INTERNATIONAL ARBITRATION
IF YOU ARE FACING DIFFICULTIES IN FUNDING YOUR DISPUTE, OR IF YOU WOULD PREFER TO USE YOUR FUNDS FOR VENTURES OTHER THAN LITIGATION OR ARBITRATION, THIRD-PARTY FUNDING MAY PROVIDE THE SOLUTION.
THIS ISSUE
MESSAGE FROM THE EDITOR
01
IN CONVERSATION WITH NICK ROWLES-DAVIES Managing Director at Burford Capital
03
RUTH STACKPOOL-MOORE Director of Litigation Funding / Head of Harbour Hong Kong
13
ROSEMARY IOANNOU Senior Counsel at Vannin Capital
29
GUIDE FINANCING INTERNATIONAL ARBITRATION: A PRACTICAL GUIDE
19
MARKET COMMENTARY A FEW THINGS TO AVOID WHEN CONSIDERING FUNDING
08
THIRD-PARTY FUNDING OF DISPUTES IN HONG KONG AND THE PEOPLES REPUBLIC OF CHINA
10
CONFIDENTIALITY AND PRIVILEGE
24
IMPACT OF THIRD-PARTY FUNDING ON SETTLEMENT
26
THIRD-PARTY FUNDERS AND THEIR EXPOSURE TO ADVERSE COSTS LIABILITIES
36
THIRD-PARTY FUNDING IN BRAZIL
39
NEWS IN BRIEF PEOPLE MOVES MARKET ACTIVITY
42
42 43 44 45
NOTABLE CASES
FORTHCOMING EVENTS
INTERNATIONAL ARBITRATION 1/3LY
MESSAGE FROM THE EDITOR 01
MESSAGE FROM THE EDITOR I am delighted to present the sixth issue of Clyde & Co’s International Arbitration 1/3LY. This issue focusses on third-party funding (“TPF”). We chose this topic because of the growing interest in funding and because it is rapidly evolving. There is a real need for lawyers to understand and inform their clients on the options available to them. To this end we have included a practical guide which takes an in-depth look into TPF in international arbitration.
Financing a complex international dispute can be burdensome on a claimant, regardless of their financial situation. There are a variety of funders with different funding models operating within the current market. We spoke to representatives from Burford, Harbour Hong Kong and Vannin Capital to discover how it works in practice. Nick Rowles-Davies, Managing Director of Burford Capital, provides an insight into portfolio funding in a conversation with me. Elsewhere, we feature an in depth conversation between Keith Hutchison and Rosemary Ioannou, Senior Counsel at Vannin Capital. Rosemary tells us about the growth of TPF and highlights some of the recent trends in the market. Ruth Stackpool-Moore, Director of Litigation Funding / Head of Harbour Hong Kong, discusses the future of funding in Asia with Clyde & Co’s Simon McConnell and Sapna Jhangiani. In the special guide, we explore the practicalities of securing funding and negotiating terms of agreement, and the highly varied and tailored forms arbitration finance can take.
In a series of articles, we cover the strategic and regulatory issues to be aware of when considering funding. Elsewhere, we assess the viability of funding in Brazil, Hong Kong and China, focussing on current laws and judicial attitudes within each country. There will undoubtedly be developments in this area in the future. On behalf of Clyde & Co, I would like to thank Nick Rowles-Davies, Ruth Stackpool-Moore and Rosemary Ioannou for contributing their expert opinions and fascinating insights. I also wish to thank my colleagues from the firm’s global arbitration group for their interviews and articles. If you have any questions regarding the articles in this publication, or would like to give us some feedback, please email dispute.resolution@clydeco.com.
BEN KNOWLES, CO-CHAIR, GLOBAL ARBITRATION GROUP
BEN KNOWLES AND NICK ROWLES-DAVIES EXCHANGE VIEWS ON PORTFOLIO FUNDING AND THE AGREEMENTS INVOLVED.
NICK ROWLES-DAVIES
BEN KNOWLES
INTERNATIONAL ARBITRATION 1/3LY
IN CONVERSATION WITH NICK ROWLES-DAVIES 03
IN CONVERSATION WITH NICK ROWLES-DAVIES MANAGING DIRECTOR OF BURFORD CAPITAL Ben Knowles, Co-Chair Global Arbitration Group, in conversation with Nick Rowles-Davies, Managing Director at Burford Capital.
BEN Is there any forum where you speak directly to companies about this or do they mainly learn about this through law firms? NICK I think it’s mixed. We spend a lot of time talking to finance and General Counsel (GC) of big corporates. One of the biggest issues we face is that GCs may or may not get it as they tend to be biased against litigation. A lot of GCs in Europe are corporate rather than litigation lawyers. I think you’ll find that in the States we get a different response because they tend to be more focused on litigation. That might be a bit of a generalisation but it feels that way. BEN Will the UK be like the US in five years? NICK I don’t think it’ll ever get there, despite what you read. The UK doesn’t have a litigation culture in the same way as the US. The biggest reason is that there are no adverse costs in the States, so a lot of cases are being brought in the States rather than in London. If you go up against a firm in the UK and they are quoting £20-£90m in adverse costs, there’s no way you can take that risk as a claimant, a claimant group, or as a funder because there just isn’t enough capacity in the market to put up adverse costs insurance of that nature. Securities litigation is very much looked at from the US side now, because of the adverse costs issue and I don’t think that’ll change. The UK won’t end up like the US, but it will become more sophisticated. I suspect these deals will be going on in the UK finance wise for longer and there will be more of them, but that may not be in the public domain.
