News & Insights from Hou Zhu 241021

• After a decade of weighing whether it should do anything to regulate the emerging field of litigation finance, the U.S. Judicial Conference’s Advisory Committee on Civil Rules agreed to create a subcommittee to examine the question of whether there should be a nationwide law on litigation funding disclosures. The subcommittee will be chaired by Chief U.S. District Judge R. David Proctor of the Northern District of Alabama. A few federal judges or courts, such as New Jersey’s, already require disclosure of litigation funding, but there is no uniformity across the judiciary. Business groups have argued that disclosures about financial backers in cases are necessary to allow defendants to make informed decisions about the course of litigation. The International Legal Finance Association (ILFA) has argued that such a nationwide requirement is unnecessary and that it should be left to individual courts to determine the relevancy of any financing agreement to the merits of any particular case.¹

• In an international arbitration claim against the Republic of Poland funded by LCM, the arbitral tribunal unanimously ruled in favour of the funded party that the Republic of Poland had breached its obligations under the Australia-Poland Bilateral Investment Treaty and the Energy Charter Treaty. The quantum of the award entered in favour of LCM’s funded party totals A$490 million plus interest. The total investment into the case to date is A$16.6 million (US$11.3 million), and LCM’s returns are calculated as a rising multiple of invested capital over time. If the award is satisfied within a reasonable period without the need for enforcement, LCM would be entitled to a multiple of 6 times its own invested capital plus significant performance fees on third party capital invested.²

• In an open letter to the government, consumer representatives — including Prof Carolyn Roberts, a water resource specialist who is spearheading a mass action against six UK suppliers for alleged customer overcharging, and Richard Smith, the chair of the Road Haulage Association — have pushed for ministers to protect the litigation funding sector and help safeguard people’s ability to bring cases against large companies, accusing the government of “dragging its heels on addressing the issue”.³

• Nakiki SE has signed letters of intent for the financing of lawsuits for damages due to construction defects with a value in dispute of up to EUR 2.4 million, and is entitled to up to 33% of the proceeds.⁴ 

• David Perla and Aviva Will from Burford wrote an article (15 years of legal finance insights showcase exponential growth)⁵ to share Burford’s growth trajectory and insights into the third-party funding industry over the past 15 years. More than a decade of research has confirmed that the legal financing sector has experienced transformative growth, and Burford’s research insights have also revealed clients’ changing needs and priorities.

• Remarkable growth in legal finance use

• In Burford’s early research, legal finance was barely on the radar of the lawyers and finance leaders they surveyed. In 2012, just 9% of AmLaw 200 litigators, 4% of in-house counsel and 5% of financial executives had used it.

• Nonetheless, even those who hadn’t yet used legal finance were already beginning to recognize its potential value, and 2012 survey respondents predicted increased demand for legal finance over the following 18 months. By 2017, more than half of those surveyed who hadn’t yet used legal finance expected to use it in the future, and in 2018, 97% of those interviewed acknowledged the growing prevalence of legal finance.

• Today, legal finance has gone mainstream. In a 2024 survey of 400 senior in-house lawyers and finance leaders, almost three quarters (73%) said that they had either used legal finance (39%) or would consider doing so (34%). These numbers reflect not just increased adoption, but the transformation of legal finance from a niche concept into an essential, widely accepted tool across industries.

• Evolving understanding and perceptions of legal finance

• In the years just after Burford’s founding, a significant number of research respondents articulated concerns about the potential for a loss of control over funded legal proceedings. In 2015, for example, two in three respondents in a UK-focused study cited fears of losing control as a significant barrier to engaging with legal finance. However, this fear was and is unfounded. In 2018, in-house survey respondents who had actually used legal finance reported retaining complete control over their cases. The percentage of all lawyers concerned about the impact of legal finance on control had fallen from two-thirds to one-third.

• Cost was another early concern for lawyers who had not yet used legal finance. In 2015, 42% of in-house lawyers and finance leaders surveyed had not used legal finance due to concerns about cost of capital. Yet those with firsthand experience told a different story. As the senior counsel of a real estate company told an interviewer in 2023, “We are definitely looking at legal finance because although we want to pursue litigation, we don't want it on our books, which is funny because we have reviled litigation finance for a long time as a defendant.” The general counsel of a global food corporation also shared “The first time we had a litigation funding opportunity (about 2018), there was skepticism, but the CFO immediately understood … and he supported it.”

• As a US-based law firm partner noted in 2018, “As people learn more and realize that they don’t have to be a cost center and could monetize their litigation, it becomes more acceptable…As more people start to use it, it becomes more established and gains respectability.”

• Empowering corporate legal departments

• A major legal finance trend over the last decade has been its increased use by corporate legal departments. While origination through law firms represented the majority of Burford’s business in our early years, by 2019, the majority of Burford’s business was originated directly from corporates.

• Whereas just 2% of in-house counsel reported that they’d used legal finance in 2013, by 2020, nearly nine in ten (87%) in-house lawyers described legal finance as a means of transforming the legal department from a cost center into a profit driver for their organizations. As of 2024, over half of GCs surveyed said they believe legal finance use will increase over the next 15 years.

• For corporations, solutions that provide balance sheet and liquidity solutions (like monetization financing and portfolio financing) in addition to P&L solutions (as with fees and expenses financing) are particularly attractive. The adoption of these solutions, especially monetization financing, continues to grow, as more organizations recognize their strategic value.

• Leading innovation & the potential of AI

• Clients have always sought innovation from their outside counsel, and research over the last 15 years suggests that legal finance has a role to play. In 2016, 88% of in-house lawyers said the need for innovation from their outside counsel was a leading challenge; 66% expected it to remain a top challenge in the future. In 2017, 64% of in-house counsel and 58% of law firm respondents agreed that law firms would be more agile if they innovated in how they finance their practices. By 2018, those numbers had jumped to 68% and 79%, respectively.

• In 2024, innovation remains critical, with 71% of senior in-house lawyers and 60% of senior finance leaders surveyed agreeing that greater legal department innovation over the next 15 years will drive more value for their businesses, benefiting clients and their counsel. 

[3]参见：Litigation Finance Insider Newsletter

[4]参见：https://litigationfinanceinsider.com/p/nakiki-se-announces-lois-for-construction-lawsuit

[5]参见：https://www.burfordcapital.com/insights-news-events/burford-quarterly/2024-issue-4/legal-finance-as-strategic-business-solution/