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!
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