THE STORY SO FAR
BEN The general impression in the market is that people are warming up to the idea of third-party funding. They are becoming more informed and in turn, they seem to be more comfortable with it. What in your view has been the main reason for companies to see this as an option? Why are corporates looking at what you do in a different light? How big a factor is the downturn in the economy over the last few years presumably leading to tighter budgets? NICK I think it’s a combination of things. There has always been a huge misconception as to how much budget corporates have to spend on claimant work. The majority of the budget is taken up by defence work and they actually lack appetite for the other side. Although most want to concentrate on their core business, which is not being a litigator, they’re beginning to see the opportunities out there. If you compare the market to how it was five or six years ago, funding is still hidden, but it’s more common place. I think the difference is that, nowadays, everybody knows what it is, or at least thinks they do. The reality is there is still a lack of awareness of its potential. Their typical view of third-party funding is miles away from the sophisticated bespoke products now on offer. It’s going to take another few years for people to become familiar with it and understand that it is not a panacea for all litigation finance ills. Ultimately, some people are not going to like it and they are never going to want to do it for all sorts of reasons.
IN THE UK, DAMAGES BASED AGREEMENTS (DBAS) ARE NOT WHAT YOU WOULD CALL COMMON PLACE, SO MOST OF OUR LAWYER PORTFOLIOS TEND TO BE BASED ON CONDITIONAL FEE AGREEMENTS (CFAS).
INTERNATIONAL ARBITRATION 1/3LY
IN CONVERSATION WITH NICK ROWLES-DAVIES 05
UNCOVERING THE MYSTERY OF PORTFOLIO FUNDING
The beauty of portfolio claims, whether you are acting for an insolvency practitioner or a corporate client, is that they have a range of litigation cases. They might have ten cases: five as a Claimant, three as a Defendant and a few cases which are no hopers that they are running to settle. In a portfolio you have the ability to fund them all as long as there is enough value in the likely, Claimant, winning cases. You look at it in the same way as a property portfolio, so by that I mean you value a property and you lend the amount of money up to a particular ratio; it might be 1:4 or 1:10 across that portfolio. What you are doing is using the likely quantum receipts from the winning Claimant cases to fund the rest of the portfolio and that is how you fund the defence cases. So as long as across the entire scheme there is a value we will advance money against that value. All we are doing is looking at an asset, whether it be a piece of litigation, or a property, and using our skills to value that asset. It just happens that our skills are in valuing litigation, not property. BEN That sounds like a real benefit of portfolio funding. What are the benefits to the clients? NICK In accounting principles litigation is expensive, whether you win or lose. Let’s say that you are a client who we are funding. If you choose to pay your legal fees today, there is a present day hit in your P&L which affects your EBITDA. We significantly differ from other funders or financiers as we don’t necessarily require you to use our money to pay the legal fees. From our perspective, we are monetising an asset and we can even give you cash to monetise a potential judgment. If you want to then bring it into your account, you can do it when you want to, instead of when the court dictates it. A problem with accounting is that there is a negative effect on your EBITDA whether you win or lose because, when the money comes back in, it is a special item and not recorded as profit. If we monetise the claim, that cash gets recorded as income but goes into the P&L. The other side of that is there is no contingent risk anywhere, no contingent liability recorded, because the amount of money that’s being spent on legal fees is transferred to us. It’s an off balance sheet transaction because it’s a non-recourse loan. The Rurelec v Bolivia case, which is in the public domain, is an example of an arbitration where we didn’t fund the legal fees, we provided them with money to run their business.
Third-party funding has moved on a lot since the days of one off claims. We do recourse and non-recourse funding, we do WIP-funding, cost advance schemes. There are many different ways, it’s really just finance. BEN That’s an interesting point. Could you talk about the specific hybrid products like litigation finance plus CFAs and DBAs? NICK The DBA has had a lot of press because Regulation 4 of the DBA Regulations says you can’t have a hybrid DBA. The answer to that is we don’t provide a hybrid DBA. The client enters into a DBA with the law firm, so the law firm receives a percentage of the damages as per the agreement if the case wins. In the meantime, somebody has to fund disbursements and keep the lights on at the law firm, so the law firm is entitled to enter into a contract with us, or even a bank, to pay overheads and disbursements during the case. The firm will agree with us that we will pay them an amount of money, up to a budget, during the course of the case. If the case wins they share their uplift of their DBA fee with us. The client may or may not know about it. They probably do, but they don’t have to. If the case loses, we write off our investment. Of course if the firm goes through a bank, then they will be paying the money borrowed back.
BEN So, litigation finance and portfolios: What percentage of these are with law firms compared to clients? NICK It depends where you are, but I would say that it is probably about 50:50. The portfolios differ whether you are a law firm or the client. One of our big schemes is with insolvency practitioners. The US is a very different market because contingency fee lawyers are much more active. Contingency fee lawyers in the US tend to want to lay off some of their risk so they will have a lot of cases, and will “sell” part of that to us as part of a portfolio. In the UK, Damages Based Agreements (DBAs) are not common place, so most of our lawyer portfolios tend to be based on Conditional Fee Agreements (CFAs). In contrast, the uplifts are not massive because they are restricted to the uplift on fees rather than damages. We do both and we do the hybrid DBA schemes as well. BEN How does it work in practice? NICK I’ll use a law firm scheme as an example. Say we were doing something with you and we wanted to do a five case portfolio of ICC Paris claims and you were acting for the Claimant. You are taking some risk in relation to your fees, whether if you are doing DBA or CFA. The challenge is that you can do more of those cases and take more risk if you lay off some of it to someone else, so you share it with us. If you have a DBA portfolio of five cases where you are going to get paid, if a case wins, out of the proceeds of the litigation or arbitration. DBA rules dictate that you can’t be paid as you go along so we can assist you by making cash flow payments during the case. In terms of the portfolio and how it works, we advance money across a portfolio of claims and if the first case loses, the amount we have outlaid gets added on to the general amount that has been outstanding. We get repaid from the next case that wins, so if the entire portfolio loses then we lose our money. Clearly we have made a fairly bad investment decision if that happens!
