The Art of Funding a Claim
Funding Options, Process, Structures and Pricing
The Client Perspective
We turned to Daryl Chew Partner at Three Crowns LLP to consider the common concerns and questions raised by clients when they first consider the prospect of litigation funding for their claim.
As the market develops and matures, Daryl noted that he is increasingly receiving questions from clients about using litigation funding for their claims.
"Funding is a partnership where a client seeks to share the financial risk and reward in an asset class and over the years, the same thematic themes and questions arise".
Who is right funding partner? Clients want to be assured that funders have the requisite reputation, experience, track record and sufficiency of capital. It’s not always easy to find the right fit. Much depends on the size and nature of the claim, risk appetites and the market dynamics. Brokers play a helpful role in navigating the market.
What economic terms can we expect? Clients need to fully understand the funders proposed deal structure and rate of return so as to avoid surprises and manage expectations. "Clients expect us to model different scenarios for them, mapping expected outcomes, or a range of outcomes, against recovery scenarios".
Who will control the litigation? Who will be taking case related decisions? Who will be taking strategic decisions? When can a funder intervene? especially in cases involving settlement where interests can potentially diverge. These questions are always of concern to the client and it is important to explain and clarify this upfront. There are funders who take a light touch approach and others who prefer to be more involved in the case strategy.
Regulatory indications. Given the international dimension, it is not just the Singapore regime that is going to be relevant. Clients need a good understanding of the risks involved in funding in potentially a range of jurisdictions. In quite a few jurisdictions in Asia, regulation is in flux. There may be limited guidance from courts and even in more mature jurisdictions, when funding is more common place, court decisions can have unexpected implications for the reputation of regulation. Sometimes the legitimacy of funding and the implications for enforcement can be left to the discretion of the courts in Asia.
Timothy Cooke , Partner Reed Smith LLP commented that "Funding is a long term partnership with a funder and we so do need to anticipate the bumps in the road and things that could go wrong. It is imperative to have a mechanism to resolve potential disagreements and stress testing that mechanism is important"
The Funder Perspective
Case Presentation
Dr. Hasan Tahsin Azizagaoglu Associate at Bench Walk Advisors Ltd emphasised the importance of the presentation of a case to a potential funder.
Hasan has looked at just under 250 cases of which 10% came from brokers, 5% directly from the Claimant and 85% came from law firms.
What was notable was the stark difference in the way in which those cases are presented. "Presentation is really important. Whilst you can’t change the facts of your case, it's presentation is really important to how the funder will respond"
He went on to note that cases that come from brokers are predominantly well documented, including an executive summary and easy to navigate details of the damages, enforcement and the strengths and weaknesses of the case, helping to get to grips with the claim quickly. This is important given how many cases they review and poor presentation will directly affect the response time.
Some law firms have experience with funding, including their own investment committees and equally know how to present the case to a funder. But this is not universal amongst law firms which can mirror the often patchy presentation of a case that comes directly from a potential Claimant. GCs or CFO of a company may not be well rehearsed in presenting a case to a funder making it very difficult for the funder to navigate their way around the case and make a reasoned investment decision.
Claim Quantum
Understanding the quantum of a claim is arguably the most critical feature.
As Hasan put it "ultimately, the difference between a good case and a good funding proposal is the pot of gold at the end of rainbow."
We turned to Anthony Ellwood-Russell, Investment Manager at Omni Bridgeway to understand what funders really look for when they are analysing quantum.
Anthony explained that they will invariably start with the profile of the respondent. Ultimately, can the counterparty pay any settlement or award?
There are three typical scenarios:
Funders don’t get a sense of capacity to pay by looking at a balance sheet, net assets or equity. " A balance sheet is great but what we are interested in is what settlements are paid in – which is of course cash."
Some of the considerations will be competing creditors and whether assets are encumbered which will consequently impede recovery.
"We are looking for assets with high tangible value but also strategic value. These serve as a pressure instrument and are more likely to induce a settlement. The optimal position is high tangible strategic value on unencumbered assets in enforcement friendly jurisdictions".
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As Anthony pointed out, getting comfortable with this can take some work and is not necessarily a straightforward task where assets are hidden.
Funders also have to consider potential time bars. Ultimately, there is a lot for a funder to consider to get comfortable with recovery prospects.
What are the main things a funder looks for?
Dr. Hasan Tahsin Azizagaoglu outlined the five things he will look at when presented with a case. "The priorities might change but we will always look at these five things"
Economics. This is always first. If the numbers do not work then it would not be possible to fund. It is important to understand the value of the sunk costs as these are what are used to build the funding structure and financial model. Budgets are also important to understand and he will usually require 1:10 ratio of budget to damages.
Enforcement and Recoverability. It is important to understand the type of assets and where they are located. Some jurisdictions can be challenging.
Merits. The seat of arbitration is very important and must be within a "reliable jurisdiction". This is more important than the governing law of the agreement between the parties. In a non-ICSID case, the law of the local jurisdiction will apply which means that the validity of the award is linked to the reliability of that jurisdiction.
The Parties. Background checks are made on the Claimant as well as Respondent parties. It is important to understand the party with whom you are contracting and their reliability.
The Legal Team. A strong legal team is essential. "We would rather fund a great lawyer with a moderate case then a moderate lawyer with a great case".
Practitioner Perspective
What are the main reasons cases are rejected?
We turned to Timothy Cooke for his experience, in practice, of the main reasons cases fail to attract funding.
In his experience of working on claims in Asia, he noted that it is not usually the merits of the claim that are in issue. Any concerns with the merits of the claim will usually be thrashed out in advance of approaching a funder. "We would not waste funders time with a claim that is not meritorious". More often it is either the economics that do not work, such as a poor ratio of budget to damages or concerns with enforcement, especially when looking to enforce in challenging jurisdictions. That is where the discussions may come to a halt. If you can’t overcome the hurdle of recovering any award, then that can kill the case.
Negotiation of the Litigation Funding Agreement
Where is the focus in the negotiation of the Funding Agreement? Where do clients require most comfort?
Timothy Cooke highlighted three key areas:
Adverse Costs Exposure. Clients want adverse cost exposure to be dealt with early on through ATE cover. This is either baked into the funding agreement or cover is taken out separately.
Pricing. What will we get at the end of the day? It is most common to see funders take a multiple of their investment, sometimes coupled with a percentage of the ultimate receipts. There are often negotiations around the time frame of the dispute where the multiple or percentage increases the longer the money is invested with negotiations focused around the stage at which the various multiples kick in.
Control. What happens if funder wants client to take a different path at any point in the case proceedings? This is again a key concern for clients and will be managed at the negotiation stage.
Looking ahead
Daryl Chew shared some of his insights as to what lies ahead for the funding market.
Trends. There is an increasing trend of moving away from single case financing to more bespoke portfolio arrangements. There are also more discussions around funding arrangements directly between funders and law firms.
Funding as a commercial tool. Many clients that seek funding are more than capable of funding their claim but they are exploring ways to manage risk and cash flow. It was interesting to note that there have been Claimants who have received multiple offers for funding and ultimately decide to fund the claim themselves.
Contingency Fees Structures. These are likely to increase ensuring that risk and reward is shared between all the parties.
Insurance. Alternatives to funding are explored with clients with consideration given to, for example, indemnities for legal fees and expenses. This can be economically viable even where funding is not an option. Discussions around assignment of awards or insurance of awards pending appeal are a further way clients seek to explore news ways to manage risk and cash flow.