I have the pleasure of serving as one of the Equity Champions for Burford Capital’s groundbreaking Equity Project, which is designed to create an economic incentive to change the gender gap in the law. Burford, a leading global finance firm focused on law, started The Equity Project to provide litigation funding for matters led by women, coming out of women owned firms or originated by women.
This month, I interviewed Christine Azar, a former securities litigator and current Director at Burford to spread the word about litigation funding. Christine discusses some of the basics of litigation funding, including the nuts and bolts of how deals can be structured, current trends in the area, and The Equity Project.
1. What is litigation funding?
Litigation funding—also known as legal finance, litigation finance or third-party funding—is a means of offloading the cost of paying legal fees and expenses associated with commercial litigation or arbitration. Typically, the funder takes on this upfront cost and risk on a non-recourse basis—meaning that if the matter loses, the client or law firm owes nothing—in exchange for a portion of the ultimate award or settlement.
The most basic form of litigation funding is a single, high-value commercial matter. Increasingly, however, litigation funding is used in ways that resemble specialty corporate finance with the growth of portfolio-based litigation finance arrangements, where multiple matters (both plaintiff and defense matters) are combined in a single cross-collateralized financing arrangement.
Portfolio financing has experienced dramatic growth in recent years—due in no small part to its tremendous value for law firms and corporations. This model now accounts for the majority of Burford’s investments in recent years. We expect to see in the future even greater diversification in the ways that firms and clients rely on funders such as Burford to finance the business of law.
2. Are litigation funding agreements enforceable?
Litigation funding agreements are generally enforceable and it is now a widely accepted part of business across the US, UK, Europe, Australia and more recently Singapore and Hong Kong.
In the US, laws vary from state to state, and in a minority of jurisdictions, statutory or common law champerty laws may limit the forms of litigation funding that are legal and enforceable.
3. What are the ethical concerns, if any, that lawyers need to consider when it comes to litigation funding?
The question we are most often asked is whether the presence of litigation funding affects control in any way. The short answer at Burford is no: We act as passive investors and exert no control over litigation related decisions or settlement. Control of key decisions remains firmly with the client.
We also get asked about the interaction of litigation funding and the protection of attorney work product. As has been affirmed in numerous cases, documents created in connection with litigation funding, or produced to litigation funding providers over the course of diligence and investment, are protected from disclosure under the work product doctrine.
Lastly, very occasionally we also get asked about terms you probably haven’t considered since law school–champerty, maintenance and barratry. The short answer is that these ancient legal issues are either obsolete or do not interfere with litigation funding in the jurisdictions in which Burford provides funding.
Of course, you should check your jurisdiction carefully, especially if you work with a different funder with a different model.
4. How are litigation funding agreements typically structured?
Litigation funding agreements are typically provided on a non-recourse basis, meaning if the underlying matters are unsuccessful then we ultimately lose our capital. As a result, the cost of our capital is priced according to the risks of the individual matter. An assumption for any deal we structure is that the litigant should receive the bulk of the damages in the event of a successful resolution to the case.
Typically structures exist on a spectrum, with variable returns on one end, and fixed returns on the other. A variable return is comparable to a contingency fee arrangement, where a law firm will advance the cost of litigation out of pocket, and then recoup those costs first-dollar out of the return, in addition to taking 30-40% of the net remaining proceeds. In such an arrangement, that percentage represents the risk the firm takes in forgoing all of its fees and advancing costs. Burford, like other funders, can similarly structure a variable return consisting of our investment back, plus a percentage of the settlement or award. At the opposite end of the spectrum is a fixed return structure, where the finance provider’s return consists of an investment back, plus a multiple (or fixed) return of that investment. The vast majority of the time, the needs of our counterparties are such that the return structure falls somewhere in the middle of the spectrum, resulting in a hybrid structure with both a fixed return and a variable return element.
5. What kinds of matters are ripe for litigation funding?
Any high-value commercial litigation or arbitration matters are appropriate for funding, including IP and patent matters, contract disputes, antitrust claims, construction disputes, bankruptcy, fraud and even defense matters.
6. How do you find a reputable litigation funder?
Commercial litigation funding has seen explosive growth in the past decade in response to client demand—but not all funders are equal and therefore any law firm or client considering it must exercise a level of diligence when selecting a legal finance provider.
The core of the legal finance business is the ability to fund legal fees and expenses over a potentially drawn-out, convoluted litigation process, so capital adequacy is of paramount importance for clients. When capital is to be paid in the future, clients must be confident that capital will be available to them at the point when it is needed.
Even if the client is receiving all the capital up front—meaning that capital availability is not an issue—clients still need to consider the size and structure of their financial providers to assess their stability and the materiality of the investment to them. This is crucial because if your transaction is material to the financier, there are inevitably contractual provisions in your arrangement that will—if it comes under pressure—permit the financier to act in a manner that may be inconsistent with your interest.
7. How can you determine if potential funders might be a good fit for your matter?
Different funders deal with different matters and have different minimum capital requirements. Burford has a minimum capital requirement of around $2 million—most of our investments are between $4 and $10 million, and some are significantly larger. There are other funders in the market that make smaller investments.
Beyond capital, you should learn whether the funder conducts its diligence in-house, as Burford does, as that will affect the speed with which they are able to respond and should also be a concern when confidential matters are being shared outside the funder’s walls.
Additionally, some funders will attempt to “lock in” a deal with an exclusivity arrangement and surprisingly low terms before conducting any diligence. We don’t require exclusivity and we don’t offer terms before we diligence matters—but we do often end up helping out law firms and clients that have found, at the eleventh hour, that another funder’s low-ball offer disappeared after diligence.
8. What do you need to have ready to pitch a matter to a funder?
We ask that law firms and their clients come to us with a well-developed factual basis and legal theory for the case. We also rely on our counterparties to provide clear and realistic budgets that do not assume early settlement. Our underwriting team will conduct an in depth review of the key documents underlying the dispute as well as financial information about the businesses involved so counterparties should be prepared to promptly provide the documentation. Although in certain circumstances a case can be financed very quickly, generally it takes about one month to move from initial assessment to investment.
9. What is The Equity Project?
Law firms and clients are showing increasing concern regarding the significant gender disparities at the highest echelons of law. However, real change has been slow to appear. The Equity Project is an initiative designed to tackle this problem and help close the gender gap in law by providing an economic incentive for change. At its core is a $50 million pool of capital earmarked for financing commercial litigation and arbitration matters led by women. Matters that qualify include matters in which a woman litigator is first chair; a woman serves as plaintiffs’ lead counsel or chairs the plaintiffs’ steering committee; a women-owned law firm is representing the client; a woman litigator earns origination credit; or a woman partner is the client relationship manager.