27th August 2019
Augusta’s James Foster and Samiksha Gosain are proud to have authored the International Comparative Legal Guide to: International Arbitration 2019 chapter on International Arbitration and Third-Party funding.
While third-party funding has been established for close to a decade in the UK, the funding of international arbitration has become commonplace only more recently. From our own experience at Augusta, we have seen a 100% increase in funding of international arbitration cases over the last two years. Where previously there was hesitance to consider costly and complex arbitrations, the funding market is now embracing international arbitration cases as part and parcel of the everyday enquiries brought forward for funding.
Augusta has established a dedicated team for the funding of arbitration claims, headed by former Gowling WLG arbitration partner James Foster. The team comprises seven investment managers dedicated to considering funding for arbitration claims, spanning commercial arbitration, construction arbitration, energy disputes, maritime and commodities disputes and investor-state arbitration. In any given week the team considers as many as seven new international arbitration cases, illustrating the sheer volume of clients considering funding on a regular basis.
When reviewing an international arbitration matter for funding, the funder’s remit is to build an assessment of various case characteristics. A prospective funding note from the instructed lawyers should ideally aim to provide those case specifics to the funder at the outset, so that an early view can be taken on the prospects for funding.
The lawyer should confirm the applicable arbitral rules, the seat of arbitration, the governing law of the underlying agreements, any applicable treaties and provide a view on possible enforcement regimes in the jurisdictions where potential awards may be pursued.
When reviewing the above, Augusta will focus on whether the applicable rules and treaties are well recognised and established, that the law applied is based on ascertainable principles, that the seat is regarded as reliable and that the enforcement regimes are understood by the proposing lawyers and can be relied on for effective asset recovery.
Often the suitability of proposed claims for funding turns on a consideration of the costs budget to damages proportionality. At Augusta, we fund cases on a minimum ratio of 1:5 costs to damages. In order to save the client’s and lawyers’ time before delving into the merits of a case, we ask that an estimated budget is provided to test that the claim is economically viable as a proposed investment. At Augusta, we consider funding for legal fees including disbursements, counsel fees, arbitration administration and tribunal fees, arbitrator expenses and costs for enforcement of awards. In appropriate cases we may also be able to consider funding a bridging loan for business operational costs.
For a funder to test the estimated budget and provide funding terms a reasonable view as to the quantum of the claim needs to be provided. Where possible the evidence to support a quantum figure should also be shared, ideally split between costs actually incurred and estimated future losses. At Augusta, we model the required amount of funding against conservative estimates of quantum to ensure that the return to the claimant is still substantial at a lower level of recovery. In doing so, we envisage settlement scenarios where the damages recovered may be significantly lower than those pleaded and test that this still delivers returns that are favourable to the client.
A steer from the claimant and their lawyers as to likely acceptable levels of settlement for the claimant allows the funder to test the claim’s economics against these various scenarios. The aim is to provide an outcome where the funder’s expected return on investment is maintained, with the client still taking home the lion’s share of damages.
Once a costs budget and quantum estimate are provided the funder can get to work on providing terms. At Augusta, we endeavour to provide terms within a quick turnaround so that the client can consider the cost of financing at an early stage.
Each investment’s pricing is bespoke and tailored to the individual case based on the risk profile, the amount of the costs and the claim value and the likely timeline to recovery. The pricing methodology applied is most commonly a multiplier of funds invested or a percentage of gross recovery.
We are also often asked to consider portfolio funding, where we can offer beneficial terms reflecting the spread of risk across the portfolio.
After the initial economics test and the client’s review of the offered terms, the next step in the Augusta process is the in-depth diligence of the legal and factual merits of the case. For this stage we ask that a firm provides detailed advice on the proposed claim drafted by the instructed firm or an external counsel. A fully informed view on merits, liability, causation, quantum and recovery will assist the funder’s review and allow a percentage prospect of success to be determined.
For investor-state claims, jurisdiction can be an early hurdle for a funder’s assessment. It is therefore very helpful for a developed and formulated argument to be presented at the outset to ensure that jurisdiction is properly founded. If it is probable that proceedings may be bifurcated, the budget should reflect this. Additionally, where elements of the dispute may require local counsel’s input, this should also be flagged, and relevant nominees should be proposed.
On cases where merits will clearly turn on expert evidence, contemporaneous evidence or witness statements, the funder is likely to ask for a preliminary sample of this evidence to corroborate the arguments presented by the law firm.
Before introducing a client to funding it is also worth assessing whether the client itself will fit the funder’s risk profile. What is the client’s motive in seeking funding for the case? Is the client an individual or a corporate? How many stakeholders are involved in the claim and how is the decision-making process to be governed if a settlement offer is made? What is the client’s likely threshold in accepting a settlement offer?
These questions are important for a funder to determine, for example, whether the client will be committed to investing its time and effort into the claim and whether the client is reasonable in its expectation of damages. Claimants prepared to accept a pyrrhic victory, unrelated to the merits of the claim, will be unattractive to most if not all funders.
As each case is unique, these criteria will be scrutinised in varying degrees, and they all assist in building the funder’s roadmap to investment.
International arbitration claims are particularly suited for funding as the applicant will often require a sizeable war chest for legal fees to even begin the arbitration process. Funding can give the claimant the ability to initiate claims and to commit to hiring expert legal teams in the appropriate field. This is particularly true in investor-state arbitration, where the respondent state’s actions have often proven so burdensome to the applicant that their entire commercial investment has been rendered valueless and they have been forced to exit a territory. In these circumstances, invoking their rights under international law through arbitration is often the only means of recovery.
Funders may also be able to manage the risk of non-recovery of awards via Sovereign Default Insurance or Awards Default Insurance. Such insurance can provide the client with peace of mind about the prospect of successful enforcement of any award. Where clients are not be able to fund the premiums for the policies themselves a funder may be willing to cover the upfront cost.
On the other hand, investor-state claimants are often faced with the daunting prospect of a respondent sovereign state with access to very substantial resources. Third-party funding can provide the client with the support of an experienced investor with a demonstrable track record and the financial strength to see the claim through.
This leads to an additional linked advantage of funding. Where the identity of the funder is disclosed to the respondent (either voluntarily or in accordance with the requirements of the relevant arbitration rules), the respondent is then on notice that an experienced third party has diligenced the claim and is willing to provide non-recourse finance on the basis that the claim is likely to succeed. The respondent will also know that a well-resourced funder will be able to see the claim all the way through to a conclusion and that attempting to exhaust the claimant’s funds through tactical legal manoeuvres will not succeed. These two factors can often lead to a much earlier settlement of the claim than might otherwise be possible.
For this reason (and many others) the claimant should ensure that its chosen funder has a strong success rate and a healthy line of credit. In this regard, Augusta has an approximately 80% success rate of its resolved claims and £150m+ capital available for investment at any time.