In early 2018, Burford reached out to leading lawyers in Hong Kong and Singapore for their insights on legal finance in the region, and we have collected excerpts from their comments in the article below. We are grateful for their time and perspective.
- Alastair Henderson, Managing Partner, South East Asia, Herbert Smith Freehills
- Koh Swee Yen, Partner, Wong Partnership Singapore
- Justin D'Agostino, Global Head of Practice, Dispute Resolution and Regional Managing Partner, Asia, Herbert Smith Freehills
- Sapna Jhangiani, Partner, Clyde & Co
- Chan Len Sun, SC, Global Head of International Arbitration, Baker McKenzie
- Yu-Jin Tay, Partner, Mayer Brown
There has been significant media coverage of the increased opening of Singapore and Hong Kong to outside finance in arbitration and insolvency contexts. From your perspective, how familiar are lawyers and clients in these jurisdictions about the practice? What do you see as the most common misconceptions about litigation finance in Singapore and Hong Kong?
Chan Leng Sun: Lawyers and companies operating in Singapore and Hong Kong would not be as familiar with litigation finance as those in jurisdictions that have a mature funding regime, such as Australia, New Zealand and UK. That said, the significant media coverage that you mention has done much to educate the stakeholders and potential users in these two jurisdictions. The legal communities in Singapore and Hong Kong have already embarked on a steep learning curve.
Koh Swee Yen: Considering that this is a relatively recent development, I do not suppose that many lawyers in Singapore have actually had the opportunity to explore the viability of third-party funding for the arbitrations that they are working on. Clients probably know less about third-party funding than lawyers, and this is definitely a matter on which the lawyers should educate their clients. It would be a real pity if a client who has a really good claim and who is unable to prosecute the claim due to legal costs is not made aware of the possibility of third-party funding.
Yu-Jin Tay: A common misconception involves the notion that all funders are the same or similar in the premiums that they charge and how the funders would interact with counsel and the funded party. It will take time for clients (and indeed the market) to figure out what practical differences could arise from different funders’ structures, source of capital, culture, management and track record. It will also take time for clients to figure out which funders they can best work with. A (less common) misconception is that funding would entail the ceding of control over the case to a funder.
Justin D’Agostino: One common misconception is around the status of Hong Kong’s law on third-party funding. Amendments to the Arbitration Ordinance were passed in June 2017, abolishing champerty and maintenance in respect of third-party funding for Hong Kong arbitrations. However, the operative provisions of those amendments are not yet in force. As a result, funding is not yet legally permitted in Hong Kong. Singapore’s law allowing funding is fully in force.
In your experience, what are the questions that firms or clients still have about litigation finance? Are these questions a barrier to their use of litigation finance? If not, what is the most important barrier to increased use?
Chan Leng Sun: The two most common questions are: (1) Can I get litigation finance for this kind of dispute; and (2) how will it work in this case? One obvious barrier is the limitation placed on the type of cases that can be financed.
Alastair Henderson: Other than lack of familiarity, we don’t see any tangible barriers to increased use. However, we do have to remind clients that not every case is suitable for funding. Funders provide finance on a non-recourse basis, so they are highly selective about the cases they accept. Realistically, there won’t be a flood of funded cases straightaway; rather we expect a steady increase over the next few years.
Sapna Jhangiani: In my experience, clients are very concerned about the commercial terms offered by third-party funders, and how to distinguish between all the funders that are now offering products in this region. For a party or firm which is not familiar with litigation finance, the range of funders, products and commercial arrangements currently available can be a little bewildering.
One of the most important barriers in this region is the fact that claims are often pursued in jurisdictions which are considered fairly “exotic” to funders. Although there is increasing interest by funders in this region, and they are often willing to review cases for enforcement in jurisdictions with which they are not familiar, they are understandably hesitant to invest in cases in enforcement jurisdictions without a strong track record for enforcement.
Yu-Jin Tay: Portfolio financing is easy to talk about in theory but difficult to put together in practice. I would say that this is the key question that a sophisticated and interested potential user would have about litigation finance: How would one go about putting together a portfolio of cases for consideration given that the cases may be at different stages of proceedings, involve different jurisdictions and parties and different levels of risks as to outcome and enforcement?