INTERNATIONAL ARBITRATION 1/3LY
CURRENT TRENDS ACROSS THE GLOBE
BEN That is an interesting point. Looking at current news, we saw that you have struck up an eight figure deal with a major FTSE 100 company to fund their litigation. Is that something that we are going to see more of? NICK Well, the slight issue I have with that is we are not allowed to talk about who we did that deal with. It would be lovely to be able to explain what that particular deal was because what’s in the press bears no resemblance to the reality and it’s a much more sophisticated product than it appears. I can say that we were approached directly. There are lawyers involved because they need to make sure everything is being done as would be expected, but yes, it’s a decision by a major corporate to say “I don’t want to keep paying this and would like someone else to pay it.” We do lots of those sorts of deals. The one we released was the biggest one that we’ve done recently and it took a lot of hard work. Those sorts of deals are more prevalent than people would suggest. Not necessarily with big FTSE companies, but those sorts of deals are happening all the time, and I think they’ll continue, as that’s where we do most of our work.
BEN Let’s discuss international arbitration specifically. Are there any key trends which you are noticing? Hot regions perhaps? Or industries? NICK Generally it’s busy! The Middle East remains busy while Asia is growing in its interest, and there is a lot of talk around funding despite being slightly restricted by regulation. There’s a lot of construction work coming out of Eastern Europe too. We are even starting to see governments and large corporates looking at options around funding portfolios because of the high value nature of some of the claims. That’s not common place, but it’s happening. BEN Are you seeing a rise in the number of Energy Charter Treaty and investment treaty cases? NICK Yes – there is a lot of that. Some funders really like the investment treaty disputes as they are very expensive and the returns are big. The downside is that they take a long time and I don’t think it suits everyone, depending on your structure as a funder. For example, if you’re a five year closed-end fund and you pick up a big claim half way through, will you be able to fund it all the way until the end?
THE MIDDLE EAST REMAINS BUSY WHILE ASIA IS GROWING IN ITS INTEREST AND THERE IS A LOT OF TALK AROUND FUNDING DESPITE BEING SLIGHTLY RESTRICTED BY REGULATION.
IN CONVERSATION WITH NICK ROWLES-DAVIES 07
WITH THANKS TO THE CONTRIBUTORS OF THIS EXCHANGE...
NICK ROWLES-DAVIES OF BURFORD CAPITAL Nick Rowles-Davies is a Managing Director of Burford and leads its business in the UK. Admitted as a Solicitor in England and Wales, the British Virgin Islands, and an accredited mediator, Mr. Rowles-Davies has a wide range of experience in commercial and civil litigation issues. In private practice he specialised in complex, high value matters that involved him in a number of reported cases in the High Court, the Court of Appeal and House of Lords. Mr. Rowles-Davies is a Director of the Association of Litigation Funders of England and Wales. Mr. Rowles-Davies has extensive knowledge of the financial and insurance arena, having been retained by a number of banks, major insurance companies and both on- and off-shore finance houses. Mr. Rowles-Davies is regular speaker and frequent media commentator on all aspects of the current costs regime, litigation funding and the impact of the Jackson Reforms. Oxford University Press published his book on Third-Party Litigation Funding in 2014.
BEN KNOWLES, CLYDE & CO
Ben is the Co-Chair of the Global Arbitration Group. He focuses primarily on International Arbitration especially in the Upstream Oil & Gas and Trade & Commodities sectors and acts for a range of international clients, including NOCs. Ben is a member of the Management Board and is recognised as a Reuters Super Lawyer, demonstrating excellence in the practice of law. Ben has extensive dispute resolution experience, especially in international arbitration including at the ICC, ICSID, LCIA, LME and LMAA. Ben focuses on the Upstream Oil & Gas and Trade & Commodities sectors and also advises extensively on international sanctions. One of Ben’s recent Claimant cases has been recognised in this year’s American Lawyer arbitration scorecard as one of the top 10 Awards by quantum in the last 12 months. The Legal 500 has described Ben as “excellent” and “extremely efficient and hardworking,” Ben Knowles “takes a great deal of trouble to gain the confidence of the clients.” Ben headed up our substantial legal team on the high profile USD multi-billion arbitration between the Government of Yemen and various US oil interests. That case resulted in a win for Yemen in 2008 which has been recognised as one of the major arbitration successes of recent years. Ben has had a number of major successes for Yemen.
