Although the effects of the pandemic are still being felt, we in the commercial legal finance industry are now in a “post-Covid” phase. Given that, it feels appropriate to take stock and assess the state of the industry.
Legal finance is uncorrelated to the larger economy because commercial disputes are litigated regardless of market fluctuations or prevailing economic headwinds. Indeed, negative economic conditions may actually fuel commercial litigation and arbitration by contributing to the pressures and behaviors that lead to conflict between businesses and make those businesses even keener to find ways of seeking redress and managing costs.
That said, the legal finance industry was impacted by Covid-19, albeit in a more transitory way: The wave of early restrictions on in-person court proceedings noticeably impacted an already slow court system, delaying the progress of many commercial claims. But that impact was a matter of timing and not a permanent setback. Unlike the restaurant meals and airplane tickets that weren’t bought during Covid-19 and never will be, commercial claims delayed by Covid-19 will eventually be litigated and resolved.
At Burford Capital experience shows us that the pandemic has not impacted the substance of any of the cases we have funded. In 2021, for example, we saw almost no losses, and no client gave up its claims or stopped prosecuting a matter. In fact, the conditions that make our capital useful to clients are magnified by slow court and settlement processes. For corporate legal departments and law firms that are willing to work on a contingent basis, the duration risk of commercial disputes—that is, the time-is-money calculation that clients make when they spend tens of millions to pursue matters that may take years to get to trial or settlement—has significantly increased because of COVID-19, and that makes legal finance all the more attractive to them.
Given all these factors, three salient trends in legal finance are (1) incremental increases in cases moving through settlement and trial; (2) continued growth in demand; and (3) increased use by corporates. I review these in turn below.
Commercial cases are moving forward again, albeit slowly
When Covid-19 hit in early 2020, courts shut down in-person proceedings for long periods, creating a backlog of matters that was especially acute in already congested courts. When courts reopened, inevitably criminal trials took precedence over civil matters.
Nonetheless, commercial cases are moving forward again and with the benefit of lessons learned from virtual proceedings that could prove a long-term benefit. Lawyers who last year complained of trials that were scheduled, delayed and rescheduled multiple times are now reporting that their scheduled court dates and hearings are sticking. “We’ve already had a number of trials this year, and we believe that the catch-up is going to occur this year and next year for sure in litigation. And that’s assuming we don’t have anything that gets in the way from the virus,” said Tom Fitzgerald, chair of Winston & Strawn. “We have pent-up demand, but also lots of new filings and trials on the calendar, in addition to the pent-up demand from Covid,” said Madeleine McDonough, chair of Shook, Hardy & Bacon. “I would say by the fourth quarter of 2021, we were back on track. And it’s only been going more and more since then.”
Some aspects of remote work may prove permanent and create welcome efficiencies in the future. As John Quinn, founder and chairman of global litigation firm Quinn Emanuel, told Burford’s CEO Christopher Bogart recently, “We’ve learned some things in the judicial system and in the practice of litigation that we can’t unlearn. A deposition can be done remotely and very efficiently. You can share an exhibit up on screen and call the witness’s attention to the very page you want the witness to read…. Once you’ve learned that you don’t have to get on airplanes and travel across the country—not even for a daylong deposition—it’s hard to unlearn that. This is bringing about permanent changes.”
Legal finance continues to grow and become mainstream
Covid-19 has augmented the pressures that make using legal finance such an efficient alternative both to using working capital to pursue claims and to waiting to access cash tied up in unpaid judgments and awards. In the post-COVID phase, companies and the firms that represent them face a confluence of near-term inflation, potential recession and the need to preserve and enhance working capital, both to invest in growth and compete for talent. Shifting cost and risk to an outside legal finance provider instead of using working capital to pay for lawyers out of pocket is a very sensible alternative.
These factors translate to the continued growth of legal finance, a trend that has been in place for some time but that is especially evident in the current post-Covid phase. As one indicator, analysis of the annual Global Arbitration Review report on the “GAR 30” leading arbitration law firms reveals continued year-on-year increases in the number of these firms reporting use of legal finance to fund significant client matters, a trend that has been evident since GAR began asking these firms about funding four years ago. Growth is also reflected in a recent survey by Bloomberg in which nearly one third (32%) of lawyers report that they are more likely to seek litigation financing now; nearly one quarter (23%) are more likely to do so than one year ago, and nearly seven in ten (69%) are more likely to do so than five years ago.
As yet another example, we’ve witnessed demand grow at Burford as well, as our Group-wide portfolio grew 15% from the end of June 2021 to the end of June 2022, our most recent reporting period.
Increased uptake of legal finance by corporate legal departments
Corporate legal teams are increasingly using commercial legal finance, as this reflects its continued normalization as a routine business and corporate finance tool and points to still more potential growth in the future.
Research and data bear this out. According to the GC of a multinational logistics company, “Fifteen years ago, if someone asked about funding litigation it sounded radical, but now it is mainstream.” At Burford, as recently as 2018, corporates accounted for only 20% of commitments, but as of December 31, 2021, corporates account for more than half (56%) of commitments.
Legal finance is attractive to GCs, CFOs and other corporate leaders of often very large companies because it considerably reduces costs while increasing certainty around commercial litigation and arbitration. Cost management and certainty are always important—and elusive—in corporate legal departments, but especially now given the combination of short-term inflation and potential recession that businesses are facing. Because legal finance capital is nearly always non-recourse, companies can use it to shift the cost of winning a significant recovery—or an expensive loss—to a third party. As the litigation counsel of a multinational investment bank put it, legal finance “make[s] economic sense because you can remove negative downside and make the upside more predictable.”
A significant growth area for corporates is the acceleration of expected damages tied up in a pending litigation or arbitration, or in an unenforced judgment or award, often called “monetization.” Rather than waiting for a matter to fully resolve to be paid their expected damages, companies can work with a legal finance partner to obtain an advance of a portion of the expected value of a claim or an unenforced judgment. Companies can use that capital for any corporate purpose, including investment in future growth or paying for other meritorious litigation that otherwise might not be pursued. They also gain certainty around cash flows and outcomes: If the matter wins, they can expect a meaningful share of the remaining damages, and if it loses, they keep any capital advanced, locking in a minimum outcome. In both scenarios, the company maintains control of its litigation—and considerably more control over its finances.
Summarizing how legal finance permits a more efficient use of company capital and resources, the assistant GC of litigation for a health insurance company argues that monetization “is appealing for accountants and the finance team, who can book it immediately rather than when a judge or arbitrator issues a decision. The certainty is appealing, but so is the risk-sharing. The time value of money is inherent in any litigation matter.”
The future of legal finance
Every industry will be grappling with the impact of Covid-19 for years to come. But arguably, this post-Covid era is reinforcing the real value of legal finance. At a time when financial certainty and cost management are valued more than ever, the growth of legal finance in the post-Covid era makes sense. Law firms and clients have become more sophisticated and more commercially minded since the last recession, and they will likely be all the more so as clients grasp for predictability in the current climate.
This article was originally published in PLI Chronicle here.