Hedge funds and other investors are betting they can earn a sizable return financing an activity that, if not exactly loved, is a fact of life in construction and engineering: litigation.
Litigation financing firm Burford Capital Ltd. (LON: BUR) is escalating its efforts to drum up new business in the construction-and-engineering sector, seeking to turn a profit by backing legal disputes over projects and other issues it believes have a high chance of success.
Under a typical litigation funding agreement, the lender agrees to pay the legal costs—win or lose—including any adverse, court-ordered costs the plaintiff may be ordered to pay, such as attorney fees, in a losing effort. Should the case prove successful in winning a settlement or damages, the financing firm gets a big piece of the pie.
Given the rising tide of new development and megaprojects taking shape around the world, there is a growing opportunity to provide litigation financing for construction and engineering firms battling it out in court, said Emily Slater, director of Burford's underwriting and investment arm in New York.
"The short and quick answer to that question is, yes, we are seeing increasing interest in the field," Slater said. "We see construction and engineering companies as particularly well-suited users of litigation financing."
Burford is involved in both one-off financing deals on specific cases and larger agreements covering a whole "portfolio" of legal cases for large contractors with projects spanning the globe, Slater noted.
Litigation financing firms also are looking for outsized returns, with the potential to make $10 for every $1 put at risk, noted Mark Crane, a partner in the advocacy department of attorney WLG Gowling's Toronto office.
To Burford's Slater, construction claims are woven into the fabric of the industry.
"Litigation is almost part of their business model," Slater noted, speaking of major developers and globe-spanning contractors. "They have disputes all the time. They have disputes on multiple projects around the world."
In fact, after Burford was launched in 2009, some of the first lawsuits the firm backed were in the construction sector, Slater said.
Development Case in Arizona
While declining to point to specific cases, Burford backed an Arizona real estate developer that sued a rival that had blocked the project. The developer, with the help of $6 million from the investment firm, managed to wrangle an $18-million settlement, according to an opinion piece in The Wall Street Journal by Gerald Skoning, a Chicago-based labor and employment lawyer.
In another case, rival litigation financing firm IMF Bentham backed a defamation lawsuit by an Indiana roofer against State Farm. The roofer won $14.5 million, and Bentham stepped in, investing $2.1 million to help the roofer successfully defend against an appeal by the insurer, Skoning writes.
Earlier this year, IMF Bentham teamed up with a large, unnamed hedge fund to launch a $200-million fund to invest in U.S. cases.
Bentham also recently opened an office in Toronto and now is trying tap into the Canadian market, where third-party litigation financing is a newer concept, noted WLG Growling's Crane.
Crane said he has spoken to people working for international contractors who have expressed interest in either financing for one-off cases or for a portfolio of legal actions.
"Third-party funding is not as advanced in Canada yet as it is in the U.S. and Australia, but it is starting to pick up steam," Crane noted.
Claims consultant Quantum Global Solutions is expanding its international operations in the U.S., and litigation funding is a key part of the company's strategy. Although forensic delay analysis is the heart of the company's claims business, it will facilitate arrangements for clients to meet with the financing companies.
Quantum Global Solutions' brochure notes that litigation funding has been permitted in England and Wales since 1967 but, until relatively recently, "was limited to insolvency situations."
Peter Murphy, Quantum Global Solutions managing director, says that third-party funding allows smaller companies to pursue fair disposition of claims that would have been too costly to resolve through arbitration or lawsuits. He cites a hypothetical example in which a subcontractor is at work on a one- to two-year project that "grows in scale to six to seven years and the subcontractor gets to the collapsing point, and [the subcontractor] has an entitlement [to additional compensation] but hasn't got the money. So, when the subcontractor brings in a funder, [the funder] will finance the arbitration fees, legal fees and claims consultant and allow the subcontractor to pursue what they do."
Are Litigation Funding Costs Recoverable?
An auspicious sign for funded litigation in the U.K. came in September 2016, when a judge in the Queens Bench Court ruled that Essar Oilfields Services Ltd.'s claim against Norscot Rig Management Pvt. Ltd. included Essar Oilfields' right to collect the cost of its funded litigation.
The ruling covered £1.94 million Essar owed to Woodsford Litigation Funding, or 35% of the total arbitration recovery. Woodsford had advanced Essar £647,000 for the arbitration.
Norscot disputed the part of the calculation covering what Essar was owed.
Murphy, in contrast, believes the funding companies are making a healthy return on their investment in a portfolio of claims that will include, of course, winners and losers.
The Potential Downside of Litigation Funding
Not everyone is thrilled with the seemingly growing popularity of third-party litigation funding.
David Silver, a Los Angeles-based public-relations executive who does crisis PR for development companies and other firms, says construction and engineering are natural areas of growth for firms looking to make money off legal disputes.
"Real estate and construction are the two next big industries that will experience third-party litigation funding," Silver said.
But Silver worries that the availability of financing through such firms may motivate some plaintiffs in construction and beyond to pursue questionable claims they might have thought twice about if it were their own money at stake.
"If the plaintiffs firms can fund their fees and expenses throughout their entire litigation portfolio with someone else's money, they will often push ahead where they may not have before," Silver writes.
There is no requirement for plaintiffs—or defendants, for that matter—to disclose in court filings that they are receiving investor financing, Silver further observes.
"It's a huge advantage," Silver said. "You talk about dark money—this is dark money. They could be funding it to the tune of $100 million, and no one really knows."
The U.S. Chamber of Commerce has come out swinging against third-party litigation financing, filing a complaint with federal regulators about the practice. The chamber estimates that about $1 billion a year is now being invested in various cases by third parties.
But signaling that third-party litigation funding is here to stay, the chamber is not trying to ban the practice but force litigants to disclose outside funding.
Thirty organizations, including the International Association of Defense Counsel, signed the letter the chamber sent to the Federal Rules of Civil Procedure, The National Law Review reports.
Still, Burford's Slater rejects the idea that third-party funders are backing questionable cases, arguing the stakes are too high to invest in shaky litigation.
The firm does extensive legal due diligence before agreeing to finance a lawsuit, whether it is in construction or another industry.
Nor does litigation financing necessarily drag out cases, with settlements having the potential to produce good returns, too, said Liz Bigham, chief marketing officer for Burford.
"We are not interested in investing in frivolous litigation because we would go out of business," Bigham said. "We are not interested in shifting the dynamic that would lead to a rational settlement. The longer an investment endures, the less advantageous it is for us."—with Richard Korman