How does duration risk affect commercial litigation and arbitration?

As CFOs seek to maximise enterprise value and bring a finance outlook to the business, they should appraise how they think about their company’s legal assets, including disputes. One of the most important factors for CFOs to consider when evaluating the risk and reward for commercial litigation and arbitration is duration—that is the length of time it will take to file a case, reach settlement, make it through litigation (and appeal) and ultimately get paid.

Since CFOs are not typically lawyers, they may not be as keenly aware of time as a variable in litigation assets as they are in other areas of the business. According to the 2021 Legal Asset Report, time is the least likely primary factor to be considered when evaluating the impact of litigation, even though the long duration of commercial disputes is a key factor in valuation and modeling. Not calculating time to resolution reduces the company’s ability to measure IRR and the net present value of the company’s legal assets. Therefore, it is important to understand how long the process of reaching a resolution can take.

How long is the litigation process?

Litigation and arbitration commercial disputes take years to resolve. For example:

• 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)
• During 2020-2021 it has taken on average 100 days for a decision to grant or refuse permission to appeal, including the time required for service of the respondent, for the respondent to file its response, for any reply by the applicant, and the provision of a bundle for the judge (The Commercial Court Report 2020-2021)
• The average completion time for applications where permission was granted (from receipt of claim to final decision) was 244 days (The Commercial Court Report 2020-2021)

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

Financial impact of duration risk

Since a company’s financial circumstances might change drastically in the years waiting for matters to resolve, CFOs need to consider the impact of having working capital spent on litigation out the door for a potentially long period of time.

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. 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 can CFOs use legal finance to eliminate duration risk?

Legal finance fixes the issue of duration risk by moving that risk from a company to a third party. 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. The provider is repaid and earns a return only if and when the client wins.

Two common legal finance products are:

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 without cost of the company. Burford 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 higher 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.

More worked examples can be found in Burford’s Legal Finance 101 Guide.

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.

This article was originally published on Burford’s website on May 25, 2021, and was updated on October 11, 2022.