INTERNATIONAL ARBITRATION 1/3LY
A FEW THINGS TO AVOID WHEN CONSIDERING FUNDING
In the Professional and Financial Disputes team at Clyde & Co, we sometimes see litigation funding from the opposite end of the telescope in circumstances where the prosecution of a case has gone awry. We have drawn from this insight in preparing this article. For convenience, we refer to litigation within this article but the issues we address are equally applicable to arbitration. The funding market has developed rapidly in recent years, so that there are now lots of different funding packages available for both high and low value claims, and many professional litigation funding companies have been established in jurisdictions throughout the world. Some funders will focus on a niche specialism, for example, insolvency litigation, whilst others will fund a wide range of commercial claims. Many third-party funders are now also (post-Jackson) offering integrated policies which provide both funding for own costs and indemnity against adverse costs (also known as after the event, or ATE, Insurance).
BY RICHARD HARRISON, PARTNER AND NICOLE MCKINNON, ASSOCIATE AT CLYDE & CO LLP
OFTEN, SUCCESS FEES WILL BE STAGED, WITH LOWER SUMS DUE, THE EARLIER THE PROCEEDINGS ARE RESOLVED.
MARKET COMMENTARY 09
Litigants in the market for litigation funding should be aware that a funder’s success fee will likely be a multiple of the amount invested and/or a percentage of the amount recovered - reflective of the likely risk - and that the costs of litigation funding can vary dramatically from funder to funder. Often, success fees will be staged, with lower sums due, the earlier the proceedings are resolved. It is essential that litigants seeking funding properly consider the various funding options available to ensure that any success fees they may be required to pay are reasonable. Litigants should also consider whether or not the funder has immediate access to funds, where the funds are coming from (that is, direct from the funder, or from other third parties), how much funds are available, and whether the funds to be provided will indeed be sufficient - placing an additional emphasis on the importance of early and accurate costs budgeting, where possible. Litigants seeking litigation funding may find it useful to consider those funders which are members of the Association of Litigation Funders of England and Wales (an independent body charged by the Ministry of Justice, through the Civil Justice Council to deliver self-regulation of litigation funding in England and Wales). Members of the Association are required to follow the Association’s Code of Conduct. However, there are other legitimate and sensible funders, which are not members of the Association. Notably, solicitors are obliged to inform their clients about the availability of litigation funding at the start of a case. The increased use of third-party litigation funding is necessarily adding a new layer of complexity to both litigation and arbitration. There is currently no requirement upon litigants to disclose their funding arrangements. However, if a litigant does become aware that its opponent is funded, this may shed a new light on the assessment of the case’s merits, since funders are generally unlikely to take on unmeritorious cases (funders very often seek to fund only those cases which they have been advised have prospects of success in the vicinity of 60% and above). That is because, third-party funding arrangements are usually provided on a “non-recourse” basis. That is, the funders’ only recourse will be against the proceeds of the claim. Therefore, if the case is lost, the funder will lose its investment and is owed nothing by the litigant.
Funded claims can be more difficult to settle, in circumstances where litigation funders may not properly understand the complex issues which can arise in commercial claims, and on receiving favourable but limited legal advice, may have a strong appetite for trial. However, in the aftermath of the highly publicised Excalibur litigation, third-party funders will, no doubt, now be very aware of the risk that they may themselves be ordered to pay adverse costs orders on an indemnity basis - even in circumstances where they were not themselves responsible for the matters giving rise to that order. Consequently, the Excalibur decision may encourage greater focus by funders on the elements of a claim which are likely to fail and result in an indemnity costs order. This may assist to provide leverage for litigants seeking to resolve funded cases outside of Court or arbitration. Funders may also now give increased consideration to how heavily they monitor claims. Although, increased scrutiny of cases by funders may cause them to stray into the forbidden fields of champerty and maintenance, which would render the funding agreement void and unenforceable, and leave the funder liable to pay the full amount of the costs of the successful party. Finally, litigants should be wary of sharing their privileged information with prospective funders. A “joint-interest” for the purposes of privilege is likely to arise once the funding agreement is in place. However, this will not apply to communications which pre-date the funding agreement. Accordingly, it is important to be aware that sharing privileged information with a prospective funder may result in a waiver of privilege. We will be watching closely how the dynamics of litigation-funded claims play out in order to feed this into our strategic approach to resolving future claims.
INTERNATIONAL ARBITRATION 1/3LY
THIRD-PARTY FUNDING OF DISPUTES IN HONG KONG
Third-party funding of arbitration has been in existence for some time in many Western jurisdictions. Up until now, however, it has not been widely used in Asia. Given the popularity of arbitration in Hong Kong and its increasing popularity in the Peoples Republic of China (“PRC”), it may not be long before third-party funders start to look East for claims to fund. In this article, we explore the legality of third-party funding arrangements in Hong Kong and the PRC, and assess the prospects for third-party funding in those two jurisdictions. OVERVIEW OF THIRD-PARTY FUNDING Third-party funding has been described as the “funding of claims by commercial bodies in return for a share of the proceeds”. A third-party funding arrangement usually provides that a third-party funder, who does not otherwise have an interest in the proceedings, pays a party’s legal and other costs of arbitration, in return for a percentage or part of the financial recoveries in arbitration. Normally, the third-party funder will be compensated from the funded party’s net recoveries from the proceedings after deducting agreed costs and expenses. However, if proceedings are unsuccessful, the funded party will not have to pay any amount to the funder. Third-party funding may be provided by a funder who routinely engages in such third-party funding activity, by banks or financial institutions, by individuals or corporations whose primary business is not third-party funding, by a party’s lawyer, or in the form of after the event (ATE) insurance taken by the party. THIRD-PARTY FUNDING IN HONG KONG Under Hong Kong law, the general rule in relation to third-party funding of disputes is that it is not permitted if it amounts to “maintenance and champerty”. Maintenance is the intermeddling of a disinterested party to encourage a lawsuit. Champerty is the “maintenance” of a person (by the third-party funder) in a lawsuit on condition that the subject matter of the action is shared with that person. Traditionally, maintenance and champerty have been prohibited in common law jurisdictions because they are seen as gambling on the outcome of a lawsuit, encouraging frivolous lawsuits and the perversion of justice. With regard to legal practitioners, Hong Kong law prohibits lawyers from entering into conditional or contingency fee arrangements. While Hong Kong law prohibits maintenance and champerty, the Hong Kong Courts have, in several cases, upheld third-party funding arrangements provided that there is a proper commercial purpose to the transaction and it does not give rise to a risk of the corruption of the judicial process. The cases where third-party funding arrangements have been considered in Hong Kong appear mostly to have concerned transactions where an insolvent company’s debts have been assigned to a third-party who has funded the litigation against the company’s debtors. In those cases, the Courts have allowed third-party funding arrangements on the basis that there is a legitimate commercial interest in recovering the company’s debts.
