In an interview with Brad Wang of CIETAC Hong Kong Arbitration Center, Burford Vice President James MacKinnon discusses how the third-party funding industry is evolving in Asia. The original interview is available here.
Brad Wang, Managing Counsel of CIETAC Hong Kong Arbitration Center: Morning James! A great number of our readers recently heard the news that Burford Capital has funded the ﬁrst Singaporean arbitration case after the change in the funding laws there. How about we start from here? Please can you explain what “funding a case” means?
James MacKinnon, Vice President, Burford Capital: Burford was very pleased to have funded the ﬁrst Singaporean-seated arbitration after the legal reforms there earlier this year. This was a milestone for the development of the Asian legal ﬁnance industry.
The standard concept of legal funding is that a third-party funder will pay for the costs required by a party to pursue its claim (e.g. legal fees), if the funder assesses the claim and ﬁnds that it is meritorious and ﬁts within the funder’s investment criteria. In return, if the claim is successful (i.e. the party receives a favorable award or judgment, or settles), the funder will receive a portion of the monies received by the funded party. Legal funding can also be characterized as non-recourse ﬁnancing, as if the case is unsuccessful, the funder has no recourse to the funded party’s assets, and will lose the money it has invested in the case.
Brad: You mentioned Singaporean law’s contribution in making this a reality. Now, the Hong Kong Legislative Council has passed amendments to the Arbitration Ordinance to permit third party funding of arbitration in Hong Kong. What are your comments on this major development?
James: Hong Kong is a leading global dispute resolution center, and these reforms will help Hong Kong compete with other prominent jurisdictions in which users of arbitration already have access to forms of legal ﬁnance (e.g. US, UK, Australia and Singapore). The Hong Kong Law Reform Commission (LRC) has invested considerable time and eﬀort in conducting a comprehensive consultation process for these reforms, and the papers published by the LRC stand as an excellent examination of the funding industry, and the laws that aﬀect it. It should be noted, however, that Hong Kong’s reforms have not yet been implemented. We look forward to Hong Kong implementing its reforms as soon as possible, so the jurisdiction can capitalize on the LRC’s good work, help maintain its competitive edge as an arbitral seat, and allow users of arbitration in Hong Kong to enjoy the numerous beneﬁts of legal ﬁnance.
Brad: You said that funding a single case takes up a small proportion of Burford’s overall investments. I ﬁnd this very interesting. What do you do primarily?
James: Burford primarily provides legal ﬁnance to law ﬁrms and large corporates in relation to a portfolio of their legal claims.
In relation to large corporates, the principal beneﬁts of this type of ﬁnancing are twofold: (1) the company’s share price is not aﬀected by spending cashﬂow on unexpected legal fees across a number of cases (thereby preserving or increasing EBITDA); (2) the pressure on legal budgets is substantially relieved, as the cost of pursuing multiple cases is shifted from the company’s balance sheet to Burford’s capital base.
In relation to law ﬁrms, obtaining ﬁnancing for a portfolio of their legal cases can greatly assist their cashﬂow, especially where they are acting on a contingency fee basis (though it should be noted that contingency fees are not permitted in Hong Kong). Having ﬁnancing in place can also put law ﬁrms at a competitive edge when tendering for work, and recently Burford entered into the ﬁrst such arrangement for a UK law ﬁrm.
What diﬀerentiates this form of legal ﬁnance is that it focusses on a portfolio of cases. By funding multiple cases, Burford can cross collateralize its returns across a portfolio and mitigate the legal risk of each case within it, with the result that the cost of providing funding is lower than it would be on a single case by case basis. It requires substantially greater sums of capital than would usually be invested in a single case, but Burford is more than able to meet these requirements.
Over the last few years, the conversation around third party funding has usually centered on companies or individuals that may not have the capital to pursue a claim, and therefore have to seek legal funding for a single case. Such opportunities now form a decreasing share of the global legal ﬁnance market. Whilst some funders may have a business model to pursue single cases, Burford’s investments have moved on to become more sophisticated, and this has been the situation for a number of years.
Burford still invests in single cases, however, and we expect the legal ﬁnance market in PRC and Asia to be dominated over the next couple of years by such investments, as users become familiar with the concept of legal ﬁnance.
Brad: How do we match that with China’s Belt & Road Initiative? Can outbound Chinese companies be investing in the Belt & Road Initiative beneﬁt from legal ﬁnance?
James: China’s Belt and Road Initiative is a tremendously exciting opportunity for Chinese companies, and for the development of the region. Chinese companies investing in opportunities in countries across the Belt & Road face a number of legal and regulatory issues in undertaking investments in the numerous countries involved in the Initiative. It is an unfortunate likelihood, however, that many Chinese companies will ﬁnd themselves in disputes with foreign governments or companies concerning their Belt & Road investments. In such disputes, Chinese companies may ﬁnd themselves on unfamiliar legal territory, requiring legal advice to proceed with either international arbitrations, or in proceedings before local courts in foreign jurisdictions. This can be an expensive and complex undertaking.
