Third-Party Funding in International Arbitration
What is Third-Party Funding?
Third-Party Funding, or Litigation Funding, is a mechanism by which a third party, independent of the claim, provides funds to a claimant to pursue a claim in arbitration or via the Courts. Typically, the funding will cover the funded party’s legal costs and expenses in pursuing a claim. The funder will also likely take out ‘After the Event’ (ATE) insurance to protect the funded party from paying the other side’s costs in the event they are not successful, or to provide security for the other side’s costs if the funded party is ordered to do so.
In return, the funder will be entitled to a percentage of any damages received from the opponent. The amount of this share is usually assessed on a case-by-case basis but a typical return is 3-4 times the sum the funder invests.
What cases are suitable for Third-Party Funding?
- Given that the funder will receive a share of any damages received, Third-Party Funding is usually reserved for claims involving damages.
- In order that the funded party’s net sum is more than 50%, the funder will generally only fund a claim where the likely damages are in excess of £10 million. However, there are a number of specialist funders who will fund claims below this value.
- Funders will also need to undertake both an internal and external risk analysis. Therefore, a funding application should usually be supported with an opinion from Counsel whereby the chances of success are, at least 60%.
- The funder will also want to ensure that the opponent can meet any award made against it. This will involve considering the asset position of the defendant; the location of any assets; and the ease of enforcement in a particular jurisdiction. Further, where the opponent is a State, the funder will want to ensure that that particular State has a good record in paying arbitration awards.
The above is not only assessed prior to the funder making an offer of funding but throughout the life of the case. For example, it may want an updated opinion on the merits after a defence has been filed or if any adverse documents are disclosed.
What are the advantages of Third-Party Funding?
There are several reasons why a client may want to consider Third-Party Funding. These include:
- Bring a claim a party may not otherwise be able to bring: this may be because the client does not have the financial resources to pursue a potentially meritorious claim.
- Off-balance sheet disputes: even if a client does have the resources to bring a claim, pursuing it will take the costs away from the balance sheet and de-risk any potential adverse costs.
- Risk-free disputes: using a funder in return for a percentage of the winnings means a party can pursue a claim with little or no risk. If the claim is successful then the client and the funder will share the damages. However, if the claim is unsuccessful the client usually does not need to pay for the funding or any adverse costs of the opponent.
- Validation: given that funders generally only fund good claims, the fact that a claim is funded may assist in an early settlement if disclosed to the other party.
Are there any downsides?
A client should make an informed decision whether to apply for funding or not. Some of the downsides include:
- Funding can be expensive: if the claim is successful, a client will generally need to pay 3 to 4 times the amount of funding (or between 40% to 50% of the damages awarded).
- Costs: substantial costs can be incurred, including obtaining Counsel’s opinion and, potentially, a report from an expert on the amount of the claim. These will be wasted if the funding application is not successful and, even if it is successful, the funder may not agree to pay any costs incurred prior to a funding offer being made.
- A funder may not fund claims below a certain level: as set out above, if the value of the claim is below £10 million then a client may have difficulty in obtaining funding. However, we have good relationships with specialist funders who may agree to fund cases below this value.
- Disclosure of the funding arrangement: a party may be ordered by a Tribunal to disclosure whether it is being funded or not and the identity of the funder. This, in turn, may prompt the opponent to make an application for security for costs.
How Gherson can assist
Gherson’s litigation team has considerable experience in not only making applications to funders but also conducting your arbitration or litigation. If you have a potential claim, please contact us to discuss potential funding options.
For any queries about your specific circumstances, please do not hesitate to contact us for advice, send us an e-mail, or alternatively, follow us on Twitter, Facebook, or LinkedIn to stay-up-to-date.
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.
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