Koh Swee Yen: The most common misconception about third-party funding is that it will result in more frivolous claims being pursued. The truth is actually the converse. Third party funders are more likely to act as gate-keepers against frivolous claims, as before deciding to fund a case, the funders go through a detailed due diligence process, involving assessment of the overall merits of the case (considering issues of jurisdiction, breach, causation, damages) and the prospects of recovery.
Can you describe a way in which you think outside finance can be especially helpful for clients in Singapore and Hong Kong?
Chan Leng Sun: The challenge faced by funders is in persuading strong companies that funding can be used to great effect as a financial management device, like factoring, to manage cashflow. It can also be compared to defense cover or a defense club, where premiums are paid to insurers in return for insurance cover on legal costs.
Justin D’Agostino: Overall, clients in this region are likely to benefit in the same ways as clients in jurisdictions with a more developed funding market. These include using funding to manage litigation risk, and to keep the (often significant) cost off-balance sheet.
Koh Swee Yen: Outside finance offers a way for a client to mitigate the risks associated with arbitration proceedings while freeing up the client’s own capital for use in its business. This is especially important for clients who may not have the necessary financial support to fund the legal proceedings or who may have already spent substantial costs in legal proceedings.
Yu-Jin Tay: Global clients with a regular portfolio of claims around the world will have to get to grips with the variety of external finance available and how that can help their organization manage risk. Portfolio financing is complicated and currently requires the involvement of enlightened management, sophisticated in-house counsel, and experienced external counsel. This is where I believe the more interesting developments will be in the years to come. In terms of low hanging fruit, I have found that clients in an insolvency context are the most enthusiastic about litigation or arbitration finance.
Sapna Jhangiani: One of the most interesting contexts in which I have seen finance used in other jurisdictions is where the third-party funder presents potential avenues for enforcement which the claimant had not considered. In such circumstances, as well as offering finance for the claim, the funder is adding value to the enforceability of the claim and its role as a business partner is enhanced.
Do firms and clients have an understanding of the various products available, e.g., single case financing, portfolio financing, etc.?
Alastair Henderson: Knowledge is spreading quickly, but real understanding is probably still limited to the relatively few clients who are frequent users of dispute resolution services or familiar with funding via their operations in the US, UK or Australia, where funding has been permitted for much longer. Law firms’ understanding has increased to a greater extent, partly as a result of concerted marketing by the funders who have been very active and visible in these markets recently. Nevertheless, there is still much more education to be done in order for potential users and their advisers to fully understand the suite of products available, and how best to make use of them.
Yu-Jin Tay: Clients are able to understand single case financing quite quickly. They can also understand the concept of portfolio financing but find it difficult to practically envisage how to go about putting portfolio financing together in a way that benefits their organization.
Looking ahead to the next five years, do you have any predictions for how litigation finance will impact the business of law in Singapore, Hong Kong and the Asia-Pacific region more broadly?
Chan Leng Sun: I will call it for the moment arbitration finance rather than litigation finance, because of its limit to arbitration-related cases. It will definitely play an increasing role now that Singapore and Hong Kong have legislated to permit it.
Justin D’Agostino: Our confidence extends beyond Hong Kong and Singapore, to the wider region. Funding has really started to take off in mainland China, for example, and markets like Seoul and Kuala Lumpur are likely to follow suit, as they develop into more and more popular seats.
Sapna Jhangiani: In my view, clients—particularly large multinationals—focus more and more on the cost/benefit analysis of each claim. They want their lawyers to offer fixed fee models for claims, as far as possible. This enables them to manage their legal budgets, as well as to ensure that the “costs” section of the analysis is unlikely to change too much, even if the merits and enforceability of the claim evolve. Lawyers are being forced to adapt to this changing landscape.
One General Counsel I know presents legal claims to the company’s Board of Directors as a revenue-generating activity, comparing the total amount of costs expended (the “investment”) to the amount recovered (the “return”). This is, of course, how litigation funders view claims, and I think we will see an increasing convergence in the approach of parties and funders in viewing claims as assets.
I think that litigation finance will assume an increasing role in unlocking the value in claims, and in ensuring that a funded party can justify to its stakeholders its return for each dollar or other resource that it has expended on a claim.