INTERNATIONAL ARBITRATION 1/3LY
IN CONVERSATION WITH NICK ROWLES-DAVIES 05
UNC O V ER ING T HE MY S T ERY OF P OR T F OL I O F UND ING
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. Theymight 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 themall 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 advancemoney 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? NI CK In accounting principles litigation is expensive, whether youwin 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 fromother funders or financiers as we don’t necessarily require you to use our money to pay the legal fees. Fromour perspective, we aremonetising an asset andwe can even give you cash tomonetise 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 problemwith accounting is that there is a negative effect on your EBITDA whether youwin or lose because, when themoney comes back in, it is a special itemand not recorded as profit. If wemonetise 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 arbitrationwhere we didn’t fund the legal fees, we provided themwithmoney to run their business.
Third-party funding hasmoved 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 aremany 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? NI CK 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 themeantime, 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 firmwill agree with us that we will pay theman 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 knowabout it. They probably do, but they don’t have to. If the case loses, we write off our investment. Of course if the firmgoes through a bank, then theywill be paying themoney borrowed back.
BEN So, litigation finance and portfolios: What percentage of these are with law firms compared to clients? NI CK It depends where you are, but I would say that it is probably about 50:50. The portfolios differ whether you are a law firmor the client. One of our big schemes is with insolvency practitioners. The US is a very different market because contingency fee lawyers aremuchmore active. Contingency fee lawyers in the US tend to want to lay off some of their risk so theywill have a lot of cases, andwill “sell” part of that to us as part of a portfolio. In the UK, Damages Based Agreements (DBAs) are not common place, somost 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 andwe do the hybrid DBA schemes as well. BEN Howdoes it work in practice? NI CK I’ll use a law firmscheme as an example. Saywe were doing something with you andwe wanted to do a five case portfolio of ICC Paris claims and youwere 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 domore of those cases and takemore 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 bymaking cash flowpayments during the case. In terms of the portfolio and how it works, we advancemoney 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 thenwe lose our money. Clearlywe havemade a fairly bad investment decision if that happens!
Made with FlippingBook - Online Brochure Maker