In these situations, legal ﬁnance will be of great assistance to Chinese companies. Paying legal fees to pursue claims arising from Belt & Road investments can have a negative eﬀect on a company’s share price, and place great pressure on their legal budgets – legal ﬁnance can help relieve these pressures that Chinese companies will almost certainly face. If Chinese companies have multiple disputes arising from their Belt & Road investments, then it is also possible to bring the claims together into a portfolio, and seek funding for it. Burford Capital not only specializes in portfolio ﬁnancing, but has the global reach, capital and expertise to fund Chinese outbound companies in such disputes.
Brad: What importance should be attached by a party seeking legal ﬁnance to the third-party funder’s source of capital?
James: Parties seeking funding need to know that they will still have access to funding throughout the dispute process (however long that process may last), and that their funder will always have access to suﬃcient capital. Parties seeking funding should check that a funder has suﬃcient and high-quality capital to meet its commitments across a number of its cases, to avoid a situation whereby a funder cannot pay the parties’ legal fees owing to invoices falling due in other, unconnected, cases.
Burford Capital is distinguished in the global legal ﬁnance market in having the largest available capital of any funder, by a number of multiples. At the time of this interview, Burford has over US$3bn invested and available to invest in law. This is signiﬁcantly more capital than any other litigation funder in the world. It is also important to note that as a result of Burford’s size, the cost of capital it raises is far lower than that of its competitors – a saving we can pass on to funded parties.
Brad: One of the most frequently asked questions CIETAC Hong Kong hears during its third-party funding mock arbitrations is the concern of funders’ alleged “control” over proceedings. What are your views?
James: In many jurisdictions around the world there are legal and regulatory restrictions on funders exercising “control” over the cases in which they invest. Where those prohibitions are in place, this means funders should not be responsible for drafting pleadings or correspondence ﬁled in the dispute, involved in the day to day running of a case, or responsible for key strategic decisions in the case. Essentially, they should not act as another lawyer on the case. If a funder fails to observe these restrictions, then they may risk the enforceability of an arbitral award. For a party seeking funding, it is important to ensure that it obtains funding from a reputable and professional funder that will observe these legal and regulatory restrictions, otherwise the party may be liable for any adverse costs awards that may arise from a ﬁnding of champertous conduct by the funder.
Brad: How do funders draw the line between “monitoring” and “controlling"?
James: It is good practice for funders to regularly receive updates as to the progress of the case, to ensure the case is developing as assessed during the due diligence phase of the funding process. Furthermore, funders expect to be regularly informed of the costs being incurred by the party’s lawyers, to ensure that costs do not exceed the agreed budget, and that the case is being pursued in a cost-eﬀective manner. It is also important that funders are informed of any issues that arise in connection with their provision of funding.
Ultimately, the ability of funders to ensure the line is drawn between “monitoring” and “controlling” a case depends on the professionalism and caliber of the funder. Given the potential cost liabilities touched on earlier, it is therefore highly important for companies to ensure that they obtain funding from reputable, professional, and experienced funders.
Brad: CIETAC Hong Kong, with the help of its TPF Working Group Members drafted Guidelines to give parties seeking funding, funded parties and arbitrators checklists as reference. What do you think of the Guidelines?
James: Burford Capital welcomes the timely publication of CIETAC Hong Kong's Guidelines for Third Party Funding for Arbitration. As the legal ﬁnance industry opens up across the region, companies and law ﬁrms will have new opportunities, and new questions. The Guidelines identify key issues that parties should consider when seeking third party funding for arbitration and diligencing potential partners, as well as provide useful guidance to arbitral tribunals when a party has obtained funding.
Of these issues, we are pleased to note that the Guidelines refer to the capital adequacy of funders (see guideline 2.4). It is important that a potential user of funding should establish that a funder has adequate and veriﬁable capitalization before it enters into a funding agreement.
We also acknowledge guideline 3.1 regarding disclosure of the fact that a funding agreement has been entered into. It is crucial, however, that parties and tribunals recognize the importance of protecting the commercial conﬁdentiality of the terms of the agreement itself. We believe that the guidelines would only be improved by incorporating this principle. In any event, we are of the view that guideline 4.1 should not be interpreted to run counter to that principle. Without this protection, the availability of funding could be aﬀected and proceedings delayed as some parties may otherwise seek tactical advantage from discovery skirmishes about funding agreements. This can tarnish the speed, eﬃciency and justice of the arbitral process.
CIETAC Hong Kong has once again shown it is a leading institution in promoting innovation in arbitration, and these Guidelines help its users and arbitral tribunals to beneﬁt from the current reforms to third party funding in Hong Kong.
Brad: Thank you very much James!