THE AUTHOR:
Alain Grec, Director & Co-Founder at Profile Investment
Third-Party Funding in Arbitration: A Series on Key Aspects and Best Practices
– Part 3 –
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.
Finding Leads
Finding cases is one of the funder’s great challenges. Firstly, in order to identify a suitable case, it will have reviewed dozens of others. It is often said that only 5% of the cases reviewed are financed. Secondly, a funder must ensure access to stable and sufficient equity capital to finance the costs of the proceedings (including possible enforcement costs) and to accompany the funded party through any unexpected development up to the payment of the proceeds, as well as to finance its own (often significant) internal costs: these costs include for example the costs of sourcing potential cases, conducting thorough due diligence, assessing the budget of a case and any cost management fees incurred during the lifetime of the funded case.
Before putting equity capital at risk on a non-recourse basis, a funder seeks to be convinced that a case has very high probability of success, that the damages sought will be sufficient to achieve the targeted remuneration, and that the amount of the award will be paid voluntarily or is recoverable through reliable enforcement proceedings. This requires a funder to conduct a rigorous assessment of the underlying strengths and weaknesses of the claims at stake, procedural hurdles, and availability of evidence (including witnesses). Further, cautious funders will invest funds in accordance with their internal investment policy and ethical requirements, consider reputational risks at all stages, determine the funding commitments against available capital according to the risks and concerns identified, and reassess as needed in light of developments during the lifetime of the case.
Such an approach excludes leads such as the ones displaying:
- Insufficiently supported heads of claim
- Pathological arbitration or contractual clauses
- Unreliable representation of the funded party (for example for the provision of supporting documents or in a context of cross-examination)
- Questionable ethical context and acceptability
- Risks of substantial drifting in duration
- Deterrent issues of recoverability (fragile solvency of the other party, poor track record with respect to payment obligations, unduly long or costly prospects of possible future enforcement actions among others).
Failing to steer the practice with sufficient rigor, to identify enough quality cases, or to ensure the availability of capitals for the required periods, would quickly drive a funder out of business. It is thus often said that the TPF market regulates itself.
Processing the Due Diligence and Structuring the Terms of the Funding Agreement
The deep dive due diligence phase conducted by Profile Investment and performed by in-house experts, in accordance with anti-money laundering and financing of terrorism regulations, usually takes six to eight weeks when properly structured and documented, and includes:
- A comprehensive counsel-driven case assessment on jurisdiction and legal merits with full disclosure of facts and behaviours including relevant documentation and analysis on how a respondent may be anticipated to behave in the proceedings;
- A thorough analysis of the different heads of claim to assess their provable strength and substance, the reliability of the documented evidence, and availability of experts and witnesses (Profile Investment would for example consider whether a claimant would be a suitable witness at an evidentiary hearing);
- A conservative valuation of the amounts likely to be recovered;
- An examination of any ethical considerations that may have arisen in the context of the contract bidding and execution, the general dispute, and the ultimate beneficiaries of any award to be rendered (This seeks to confirm the absence of ethically questionable issues and behaviours (e.g. corruption, conflicts of interest, undue enrichments., etc.) while allowing for reputation risk management. Because of the issues that can raise, Profile Investment deliberately excludes certain sectors that do not comply with its ethical principles. These include addictive drugs, gambling, and pornography industries.
- Anticipated enforcement strategies if the debtor does not voluntarily pay the awarded amount, an assessment of the respondent’s mid-term solvency, its payment history, and the location of its assets at the time of the award;
- An assessment of the experience and qualification of the funded party’s counsel and appointed experts; and
- A determination of budget heads and of a global budget plan proportionate to the realistic underlying claim amount, ideally on the basis of a one-to-ten ratio.
When a funder finds that a case meets its predetermined criteria, it negotiates the terms of a Litigation Funding Agreement (“LFA”) with the party seeking funding, laying out the conditions for funding and the terms of the collaboration, and defining what constitutes a successful outcome. When funding a respondent’s case, a funder may define an amicable settlement – or any solution allowing to preserve its reputation, lower the amount allegedly owed, or change the nature of the compensation sought – as a successful outcome. The LFA is generally tripartite and will always reflect the risks taken considering the specific characteristics of each case, the relationship between the funder, the funded party, and its counsel, making clear that the funder remains a third party to the claim, that it does not instruct the lawyer, and that the funded party consents to the provision of any and all the necessary documentation and information related to the case development to the funder.
The claimant seeking funding will likely consult several funders. The conditions offered may vary substantially depending on the weight given to each of the criteria identified at the due diligence phase and the business model adopted. It should be noted that a funder may reject a case that meets all its criteria. This may happen when a funder needs to diversify its investments, or comply with its internal rules of ‘concentration of risks’, i.e. a case which would normally be worth funding but which it deems too similar to its other investments.
As the TPF market considerably matured over the past decade, there is now a variety of options available and all funders do not compete to finance the same cases. Indeed, some funders exclusively finance the procedural phase while others prefer to acquire an already final award at a discount price and handle the recovery phase. Also, rather than financing the costs of the dispute, a funder may offer to finance the claimant’s business expenses while the claimant itself covers the litigation/arbitration costs. In such cases, a funder shall very cautiously approach its role in the claimant’s affairs as a tribunal may consider it a party to the proceedings if it plays a predominant role in the claimant’s management.
Furthermore, where a law firm has a number of claims to bring forward, a funder might consider “portfolio funding”, essentially financing the law firm as a whole for a pre-determined period and collateralise on the results of a category of cases matching with certain pre-defined criteria, or on the success/failure of certain steps of the procedures at stake.
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.
