The changing world of dispute finance, part 2 – where to next?
IMF Bentham’s Chief Investment Officer (Asia), Tom Glasgow, explains developments in dispute finance in Asia (including jurisdictional nuances and funders’ investment criteria) and Managing Director and CEO of IMF Bentham’s global operations, Andrew Saker, discusses the expansion of funding products available.
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Welcome to In Conversation with IMF Bentham. My name is Nathan Landis and I'm your host for part two of our podcast called ‘The changing world of dispute finance’.
In part one of this episode, I chatted with Executive Director of IMF Bentham and one of the pioneers of the industry, Hugh McLernon. Hugh took us back to the beginning and shared insights into the origins of the modern-day dispute finance industry in Australia and its subsequent global expansion.
Today, I'm joined by two of my colleagues at IMF Bentham, Chief Investment Officer for Asia, Tom Glasgow, and Managing Director and CEO, Andrew Saker. Tom will be talking about the expansion of the dispute funding industry in Asia and also how the funding process works, including the funder's investment criteria. Andrew will be discussing other recent changes in the industry, including the types of funding products being offered and also how funding is being used today. Firstly, welcome Tom.
In part one, Hugh McLernon talked about the expansion of dispute finance around the globe. As IMF Bentham's Chief Investment Officer for Asia, can you tell us, firstly, about the dispute finance industry in Singapore and Hong Kong? And also about the legislative changes that have occurred and the types of cases now being permitted to be funded in those jurisdictions?
Sure. Well, I think it's fair to say that, historically, both of these jurisdictions were quite conservative in their approach to litigation funding. The medieval common law doctrines of maintenance and champerty prevented funding in most types of cases in both Hong Kong and Singapore in the past. In both jurisdictions, funding would've been considered a tort. And in Hong Kong, it was considered a crime and, indeed, solicitors have been prosecuted in Hong Kong for entering into contingency fee type arrangements to fund cases there. In both jurisdictions, there were very limited exceptions to those rules, and one of those exceptions included the funding of cases arising out of insolvencies. And there, the courts really were acknowledging that the social utility of allowing liquidators or bankruptcy trustees to obtain funding to pursue claims on the behalf of a bankrupt estate. And on the back of that, IMF has been actively funding those type of insolvency claims in Hong Kong for some time.
But, really, the big changes came in 2017 when both jurisdictions passed legislation to facilitate the funding of international arbitration, and that was really to bring Hong Kong and Singapore in line with other major, international dispute resolution hubs where funding is permitted. And both jurisdictions are very competitive in trying to attract international arbitration work, and so, the policy decision was motivated by that.
They each took quite different approaches. So, in Hong Kong, narrow amendments were made to the Arbitration Ordinance there to expressly allow the funding of international arbitration and, indeed, domestic arbitration. And they also brought in quite a compliance-heavy code of practice to govern the industry in Hong Kong.
Singapore, on the other hand, took a broader approach. They amended their Civil Law Act to abolish maintenance and champerty as torts entirely and brought in regulations that made it clear that international arbitration could be funded, and regulations governing what sorts of funders would qualify in order to be able to validly fund that sort of case.
The effect, I think, of that is, in Hong Kong, the crimes and torts of maintenance and champerty are still very much alive and well. And you've got, really, a sort of narrow exception-based approach which allows funding in specific circumstances, so in arbitration and insolvency cases, and in very limited access to justice scenarios as well.
Whereas in Singapore, with the abolishing of maintenance and champerty as torts, there's now active funding of arbitration and insolvency, but it's a slightly more permissive scenario where we expect to see greater expansion, and to commercial litigation, and, possibly, funding in the Singapore International Commercial Court here.
And what about other Asian jurisdictions? Is funding permitted and available more widely in Asia?
The rest of Asia is made up predominantly of civil law jurisdictions, and, of course, they don't have the old common law hangover of maintenance and champerty. So, the situation there is typically there is no prohibition on litigation funding, but there's also no express permission allowing it.
So, some might see that as a bit of a grey area. Others may see that as being permissive. It's fair to say that those markets outside Hong Kong and Singapore are still, very much, in the development phase. I don't think any other Asian jurisdiction would be described as a very active domestic market for funding.
They are, though, large feeder markets for international arbitration cases in Hong Kong and Singapore. And so, we are seeing, across the region, very much a general increase in awareness and use of funding particularly in arbitration. There are very high levels of cross-border investment in Asia that gives rise to costly and complex international disputes. Often, they're involving parties from developing states and come with significant enforcement risk. So, a lot of the commercial parties we're working with around the region are looking to offset that risk, that complexity, and the cost, and sometimes looking to do so over large portfolios of cases.
So, the interest is certainly increasing. Asia may be starting later than some other jurisdictions when it comes to the adoption of funding, but it is moving very, very quickly and gaining in sophistication very, very quickly.
Shifting gears slightly, can you explain a little bit about the process, in particular, can you talk through the investment criteria that funders consider?
