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Arbitration funding making inroads in commercial disputes

By AdvocateDaily.com Staff

The commercial world is waking up to the value of funding options in arbitration, says Matthew Amey, director at TheJudge Global.

As the arbitration scene matures worldwide in tandem with the market for litigation funding, Amey tells AdvocateDaily.com that parties to disputes are shedding some of their historical concerns about combining the two.

“In commercial arbitration, the parties will often have plenty of cash reserves, so they weren’t instantly attracted to the idea of outside capital. The other main concern was about involving a third party in a private dispute and the potential for compromising the secrecy that is one of the big selling points of arbitration,” he says.

“However, as awareness and comfort have increased, those fears have subsided. The cost and complexity of international arbitration, in particular, have also grown over time as the practice has developed, so the use of outside capital and insurance options to reduce your risk and increase cash flow have become much more attractive.”

TheJudge, founded in 2000, is the largest litigation funding and insurance broker in the U.K., and recently entered the Canadian market via its merger with Toronto-based JusticeRisk Solutions.

And while the use of third-party funding has become increasingly mainstream in the Canadian class-action field, Amey says the still-developing nature of the market here means arbitration funding is less common.

However, he expects that to change in the coming years, as Canadian companies appreciate the benefits of arbitration funding.

Amey will discuss after-the-event (ATE) insurance trends at the Ontario Bar Association’s Institute 2019 on Feb. 5:

Bilateral investment treaty arbitration

He says international arbitration breaks down into two main categories: commercial arbitration between foreign companies using an agreed set of rules, and bilateral investment treaty arbitration, typically between an investing corporation and a foreign sovereign state that is a signatory to an international treaty designed to protect investment from the domicile of the investor.

While the structure and rules of individual arbitrations differ according to the treaty at issue, Amey says they have become an attractive class of investment for arbitration funders.

“Where the investment has failed because of alleged actions or inaction by the sovereign party, the situation frequently involves an investor with little to no resources available, perhaps because the company’s key assets were seized, to cover the arbitration cost,” he explains. “Such investors seek out lawyers willing to act on a contingency-fee basis and arbitration funders that able to fund hard costs, such as tribunal fees or damages expert reports, on their behalf.”

According to Amey, the solution is particularly popular in the energy sector, where low oil prices have created a cash flow crunch for businesses in the area.

Adverse costs and security for costs

“Traditionally, adverse cost risk was not a big concern in arbitration, because generally, the situation is that you are expected to bear your own costs, perhaps with a limited recovery for the winning side,” Amey says.

However, he says conventional wisdom has changed on the subject, following a series of major adverse costs awards made against unsuccessful parties, particularly in bilateral investment treaty arbitration, and regular international and domestic commercial arbitrations.

The increased risk has, in turn, caused a spike in interest among parties to arbitration in adverse cost insurance, which covers a party’s liability to the other side should they lose their case. Amey, who says parties can get even more creative by extending insurance coverage to their own cost budgets, a model that allows clients to finance arbitration themselves, with insurance to cover their outlay in the event the case is lost.

“The other thing that comes with the increased number of adverse costs awards is you can expect a concurrent increase in security for costs applications,” says Amey, who notes that TheJudge also provides insurance coverage for commercial arbitration parties required to post security for costs.

“A claimant would buy insurance to cover the risk and use the policy, along with ancillary deeds of indemnity or other mechanisms, to persuade their opponent or the tribunal that they are good for the money,” he adds.

Continency-fee insurance

Amey says that contingency fees are increasingly offered law to firms willing to share the risk of arbitration with their clients, especially in cases involving bilateral investment treaties. He says they have the option of using insurance products not just as a risk-hedging mechanism, but also as a business tool.

By arranging a facility between a law firm and an insurer, he says that the insurer can also spread its risk across a number of cases, rather than calculating its rate based on a single client.

“I’d be surprised if any have been adopted yet in Canada, but I think it is inevitable as it has become a vital product for many firms in the U.K., the U.S., and even in some mainland European countries,” Amey says.

TheJudge also offers work-in-progress insurance products, allowing firms to hedge their exposure for work done on unsuccessful cases. Premiums are generally only payable on cases with a successful outcome.

Enforcing awards

Amey says a slam-dunk arbitration case does not always equate to a certain windfall for the winning party.

“There are occasions when the risk is less about losing, and more about enforcing the award,” he says.

To solve this problem, different types of “claim monetization” funding have emerged, allowing parties with an arbitration award in hand to sell on the judgment for a modest percentage paid upfront, and then split the proceeds of any recovery according to an agreement signed between the parties.

“Enforcement is sometimes as expensive as the arbitration process itself, depending on where in the world you have to go, so this product helps parties manage that risk,” Amey says.

A variation on the product known as an “arbitration default” insurance policy is also available in the case of sovereign nations that refuse or are unable to pay out awards made in bilateral investment treaty arbitrations.

Recovering funding costs

Amey says the case for arbitration funding received an additional boost when a recent U.K. High Court decision upheld an arbitrator’s costs award that included the winning side’s funding expenses.

“The notion of being able to recover your costs will have a significant impact on the attractiveness of the product,” he says, adding the caveat that the decision only applies to English law, and was influenced by the extreme fact situation.

The High Court found that the arbitrator was within his rights to make the award after finding that the claimant was compelled to obtain a funding agreement to enforce its rights following the respondent’s “reprehensible” behaviour.

However, a Canadian court has delivered a similar verdict in the context of after-the-event insurance involving a personal injury action.

The court allowed the plaintiff in the case to recover the cost of his ATE premiums after winning just under $70,000 in damages. The defendant objected to paying for the plaintiffs’ disbursement for cost insurance, but the judge commented that “without costs insurance, the fear of a very large adverse costs award would cause many plaintiffs of modest means to be afraid to pursue meritorious claims. It is in the interests of justice that plaintiffs be able to pursue meritorious claims without fear of a potentially devastating adverse costs award.”

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