A Thomas Miller Company
Verity Jackson-Grant, the director of business development at specialist third party funding broker TheJudge, discusses funding trends and how removed from mere legal fees and expenses financing can become.
The arbitration arena has become a prime hunting ground for third party funders wanting to invest in high value claims attracted by the perceived finality of awards and the New York Convention’s enforcement regime. For their part, the arbitration community has welcomed third party funding as an innovative cost tool, recognising that a funding friendly environment not only facilitates the bringing of a claim where the applicant cannot or does not wish to fund the legal fees but could also positively differentiate arbitration as a form of dispute resolution.
The funding market has had a significant impact on the way arbitrations are funded and most lawyers have some experience of the process the client must go through to obtain funding for their legal fees. The market is developing at pace to offer diverse and innovative products to meet the increasing needs of lawyers and their clients. One visible trend is the willingness by financiers to provide funding for a variety of purposes other than legal fees.
An increasing number of legal financiers are now providing recourse and non-recourse working capital for general operating purposes by essentially monetising a portion of an actual or prospective award. In monetising a claim or award on a non-recourse basis, the funder provides the applicant with capital secured on the underlying dispute to be used elsewhere in the business. In some circumstances, the funder may purchase the claim or award in its entirety, either by way of an upfront sum to the applicant with the funder retaining any sums recovered or through a cash down payment to the applicant followed by a back-end share of any recovered proceeds. Should the legal dispute that forms the basis of the funder’s security prove unsuccessful, the funder loses its investment.
Monetising a claim or an award in this way enables companies to use some of the “prospective” value in their disputes as current income to fund today’s expenses. To give an example, at TheJudge we arranged a £6 million working capital advance for a mining company, which allowed the company to continue its current operation while their ICSID arbitration claim was pursued. This budget was agreed against ongoing known expenses, which resulted in the itemisation of various overheads for the business, even down to a line item for the food and upkeep of the security dogs.
While many deals won’t identify micro expenses to this extreme, this example does aptly demonstrate just how removed from the legal expenses such financing can become. Fundamentally, once you recognise the award as an asset, a whole range of potential capital options can present themselves.
At the other end of the spectrum, another example involved a client with a very sizeable award. In addition to TheJudge sourcing funding for the legal fees and expenses to enable the client to pursue the claim to an award, the client had an urgent need for a capital advance on their award. The client knew that achieving the award was only going to be half the challenge, with a likely enforcement campaign ahead. Offers of capital advances of over US$100 million were received on the basis the client would receive US$100 million now and then receive an earn out based on the ultimate recovery in the future.
As with all non-recourse funding, the funder needs to recoup a large enough success fee from winning cases to cover the losses they suffer in funding other unsuccessful claims and the applicant must accept that this, coupled with the risk to the funder of ultimately losing the claim (or failing to enforce an award) when agreeing the financial terms of the arrangement.
Whilst there is significant competition between funders, there will always be a floor to the pricing with this form of capital, particularly in international arbitrations. It is not uncommon to see funders address this through charging some form of time based ratchet on their success fee. At first glance a x3 or x4 multiple on the funder’s investment may seem like a high fee. However, funders must factor in a high propensity for some cases, particularly bilateral investment treaty arbitrations, to go to a full hearing, increasing the chances of total loss of investment and at the same time extending the duration of the investment.
A claimant with a good claim, solid quantum valuation and a flexible view of the level of award proceeds they are prepared to concede to a financier may well find funders showing greater flexibility as regards the level of capital they are willing to invest in the dispute by way of partial monetisation in addition to any necessary funding for the legal fees.
Funders often prefer business to business commercial arbitrations over investor state arbitrations, not least because statistically the time to recovery is often faster, particularly where the respondent is financially secure. In this arena, we also see different models applied. For example, in one sizeable commercial arbitration claim, what started as a funding request for legal fees and expenses of $20 million by a corporate client, resulted in a discussion for a separate $200 million capital loan at 50 basis points above LIBOR.
Where corporate enterprises have a potential requirement to raise significant amounts of capital and have anything from a single dispute to a portfolio of disputes in their group, they will find there is a growing market of alternative finance options available. Lawyers seeking a reason to connect with target or key clients could capitalise on the current knowledge gap with general counsel and chief financial officers over the full extent of options now available.
The capital sources involved in such arrangements are often a different pool of funders to those most would consider traditional litigation funders. Understanding which market players suit which opportunity is crucial, not only to save time, but to get the very best of what this ever-expanding market of alternative finance can offer.
The article was first published by Global Arbitration Review on 9th October 2018.
Director of Business Development
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