Third party funders for arbitrations, nearly all of which are listed below, may agree to finance all or a portion of one party’s legal costs for a given international arbitration. A third party funder typically earns an agreed percentage of any award or a success fee, or a combination of the two, in the event of a successful case. Should the case fail, the funder loses its investment and is not entitled to payment. The percentage of compensation earned by the third-party funder in the event of success is always significant – usually 25% – 45% of the amount of compensation awarded in a case – although its compensation can also be a multiple of the amount invested by a third-party funder.
Returns on investment of three times the amount invested by third-party funders are generally sought by funders, as in private equity or project finance. Thus, it is typically a poor strategy to use the most expensive lawyers for a case requiring funding, except for the largest claims, as higher litigation costs may render cases impossible to fund.
Third party funding is very difficult to obtain for all but the most black and white cases. Third party funders will rarely fund international arbitrations where the amount in dispute is less than USD 3 million, they will only fund cases against respondents with assets that an arbitration award can almost certainly be enforced against, and it can take many months for a third party funder’s due diligence to be completed. Factors taken into consideration by funders when deciding whether to find an international arbitration include (1) the value and complexity of a claim, (2) the amount of funding needed and the litigation budget, (3) the likelihood of success of the claim, (4) whether other parties have an interest in the claim, (5) the jurisdiction in which the arbitration takes place, (6) the arbitral institution that administrators a case, (7) whether counterclaims may be made and (8) the ease of enforcement of the arbitral award to be rendered. Funders who are potentially interested in a case generally request an exclusivity period to consider it, due to the time and resources that are needed to analyse each international arbitration prior to agreeing to funding.
Individuals and entities that are not represented by counsel will typically be turned away by third party funders, as third party funders generally require a legal memorandum analysing jurisdictional issues, the merits of a case and quantum issues, prior to agreeing to initiate due diligence on a claim or to consider funding. Some leading arbitration law firms, such as Aceris Law LLC, do not charge legal fees to assist clients in need of third-party funding, for commercial arbitrations or for investment arbitrations.
While third party funding raises issues concerning confidentiality, legal privilege, disclosure, conflicts of interests, cost issues and the attorney-client relationship, third party funding plays an important role in many arbitrations today and is widely accepted both for commercial and investment arbitrations. When it can be obtained, third party funding permits greater access to justice for claimants, permitting meritorious claims to proceed that could not otherwise be pursued for purely financial reasons. It also levels the playing field so that cases will not be resolved on the basis of unequal economic resources or risk preference. Even for claimants with sufficient funds, third party funding is sometimes used to take the costs of litigation or arbitration off of the company’s balance sheet, or to outsource costs and financial risks. The terms of litigation funding agreements between funders and clients typically set out the agreed conduct of each party, the payoffs to the funder, the circumstances and conditions in which the funder can exit the case, and the reporting and updating requirements of the funder, lawyers and client.
You will find a list of the primary third party funders, and third-party funding brokers, for international arbitration today. This list is updated annually to reflect developments in third-party funding.