INTERNATIONAL ARBITRATION 1/3LY
OVERV IEW The market for financing international arbitration is rapidly evolving. Initially, TPF was introduced to resolve an inability to cover the costs of arbitration. Today it is being used in a number of ways. There are several misconceptions about arbitration funding, for instance that the funding is only for one-off claims, or that the funds must be used to cover the costs of the arbitration. The reality is that the current market is far more sophisticated and can now be likened more to “arbitration finance” or simply “finance”. As such, there are an increasing number of ways that parties facing disputes can manage uncertainty and risk, and ensure that good claims don’t go unheard. BENEFITS OF THIRD-PART Y FUNDING The classic example of a party using TPF is a claimant in an expropriation case – it cannot fund the claim, has no control over its assets, and has no access to loans on themarket. TPF covers the costs so that the claimant can pursue the claimwithout risk. If the case is successful, the claimant receives damages and pays the TPF fee; if it is unsuccessful, the funder covers the costs (adverse costs can be covered by ATE insurance). At the other extreme, awell-capitalised companymight use TPF as a financial tool to shift the risk of a claim to a funder whilst still reaping the benefits of an award. Thismight be the case with a general counsel seeking to turn the legal department into a profit making entity. Most TPF users come between these two: not insolvent but cash sensitive, andwould rather invest their funds in their business, while still pursuing the claimand outsourcing the risk to the funder. Other benefits include where the claimant faces budgetary constraints (for instance, where there has been nomoney set aside for potential disputes) or potential accounting benefits (owing to an asymmetry in the accounting treatment of litigation costs and any award). WHO ARE THE FUNDERS? When considering using TPF, it is crucial to partner with the right funder. Themajor funders providing TPF in international arbitration are all specialised in funding high-value commercial litigation and arbitration disputes. The key attributes to look for in a funder are that they are capitalised – that is, “good for themoney” – and have a strong track record. Other questions include whether the funder is (i) backed by institutions, (ii) publicly listed or private, (iii) a permanent capital vehicle, a private equity fund or a high net-worth individual. Funds also differ in their decision-making structure: some undertake an analysis of themerits using in-house lawyers or external legal experts, while others prefer to analyse the claimas they would any other type of investment. An interesting trend in themarket is for funders to alignwith certain firms (or, less frequently, certain companies) in so-called “portfolio funding”. This relatively newpractice (which ismore developed in the US) provides an attractivemechanism for ensuring long-term reliability in funding disputes.
SECURE F INDING
TENDERING FOR FUNDING The process of tendering for and securing funding works in largely the same way with all funders: – First, the funder undertakes a high-level analysis of all aspects of the claim, and preliminary terms of agreement are drawn up between the claimant and the funder – Second, the funder spends a period of between three weeks to threemonths on amore thorough investigation of the claim(due diligence), after which the terms of agreement are accepted, modified or rejected The process is not formalised and fundersmay vary in their approach. For instance, some funders have lawyers in-house, and somay have a quicker turnaround time for an initial decision than those who have to outsource. The length of funders’ due diligence period also differs considerably. Another key difference is the nature of the initial agreement. Most funders will offer preliminary terms of agreement, to be confirmed and accepted at the end of the due diligence period. This is often coupledwith the requirement of exclusivity during that period –meaning that the claimant is prevented fromgoing elsewhere and it is the funder’s choice whether to go aheadwith the deal. Other funders will offer more certainty and actually sign terms of agreement after the initial stage, leaving an opt-out clause in the event that the due diligence reveals a serious irregularity. Given these various issues, it is crucial to consider various funders as early as possible, in order to negotiate themost favourable terms of agreement and ensure that the claimcan be reliably funded, keeping inmind any relevant deadlines in the arbitration and other time constraints. E VALUATION OF THE CL AIM The key factors funders consider when evaluating a claimare: i) any potential issues with enforcement of the award or recoverability; ii) themerits of the claim itself (jurisdiction, liability, facts); iii) a reasonable estimate of the quantumbased on the damages claimed; and iv) issues relating to the arbitration process (including legal and other costs, duration of the case (potential bifurcation or document production), rights of appeal/annulment, the arbitrators involved). The funder’s investment committee will consider these factors and decide whether the claimas awhole is aworthy investment. The committee will then offer terms of agreement based on the expected return versus the expected risk, assessed on both a qualitative and quantitative basis. The due diligence period involves an evaluation of the same issues in greater detail. The claimant’s lawyers often assist the funder in this evaluation period, providing guidance on strategic issues and assisting with case documents (often using secure-access websites to ensure confidentiality). Funders usually issue a questionnaire regarding key contracts, documents, accounts and financial information, reports on damages, expert reports, witness statements and legal opinions. Funders then followupwith supplementary requests andmay seek external legal advice. Howquickly the due diligence hurdle is overcome depends on the availability and quality of the documentation.
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