AND THE PEOPLES REPUBLIC OF CHINA
BY RICHARD BELL, PARTNER AND YONG TONG ANG, LEGAL DIRECTOR AT CLYDE & CO LLP
MARKET COMMENTARY 11
With regard to arbitration, while it is not entirely clear whether third-party funding for arbitration is permitted under Hong Kong law, in principle, there is nothing preventing such transactions, provided that there is a proper commercial purpose to the transaction. THIRD-PARTY FUNDING IN THE PRC Unlike the position in Hong Kong, there are no laws or regulations that expressly prohibit third-party funding of arbitration in the PRC. However, such transactions do not appear to have been used in the PRC and legal commentators have noted there do not appear to be any professional funders active in the market, either for litigation or arbitration. Nonetheless, it appears that the PRC may be open to allowing third-party funding. The “Measures on Lawyers’ Fees” Law passed in 2006 allowed lawyers to charge contingency fees in certain cases, capped at 30% of the proceeds. Further, in a recent Hong Kong case, the Court permitted the liquidators of a Hong Kong registered company to enter into a third-party funding arrangement with a party in the PRC on the basis that it was permitted under PRC law. While that case is not binding in the mainland, it does tend to indicate a more receptive attitude to third- party funding in the PRC than one might expect. With regard to arbitration, similar to the position in Hong Kong, it is unclear whether third-party funding is permitted to fund arbitration claims seated in the PRC, but there is nothing in principle preventing it. PROSPECTS FOR THIRD-PARTY FUNDING IN HONG KONG AND THE PRC While it may yet take some time before third-party funding of arbitration proceedings is officially recognised in Hong Kong and the PRC, some tentative steps have been taken in that direction. A consultation paper released by the Law Reform Commission of Hong Kong in 2015 has recommended that the law be reformed to clearly allow for third-party funding of arbitrations taking place in Hong Kong. The six-member subcommittee responsible for preparing the report unanimously concluded that third-party funding should be written into the law provided that “clear ethical and financial standards” for third-party funders be established and enforced by either a statutory or self-regulatory body. CONCLUSION While it is probably too early to say whether third-party funding of arbitration claims will become a feature of the legal landscape the PRC in the near future, if the government of Hong Kong adopts the changes recommended by the Law Reform Commission, it is not unreasonable to assume that the PRC could, in time, follow suit. In light of these developments, the future of third-party funding in Hong Kong and the PRC looks reasonably bright. Third-party funders and lawyers who are prepared to take on arbitrations on a contingency fee basis may therefore want to “watch this space”.
SIMON MCCONNELL, SAPNA JHANGIANI AND RUTH STACKPOOL-MOORE EXCHANGE VIEWS ON THIRD-PARTY FUNDING IN ASIA, INCLUDING WHEN IT WILL BECOME LEGAL AND THE DEBATE SURROUNDING DISCLOSURE, CONFLICTS AND SECURITY FOR COSTS
RUTH STACKPOOL-MOORE
SIMON MCCONNELL
SAPNA JHANGIANI
INTERNATIONAL ARBITRATION 1/3LY
IN CONVERSATION WITH RUTH STACKPOOL-MOORE 13
IN CONVERSATION WITH RUTH STACKPOOL-MOORE DIRECTOR OF LITIGATION FUNDING / HEAD OF HARBOUR HONG KONG Simon McConnell, Partner and Sapna Jhangiani, Legal Director at Clyde & Co in conversation with Ruth Stackpool-Moore, Director of Litigation Funding / Head of Harbour Hong Kong.
SAPNA Speaking of Hong Kong and Singapore, what is the future of third-party funding in both jurisdictions? In Hong Kong there has been a consultation paper of the “ Third-Party Funding for Arbitration Sub-Committee of the Law Reform Commission” report which Simon and I and many other arbitration practitioners in Asia are familiar with. But in Singapore the Ministry of Law hasn’t been issuing reports to update us on what’s going on. I think we all believe that there are things happening behind the scenes and I don’t think anyone disputes that it is something they are looking at very closely, but I am hoping you might have a better idea as to where the future is going in Singapore. RUTH Unfortunately, I’m unlikely to have any more specific Information than you do. The Ministry of Law did do a consultation back in 2014, but it wasn’t the sort of a public consultation that Hong Kong is currently going through. Selected individuals were asked to provide views and Harbour had the opportunity to respond. As I understand it, I don’t think we have had any formal feedback or indication of what can be expected as a result of that process, other than publically available information. My own personal view is that third-party funding will probably be allowed in arbitration in Singapore eventually. I’m not sure of the timing, it may be that developments in Hong Kong will stir action in Singapore, which might push to get there first, or it may prefer to take a ‘wait and see’ approach. SAPNA I guess they are quite cautious. Champerty is still a concept which there is a lot of resistance to in Singapore. Simon, do you have any thoughts on the Singapore vs Hong Kong debate surrounding when will third-party funding come in?
