Legal finance could transform the way construction firms manage litigation – Construction News
Legal disputes in the construction industry are, unfortunately, a fact of life, and the higher the stakes, the more damaging – and costly – they can be.
The collapse last year of UK contractor Carillion brought many of the difficult challenges faced by the construction industry to light. Despite operating in a high-risk environment, construction profit margins remain small: the total profits for the 100 largest firms combined (£1.1bn) equates to 1.5 per cent of turnover.
In fact, research from the latest CN100 revealed that the 10 largest UK firms made an average pre-tax loss of -0.5 per cent.
“Legal finance can support in reducing or eliminating the immediate legal costs of a claim, as well as bearing some, or all, of the risks”
We believe these reasons are behind a big rise in the number of construction companies and contractors expressing an interest in litigation finance.
In most cases, any construction company facing a dispute will not only have to absorb legal expenses within existing legal budgets, but also deal with significant internal resources being tied up for an indeterminate amount of time.
Legal finance can change this dynamic. It is a process through which litigants finance their litigation or other legal costs through a third-party financier.
Because it is now commonplace for companies in the construction and mining industries to be dealing with multiple cases, the provision of finance offers them certainty as to their legal spend, as well as divesting the risk associated with that spend to the third party.
In exchange for assuming the expense and risk of loss, in the event of a successful outcome, the finance provider recoups its investment and gains a return from the settlement or damages.
In more complex financing arrangements, the finance provider may provide capital for multiple matters in a ‘portfolio financing’ approach, which can include claimant as well as defence matters.
Choice and necessity
These arrangements can be helpful to parties engaged in construction disputes for a variety of reasons.
In some instances, a construction claimant may simply lack the financial resources to pursue a single, high-stakes matter without outside capital.
Legal finance offers these parties access to capital without which they might not have the resources to pursue a fair recovery through the courts or arbitral process.
Similarly, a cash-strapped claimant may wish to monetise a portion of a pending matter to provide short-term capital for their business.
But legal finance is equally suited to scenarios in which parties have ample resources to pay their legal bills, and is regularly used by well-capitalised companies.
In many industries, corporations are increasingly using litigation finance by choice, not just out of necessity. This is because it is simply a more efficient way to pay legal costs. It also provides a tool to hedge risk, eliminate budget constraints and monetise pending claims to free up capital for other corporate needs.
Not only do mounting legal costs have an adverse impact on balance sheets, but because pending legal claims traditionally haven’t been treated as potential assets, they may represent hundreds of millions, if not billions, of pounds in captive value.
The level of risk in a construction dispute is very high, with significant dependencies on complex technical knowledge, as well as significant expense, to bring the matter to fruition.
Legal finance can support in reducing or eliminating the immediate legal costs of a claim, as well as bearing some, or all, of the risks associated with bringing the claim in the first place.
Portfolio financing of multiple matters is especially suitable for construction companies that may be pursuing multiple ongoing claims through the courts and arbitration tribunals.
Portfolios may range in size from as few as two cases to all of a company’s pending (and, even future) matters. The ideal portfolio combines cases of varying degrees of risk, and terms are typically better because risk is diversified.
China’s One Belt One Road (OBOR) initiative, the mammoth undertaking in construction and infrastructure that’s set to link European and Asian economies, has already introduced the potential for some of the largest-scale disputes in international arbitration.
Spanning at least 60 countries and costing more than $1.3tn (£1.02tn), the potential for OBOR-related disputes is vast, and will undoubtedly pose extraordinary cost and risk burdens for the parties involved.
Clearly, there is a role for legal finance here. Rather than being required to reserve millions for legal costs (the average time for resolving a commercial dispute through OBOR-participating countries is nearly 20 months), stakeholders can instead shift those costs to a third party and focus on running their business.
Legal finance is a fast-growing industry – and construction disputes are well suited to this specialised area of finance.
Elizabeth Fisher is a senior vice president at Burford Capital