Using financing to pursue international arbitration cases: A growing opportunity

By: Dana MacGrath , Investment Manager, Legal Counsel - New York; and
      Tom Glasgow , Chief Investment Officer - Asia

International arbitration is continuing to grow rapidly as the go-to dispute resolution choice for many multinational companies.

Consider recently released statistics from the International Chamber of Commerce. The organization’s international arbitration forums notched 869 new cases in 2019, the second-highest number on record. The ICC figures show that more than a third of the new cases in its forums were for amounts in excess of $10 million. Five of the 10 most frequently selected arbitration venues were outside Europe or North America. (Singapore, for instance, was selected as the arbitration venue for more cases than New York.) And state-owned entities represented one-fifth of new cases—a nearly seven-fold increase over the previous year.

For businesses and law firms embroiled in an international arbitration proceeding, dispute funding can help alleviate financial stress. Funding can be used in both commercial international arbitrations—where parties, such as multinational corporations, have chosen arbitration as the path to resolve a dispute—and in treaty, or investor-state, arbitrations, where a party brings a claim against a sovereign state. Businesses also look to arbitration funding as a solution to improve their cash flow in the short term by monetizing or selling an arbitral award or judgment.

CASE CRITERIA

It’s important for parties seeking funding for arbitration to understand the factors that funders consider before making an investment into an arbitration, including:

• The likelihood of success. Experienced, professional funders, like Omni Bridgeway, can meaningfully evaluate the prospects of success. When specialized knowledge about a particular industry or area of law is required, experienced funders can tap into their own expertise, in addition to an extensive network of contacts. As international arbitration may involve multiple applicable laws and a blend of civil and common law procedure, funders with a wide international team and breadth of expertise will be best placed to consider the issues.

• The caliber of counsel and the tribunal. What is the experience and track record of the lawyers involved? If an arbitral tribunal has been appointed in the matter, an evaluation of the arbitrators and their ability to run the case efficiently and effectively is important. Again, funders with broad international arbitration expertise may have in-depth knowledge of the capabilities and decision-making styles of many international arbitrators.

• Jurisdiction. Where is the arbitration seated, what rules will apply, and which courts will oversee the process? If an award is obtained, where will it be enforced and how predictable/reliable are the enforcement courts?  International arbitrations often involve a complex web of jurisdictions and applicable laws which may create risks or potential for delay if not handled correctly.

• The potential length of the case. International arbitration proceedings can potentially run for as long as five years or more, depending upon the nature of the claim and whether enforcement steps are required.

• The profile of the respondent. Who is the respondent? What will be its financial position at the completion of a case? Will it be able to pay an award or settlement—or will it resist? How and where might one enforce the award? An award on paper is meaningless if it cannot be monetized, including for the funder, whose return depends upon making an actual recovery (see more on the non-recourse nature of dispute funding here).

• The economics of the project.  How much will the case and any enforcement steps cost and how much will be recovered at the end of the day? A funder committed to prioritizing the needs and success of its clients will aim to structure the funding transaction to ensure that the funded client retains the bulk of the commercial benefit from the arbitration, after the costs of the dispute and funder’s fee have been subtracted.

PORTFOLIO OPPORTUNITIES

Increasingly, international businesses are seeking funding across a portfolio of cases. This can allow funding for a broader range of cases, as the economics and risk profile are assessed across the overall portfolio, rather than each single case. In this way, businesses may be able to secure funding for low value cases, more complex or unpredictable claims, or indeed defenses.   A portfolio approach may also allow for effective diversification of the funder’s risk, which may, in turn, allow funding at more favorable rates.   

INVESTOR-STATE CONSIDERATIONS

International arbitration often involves state or state-owned parties. When choosing a funder, companies and firms should ensure that the funder they select is aware of the unique challenges involved in bringing investor-state/treaty arbitrations. Jurisdictional issues can trigger delays. Some parties may act less aggressively in treaty arbitrations when they have ongoing business in-country in the hopes of preserving a relationship with a state. Settlement prospects are lower in treaty arbitration, and the lifespan of the case is generally longer.

Enforceability can be a greater concern as well. Enforcing a judgment may be more difficult against a country that is not rich in natural resources or that does not have substantial non-immune commercial assets or income. In this situation, it would be ideal to select a funder with global enforcement capabilities—one who can assist in efforts to identify and navigate against non-immune sovereign assets.

In addition, not all sovereign entities behave the same way when faced with an international arbitration. Witnesses residing in the country, and who may be critical in providing testimony, may face threats, jail time, or actual bodily harm. A funder must understand that a portion of its investment may go to ensuring the safety and well-being of those who might be at risk.

To learn more about how dispute finance can assist parties involved in international arbitration proceedings, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.