THIRD-PARTY FUNDING IN HONG KONG AND SINGAPORE
SAPNA How did you develop an interest in third-party funding and become involved in the industry? RUTH My interest in third-party funding grew while I was working in London, although I never had the opportunity to work on a funded case while I was there. When I arrived in Hong Kong to join the Hong Kong International Arbitration Centre (HKIAC) in early 2013, one of the first things I was asked to do was to put together a briefing note on the advantages and disadvantages of funding from an arbitration perspective. This was some time ago, shortly before the Law Reform Commission working group was set up to look at funding in arbitration in Hong Kong. Through that process I learnt a lot and gained a more in depth understanding of what funding was, and realised that it was something on the radar for Hong Kong. In terms of actually moving into the field, I had known Susan Dunn, one of the earliest developers of third-party funding and Head of the investment team at Harbour, for several years. Harbour had funded a number of cases in the Asia Pacific region, despite not having a presence here, so it made strategic sense to open an office in the region. When Susan asked if I would be interested in opening that office and being Harbour’s representative for Asia Pacific, it seemed like a unique and exciting opportunity so I said yes. Developments surrounding third-party funding in the region are so interesting at the moment, in Hong Kong and Singapore in particular, it’s a fantastic field to be working in.
INTERNATIONAL ARBITRATION 1/3LY
SIMON I do, but I have a question for Ruth. In Singapore, using the Otech Pakistan Pvt v Clough Engineering case in 2007 1 as an example, our understanding is that there has been quite entrenched resistance to the concept. In that case, the Court of Appeal in 2007 found that “it would be artificial to differentiate between litigation and arbitration proceedings and say that champerty applies to one because it is conducted in a public forum and not to the other because it is conducted in private”. On the other hand, in Hong Kong, the Law Reform Sub-committee currently recommends that third-party funding should be permitted in arbitration taking place in Hong Kong. Why do you think Singapore may move more quickly than Hong Kong? RUTH It’s possibly a combination of things. When the Otech Pakistan Pvt Ltd v Clough Engineering Ltd decision was made, funding was even less developed than it is now. It’s a fairly nascent industry and funding only comes up in relatively few cases compared to the overall number of cases that go on. But the understanding of what funding is and how it works has evolved significantly since 2007. This is coupled with the desire of Singapore to position itself as a hub for dispute resolution, which has also evolved since 2007. The combination of both factors have possibly led to an evolution in decision making regarding champerty, and the outcome might be different to what it was in 2007. In addition, with funding being used in jurisdictions like Australia and more recently the UK, there is more information available to demonstrate that the fears associated with allowing funding aren’t really going to materialise in the way I think they suspected. SAPNA I do share your view and I feel it is inevitable in some sense - it’s really a question of when. I also share your view that Singapore really likes to be a market leader and they can put in place regulation, quite quickly, if they want to. 20 years ago, champerty was a dirty word in England too, but over that time things have evolved and institutions like Harbour have paved the way and really tried to be very transparent and engage with the community. I feel we have a long way to go in Singapore in a much shorter time and I am just not sure how quickly they are going to be able to reach the same stage of not thinking that there is something quite sinister about third-party funding.
I definitely feel that, as you say, things have changed a lot in the last few years, and people are more open to the idea but there is still this hesitance and champerty is felt to be intrinsically bad. That is my gut instinct. RUTH I agree. I think one of the reasons for that is that generally the cases that come up in the public sphere, that deal with maintenance and champerty, tend to be the very worst examples, often cases of lawyers really exploiting and taking advantage of their clients. However, that’s not the same realm as cases being considered by commercial funders like Harbour; where there are generally sophisticated companies and advisers involved, so there is simply not the same dynamic. Harbour is not looking to fund consumer type cases; we are looking at very large commercial cases. It will take time for people to understand that.
Different funders will focus on cases of different types, sizes and jurisdictions. We focus on large commercial claims with a value of GBP 10 million or above. There are other funders who focus on cases with a smaller claim value, but we found that they don’t work for us, or the claimant, economically. Another advantage of Harbour’s model is that we have capital immediately available for investment. Other funders may act more like brokers, such that it is only when they hear of a good case they then try to find money to fund it. If they can’t find the money it may delay or stall the process altogether. The availability of Harbour’s funds is a differential and means we can respond quickly in terms of our decision making. A further advantage of Harbour’s model is that we spend the capital we have in a way that gives claimants comfort that they will have funding available throughout the life of their claim. We do this by ring-fencing within our funds the money that we agree to fund. We don’t leverage our capital; we only spend the money once. Other funders might leverage the monies they have, which can leave claimants in a more precarious position. SIMON How does ring-fencing actually work? Do you make a note to the accounts and actually set aside the budgeted fees of forward costs? RUTH Effectively, if we complete our due diligence on a case inquiry and it is the recommendation from the investment committee that we fund, we will agree a detailed budget with the firm who is acting on the case. Whether it’s arbitration or litigation, you can get a pretty good idea of the basic skeleton and add some extras for contingencies. This means that at the point we enter into the funding agreement, we have a specific budget agreed along with the total amount of funding to be provided. We ear mark the money for the budget of that particular case within the fund. One of the goals we have at Harbour is to decrease the differential between anticipated budget and what is actually spent. This foreseeability is useful for everyone involved, including the claimant and their lawyers, as well as the funder.
