The Role of Third Party Funders in Investment Disputes
In investment disputes, when the claimant decides to pull the trigger and bring forward, one can wonder what his options are to finance the arbitral proceedings. Claimants most often do not have much capital left and are in a distressed financial situation but their claims have a certain monetary value. An option to bring investment disputes is to resort to third-party funding. Most often, it is the claimant’s lawyers who will contact the funders.
Funders Offer a Large Variety of Products to Claimants in Investment Disputes
When exploring the funding market, claimants must be aware of the different types of financing products and solutions available. They are not familiar with the different types of products and will be looking to their lawyers for information. Most often, in investment disputes, claimants will use a legal claim and a potential award to secure financing, but there are many different products available. Although the offers vary greatly, the specificity of these products is that financing claims are high risk investments and the funders will only be compensated for their investment if the claimant is successful on the merits and on recovery.
As the market is maturing and the funders are becoming more creative, different structures have emerged to unlock the value of the legal claim. For example, funders can offer to finance the business expenses of the claimant’s company so that the claimant can fund the investment dispute itself. Funders can also be interested in offering ‘portfolio funding’ to a law firm with a set of claims and in this case the funders will finance the law firm. Moreover, if a claimant has won a large award and is looking at a 2 or 3-year enforcement process, he may be interested in selling the award with a discount, in which case the funders will be in charge of the enforcement (or will finance the law firm in charge of the enforcement process).
Funders in Investment Disputes Usually Consider Specific Criteria
The claimant will expect his lawyer to prepare the documents required by the funders. In order to determine whether a particular case fits the funders’ funding profile, in the context of investment disputes against state entities, funders will generally look at seven criteria:
First, concerning jurisdiction, Claimant’s counsel must first find a funder which accepts to finance investment disputes. It was difficult in the past to find funding for treaty cases because the background of most lawyers was commercial arbitration rather than treaty arbitration. This has now evolved and the funders can now rely on investment disputes specialists able to draft lengthy jurisdictional analysis.
Second, Claimant’s counsel will be expected to prepare a memo about the case, including merits, liability and quantum. Funders have a very conservative approach to quantum and, although they will look at lost profits, funders will mostly take into account the value of the initial investment which is the key figure.
Third, funders will ask claimant’s counsel to prepare a budget for the case which will include arbitrators’ fees, legal fees, experts’ fees, costs of enforcement and all other costs necessary to see the case to the end, and will compare this figure to the minimum damages value for the case. Most often, if funders seek to invest 5 million in a case, they will be looking for a minimum claim value of 50 million (which is likely to exclude lost profits).
Fourth, the profile of the Respondent can give the funders more or less comfort in investment disputes. While funders will feel relatively confident when the respondent is an EU member state, they might lack knowledge of how some South American states would behave in investment disputes.
Fifth, in relation to the claimant’s profile, funders always wonder whether the claimant is going to be a good witness or might be too emotional.
Sixth, concerning enforceability, funders always wonder where the Respondent’s assets will be several years later. Funders assume that state assets will not disappear by the end of the investment dispute but some countries are difficult to enforce against.
Seventh, some funders have a maximum capital available for some specific cases.
Even if all criteria are met and the case fits the funders’ profile, it is possible that a case gets rejected because funders seek to diversify their investments and prefer to invest in commercial cases if they already have too many treaty cases. This factor is out of the control of the claimant.
It takes about three months for funders to complete their due diligence and determine whether a particular case is worth funding. In the case of an enforcement in China, the process has taken a whole year and and in some exceptional cases this determination can be achieved in a couple of weeks. It is possible that the parties to the litigation funding agreement collaborate in order to put the funding in place very quickly before a specific event happens.
Examples of Funding in Investment Disputes and Further Considerations
First, in the case Rusoro mining Ltd v. Venezuela, further to an expropriation of its assets in Venezuela, a listed mining company in Canada was seeking funding for both the investment dispute and to continue operating the company which was running out of funds. In this particular case, the Respondent’s profile was important because it was Venezuela, a country with high political risk. Some funders expressed the view that it was a great opportunity and others expressed doubts as to the enforcement and could not anticipate how Venezuela would behave during the arbitration. The main factors which were considered by funders were the time issue and that the funding would have to be disclosed. The Claimant secured financing with Calunius Capital.
Second, in an energy treaty case against an EU member state, an issue was the risk of intervention by the EU Commission. Some funders refuse to finance intra EU treaty arbitrations because they believe that it is too risky as they do not know whether the EU Commission would try to get involved. The main factors which were considered by the funders were the Respondent’s profile, market interest, the Claimant’s and creditors’ positions. The Claimant had eight offers on the table and had to weigh the benefits of each offer individually, and it is the role of the lawyer to explain to his client what return it would receive and the effect of the funding through the life of the investment, depending on the date of the recovery. For example, if we are looking at an early settlement (within months), then the claimant would be expected to keep a larger amount of capital. The longer it takes to settle, the larger the recovery for the funder.
If the claimant has several offers on the table, it will have to consider the commercial aspect (the type of return it would obtain) but also other considerations which will have an effect on the way the case will be conducted. For example, each funder requires a different level of control and management, and some funders may be very protective over the claims and want to retain total control over the case. Claimant’s counsel must be aware of the dynamics created by the funding because it will have an impact on how the case will go forward. Ideally, funders would be happy with a monthly reporting on the case. Claimants also have to look at whether the funders are seeking to control potential settlements and consider what will happen if the litigation funding agreement does not provide for settlement or imposes specific counsels. The UK has been guiding the debate on third-party funding with the Association of Litigation Funders and a Code of Conduct.
The litigation funding market is not transparent because it is not well regulated and funders do not disclose what they are doing. In 2011, there were only 6 funders on the market and there are now about 30 funders likely to finance investment disputes because the establishment of the litigation funding market as an alternative asset class in financial services is becoming more accepted and because of an increase in capital availability.
Presentation by Maddi Azpiroz, ClaimTrading, London, INVESTMENT ARBITRATION IN PRACTICE: A VIEW FROM THE INSIDE, Conference of 26 September 2015, Geneva (YAF, ICC, CISD)
– Olivier Marquais, Associate, Aceris LLC