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Assignment of arbitral awards: Key webcast takeaways from Freshfields, Airbus and Burford

  • Jörn Eschment, Philipp Leibfried
Read Jörn Eschment 's Profile
Jörn Eschment

Jörn Eschment

Senior Vice President

Former Senior Associate, Herbert Smith Freehills

Read Philipp Leibfried's Profile
Philipp Leibfried

Philipp Leibfried

UK/European Corporate Counsel

Former Corporate Lawyer, Freshfields

After spending crucial time and resources to secure an award, companies often face the uphill battle of enforcement. The assignment of arbitral awards, also known as award monetisation, has provided award creditors with an alternative method of receiving the expected entitlement of their hard-earned judgments without facing delays from reluctant debtors or the costs of appeals and further litigation. Burford Capital hosted a webcast on November 25 with experts from Freshfields and Airbus to discuss the growing popularity of award monetisation, the process of assignment and how external tools such as legal finance can help. Below is a summary of the conversation.

What is award assignment or monetisation?

An arbitral award is an asset that a company owns, like a debt receivable. Once an award is rendered, there are several ways in which the award creditor can receive payment in the event of non-compliance by the award debtor. This includes commencing recognition or enforcement proceedings to secure assets belonging to the judgment debtor or—as they would with any other asset—selling or assigning the award to a third party.

Award assignment or monetisation is the process by which the award of damages, following the arbitration, is sold on the secondary market to another party. After the sale, the third-party purchaser is entitled to receive the monetary benefits of the award when the debtor ultimately pays.

Why is assigning an award useful for award creditors?

Obtaining an award can be a significant battle that takes many years and resources, and the process can be a financial drain on a company that has already spent millions on arbitrating the original dispute. What many parties fail to realize is that securing a judgment is not the end, but merely the first step of the process towards recovering the actual value of the award. When the judgment debtor refuses to comply, recovery efforts can be very difficult and require years-long enforcement proceedings.

Monetizing an award is relatively easy way for a company to realize the value of its assets without delay and, most importantly, use it to really invest in the business.

The costs of enforcing a judgement can be significant—many millions in the case of large-scale proceedings—and companies are often (and understandably) reluctant to pursue a lengthy procedure in court.

Assigning an arbitral award is therefore a valuable alternative for companies, especially for companies that would rather put available financial resources towards operations, growth and investment in the business. Assigning an award also mitigates risk, which can be an important motivation for companies that wish to reduce the possibility of challenges to the award or annulment. Regardless of what a company’s financial position is, the immediate liquidity can provide a myriad of opportunities that would otherwise be unavailable.

70% of in-house counsel surveyed in 2020 said they were likely to monetise outstanding claims and also stated they had unenforced judgments or awards valued at $20 million or more.

In the past decade, a growing market for award assignment has emerged. That’s hardly surprising: Over 70% of in-house counsel surveyed in 2020 said they were likely to monetise outstanding claims and also stated they had unenforced judgments or awards valued at $20 million or more. The increased availability of third-party financing from legal finance providers, hedge funds and financial institutions has tipped the balance in the award seller’s favour.

Monetisations are generally more cost effective than other forms of pre-settlement legal financing. Given that the proceedings have settled, and the award finalized, the risk to the legal finance provider is greatly reduced and award creditors are generally offered more attractive terms. In these instances, the legal finance provider would generally seek a smaller return.

Key considerations for award assignment

Finding a finance partner is the first step in the process of assignment. Burford routinely works with companies on award assignments and offers multiple options to creditors that wish to monetise their awards: Outright assignment, sub-participation or, in select instances, a purchase or acquisition of the asset via a special purpose vehicle (SPV ). Most monetisation deals at Burford are outright assignments, in which a portion of the award is advanced in exchange for a return of the advanced amount and a premium upon successful final resolution. Sub-participation differs in that it does not involve any legal transfer of rights, and instead just creates a new arrangement between the finance provider and the creditor.

Due diligence is crucial in helping interested parties to substantiate the amount of their bid and a well-organized seller is likely to see a quicker transaction.

In principle, the sale or assignment of an award can be conducted as the sale of any other asset belonging to a company, and the seller would need to enter into a sale contract or assignment agreement. Usually, national laws do not regulate or restrict award assignments and therefore the general laws involving sales of assets would apply. As long as both the creditor and the legal finance provider comply with the formalities for assignment under any given national law, then there should be no issues with assigning an award or receiving the benefits of assignment. However, there are some nuances to keep in mind, especially in common law jurisdictions such as the UK where the doctrines of champerty and maintenance need to be considered.

The process of selling the award is similar to an M&A auction process. The seller usually prepares documents for potential purchase, which can include basic information about the award, a non-disclosure agreement and access to data for due diligence. Following due diligence, buyers of the award would then provide a bid along with any terms for consideration. Each transaction is a bespoke assessment that a legal finance provider like Burford conducts in-house, to ensure that the terms are suitable for the treaty or commercial award in question.

Conclusion

Assignment of arbitral awards has become an increasingly common practice across the globe, for good reason. Monetisation allows businesses to offload the risks of an award judgement, recover the proceeds of their judgement on an accelerated basis and free up existing capital for far more critical aspects of the business. Burford is able to provide unique arrangements for companies that wish to unlock the cash value of their legal assets.