Mercantile adventurers. Commercial beasts. Third party funders are known by different monikers, many focusing on a funder’s interest in profit and need to minimize risk to their investment. This is weighed, correctly, against a funder’s ability to facilitate access to justice.
The narrative about funding to date has concerned what funders may offer to prospective parties, and what jurisdictions – like Hong Kong and Singapore – are doing to accommodate funding and, by implication, optimize their attractiveness as places of arbitration.
While this helps to understand funding in the abstract, the process of applying for funding and satisfying a funder’s investment criteria has been given little attention. Understanding this process, however, is crucial to obtaining funding.
It is important to understand that, although a party may have a strong case on the merits, this is far from a fait accompli; it is one of various factors that a funder assesses. Generally, different funders have similar criteria, some of which overlap, others which differ by degree. These may include, in addition to strong prospects of success on the merits, that the key evidence can be obtained and is preferably in documentary form, and that the relevant legal principles are clear and tested. This helps to assure the funder that the case does not depend substantially on oral evidence (which can be unpredictable), and that the case does not seek to ”make new law”, which presents additional risk.
Many funding applications that LCM receives present a comprehensive assessment of most of these criteria. Nonetheless, LCM approves only about 5% of all funding applications received. Why?
An often-neglected criterion is recoverability and enforceability. In contrast to a lawyer in private practice who is trained to focus on whether a cause of action is sound, funders often place more emphasis on the likely outcome of the litigation by seeking to identify where, and how, an award may be satisfied (and monetized) if and when an opposing party fails to pay as ordered. Regardless of whether a party seeks funding, such an assessment assists to focus a client’s mind on the inherent risks in pursuing the dispute locally or globally.
At the very least, considering an opposing party’s financial position and location of assets can help identify the prospects of recoverability. This may include obtaining copies of a party’s recent financial reports, and identifying tangible and intangible assets including known accounts, real property etc. in one or more jurisdictions. Although this recoverability position may change throughout the course of the dispute, assessing an opposing party’s financial status both before and during the life of a dispute helps to assure a funder that due consideration has been given to this crucial issue.
An extension of this concerns cases by investors against states and their entities, which comprise a large proportion of arbitration funding applications. In the majority of cases, the investment which was allegedly destroyed by the state was the only or predominant financial resource of the investor. Although it is common for parties seeking funding to rely on the assumption that states have sufficient assets around the world (as they often do) the question for a funder is whether and how such assets may be seized to satisfy an arbitral award. Indeed, while modern doctrine generally provides that a state waives its immunity when agreeing to arbitrate disputes, this is far from waiving immunity from execution against its assets. Consequently, funders seek to understand what weapons a party may have in its armoury to enforce against a state. For example, does the state have a history of satisfying awards made against it, or does it enter into protracted proceedings to resist enforcement, have an award set aside, and raise defences of state immunity? Is there any visibility on whether the state is concerned with its reputation to attract foreign investment, such that it would seek to satisfy an award so as not to prejudice its standing in the international community?
The New York Convention remains an effective tool, but is limited in its scope as concerns seizing state assets. Unfortunately, the 2004 UN Convention on Jurisdictional Immunities of States and Their Property, which seeks to harmonize principles concerning the same, is still not yet in force. The question of executing against states – including for the enforcement of ICSID awards – falls to domestic law. This gives rise to a Pandora’s box of contingencies, including courts deferring to political agendas and foreign policy. This may at times be seen to trump legal principles in favour of avoiding embarrassing a foreign state by seizing its assets, and strengthening a general presumption that a foreign state is immune from the jurisdiction of domestic courts – a tough presumption to move. As one commentator has identified, at the extreme end of this spectrum courts are not willing to aid foreign private parties in whom they have no interest, and sovereign immunity will always provide the means of avoiding a difficult situation for domestic courts when faced with international complexities. In more aggravated circumstances, enforcement against the property of a recalcitrant state remains in the realm of fantasy. This increases time and costs, and from a funder’s perspective, risk – an unattractive cocktail.
In addition to satisfying other criteria, the more information a funding applicant can provide to a funder concerning assets, the domestic law that would apply to seizing such assets in one or more jurisdictions (in particular against a state), and any visibility on an opposing party’s history of satisfying awards or judgments, the better the chances of funding being approved.
Jonathan Barnett
Litigation Capital Management (LCM)
