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Use of litigation funding continues to rise despite cost concerns

Bogart: GCs embracing legal finance

The “perceived cost” of litigation funding continues to be the biggest barrier to take-up by large companies, but most have still been increasing their use of it, according to a new survey.

The poll by listed funder Burford Capital found it was the biggest companies – those with a turnover of more than $1bn – that were keenest on finance.

It surveyed 250 chief finance officers (CFOs) and other finance professionals in the UK, 201 in the US and 51 in Canada, who all worked at companies with annual turnovers of at least $50m – nearly half of them had revenues topping $1bn.

Unsurprisingly, the survey argued for the importance of litigation funding, although the need did not appear quite so strong in the UK.

While 86% of respondents at US companies, and 73% at Canadian companies, saw legal costs management as an “urgent” issue, the figure fell to 59% for the UK.

The top three “very critical” challenges in using funding were the “perceived cost of legal finance capital”, the lack of an internal policy on working with funders, and the time required to secure financing.

The report said: “These challenges are real but solvable: Given the extent to which CFOs surveyed say they value the ability to offload risk to a third party, as CFOs become better educated about legal finance the perceived cost of financing that risk is likely to diminish.

“And as they develop experience and relationships with premium legal finance partners, concerns about policy and timing are also likely to fade.”

The findings indicated that this was already happening – 75% of respondents said their company’s use of litigation finance increased in the past two years, while just 3% said it fell.

Some 65% said their companies were “very likely” to use it in the next two years as well, with those from $1bn turnover businesses significantly keener.

Respondents who said their companies have used legal finance or were likely to use it in the next two years cited “general economic conditions outside my company” as a primary factor.

Those at the biggest companies (with annual revenues over $10bn) were about four times more likely to say they would finance 10 or more matters per year than those at companies with annual revenues under $1bn.

Perhaps surprisingly though, respondents from the $10bn-plus companies were most likely to say that their businesses have chosen not to pursue claims due to the cost of doing so (73% against the overall figure of 63%).

More than three-quarters of all respondents said their companies have unenforced judgments and uncollected awards valued at $10m or more – for 24%, it was more than $50m.

The report said: “CFOs at the largest companies are the most likely to be active advocates of legal finance. This flies in the face of the assumption that legal finance is a tool of necessity used by small companies without other, better choices…

“CFOs at big companies are especially likely to embrace legal finance as corporate finance for law. CFOs are also more likely than their GC peers to view legal finance as simply another form of financing, analogous to financing real estate or other corporate purchases— in other words as a sensible and smart business practice that helps their companies increase efficiency.”

Christopher Bogart, Burford’s CEO, said: “As a former GC of a Fortune 20 company, I know that CFOs don’t love legal spending.

“However, the research shows that CFOs, particularly at large companies, embrace legal finance as tool to manage and improve control over legal spending, even more so ahead of a possible recession when it is so important to create certainty around corporate budgets.”