A rapidly developing option for covering litigation expenses.
An article in ENR magazine by Scott Van Voorhis and Richard Korman discusses litigation funding by “hedge funds and other investors 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.”
Construction companies filing suits for construction related damages can now enter into litigation funding agreements with large companies with excess capital that guarantee coverage for the expense of litigation even if the suits are not successful.
“Under a typical litigation funding agreement, the lender agrees to pay the legal costs—win or lose—including any adverse, court related costs the plaintiff may be ordered to pay, such as attorneys’ fees, in a losing effort.” The investors carefully vet contractors and projects before providing coverage. They gamble that their clients will prevail in court and enable them to receive a portion, a large portion, of the settlement.
For contractors this is an opportunity to reduce some of the risk associated with litigation that is almost a given on large projects.
According to Mr. Van Voorhis and Mr. Korman, litigation funding is proving to be tremendously profitable for investors, with rates of return as high as 10 to 1 on funds invested.
There is concern among industry analysts and the U. S. Chamber of Commerce that third-party litigation funding “may motivate some plaintiffs in construction to pursue questionable claims that they might have thought twice about if their money were at stake.”
Proponents of litigation funding agreements argue that this concern is unfounded. Investors are unlikely to back litigation that is likely to fail and cost them money. For the same reason, investors are motivated to settle cases quickly. “Liz Bigham, chief marketing officer for Buford [Capital Ltd.] states that ‘we are not interested in shifting the dynamic that would lead to rational settlement. The longer the investment endures, the less advantageous it is for us.’”
Contractors should proceed with care before entering into a litigation funding agreements. But it is worth considering the use of these agreements as part of project risk analysis.
Disputes R Us: Litigation Funders See Big Future, Scott Van Voorhis and Richard Korman, ENR, Jan. 25, 2017.