The next game changer in global litigation and arbitration

April 2017  |  EXPERT BRIEFING  |  LITIGATION & DISPUTE RESOLUTION

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Third-party litigation and arbitration finance is now firmly established as a valuable tool that facilitates both litigation risk sharing and better access to justice. Jurisdictions such as Hong Kong and Singapore, and arbitral bodies including the ICC’s International Court of Arbitration are signalling that third-party funding is a positive force in the dispute resolution world.

As the litigation and arbitration finance market has matured, it has begun to expand its investor base beyond its historical reliance on high net worth individuals. Today, banks and hedge funds are far more willing to finance claims because they are viewed as a relatively low risk asset class with good potential returns that are not correlated to the public markets. The demand for access to justice continues to be a key driver in the rise of litigation funding, ensuring that claimants who may not otherwise have the resources for litigation are able to pursue their case. Litigation and arbitration need not be the preserve of the wealthy and well resourced. In fact, litigation and arbitration funding is particularly pertinent in ‘David versus Goliath’ cases where a smaller claimant takes on a bigger, more powerful defendant. All claimants, whatever their size and influence, who have valid claims, should be able to bring those claims to court.

The risk-sharing model ensures that third-party funders, working hand-in-hand with experienced law firms, can offer effective solutions for their clients. All funders will only back cases (or portfolios of cases) with strong legal merits as funding is typically ‘non-recourse’, meaning that if the case loses the funder will lose its entire investment and may be liable for significant additional costs.

Funders perform a huge amount of due diligence before the decision to fund is taken and they will look more favourably on cases where the law firm has some ‘skin in the game’ and is shouldering some of the risk itself. If the law firm is operating on a contingent or conditional fee basis, the risk is aligned between the claimant, the claimant’s lawyers, and the funder with all parties taking some risk, confident that they will benefit from the fruits of any success. Additionally, faced with a well-resourced claimant backed by a litigation or arbitration funder who has dispassionately assessed the merits of the case and has committed a significant amount of capital on a non-recourse basis, some defendants will read the writing on the wall and act quickly to reach a settlement.

Where arbitration leads, litigation follows

In the past, legal principles of champerty and maintenance, which prevented third parties from having a financial interest in supporting law cases, prevented litigation and arbitration finance in many jurisdictions. In many areas of the world, these restrictions have been lifted and the arbitration market in particular has now fully accepted third-party funding. For example, the Singaporean parliament argued that the country appeared at risk of losing its status as a leading centre of dispute resolution if it did not permit arbitration funding. It also made it clear that allowing arbitration funding was likely to be a step towards full litigation funding – where arbitration leads, litigation follows.

The 2016 Essar v. Norscot case has had a major impact on opening up arbitration and litigation funding. The dispute between the two companies operating in the oil & gas industry was first heard in the International Chamber of Commerce’s court of arbitration and found in Norscot’s favour and that Essar’s conduct had effectively forced Norscot to seek third-party funding and therefore Essar should pay Norscot’s funding costs, including the success fee payable to the funder.

This case was a game changer. As a result, claimants can use litigation finance not just for funding a claim, but also for tactical reasons. In the Essar v Norscot case the defendant was, in effect, punished for bad behaviour by being forced to pay the claimant’s litigation costs. The English courts in particular have a long history of using cost sanctions as a way of influencing litigant behaviour and the Essar v Norscot case tells the rest of the world that arbitrators should be using the same cost sanctions as a way of influencing the behaviour of both defendants and claimants. Now lawyers and claimants around the world are considering how to use these tactical devices.

Arbitration and litigation funding is evolving into an accepted, standardised practice of financing. The international arbitration world, which transacts beyond borders, has fully embraced third-party funding as a globalised practice, making it equally transnational. Following Essar v Norscot, most international arbitration bodies will adopt a consistent international approach.

Further drivers of litigation finance

In addition to regulatory developments, there are two further drivers of litigation finance. The first area of growth is in relation to portfolio funding, whereby litigation and arbitration funders provide finance for a number of disputes at once. Typically, this may apply to large multinational organisations involved in multiple similar high-value disputes and law firms that take on a significant amount of contingent fee business.

The second driver for change is the growing inclination for litigation financers to support smaller claims. In the past, litigation funders focused on claims valued around $50m-$100m. Now, litigation finance is supporting claims worth between $10m-$50m, particularly as organisations realise that there are options to fund litigation that they would otherwise not be able to pursue. This is likely to attract a number of new entrants to the litigation funding sector and it will become vitally important for claimants, lawyers and financiers to ask hard questions about a proposed litigation funder. Do they have a track record of financing successful claims? Do they have the expertise required to make accurate judgements about the merits of a claim? Do they have access to sufficient capital to see a dispute through to its conclusion?

Arbitration and litigation funding has been established globally for more than 10 years. It has proved itself as a robust business model that creates value for everyone in the chain. There are opportunities for claimants to bring claims that they may not otherwise have been able to bring, while lawyers can offer their clients innovative funding options that enable them to win more business and take on more contingent fee work.

There are clear opportunities for financiers and investors – hedge funds, banks and high net worth individuals are increasingly looking for opportunities to deploy their capital into litigation funding. Selecting the right litigation funding partner with the experience, track-record and resources is key in a sector that is increasingly attractive to financiers looking for new avenues to high returns.

 

Steven Friel is chief executive of Woodsford Litigation Funding. He can be contacted on +44 (0)20 7313 8071 or by email: sfriel@woodsfordlf.com.

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Steven Friel

Woodsford Litigation Funding


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