Rising Construction Disputes Require Improved Legal Finance

Apoorva Patel | Construction Executive

Construction disputes are famously high stakes, and the industry is currently experiencing an uptick in the value and number of disputes resulting from contractual obligations and third-party or force majeure incidents. While this is not entirely surprising given COVID-19’s disruption of global markets and supply chains, the numbers are noteworthy.

For example, in 2020 alone, the International Chamber of Commerce (ICC)—the leading institution for construction disputes, partly because its clauses feature in many FIDIC standard form contracts—registered 194 construction arbitrations, and construction disputes now comprise over 20% of the ICC caseload.

In addition to the damage to business outcomes that the underlying disputes may present, parties can quickly spend many millions on legal fees and expenses, as well as technical experts and consultants, if and when those disputes progress through the courts or arbitration. According to Norton Rose’s 2020 Global Construction Disputes Report, the average construction dispute value rose sharply from $30.7 million in 2019 to $54.26 million in 2020.

Litigants’ financial profiles may be significantly impacted by construction disputes—not only because mounting legal costs can drag down balance sheets, but also because of the risk associated with these claims, which present duration risk (given that they may take many years to resolve) and binary risk of loss. Meanwhile, pending legal claims may represent hundreds of millions (if not billions) of dollars in captive value and traditionally haven’t been counted as assets.

With so much at stake given the increasing size and scale of construction disputes, companies in the sector are well served to be fully conversant in the tools that can help them maximize the value of their legal claims. Legal finance is one such tool.

MAXIMIZING LITIGATION ASSETS

In some instances, a construction claimant may simply lack the financial resources to pursue a single, high-stakes claim. Legal finance provides parties with access to capital, without which they might not be able to pursue a fair recovery through the courts or arbitral processes. Lacking the resources to engage the very best counsel for the full duration of a dispute can put the claimant at a significant disadvantage. Legal finance removes that obstacle—without impacting control of the claim, which remains with the client.

Legal finance is equally suitable in situations where parties are facing insolvency and where they have ample resources to pay their lawyers. In many industries, companies are increasingly using legal finance by choice, not just necessity: It may simply be a more efficient way to pay for legal costs, whether for respondents or claimants.

Further, finance is particularly important to construction contractors facing disputes. In most cases, any construction company facing a dispute will not only have to absorb legal expenses in existing legal budgets but must also deal with significant resources being tied up for an indeterminate time. The level of risk in a construction dispute is very high, with significant dependencies on complex technical knowledge as well as significant expense needed to bring the matter to fruition. Finance can support in reducing or eliminating the immediate legal costs of a claim, as well as bearing some or all the risk associated with bringing the claim in the first place.

In the simplest legal finance arrangements, capital is provided up front to pay legal fees and expenses for a matter to proceed, collateralized by the pending legal claim. Generally, capital is non-recourse, not debt, meaning the construction contractor has no obligation to repay its legal finance partner if their case loses. The financer is entitled to recoup its investment and gain a return from the settlement or damages should the claim be successful. In so doing, construction companies can defray the often-significant upfront costs or downside risk of pursuing disputes.

In more complex models, the financer may provide a capital facility for multiple claims and defense matters, in an arrangement called a portfolio. Additionally, a construction company can seek to advance some of the future value of pending claims, judgments and awards. In this “monetization” scenario, the finance provider advances an often significant portion of the expected entitlement—working capital that the construction company may put to immediate use for any business need.

QUALIFYING FOR LEGAL FINANCE

Among the most important criteria to a legal finance provider considering a matter for funding is whether a construction dispute is governed by an arbitration clause of a leading arbitral institution. Typically, legal finance providers look for claims involving tried and trusted arbitral institutions.

The size of the claim is also important. Many construction arbitrations involve multi-million dollar or even billion-dollar construction projects. Matters suited for financing are high-stakes commercial cases with significant value to the business, in which damages or returns are sufficient to appropriately balance the interests of the client, lawyers and an outside financier. The amount provided by the financier (not the size of the claim) may range from as little as $1 million for a single case to as much as $100 million for a portfolio of cases.

Another important consideration is the financial solvency of the respondent. A legal finance provider must be confident that if the case is successful, the losing party is creditworthy or has sufficient assets located in a favorable jurisdiction for enforcement. Oftentimes the respondent may be a state-owned entity or a special purpose vehicle. The legal finance provider will be keenly attentive to what will be required to enforce any favorable award.

A FINANCE PARTNER

Legal finance is a fast growing industry that has attracted many new entrants to the field. Parties seeking financing should be careful to perform their own due diligence in seeking out the right fit for their business and their needs.

Companies and law firms and that work with a professional legal finance provider get more than capital: They get a long-term partner in alignment with them who is focused on maximizing the value of the claim, which is the goal of bringing the case in the first place.

Because construction disputes are complicated and time-consuming, a sophisticated finance partner is essential as they can conduct diligence in-house, provide the scale of capital needed quickly and at competitive rate and offer value-add expertise.

With that in mind, construction companies should seek arbitration finance partners with deep expertise in funding high-risk disputes. While control of strategy and settlement decisions ultimately remain with the client, working with an experienced arbitration finance partner delivers a host of other benefits, including insights on case strategy, arbitrator selection, damages methodology and judgment enforceability.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

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