FUNDING THE CLAIM: HOW DO FUNDERS DIFFER?
SAPNA I hadn’t appreciated that there were so many litigation funders around with different focus areas and different ways of funding. How does your business differ from other providers in the market and what are the benefits of the various types of funders? RUTH There are lots of different models that funders use. Some are publicly listed; some are backed by high net worth individuals whilst others have particular lines of credit available to them. Harbour is different again, we have closed end funds, with the capital raised available for investment. One of the benefits of this model, and not being listed, is that we don’t have an eye on our share price all the time which can affect the manner and the speed with which we make decisions.
1 Otech Pakistan Pvt Ltd v Clough Engineering Ltd [2007] 1 SLR 989
IN CONVERSATION WITH RUTH STACKPOOL-MOORE 15
SAPNA Lawyers sometimes assume corporate clients want them to be as lean as possible with fee estimates. However, the trend is that clients are saying ‘don’t give me a bare bones fee estimate with lots of caveats saying that it doesn’t include this or that contingency. Give me a realistic budget and err on the more generous side rather than the leaner side’. I guess it is the same for you. RUTH Our interest in that respect is exactly the same as the Claimant’s as we step into their shoes in terms of payment. The ratio of the budget versus the claim value is a key metric for us in determining whether a case is a good investment. SAPNA Yes. RUTH People are often surprised that we don’t want the lowest budget possible. We recognise that to have good people working on these cases you need to pay a decent amount of money. We don’t want to pay for inefficiencies, or extra work that is not necessary, but we have no problem with paying for good work. Firms will come to us with their expected budget and we will say ‘what about this, what about that. You should make it a bit more’ to make sure we have a real reflection of the likely costs. SAPNA When you’re deciding to take a case on at the beginning, do you outsource any of your decision making, either on the investment side or the legal side? RUTH We do rely on others to provide us with relevant information but we don’t outsource any of the decision making. When we initially receive an enquiry myself, or one of our investment teammembers, will make an initial assessment to determine whether the case is one that we should be looking into. If it is, we will enter into a non-disclosure agreement with the claimant so that we can receive documents relating to the case. If it still looks like a good proposition after reading the documents, we will present it to the investment committee. So in all circumstances both the investment team member and investment committee has to be satisfied that a case is a good investment if we are to enter into a funding agreement.
SAPNA And are you engaged in any portfolio relationships with law firms or clients? RUTH We don’t currently have any portfolio arrangements with firms. I don’t know if we’ve been asked to look at that before. I certainly haven’t in the short time that the office in Hong Kong has been open. At Harbour, we are quite open- minded and will look at most opportunities to see if there is something that we can do, but I’m not sure whether we would enter into a portfolio arrangement with a firm. We have to make it work from an economic point of view, for our investors. We are also looking at funding a portfolio of claims for companies, and one development we have seen recently is banks coming to us with a portfolio of claims for us to look at. SAPNA Have you ever funded a Respondent? If so, how does it work? RUTH We generally don’t fund respondents unless there is a monetary counter claim, but I know others do. We are currently thinking about how we could make it work. SAPNA There must be a way, but it’s not as straight forward as funding a Claimant. RUTH You’re right, it’s not straight forward. When someone is facing a claim against them it is harder to define success. When the claim is in motion a Respondent may be very willing to sign up to our terms, but if it is successfully defeated, there is nothing coming in for us to take our portion from and the party may try to re-negotiate what we are actually are entitled to. However, as I mentioned, we can fund a counterclaim for a Respondent if we think it is viable. I am involved in a situation like that at the moment.
INTERNATIONAL ARBITRATION 1/3LY
DISCLOSURE, CONFLICTS AND SECURITY FOR COSTS: THE THREE FACTORS CURRENTLY IN THE SPOT LIGHT SAPNA One of the topics which is discussed a lot at conferences is disclosure. It’s one of the things that worries those who are opposed to third-party funding. They seem to be worried about the risks of the non-disclosure of third-party funding. What are your views on the issue? A related topic is security for costs. What are your views to share on disclosure and the related issue of security for costs? RUTH Disclosure, conflicts and security for costs are certainly three important issues. With disclosure, there are two points. First, we don’t mind disclosure of our involvement and in, many circumstances actually encourage it from a strategic point of view. However, we don’t agree with the disclosure of the terms of the funding. We think that that is unnecessary. Funding is a commercial transaction that is being entered into between the funder and sophisticated commercial parties. Why should the Respondent be put in an advantageous position by knowing what resources are available to the funded party?
