetize legal assets
The proceeds can be redeployed in the company’s core business
|ACME Co uses the
$20 million that was eliminated from the legal budget to invest in winning other business
Necessary legal expenditures
Costs can’t be capitalized, but must be expensed each period
Reduces operating profit in each period
|Annual legal costs of
$4 million, reducing ACME Co’s operating profit by
$20 million over five years
|Up to 100% of legal costs covered||ACME Co reports better operating margins than it would if it were funding the legal claim itself|
Seen as an exceptional event that isn’t core to the company’s business activities
Excluded from forecasts before a victory, not appreciated afterwards
|The market reaction to the news is far less than hoped, but the company does have
$400 million to redeploy in the business
|Upside participation in the outcome if the claim is ultimately successful||
ACME Co receives net proceeds of $280 million, over 70% of the original damages estimate
In addition, ACME Co receives a costs award against the claimants
|3b. Unsuccessful claim||
Questions from the Board of Directors about the capital seemingly wasted on the unsuccessful claim
Substantial adverse costs liability to the defendants
|ACME Co must pay $40 million—its own $20 million legal fees and expenses, plus $20 million in adverse costs||
Downside exposure mitigated if the claim is ultimately unsuccessful
Insurance policy, paid for by the litigation finance provider, answers to any adverse costs liability
|No impact on corporate balance sheet because litigation finance provider bears cost; revenue neutral outcome|