Making Rational Financial Choices in Litigation

October 18, 2017

Making Rational Financial Choices when Faced with a Lawsuit

By: Dave Kerstein, Investment Manager and Legal Counsel

Litigation funding can provide claimants and their lawyers with the resources necessary to avoid making adverse decisions that can reduce the value of their claims and prematurely end meritorious cases.

On the client side, the financial pressure created by litigation can affect whether a claimant decides to bring a case at all. Even those claims with a significant chance of success that have the potential for a large recovery may be abandoned by clients who fear draining their coffers to fund a long litigation battle.

Should a claimant decide to bring a case, fewer resources may result in a corresponding lack of leverage in settlement discussions. For instance, a well-financed adversary may call a resource-challenged litigant’s bluff in a settlement negotiation, knowing that their opponent does not have the capital to carry on an extended court battle. This can lead to an early settlement by the claimant, leaving them with pennies on the dollar.

For lawyers, an under-capitalized client can yield unfavorable fee arrangements that may substantially increase their firm’s risk without guaranteeing financial rewards. A full contingency arrangement may force the lawyer to make do with less, because every dollar spent means a lower return on value.

When expenses do occur, lawyers may face slow payments from clients with capital issues. This can create tension between the litigants and their counsel and force the lawyers into uncomfortable collections conversations. The very nature of a contingency fee also triggers budget concerns. A full contingency is, by definition, uncertain, making it difficult for a firm to generate a predictable revenue stream and increasing the firm’s reliance on partners’ savings or bank debt to cover fiscal gaps.

A relationship with a reputable funder like Bentham allows lawyers and their clients access to non-recourse financing, in which the funder only recoups its investment in the event of a favorable settlement or win in the funded case. A law firm can more accurately predict its budget, reduce its debts, and – because expenses are covered –avoid the unsavory task of chasing down clients to pay their bills.

Funding can turn any billing scenario into a hybrid contingency arrangement, which incentivizes lawyers to pursue cases to their best-possible conclusion. The lawyers can take a partial contingency, giving them upside in the event of substantial recovery, yet a portion of fees and expenses are covered. This reduces their risk, guarantees income, and allows them to spend greater resources in areas like discovery or expert witnesses.

In situations where a hybrid contingency replaces the billable hour, the client gains a far more financially reasonable fee arrangement. A billable hour arrangement, by contrast, produces incentives for lawyers to bill to the maximum possible extent, leading to even greater financial stress for the client. For corporate clients, hourly fees accrue directly to the bottom line. Yet recoveries aren’t treated as income. They are booked under the line, meaning a company’s EBITDA is reduced without a corresponding increase in revenues. Funding, however, removes litigation expenses from the books, giving companies that may have been skittish about spending dollars on plaintiff-side litigation a strong motive to seek recoveries and to assert their rights in the marketplace.

To learn more about how funding can better align the needs of clients and lawyers, contact us for a consultation.