Doing more with less: how dispute finance can help in-house counsel generate revenue and preserve cash for their business
Dispute finance is increasingly being recognised as a means by which businesses can leverage legal claims as valuable assets. The multiple benefits of third-party dispute funding offer corporates a way to transform the pursuit of legal claims from an expensive and resource intensive proposition into a cash generating function, allowing it to unlock the unrealised value of potentially lucrative claims.
Armed with an understanding of these financial benefits and how dispute financing can be used to unlock the value of legal assets, in-house legal teams have the means to shift the dial on the long established position of being purely a costs centre and to take a seat at the executive table as a significant contributor to the company’s revenue generation pursuits.
At Omni Bridgeway, we are increasingly working with corporates seeking to pursue meritorious claims and, in recent months, we have been bolstering our corporate funding capabilities. Most recently, in February we were joined by Leanne Meyer as an investment manager in our Sydney office. A seasoned commercial litigator with more than 25 years of experience in private practice, Leanne came to Omni Bridgeway after being engaged as General Counsel of RSL NSW, one of Australia’s largest veterans’ charity organisations.
In her role as General Counsel, Leanne oversaw a legal function with a limited budget that had to be frugally managed – a challenge shared by many, if not most, in-house lawyers. She brings this experience and insight to her role at Omni Bridgeway. She has a first-hand understanding of the ever-increasing pressure on in-house legal teams to ‘do more with less’, to add value to the business whilst working with tight budgetary constraints. She also understands the difficulties that exist in demonstrating to the business’s decision makers the benefits of pursuing legal claims which are traditionally associated with significant cost, risk of loss, drain on cash flow and legal team resources at the expense of much needed business as usual capital.
Even well-capitalised organisations with valuable claims and the financial means to pursue them can be reluctant to take up a case. Pursuing a litigation or arbitration case is a lengthy process, and the results can be unpredictable. Further, although a company may anticipate a strong recovery, the way in which legal expenses and any potential recovery from the case must be treated in an accounting sense can have a negative impact on the company’s financial statements.
- legal claims and any expected or anticipated recovery amounts cannot be treated as an asset and must be recorded at zero in the balance sheet;
- legal fees incurred periodically throughout the life of any claim are treated as expenses as and when they are incurred, decreasing cash and operating profits; and
- any amounts recovered if a claim is successful is accounted for as an extraordinary item not operating profit.
These negative accounting consequences, coupled with long lead times, uncertain outcomes, and the risk of a claim being unsuccessful having adverse costs outcomes can make pursuing even a meritorious claim an unattractive option for executive decision makers, and thus for an in-house legal team in unlocking any potential asset value.
By having a good working knowledge of how dispute finance allows corporates to pursue meritorious claims whilst alleviating many of these risks, in-house legal teams will be well placed to help the business do what is strategically important, particularly in the current economic climate – generate revenue and preserve cash.
Leveraging claims as assets – how dispute finance can help
While litigation or arbitration outcomes can never be guaranteed, dispute funders like Omni Bridgeway work closely with legal teams to carefully select those claims which have merit and are most likely to achieve a return for the company. Additionally, with our finance, the company is able to engage the best-possible external lawyers and experts for its case, which can also help maximise the likelihood of potential recovery.
Significantly, by using external funding to finance a dispute, legal expenses become those of the funder and not the business, thus keeping them off the balance sheet and preserving cash for business as usual activities.
If a dispute is resolved successfully, the business can record the recovery as revenue without carrying a reduction in cash or profits along the way.
In other words, disputes—once viewed as a liability for the company—are transformed into revenue-generating assets with additional upside in the event of a strong recovery.
Our funding is non-recourse, which means the funder receives a return on its investment only in the event of a successful recovery. Should the company lose its case, the funder receives nothing, and most funders will agree to pay any adverse cost orders should this be part of the company’s requirements. All of our funding arrangements are flexible and tailored to the needs of the company and the size and relative risks associated with the claim.
Aside from the financial benefits, the pursuit of commercial claims can have a strong impact on the marketplace as well. In doing so, a company sends a strong message to competitors that it will protect its position when wronged, and that it has the resources to pursue its rights no matter the scope of the potential case.
Some common questions
Dispute finance is available to companies at any stage of a case, even after a judgment or arbitral award has been made, if funds are required to pursue enforcement action. For the funder, key factors in determining whether a commercial dispute should receive funding is the claim size relative to the size of the anticipated budget to pursue the case, the merits of the case, and the likelihood of a successful recovery.
Critically important in the funding relationship between the funder and the funded party is the funding agreement. This contains the financial terms on which the funder agrees to fund the claim, as well as the parties’ other rights and responsibilities in relation to the claim.
The agreement also deals with the following issues which are often raised by in-house counsel when engaging with a funder:
- Confidentiality and privilege: Normally, the funder enters into a confidentiality/non-disclosure agreement from the time of a funding inquiry and before the potential matter for investment is considered. This allows the funder to pursue the due diligence necessary to determine if a matter is eligible for funding. If the funder agrees to fund the claim, further confidentiality provisions are usually included in the funding agreement. In addition, in jurisdictions such as Australia where common interest principles apply to protect against the loss of legal professional privilege, a claimant is protected from waiver of privilege in providing documents or information to a funder as the funder and the claimant have a common interest in the outcome of any funded claim.
- Case management and control: The funding agreement sets out the nature and scope of the funder’s role, including the extent to which the funder can participate in the day-to-day management of the case. Matters funded by Omni Bridgeway are managed by highly experienced former dispute lawyers who work closely with the in-house legal team and external lawyers engaged by the in-house team, all of whom can rely on the skills and experience of the Omni Bridgeway investment team to assist them with the legal strategy and oversee the expenses. The experience of the investment team is one of the key factors that companies often use in determining whether it will engage with a funder. However, the level of the funder’s involvement in the case is always a matter to be negotiated and agreed between the funder and the company.
- Conflicts: Funders in Australia are required by regulation to have adequate practices in place for managing any conflicts of interest that might arise in a funded dispute. The identification and management of conflicts of interest should be addressed in the funding agreement. For example, the agreement should:
- state that the lawyer who has the conduct of the claim owes his or her full professional and fiduciary duties to the funded claimant, even if a funder is adversely affected; and
- address possible conflicts over whether to settle and clearly provide the mechanism for doing so. It may provide, for example, that any irreconcilable difference over a settlement offer must be referred to nominated counsel for a binding opinion on whether the settlement is reasonable.
In most circumstances, however, potential conflicts are resolved because the interests of the claimant and funder are aligned in seeking the maximum-possible return on a claim.
In-house teams are increasingly being asked to do more with less. Dispute finance can provide a pathway to help them achieve their companies’ financial goals while pursuing highly meritorious claims and substantially mitigating risk. To learn more about how Omni Bridgeway can help, please contact us.