SIMON I certainly think so. Hong Kong usually approaches these issues fairly conservatively, particularly in the champertous context, so I can’t see there not being some controls around it. It is almost inevitable that disclosure of the identity of the funder will be mandatory so that they can be chased if there is an adverse outcome is almost inevitable. I think it’s going to be an essential part of the cautious approval of third-party funding. SAPNA Which other jurisdictions are you active in? RUTH In the Asia Pacific region, we are most active in Australia, where we have funded nine cases, and New Zealand. In the insolvency context, we have funded some cases in Hong Kong and we are quite far down the road in looking at funding cases in Singapore. We are also looking for possibilities to fund in other jurisdictions in the region where the idea of funding is currently less developed. SAPNA Did you begin with insolvency cases in Hong Kong? RUTH Yes we did, but we are now looking beyond this and are looking at what is available on a case by case basis within Asia more broadly. Many of the civil law jurisdictions don’t have any equivalent prohibition on funding.
Second, we want to avoid any conflicts of interest associated with our involvement because we do not want to jeopardise the enforceability of the award. We are very diligent about ensuring, to the extent we are able to, that no kind of conflict arises. In relation to security for costs and adverse costs, it’s a different kettle of fish. If you do make a security for costs order a guaranteed outcome when a funder is involved, it will make funding more expensive for claimants. The amount that we charge is partly based on how much we fund, so if security for costs are automatically awarded in funded cases then the cost of securing funding will increase. That’s unfair to claimants,- why should it be more difficult and/or more expensive for them to access funding? Security for costs should be assessed on the basis of usual principles, even where a funder is involved. A relatively neat solution to the issue is to clarify whether funders are accountable for the adverse costs at the end. If this is the case, then you remove the need for the provision of security. SAPNA In Hong Kong, I believe they are consulting now on the types of conditions that should be attached to this concept of arbitration funding. This includes disclosure, partly because of the fear that a third-party funder may get away without paying any costs if they are not disclosed even if they succeed! Simon, have you heard people talking in Hong Kong about it being perhaps something that should be part of the new regulations?
IN RELATION TO SECURITY FOR COSTS AND ADVERSE COSTS, IT’S A DIFFERENT KETTLE OF FISH.
IN CONVERSATION WITH RUTH STACKPOOL-MOORE 17
WITH THANKS TO THE CONTRIBUTORS OF THIS EXCHANGE...
RUTH STACKPOOL-MOORE, DIRECTOR OF LITIGATION FUNDING / HEAD OF HARBOUR HONG KONG Ruth is a dual Australian and UK qualified lawyer with extensive experience in dispute resolution. She joined Harbour Litigation Funding from the Hong Kong International Arbitration Centre, one of Asia’s leading global arbitral institutions, where as Managing Counsel she led the arbitration team and managed the Centre as Acting Secretary-General during the second half of 2014. Ruth has wide-ranging insight into the diverse and growing number of cases being handled in the Asia Pacific region and has strong connections to its dispute resolution community. She is a frequent speaker, and has published a variety of articles, on arbitration-related issues, and has travelled worldwide in connection with the promotion of arbitration and other forms of dispute resolution. Ruth has experience in private practice having previously specialised in international commercial arbitration and litigation with Debevoise & Plimpton in London, Orrick Herrington & Sutcliffe in Paris and Coudert Brothers in Paris and Sydney. She has advised clients on a wide range of proceedings conducted under many of the most recognised sets of institutional arbitration rules and ad hoc proceedings, as well as associated national court matters in civil and common law jurisdictions. Ruth spearheads Harbour’s continuing growth in the Asia Pacific region. SIMON MCCONNELL, PARTNER AT CLYDE & CO Simon has significant expertise in insurance and reinsurance matters, particularly in trade-credit cover, professional indemnity, directors and officers claims, financial institutions blanket bond cover, and fraud cases. Simon’s practice extends across the Asia Pacific region. Simon has extensive experience in commercial litigation disputes, particularly in the financial services industry and real estate sector. Apart from contractual disputes, fraud and shareholder disputes, he specialises in regulatory matters and investigations, and currently acts for a number of financial
and securities industry clients in confidential regulatory matters in Hong Kong and regionally. This includes acting in regulatory and employment matters for regulated entities, and handling contentious ‘team moves’ and restrictive covenants, enforcement and injunctive relief. Simon’s real estate expertise focuses on acting for commercial and retail tenants for a variety of corporates, financial institutions and retailers in the Hong Kong property market. Simon is ranked in Chambers (Hong Kong) in Band 1 of contentious insurance lawyers. Chambers states: “Simon McConnell’s top-tier ranking is acknowledged by many sources, with one enthusing: ‘He’s head and shoulders above the rest for complex claims’”. Simon is also ranked by The Legal 500 (Asia Pacific) as a leading insurance practitioner. It notes that “Clyde & Co has a growing reputation for regulatory matters and investigations. Simon McConnell has a fine reputation”. SAPNA JHANGIANI, LEGAL DIRECTOR AT CLYDE & CO Sapna is called to the Bar of England and Wales, and spent several years in practice at the Independent Bar in London before joining Clyde & Co’s Dubai office in 2006. She relocated to Singapore in 2011. In her career she has managed commercial disputes spanning a wide range of industries and governed by different institutional rules such as those of the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), Singapore International Arbitration Centre (SIAC), Singapore Centre for Maritime Arbitration (SCMA), and Dubai International Arbitration Centre (DIAC). She has substantial advocacy experience and has represented clients in trials and preliminary applications before arbitral tribunals, the UK Civil Courts (including the Supreme Court), and the Courts of the Dubai International Financial Centre (DIFC). In addition, Sapna has several appointments as an arbitrator and is a Fellow of the Chartered Institute of Arbitrators and the Singapore Institute of Arbitrators. She has been described in Chambers & Partners as producing “wonderful work with a creative mind”.
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