THE AUTHOR:
Alain Grec, Director & Co-Founder at Profile Investment
Third-Party Funding in Arbitration: A Series on Key Aspects and Best Practices
– Part 4 –
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.
Budget and Budget Plan Discipline are Key
In the decision-making process, funders will define the budget required (i.e. their investment in the case) relying on a budget plan provided by the funded party’s external legal advisors (“counsel”) and any expert assessment available (for example on damages) and adopt a cautious and conservative approach.
Indeed, underfinancing a case might lead to a deadlock, where the funder is not entitled to increase its risk exposure for such reasons as risk concentration, proportionality to the final expected outcome, or lack of available financial means among others. Similarly, the funded party may find itself in a situation where it cannot self-finance the further costs. To avoid this type of situation, funders often base their allocated budget on figures committed by different stakeholders, in particular those of counsels and experts, by taking into account other costs as provided by institutions’ calculators for administrative and arbitrators’ fees. This requires a thorough assessment of the upcoming procedure and key matters: the future invoices will have to fit with the milestones of this contractually established limit, whereas lawyers are generally calculating purely timesheet-based fees. TPF financing therefore means a certain shift cost side of a procedure and compels the lawyer counsel together with the funded party to make a thorough prospective analysis of the case development scenarios, probably to the benefit of the preparatory phase.
In the case of Profile Investment, conducting the due diligence process, establishing the budget necessary to unlock the value of a claim, and measuring the investment against the minimum expected returns takes at least a few weeks and usually no more than two months if detailed and reliable case documentation is available. To facilitate their due diligence, certain funders make use of online platforms, automated tools, and algorithms to gather and assess relevant information about a case.
The Intelligence of Remuneration Structure
As mentioned supra, a number of funders use a remuneration structure equal to the greater of a multiple of the amounts invested and of a percentage of the proceeds capable of reaching 40% or more. Thus, in the event that the proceeds are lower than expected, the funder will have at least tripled or quadrupled its investment (assuming that the proceeds allow for it). This remuneration structure reflects a “price the risk” selection model pursuant to which few winning cases will be sufficiently remunerative to ensure the profitability of the business and cover the losses incurred in a majority of riskier and unmeritorious cases. Law firms would tend to refer non-straightforward cases to such funders and seek to reduce any success fees.
However, the model of Profile Investment and other TPFs, is “merit driven” in that it invests in cases that it assesses are strong on the merits, quantum and recovery, and only seeks to be remunerated on the basis of a staged multiple of its investment and/or a small percentage of the proceeds, thus ensuring easy remuneration-footprint/reward calculation for the funded party.
This author believes that a “pricing the risk” model can only be viable if the funder is able to pool or cross-collateralise a large number of cases, and can eliminate or marginalise certain generic risks (recourse to specific insurance policies, portfolio funding, due diligence expertise focussed on certain parts of the risk mapping, sale policy after given milestones have been completed successfully).
In principle the merits-driven approach should be seen better aligned with the pursuit of justice, where only meritorious and valid cases would benefit from the support of an external funding. This however would require a prior effective and comprehensive education of the arbitrators, judges, and regulators community about how TPF works. Until this becomes a more widespread reality, many awards, judgements or decisions may continue to show a certain biased mindset that monies backing a party to a dispute twist the balance of justice and hence deserves to be treated as unsound.
It is worth elaborating further on the virtue of a well-thought remuneration structure: as the TPF is structurally vulnerable to what is disclosed to it, it is essential to ensure an alignment of interest. The alignment with the funded party may encompass adding a small (marginal) percentage calculated on the proceeds to be received from the opposing party (be it post-settlement agreement, or payment of the awarded compensation). This gives the funded party the comfort that the TPF will remain motivated and dedicated to the full recovery until the end.
In addition, making the remuneration (the multiples and the marginal percentage) progressive upon each key milestone of the procedure will encourage the funded party to open settlement discussions at each favorable slot in order to limit the footprint of the funding remuneration. Paradoxically this is also in the interest of the TPF to concretize an investment return while closing a risk exposure and to re-invest its thus freed equity capital in other matters.
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.
