Collection risk is an important factor for companies deciding whether to pursue meritorious litigation or arbitration claims. Legal claims and decisions can represent highly valuable, multi-million- pound business assets, but assets that companies and law firms routinely leave unpursued due to the cost of litigation, arbitration and enforcement. Indeed, in 2022, three out of five in-house lawyers interviewed said their companies neglected to pursue meritorious recoveries in the prior year. A key reason for this reluctance to spend money on disputes is that companies need to be confident before pursuing a claim that payment will be made by the counterparty.
Many companies choose to work with a legal finance provider like Burford Capital to fund the recovery of their legal claims and shift some of the downside risk (including collection risk) while retaining a share in the upside. The legal financier will either pay the legal fees and expenses incrementally as a matter progresses or accelerate a portion of a pending monetary award as cash, with the legal finance provider advancing non-recourse capital that would otherwise be unavailable until that dispute is fully adjudicated and enforced.
While a legal finance provider may use its own in-house team of experts to investigate and locate assets if it has such a resource, it may also engage an external investigator to work alongside them at any stage of the recovery process as a partner to achieve the client’s main aim: To be paid monies owed.
The challenge of enforcement
Identifying enforceable assets is the cornerstone of any effective dispute resolution strategy where the desired outcome is the payment of a monetary sum. The claimant and its funder must be satisfied at an early stage that the defendant is creditworthy, has the means to pay or else has sufficient assets located in favourable jurisdictions for enforcement. No matter how meritorious the claim, if any resulting judgment or award is unenforceable, a legal finance company would not be able to fund the matter.
An experienced investigator is often an important part of the wider legal team alongside other dispute professionals and the funders financing the claim. Investigators help to identify and find geographically dispersed assets that could be enforced to satisfy damages awarded to the claimant, and gather strategic intelligence that can encourage the defendant to engage and consider payment. In fact, given that compliance with a judgment is essentially voluntary and particularly so when, it is often the threat of pressuring the respondent’s vulnerability points that forces them to settle or at least come to the negotiation table.
The process of finding these assets is not straightforward. Respondents (whether sovereign states, companies or individuals) will often obscure assets in deliberately opaque structures and interests, incentivized by domestic tax and other issues. Another significant issue in the tracing of assets is the lack of publicly available corporate information, particularly regarding shareholders and ultimate beneficial owners of companies, in many jurisdictions.
Thus, an effective asset trace must combine forensic financial analysis, detailed public record and corporate investigation, inquiries with sources close to the debtor and its business, and intelligent use of the different legal remedies available across jurisdictions and circumstances.
Collection risk against sovereign states
The problem of finding applicable assets is even more acute in investor treaty arbitration awards against sovereign states. An investigator will not only be needed to help identify assets for enforcement but they will also often need to develop intelligence to support arguments of alter ego in order to pierce the veil of separate corporate identity. It may also be useful to obtain intelligence into the political landscape so that claimants fully understand what they’re up against and if there are any special considerations that need to be taken into account before bringing a claim.
The volume and variety of assets owned by a sovereign and a sovereign’s lack of transparency create additional challenges to enforcement. In our experience, states use complex ownership structures, extensive restructuring and ostensible privatization as tactical manoeuvres to obscure, dissipate or otherwise firewall assets, enabling them to claim that they lack the requisite levels of control over money-making interests.
The sovereign immunity doctrine also poses a significant enforcement hurdle. The claimant’s counsel will need to distinguish between acts of a sovereign government and those of a purely commercial nature. The "commercial purpose" test has a high threshold: Using the Bancec guidelines, claimant counsel will need to be able to prove that a state-owned entity is an instrumentality of the state. The investigator’s role here is to secure intelligence that unveils a clear underlying commercial purpose to the transaction in dispute.
Considerations when using investigators
Legal finance providers look at pending claims and awards through an economic lens, with predefined budgets in place and set against procedural timetables. However, investigators tend to gradually form an iterative asset profile and develop contextual intelligence in parallel with the legal process, often without set deadlines. Relatedly, more time dedicated to the investigation process does not necessarily mean there will be more assets uncovered. It may also not be possible or even advisable to work with investigators on a contingent fee arrangement to reduce the current cost. Therefore, legal finance partners and clients should be realistic and transparent about setting a timeframe and budget for investigators’ work to keep the economics balanced and interests properly aligned.
Ultimately, investigators are a vital part of assessing the viability of a potential litigation or arbitration claim. By including investigators in the process from the early stages of a litigation or arbitration pre-judgment or award, legal finance providers can better assess collection risk. Having a clear enforcement target early on means that the claimants can freeze assets before they can be further dissipated or obfuscated, resulting in better outcomes for clients and law firms.
This article was originally published in TL4 Fire Magazine here.