MARKET COMMENTARY 27
THIRD-PART Y FUNDING In the traditional scenario, it is relatively straightforward to identify the key financial drivers for both parties and analyse how these will dictate their strategy. However, the existence of TPF adds an extra layer of complexity to the situation. If your previously- impecunious client obtains TPF, with the burden of legal fees shifted to the funder, the client may wish to seek a higher settlement figure. Similarly, if the opposing partywho you understood to have financial pressures obtains TPF, this removes leverage against them that would be useful in early settlement discussions. TPFmay also have wider implications in encouraging unmeritorious claims being pursued at length. But thismay be counter-balanced by the argument that TPF allows clients to pursue claims that would otherwise be prohibited by potential costs involved in the dispute. Put simply, the relatively limitless pockets of TPF will change every aspect of strategy. TPF will have a direct impact on the answers to the two key questions considered above. What now represents a “victory” if legal fees no longer are a pressing concern?What is the best strategy in obtaining a victory if you no longer have leverage or different issues have taken priority? WHO MAKES THE DECISIONS? Another key question to ask in cases where TPF is being used is regarding whomakes the decisions on case strategy. This point might appear quite straightforward at first glance. A third-party funder will not want to be seen to have any role in strategy at any stage (including in particular, settlement negotiations), in order to shield against any claims of liability in the dispute, for instance in the case of a a non-party costs order issued by the Tribunal and/or national court. However, whilst a TPFmay not wish to be directly involved in dictating strategy, there is no doubt that this scenario ismore complex than in the traditional relationship between client and their legal team. Funders will seek tomaximise their potential return on their investment, whilst the structure of the funding arrangement may influence the strategy adopted by the client. For example, the financial implications of when a dispute is resolved under the funding arrangement should be taken into account by the client. A typical TPF arrangement may include a time variable, whereby a lower success fee is payable if the case settles early, and a higher success fee is payable if the case takes longer to resolve. As a simple example, the funding could be arranged so that the success fee is 2 times the funded amount if the case settles within 12months; 2.5 times the funded amount if the case settles within 12-18months; or 3 times the funded amount if the case settles after 18months or more.
TPF PRIORIT Y A further factor of TPF which could play a role in dictating strategy is that the TPF will take their success fee as a priority in the event of any award beingmade. Accordingly, a client who is awarded the amount which is equal to the success fee will gain nothing from the arbitration (except the possibility of a costly After the Event insurance premium). Therefore, when this is considered, together with the value of the success fee increasing the longer a case goes on, the proposition of earlier settlement may becomemore attractive. DISCLOSURE OF TPF ARRANGEMENTS If we consider that the presence of TPF for either the client or the opponent will considerably alter the dispute resolution strategy to be adopted, then awareness of TPF becomes crucial. Whilst lawyers will usually be intimately involved in the process of obtaining TPF for their client, currently there is no clear requirement to disclose the presence of TPF and so it will not be clear if your opponent has TPF in place. However, arbitral tribunals have ordered the identity of the funder and even terms of the funding agreement to be disclosed in some cases. The issue of disclosure is, therefore, a key topic of discussion at present, with several arbitral institutions considering the possibility of introducing obligations on disclosure of funding arrangements. Unsurprisingly, funders are strongly against this proposition. Accordingly, it is possible that lawyers and clients will not have concrete information regarding the presence of TPF andwill be left in the dark as to the strategy to be adopted by their opponents. There is no doubt that this uncertaintywill influence strategy, but whether it aids or proves to be a barrier to settlement, remains to be seen. CONCLUSION The strategy a client chooses when resolving a dispute using an arbitral process is driven by many considerations, of which the financial position of the Claimant and Respondent are pivotal. Accordingly, TPF has the potential to drastically alter the decision-making landscape, with the risks of arbitration effectively being outsourced to third parties with significant capital available. It is unclear at present whether the increase in funding options will lead to a decrease in early settlements, as the pressures of legal fees in taking a case all the way to a hearing are removed. And case strategywill vary depending of the underlying facts and situation of the parties in each individual case. Nonetheless, it is crucial that clients and lawyers are aware the potential implications of TPF on case strategywhen choosing a strategy for resolving their dispute.
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