Dispute resolution finance for companies: Turn your in-house legal department into a source of revenue
Increasingly, companies are expecting legal departments not only to mitigate risk, but to help generate revenue and boost corporate profit margins. Dispute resolution finance can help in-house counsel transform their legal departments from cost to profit centres.
One of the most complex issues facing many in-house counsel is the expense of litigation. Companies, even well-capitalised ones, with potentially valuable claims are often reluctant to pursue them, or see them through to their most valuable stage, for several reasons:
- Legal department budgets are typically finite and built around financing matters that must be defended. This leaves little for companies to pursue legitimate claims that might enforce their legal rights and result in a substantial recovery.
- Pursuing claims can negatively affect a company’s bottom line. Under accounting rules, litigation expenditure, such as fees paid to lawyers and experts and court costs, are typically recorded as expenses as soon they occur and can have a negative impact on earnings. Consequently, a large ongoing litigation can have a significant impact on a company’s profits. Meanwhile, a potential recovery cannot be recognised as future income and contingent assets cannot be recognised in a company’s Statement of Comprehensive Income. Income can typically only be recognised on successful completion of the litigation.
- Litigation carries financial risks. If the case is unsuccessful, in addition to paying the company’s own legal costs, the company will usually be ordered to pay adverse costs (the other party’s costs).
How financing helps
Dispute resolution finance can help solve these issues. By using external funding, in-house counsel can turn meritorious claims that are often costly on the company’s bottom line into revenue-generating assets with minimal or no risk to the company’s profits.
Mitigate cost: By using a funder’s money to pay for the litigation, a business can take the litigation expenses off the balance sheet. They become the funder’s expenses. On the other hand, if the claim is successful, revenue can be recorded without having incurred any downside costs or risk along the way. Dispute resolution finance therefore helps transform litigation from an expense to a cash-generating asset.
Non-recourse: Commercial funding is non-recourse. This means that the funder receives a return on its investment only in the event of a successful recovery (whether by way of a settlement or judgment). If the company loses the case, the funder receives nothing.
Transfer risk: Not only does using capital from a funder free up a company’s legal budget for other matters, but most commercial funders also assume the risk of having to pay any adverse cost orders if the case is unsuccessful. A funding arrangement can also help reduce litigation risk by helping the company afford the best-possible counsel for the case and ensure that a matter is pursued to its maximum possible return - not settled early because of financial constraints.
Case management: In addition, dispute resolution finance companies such as IMF Bentham are run by experienced former dispute lawyers who are experts at selecting cases that have a strong chance of success. Once a case is funded, the funder can relieve pressure on the in-house legal team by providing case management, including independent oversight of the legal strategy and litigation expenses.
Portfolio funding: Many companies have more than one potentially valuable claim. With a few meritorious cases to pursue, a company can work with a funder to create a portfolio of bundled cases that allows the company and funder to further manage risk and keep the cost of capital down.
By partnering with an experienced funder to bring strong claims with mitigated cost and risk, a company can turn its legal department into a revenue source that boosts – rather than diminishes – the bottom line. For more information on how to use dispute resolution finance to transform your legal department into an asset for your company contact us.