Litigation is not a luxury: disputes can be assets

Could this be the calm before the storm or the quiet in the eye of a hurricane?  Despite a few high-profile insolvencies in the retail sector (Debenhams, Arcadia) the wave of insolvency disputes expected to be created by a global pandemic and the resulting economic fallout hasn’t quite crashed down upon us just yet, but why? 

Many would point to the various government-run programmes that are propping up businesses (many of which would have long folded without them), while others might also suggest that applying relief to contract terms and increased attempts at ADR means the pandemic has brought out the softer side of some businesses when it comes to holding others to account. There is of course a third reason – with so much uncertainty in the air, many may view the costs of litigation as more of a luxury expense, one they simply aren’t willing to take on. However, for many distressed companies litigation may be an asset. There are more options than ever when it comes to insuring, funding or monetising litigation, options that can turn it from a burden into an asset. 

A company in financial distress may not be able or willing to pay legal costs out-of-pocket, and law firms may not be able or willing to proceed on a contingency basis. Even if you can find a law firm willing to proceed with a contingency arrangement there will still be counsel’s fees and other litigation costs to fund, which could be a substantial spend. When deciding how to proceed in such a situation there are several options for companies, IPs and law firms that can help de-risk the litigation spend, take the costs of litigation off a company’s balance sheet and even provide immediate cash flow to the business.

Option 1: insure the risk. 

If a company has enough resources to pay for litigation costs but is simply unwilling and too risk-averse to pursue litigation on the chance that it might be unsuccessful, litigation insurance that covers the costs of the risk of adverse costs and disbursement fees (sometimes coupled with the offer of a law firm to operate on a contingency fee) can be an easy solution. Relative to funding arrangements, insurance arrangements can bear lower costs, meaning when the matter is successful a smaller proportion of the claim proceeds will go towards payment of the insurance premium.

Option 2: engage a litigation fund.   

For companies that cannot or will not fund the ongoing costs of the litigation – there is the option to engage a third-party funder to cover the ongoing costs of the litigation. In this instance, seek a competitive funding solution that will finance law firm fees, counsel’s fees and other disbursement fees on a non-recourse basis, meaning that if the claim is lost the claimant is not liable to repay the investment of the funder. However, if the claim is successful, the funder will share in the claim proceeds.

Option 3: monetise the matter. 

Monetisation (the sale of insolvency claims) is also an option for either immediate upfront consideration and/or a share of any recovery generation by the funder. This can be an option for ongoing matters or an exit strategy if a judgement or award has been obtained, but there are pending appeals or enforcement issues that are delaying the realisation of claim proceeds.

Option 4: consider a portfolio arrangement. 

For larger corporate enterprises with several legal claims, it may be worth exploring portfolio options in which cross collateralisations can reduce both risk exposure and the costs of litigation. 

Portfolio structures can enable larger commercial entities to bring forward value in their contingent legal assets to achieve revenue recognition. Corporate finance facilities can range from the low tens of millions to several hundred million dollars and could be a lifeline to a struggling entity.

While forbearance and ADR have their place, businesses should also feel empowered to act where they need to, and litigation costs should not hold companies back from the financial and legal remedies available to them under the law.  With the right insurance, funding or monetisation strategy, litigation can be transformed from ‘a luxury we can't afford right now’ to a powerful asset.