My experience, first hand, from hunting for a third party funder was different than I had anticipated. I have been researching this newer field for some time now and have entered some previous posts which go more into the basics of what it is and how it works. So, I won’t repeat all of those details here except to clarify that by third party funding I am referring to a fund or investor source which then covers the costs and legal fees for a claim before a court or tribunal, whose repayment is entirely contingent on the success of the claim and payment of the award.
I was approached with a possible BIT claim with a very strong case on the merits. The damages were also quite high –certainly high enough in terms of the legal and expert costs and then ultimately sharing some with the third party funder should the arbitral tribunal agree it is a meritorious claim. I felt confident that this claim, after all of my research, would prove attractive to most third party funders, and at the very least one. And, of course, we only needed one.
What I learned instead is that it is quite difficult to get a third party funder on board. From researching my book and my PhD, I had made several contacts within the third party funder community. All of the third party funders I know are friendly professionals who were great about taking the time to discuss this possible claim with me and consider whether it was worth pursuing from their standpoint. By pursuing, I mean for them to fund. I was impressed with their availability and willingness to discuss the case with me to at least see whether it was worth a deeper dive into.
This is what I further learned: First, a good third party funder is going to appreciate the need for a confidentiality agreement to be in place before sending over the client’s information. This is a dynamic, unresolved field and that includes how to treat information sharing with these third parties. It is important to get this covered immediately. Second, they are typically very approachable and very happy to consider a case based on what information you have. This may not mean they are ready to then negotiate a funding agreement, but they may be able to look at a well-prepared overview memorandum in order to spot some initial red flags before spending a considerable more amount of time (which you may or may not get paid for) essentially preparing the entire Statement of Claim or such before they determine that it is not the right case for them to fund. This piece of information was especially useful and I think is a great way to get an idea about a case before committing to a significant amount of time. No doubt, it still takes a good amount of effort as the memo should at a minimum provide a summary of the facts, which legal claims will likely be made and key measures establishing these legal claims, rough litigation budget, and, of course, damages. Damages are probably the biggest key, which leads me to the next learning point. Third, even with a high amount of damages backed by strong liability claims, it is not so much the amount of damages that matter or even that you can prove them but more the amount of sunk costs. By sunk costs I am referring to the amount already spent on the investment. It is this number that is truly the magic number since, at the very least, with a meritorious claim, one would expect to get that amount back. This should typically be in several million to tens of millions before being a true attention getter of a third party funder.
This information was interesting and useful to learn, making it worthwhile to share. Third party funders are incredibly approachable and truly willing to look at prospective cases with you, one which has not yet been initiated or those already happening. Sunk costs, though, is a crucial number. Incidentally, we are still considering funding options for this particular case, even though it has a lower sunk costs amount.
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Dear Lisa,
Thank you for your interesting post.
We agree that this is an engaging topic and that funders are generally very pleased to discuss potential claims, but would express a cautionary note or two in response to your comments below.
First, you suggest that counsel should be prepared to provide an information memorandum containing, “at a minimum [] a summary of the facts, which legal claims will likely be made and key measures establishing these legal claims, rough litigation budget, and, of course, damages.” While, as you note, such a memorandum may be preceded by the parties entering into a confidentiality agreement, it is important to remember that such an agreement will not necessarily shelter the memorandum from disclosure, should it find its way into a jurisdiction whose courts allow for discovery in aid of international arbitration, e.g. in the United States, pursuant to 28 USC 1782. Thus, if the opposing party in the arbitration learns that funding has been sought or obtained, and suspects that the claimant’s counsel may have outlined its views of the merits of the claim and an estimate of damages, an attractive discovery target will be in the offering for the sophisticated litigant. As set out in greater detail in an article prepared on this subject by Aren Goldsmith and Lorenzo Melchionda, “Third Party Funding In International Arbitration: Everything You Ever Wanted to Know (But Were Afraid to Ask), International Business Law Journal / Revue de Droit des Affaires Internationales (Nos. 1, 2 — 2012), the law of privilege in the United States in relation to communications shared with funders is very much unsettled. In short, those who share sensitive information that could contain damaging admissions regarding the claim with a funder that may be found within the jurisdictional reach of the United States courts, take a substantial risk of waiver and therefore arguably should, before advising the client to take such a step, provide full and clear disclosure as to the risks of loss of privilege (see the New York City Bar Association’s recently published guidelines in relation to TPF as an example of ethical duties in this context). An alternative, of course, would be to structure funding discussions in jurisdictions that provide greater protection for information shared between lawyers, such as in France pursuant to professional secrecy rules. Finally, it is worthwhile to note in this context that we learned in a roundtable on this subject (see below) that it is precisely because of the discovery risks above that many funders refuse to receive work product from counsel analyzing a claim. In our view, their caution is well justified.
Second, you suggest that high “sunk costs” are needed in order to capture the attention of funders. We wondered if you could clarify this concept. Sunk costs generally are understood to refer to the claimant’s own “sunk” investment in its claim. From an economic perspective, the funder’s interest is in taking a percentage of the claim’s proceeds (usually as the greater of a percentage of damages or multiplier of the funder’s own investment in costs supporting the claim). Sunk costs are certainly relevant to the client because the result of funding may be that the client does not gain anything through damages because, after the funder’s stake has been accounted for, what remains for the client may not be enough to compensate it for its own sunk costs prior to funding. But it is not clear how such costs are of interest to the funder, other than in establishing that the claimant has some “skin in the game”, i.e. that it has an incentive to continue to support the claim. Note that there are other sources of “skin” that the funder can accept, such as from lawyers who work with funders based upon a contingency or conditional fee arrangement and/or with ATE insurers who accept adverse costs exposure should the claim not succeed and should costs be awarded against the losing party.
For more guidance as to actual funding practices in connection with international arbitration claims by leading funders operating in Europe, we would refer you and the other readers to another article to appear in April as part of the RDAI/IBLJ’s ongoing investigation of TPF, M. Scherer, A. Goldsmith, C. Flechet, “RDAI/IBLLJ Roundtable 2012: Third Party Funding In International Arbitration In Europe (Part 1: Funders’ Perspective), International Business Law Journal / Revue de Droit des Affaires Internationales, No. 2-2012. This roundtable describes current funding techniques and practices in reference to the key structuring issues that parties should expect to encounter when negotiating funding. A second roundtable, the participants of which include leading arbitrators, counsel and academics, will explore the legal consequences of TPF for international arbitration, particularly from a civil law perspective. Its results will be published later in 2012 in the IBLJ/RDAI.
Aren Goldsmith / Maxi Scherer
[The comments above reflect the views of the authors alone and should not be understood as necessarily representing the views or opinions of the law firms with which they are affiliated or the clients of those law firms.]