Slow Pay, No Pay & the Inadvertent Contingent Fee

There’s a lot of chatter about litigation funding these days. Today, the American Lawyer published an article, "Law Firms Flock to Litigation Funders.” True, litigation funding is abundant and often provides needed solutions for the illiquid or impecunious client. But lawyers who are following the news about funding in the current markets may be missing an opportunity: it’s time they consider being litigation funders rather than taking litigation funding.We’ve seen how it often begins with litigation fee revenues in a recession. 

First, the client starts to control the spend and question invoices. Maybe it still makes progress payments. (And in this environment, who would not be sympathetic and understanding.) But then, slow pay slips into “no pay”. Before you know it, you are in a de facto contingent fee arrangement with no promise of upside from the case recovery; the hope of payment dwindles to an aging but ever-mounting account receivable. The lawyer is stuck facing the jeopardy of any payment in the near term if she resigns from the case.To the lawyers out there, rather than find yourself in this conundrum, why not be proactive? Seize the opportunity: suggest converting the arrangement to a full or partial contingent fee basis sooner rather than later.Litigation risk mitigation techniques have come a long way. Insurance, capital support, portfolio management techniques and risk-sharing arrangements are all available. These are the same financial tools litigation funders use to make their out sized returns. Why not emulate them?Lawyers are better suited to funding cases than litigation funders. Unlike professional litigation funders, law firms have control over deal-flow, project staffing, litigation investment economics and deal sourcing. Law firms have built in “pipelines” and they have access to the highest alpha in litigation outcomes. In the US, law firms are the original “litigation funders” (the rest of the world is catching up through varieties of litigation co-investments with clients like damages-based agreements in the UK).Alternative litigation finance—“ALF” as it is known in the US—is the alternative to traditional litigation finance, the litigation funding technique that has existed for centuries through client-lawyer co-investment. It’s not hard to predict that the burgeoning recession will return law markets back to the traditional model of lawyers as litigation funders. One would hope it’s by choice rather than happenstance.