Time is money—a tried and tested truth, yet time is the least likely primary factor to be considered when evaluating the impact of litigation, according to the 2021 Legal Asset Report: A Survey of Finance Professionals.
By overlooking duration risk—the length of time it takes to file, settle, litigate, appeal and get paid—CFOs may be unnecessarily risking their own budget by spending out-of-pocket. Below, we cover key takeaways from the research.
Duration risk
It can take months to years for litigants to go through the courts, appeals and eventually get paid. To cite a few examples:
- ICSID arbitrations take on average 46 months to resolve and an additional 13.3 months to the payment of an award [1]
- It takes roughly two years for a commercial matter to reach trial in the US according to Lex Machina’s 2018 report
- The ICC reports that litigants can expect to wait 26 months for an ICC arbitration to reach a final award
In short, winning litigation is not the same as getting paid, and the time value of money spent on or otherwise tied up in pending matters is an important factor to be considered.
However, according to the report, time is the least likely primary factor to be considered when evaluating the impact of litigation and the length of time projected for recovery is given less weight than other factors when the decision is made not to proceed. Further, the research found that financial officers are significantly more likely to base their minimum recovery target on return on investment (ROI) vs. internal rate of return (IRR).
Finance officers are experts in enhancing liquidity across the business and factoring in the duration risk of litigation may help them better leverage their valuable legal assets. This includes considering the impact of having working capital spent on litigation out the door for an extended period of time. Even companies with robust recovery programs that can afford litigation may find that capital could generate a better return if invested elsewhere in the business. Legal finance can help companies fund recovery programs without risking their own capital.
Case study: Preserving OPEX while pursuing bet-the-company litigation
An industrial engineering company was involved in a high-value, multi-year dispute over a supplier’s alleged professional malpractice. The dispute was damaging, leading to lost customers and business, significant reputational damage and reduced cash flow and liquidity. Following an unsuccessful mediation attempt, the company initiated an AAA arbitration. The company stood to recover damages valued in the low nine figures but needed to preserve its budget for use in day-to-day operations rather than paying legal fees and expenses out of pocket.
The company needed capital as well as expertise, and Burford provided both, including almost $6 million to cover case-related fees and expenses. At the company’s request, Burford also introduced several potential replacement law firms when its original counsel withdrew after filing the arbitration.
The $6 million was non-recourse, not a loan: Burford’s investment did not add to the company’s debt load and would be paid back only if and when the company achieved a successful outcome in the dispute. The company would keep any excess funds recovered after paying Burford’s return. If the case was unsuccessful, the company would owe nothing to Burford or its lawyers— eliminating the cost and risk of the litigation.
Burford’s $6 million of non-recourse capital guaranteed that the company could assert its right for relief under the contract with its suppliers, without having to redirect precious operating cash to its outside lawyers.
Conclusion
Legal finance solves the duration problem by reducing or removing costs to the business by accelerating working capital from legal assets. In short, it enables CFOs to realize otherwise invisible assets without delay.
Just as companies routinely seek outside expertise and financing for areas that are not core to their business, they should have the same expectations for their legal assets. Few companies litigate with enough frequency to have built expertise in key aspects of budgeting and modeling litigation, and their data sets will by definition be limited to their own experience. Along with capital to finance affirmative recovery efforts, this expertise and data are available from legal finance partners.
Click here to access the full research report.
[1] Procedural Issues in International Investment Arbitration, 2018
