THE AUTHOR:
Alain Grec, Director & Co-Founder at Profile Investment
Third-Party Funding in Arbitration: A Series on Key Aspects and Best Practices
– Part 1 –
Discover our in-depth series examining third-party funding (TPF) in arbitration. Each installment sheds light on essential aspects of TPF—from foundational principles to funders’ decision-making and collaboration with legal counsel. Through this series, gain insights into how TPF facilitates access to justice, ensures disciplined budget management, and helps claimants pursue cases with confidence.
Although no entirely reliable information is available about this sector, the financing of legal actions by third-party experts (“Third-Party Funding” or “TPF”) has grown exponentially since around 2005, after its start in the 1990s in Australia and it has become a common practice in a number of common law and civil law jurisdictions. There are now dozens of players of very diverse natures and structures dedicated to TPF across all continents.
International arbitration has played a large role in its growth and internationalization, as evidenced by the abundance of literature on the issue (See for example Olivier Marquais and Alain Grec,‘Do’s and Dont’s of Regulating Third-Party Litigation Funding: Singapore vs. France’, in Lawrence Boo and Gary B. Born (eds), Asian International Arbitration Journal, Volume 16, Issue 1, pp. 49 – 68). The heterogeneous development of TPF worldwide is mainly due to adverse domestic legislations. In particular, in many common law jurisdictions, the doctrines of maintenance and champerty (which prohibited meddling with other people’s litigations for one’s personal profit or the incitement to litigation) were progressively softened or even abolished over recent years (see Lord Justice Jackson, Review of Civil Litigation Costs: Final Report, 21 December 2009). In the UK, lawyers may even have a duty to alert their clients of the possibility to obtain funding from a third-party.
The very nature of TPF, at the crossroads between supporting compensation claims and private equity investment logic, requires a cautious balancing exercise to protect the stakeholders of the claim from cynicism and abuses. The very recent case of PACCAR Inc and others v. Competition Appeal Tribunal and others, Judgment of the Court of Appeal of England and Wales [2021] EWCA Civ 299, 05 Mars 2021 (“PACCAR”) addressed TPF’s compliance with English legislation and regulations relating to Damages Based Agreements (“DBAs”), and more precisely the unenforceability of the percentage component of a funder’s success fee under certain circumstances in light of section 58AA of the Courts and Legal Services Act 1990 and the Damages-Based Agreement Regulations 2013. However, its outcome has surprised many industry specialists and practitioners, and is generating intense discussions and satellite litigation (See for example Fracas post-PACCAR – What does this mean for litigation funding?, co-authored by Emma Carr, Alexander Wrixon & Christopher Richards).
In a civil law jurisdiction such as France, caution is required for a different reason: under French law, a party intending to monetize the debt entitlement allocated by a judgment or an arbitration award must be aware of the notion of “retrait litigieux” which allows the debtor to request that the amount effectively owed be adjusted to the purchase price of said entitlement.
In international trade and domestic contractual disputes, arbitration has become a standard method of resolving disputes, thanks to rules issued by state-of-the-art institutions, their privacy and confidentiality enabling amicable resolution, as well as the reliability of the process. However, choosing international arbitration requires being knowledgeable and experienced in this very specific matter and it no longer ensures a quicker justice. From the filing of a request for arbitration to a final award, an international commercial arbitration will rarely take less than 18 months (and often closer to 24 months). Complex disputes involving multiple parties or multiple contracts – with likely dilatory-driven procedural incidents – may take far longer.
The frequent need for external funding often relates to the fact that international arbitration is a costly dispute resolution system. For an amount in dispute of USD 10 million, the costs of an International Chamber of Commerce (“ICC”) arbitration involving three arbitrators nears USD 400,000 (See L. Flannery, Arbitration Costs compared), but these are only the tip of the iceberg. Lawyers’, witnesses’ experts’ fees, and other external costs represent by far the largest part of the costs incurred in arbitration proceedings. The involvement of technical, quantum, and/or delay experts is often necessary to assist in assessing the issues in dispute, and valuating the claims and the damages suffered. Also, lawyers have specialised in this niche and lucrative field of practice. Their fees often account for 70% of the costs of resolving the dispute or more. Further, choosing busy and expensive brand name arbitrators, who conduct arbitrations in the same way as sophisticated litigations, adds substantially to these costs. In total, a claimant’s costs frequently exceed 8 or even 10% of the amount of their claims.
Thus, in order to conduct an arbitration to a final award, a claimant not only needs to mobilize and dedicate substantial amounts and energy to their claim but also to take a financial risk given the uncertainty of the outcome (legal merits, quantum). Having to enforce the award – if a debtor fails to pay it – further increases this risk. An arbitration claim thus constitutes both a financial asset and a burden. For these reasons, arbitration practitioners witness a growing need for solutions allowing their clients to externalise these costs.
Despite its shortfalls, international arbitration maintains its appeal for several reasons including international enforcement (owing to the New York Convention or the ICSID Convention) viable and predictable timeframes, the appointment of seasoned professionals with the industry-specific experience necessary to best handle technical difficulties and understand the issues at stake, balanced arbitral tribunals and a greater degree of predictability of the outcome as compared to domestic courts in certain jurisdictions. These benefits, as well as the likelihood of high amounts in disputes and potential returns, make arbitration a particularly suitable area of practice for third-party funders, all the more so with a number of jurisdictions implementing modern arbitration laws and a legislation favourable to third-party funding schemes.
For these reasons, Profile Investment’s team has developed its expertise in funding the resolution of international disputes for more than 15 years. Our experience mostly involves commercial disputes, with tribunals seated in many different jurisdictions and parties from all continents.
It is, however, important to refer to other types of disputes, which are targeted by other third-party funders. Among these types of disputes, we can mention construction arbitrations, class actions, and patent claims. Regarding these types of claims, TPF will prove appropriate if the jurisdiction is efficient and predictable, if abusive appeals are sufficiently discouraged, if the calendar is under control and compatible with financial investment timelines, if there is a need for funding to bring the claim to the court, and if the quantum prospect allows for a sound proportionality between the expected remuneration of the funder and the net compensation due to the funded party.
Owing to our long and dense experience in the area of international dispute resolution, Profile Investment participated in the ICCA (International Council for Commercial Arbitration) / Queen Mary University of London Task Force on Third-Party Funding in International Arbitration (See ICCA Reports No. 4) (as coordinator of the Best Practices sub-committee) in 2015-2017. The different conference panels over the years as well as the recent invitation to share the main takeaways and insights on third-party litigation finance within the symposium “La Justice à la croisée des chemins” organised in Nice (France) on 20 and 21 November 2023 by Université Côte d’Azur and Groupe de Recherche en Droit Economie et Gestion (GREDEG), are good opportunities to synthetise what effectively defines TPF, its current developments and what we humbly consider an accurate understanding of its characteristics.
This is precisely what I intend to explore in the following 5 separate articles addressing the different aspects of the TPF.
ABOUT THE AUTHOR
Alain Grec is Director and Co-Founder of Profile Investment, a company specialized in third party litigation funding (predominantly commercial international arbitration) with more than 15 years of experience under the Luxembourg regulation of Alternative Investment Funds.
Alain is also heading a complementary business line of external assessment and valuation of litigations for companies, investment funds or auditors.
Alain has held various positions within the banking group Natixis, where he was Head of the German branch of Natixis (1994-2002), as well as Head of Development of its Corporate and Investment Financing bank between 2005 and 2009.
He has also lectured in various French university courses, symposiums or seminars as they pertain to his specialisms in international arbitration, notably in Montpellier (D.U. Arbitrage).
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