Sure. The process really starts from an initial inquiry, and one of the things that we try to put in place as soon as possible is a confidentiality agreement, or an NDA. And that ensures that we're protecting confidentiality and also protecting the privilege in any information that may be shared with us, and we do that by documenting our common interest between us and the party that's applying for funding in order to protect privilege.
Once we have that in place, we will begin an initial assessment. And really, the key things that we need to know from the outset are the basis of the claim. What is its perceived merits? And often, we work closely with the lawyers to understand that. And also, what are the likely defences that might serve as roadblocks to success?
We look very closely at the identity of the respondent and their ability to pay, and assess the realistic claim value of the case, and also, the claimant's commercial objective, what they're looking to try and achieve from it. And, of course, finally, we also need to understand the likely budget, the funding that's required to see the case through to a successful outcome.
The more information that can be provided to us at that initial stage, the better placed we are to be able to, as soon as possible, provide some sort of indicative commercial terms in relation to possible funding. If the case does look like it's suitable for funding, then we will usually produce a term sheet or at times a conditional funding agreement, and that will set out what we would propose to fund, what the return structures would be in the event of a success, and usually then we would identify any further due diligence that might be required on the case and whether we would be contributing to the cost of carrying out that due diligence.
We then would progress to a more detailed due diligence phase if that's necessary. It depends on the case and the complexities involved. That's very much a collaborative process. We work together with the legal team and the client to look critically at the issues in the case. Sometimes, it might involve needing to consult with external experts. For instance, on the quantifications of damages, we might engage investigators to look at the respondent’s financial position. We will go through that and, if the case looks good and the due diligence stacks up, we then need to present that opportunity to our investment committee in IMF, which consists of senior members of the business. All very experienced disputes professionals, funders, as well as external retired judges. And they will vet the case and the opportunity. And if they agree with us that it's a suitable prospect, then they will approve it for funding. And we'll enter into a detailed funding agreement with the funded party that reflects the terms we had agreed earlier, and deals with important issues like confidentiality, the management of conflicts, and the roles that the lawyers at IMF and the client will be playing going forward.
Thanks, Tom. That's a great summary of the process.
Now to my final guest, IMF Bentham's Managing Director and CEO, Andrew Saker. Welcome Andrew.
Thanks very much.
Andrew, we've discussed today the globalisation of the dispute finance industry over the last 20 years. There has also been a recent expansion in the type of funding products being offered by third-party funders. Can you tell us about some of these funding products?
Sure, and that's right. In addition to providing funds to pay legal and associated expenses for disputes, some funders now offer various other forms of funding, including seed funding, which can be used to investigate a case. For example, to undertake public examinations for liquidators in insolvency matters, or to obtain counsel's opinion on the merits of pursuing a case. In addition, portfolio funding for large corporates and law firms where groups of cases are funded together as a package or portfolio. This allows the funded party to pull together cases in a portfolio that may not otherwise provide sufficient monetary value to secure funding on a standalone basis, including the funding of defence costs. Also, there's working capital. Businesses are now able to leverage the value of their contingent litigation or arbitration assets.
You mentioned businesses using funding. Can you tell us about the types of parties that are using funding today?
Sure. There's been a noticeable shift over the last few years. Better resourced parties are now seeking dispute finance to manage risk, reduce their legal spend, and allocate resources to core business needs. It's not that they can't afford to pursue their claims, it's just that it makes sense to outsource the cost and risk, and direct their own resources elsewhere, to business as usual or strategic growth. It's not a dissimilar philosophy to a leasing company that leases fleet vehicles or leasing IT technology, or where you outsource call centres or data processing, or even renting commercial premises. What is the core business, and what can and should be transferred to others who are best of breed in that field? Litigation is not a core competency for most companies whereas it is for us. We know how to assess which cases are worth pursuing. We know the strategies in different jurisdictions to optimise outcomes, and we have significant capital to finance it.
Corporates now seeking dispute financing include sophisticated and well-resourced companies, both large and small. Parties that could afford to pay for the dispute themselves, but choose to shift the cost and risks to a funder.
Dispute finance has developed into a sophisticated and flexible financial and risk management tool to the benefit of a range of commercial parties. It is, effectively, a new asset class.
Andrew, can you tell us a little bit about the changing size and structure of IMF Bentham over the last few years, and what differentiates it from other global funders?
Fundamentally, IMF Bentham has been operating now for over 18 years, and during that period, has exhibited significant growth. Recently, we have transitioned away from funding entirely on our balance sheet to becoming a fund manager. The global funds under management are expected to approach approximately 1.5 billion dollars by FY19. We have various fund structures for US investments, as well as non-US investments that deploy capital in relation to investments in Australia, Asia, Canada and Europe. With respect to the non-US investments, we have a world first, global ATE insurance arrangement and the ability to provide that to funded parties in costs-shifting jurisdictions to cover their adverse costs without requiring separate ATE insurance policies.
Thanks very much, Andrew.
That concludes our episode. Thanks for joining us.