This article by Christopher Bogart was originally published in The European Arbitration Review 2017 (Global Arbitration Review).
Let me begin with an assertion: although there persists much noise in some quarters about its use, third-party financing of international commercial arbitration is – to quote one of the world’s largest and most respected global law firms – ‘here to stay, and not just for small or cash-strapped claimants.’1
It therefore behoves lawyers, corporate executives and arbitrators to understand third-party financing of international arbitration much better than they currently do. It is indeed ‘here to stay’, and those who ignore it do so at their peril. Research affirms that the need for more innovation from their law firms is a leading challenge for clients; according to the global co-head of international arbitration for a leading international firm, ‘sophistication and knowledge of third-party funding is increasingly part of firms’ pitches in any contentious international case’.2
It is in that spirit that we offer the following, as a primer of sorts, on arbitration finance and the advantages it brings to both corporate clients and their lawyers. I also address the two areas of concern that are most frequently raised in regard to financing international arbitration: disclosure and security for costs.
As a preliminary matter, let’s be clear that financing of litigation and arbitration claims by third parties is neither new nor capable of being characterized in the rather black-and-white manner so often employed by press and academic writing. In reality, the practice is complex and multifaceted – and rapidly evolving.
At its core, arbitration finance is really just specialty corporate finance that is focused on arbitration claims as assets. Virtually every corporate activity, from buying photocopiers to constructing skyscrapers, has specialty corporate finance available to it, and businesses elect to make use of such finance in a variety of ways and for a variety of reasons. In some instances of arbitration finance, outside funding is necessary for a claim to proceed at all and for justice to be obtained, as in the case of an impecunious claimant or one facing liquidity or budgetary challenges. This is the most discussed form of arbitration finance because it is the simplest and easiest to understand, but it is increasingly the case that more complex arrangements are becoming the norm, with companies using external capital out of choice, not necessity: moving cost and risk off corporate balance sheets has, after all, far better outcomes for accounting issues, risk management and financial reporting. A particularly fast-growing area of arbitration finance is for clients or law firms to aggregate risk positions in a number of matters (including mixing claimant and respondent matters) in a single cross-collateralised financing arrangement, often called ‘portfolio financing’.
Moreover, there is a long history of outside arbitration financing being provided from a diversity of sources in accordance with a variety of financial models. Parties involved in international arbitration that cannot or prefer not to pay for legal fees and expenses out of pocket may turn to law firms willing to work on contingency or conditional fee arrangements; they may approach banks, private funds or other financial institutions to secure loans, debt or equity instruments; they may secure financing in the form of risk-avoidance instruments, BTE or ATE insurance from insurance companies; and for the past decade or so, they have also been able to work with specialist providers of litigation finance – the preferred term for third-party financing – like Burford Capital, the world’s largest publicly traded provider of finance for law, of which I am CEO.3
All of these sources of outside financing – contingent fee firms, banks, insurers and specialists – could be considered ‘third-party financing’, and that is precisely how the International Bar Association sees it. According to the IBA Guidelines, a ‘third-party funder’ is: ‘Any person or entity that is contributing funds or material support to the prosecution or defense of the case and that has a direct economic interest in the award to be rendered in the arbitration’.4 Some academic articles take a similar approach, such as one that extends the third-party financing umbrella to include contingency fee legal arrangements, insurance mechanisms (both BTE and ATE) and financing not seeking a financial return (eg, sponsoring a claim for strategic or philanthropic reasons), using a definition inspired by the Code of Conduct for Litigation Funders:5
[...] the provision of non-recourse financing to cover all or part of the costs and disbursements necessary for pursuing a claim (such as legal fees, expert fees, arbitrator and administrative costs and, in some cases, even operating costs to support the existence of the claimant entity so that the claim may be pursued), in exchange for a financial interest in the proceeds collected based upon the enforcement of any award that recognizes the claim.6
The basic message from all of this is that third-party funding takes a vast number of forms and cannot be limited to a ‘professional funder’ like Burford, which simply pays the legal fees in a case.