2. ROLE OF PARTICIPANTS IN TPF ARBITRATIONS
2.1 Participants in TPF Arbitrations
In a regular arbitration proceeding, a claimant and respondent would each employ a lawyer to argue their case and an arbitration award would be passed based on the arguments put forth by both counsel. In contrast, the main participants in a dispute that is funded by a TP are the claimants (and respondents?)parties to the dispute, funders, lawyers, and potentially, funding brokers. A claimant (party?) may require funds to cover its legal fees, out-of-pocket costs (e.g., expert fees, arbitrator fees, arbitral institution fees, etc.), or costs associated with subsequent enforcement actions or appeals. It is generally considered that the majority of recipients of TPF are claimants. In light of this, and to ensure uniformity, the examples of TPF funding structures cited in this paper list the claimant as the funded party.
Just as private equity and venture capital investors look for companies with a potential to grow in the hopes that their investment results in a profit at a later stage, TP funders are on the constant look out for law firms that they can partner with or potential disputes that they believe they would be able to fund, in order to make a return on their dispute financing investment. Generally speaking, TP funders are said to be passive financial investors with no role to play besides being external, separate financers. However, over the years a number of novel structures have emerged with the roles of funders and lawyers merging and sometimes even clashing.
This chapter will explore the various structures prevalent today in the TPF-arbitration environment and dive into the conflicts that could arise in the roles played by the counsel involved and the TP funders as well as risks taken on by funders and the steps used to mitigate these risks. The chapter will also look at jurisdictions that have certain regulations on TPF and how this affects the role played by funders.
2.2 TPF Structures
Typically, TP financing is offered on a ‘non-recourse’ basis, i.e. the funder has no recourse against the funded party if the claim is unsuccessful. Under this model, the funder’s recourse for repayment of the capital advanced and return on the capital invested is limited only to the claim proceeds recovered, if any. A funding arrangement would almost always contain a clause stipulating that if the funded party loses the case, the TP funder would not be required to pay any part of the client’s debt (e.g., an adverse award on costs?). More often than not the vast majority of recipients of TPF are claimants. In light of this, and to ensure uniformity, the examples of TPF funding structures cited in this paper list the claimant as the funded party.
There are 2 traditional ‘triangle’ structures that are possible in TPF arbitration claims for a single dispute where the funder is a separate legal entity from the client and the attorney. In the first structure, the client (i.e. the claimant of the case) would contract directly with the TP funder who would provide funds to it based on the terms of the funding arrangement. The claimant would then enter into a retainer agreement with an attorney/law firm who would argue its case. In this structure, the relationship between the funder and the attorney is not clearly defined by any contract, however the two are indeed working together for the benefit of their client. This structure is represented in Diagram (I) below. The dotted line indicates that there is no distinct, contractual relationship between the funder and the attorney. This is as opposed to the solid line towards the client which represents the funding contract and the retainer agreement with the TP funder and the law firm, respectively
In the second structure there is no direct TP funder-client agreement. Instead, the law firm and the TP funder enter into an agreement wherein the TP funder is directly funding the law firm/attorney. The law firm in turn, will represent the client at the arbitration and be remunerated based on its retainer agreement with the client. Here, the client would not be a party to the attorney’s funding arrangement with the funder. This structure is depicted in Diagram (II) below.
DIAGRAM (I) DIAGRAM (II)
Thus, based on the above two diagrams it may be seen that the funder will typically structure its agreement (represented by a solid line as opposed to a dotted line) to fund either the individual party to the case (Diagram (I)) or the law firm involved in the case (Diagram (II)). But the TP funder will not make funding arrangements with both the client and the law firm at the same time regarding the same case. It is also interesting to note that the client-attorney relationship (again, represented by a solid line) will always be governed by a retainer agreement, irrespective of whether the TP funder is funding the law firm or the client. This is largely due to the fact that in manya majority of jurisdictions around the world, professional ethics codes stipulate strict rules for attorney-client relationships.
Another trend that is prevalent in this industry is the portfolio method of structuring dispute financing. Here, instead of a claimant seeking funding to pay fees or expenses related to a single matter, multiple matters are uses as collateral to secure capital. It is interesting to note that Burford Capital, one of the leading litigation funding firms in the world, had only about 13% of their commitments in 2015 made to single arbitration or litigation matters while the remaining capital flowed towards portfolios and other complex investments.
In some instances, a law firm could seek the use of TPF as a way of supporting its fee opportunities. In this context, the law firm would approach the funding market directly in order to seek financing options and would then technically become a ‘client of the fund’. In such a situation, if the law firm is advising a claimant that is seeking TPF in an arbitration it would be able to enhance its ability to offer alternative billing arrangements, have its fee risk covered, and perhaps act on a contingency fee basis. Should the claimant win the case, the ‘profits’ would be made to the law firm who in turn would make the required payments to the TP funders. In this scenario, the claimant may or may not be aware of the relationship between the funder and the law firm.
In essence, the two Diagrams above, represent the entire universe of options for funding arrangements in which the a single funder is a separate legal entity from the law firm and the client. Despite the fact that these arrangements embody the most basic and simple form of a funding structure in an international arbitration, they still give rise to a number of issues and risks that TP funders face either just before the start of, or during the arbitration proceedings, or after the award has been passed (i.e at the time of the enforcement). While risks pertaining to enforcement of the award will be dealt with in Chapter 4, the risks discussed in this Chapter are mainly associated with the role played by the funder and its relationship with other parties in the triangle structure. A few of these have been analyzed below.
2.3 Role of FundersRisks associated with Role of Funders
The role of a TP funder in an arbitration claim has evolved and expanded over the years, so much so that it has given rise to questions pertaining to the regulation of such arrangements and its impact on other participants in the arbitration. Some may argue that a TP funder does not have ‘an official seat at the arbitration table’ and hence its role must be limited to assisting in the monetary aspects of the case. After all, a TP funder is only an economic player in relation to the proceedings, even where – as will virtually always be the case – it never expressly agreed to arbitrate the dispute it has agreed to fund. However, with the increasing value in claims and the high stakes involved, the risks associated with funding has also risen, especially those in relation to the role of funders.
2.3.1. The Risk of Losing
One of the fundamental risks involved in financing a claim from a TP funder’s perspective is losing the case itself, thus leading to not only a financial loss but also a reputational loss for the funder. In some cases, even if the claimant wins the case on the merits, the TP funder may still risk not recovering its investment if the respondent is unable to make the required payment in full or in part to the claimant. To mitigate this risk to the maximum extent possible, the funder can take a number of measures, two of which have been highlighted in this section.
(a) Nipping the risk in the bud
Prior to the stage of actually signing the funding agreement, one of the primary tasks undertaken by TP funders is to conduct a detailed review of the case, the parties involved, and the financial aspects of the claim. These are all procedures undertaken to snuff out the risk of losing the case to the maximum extent possible prior to the proceedings actually beginning. In fact, Steven Friel, the Chief Investment Officer at Woodsford Litigation Funding, (a large dispute financing firm based in the United Kingdom), advertised that they would only fund “meritorious claims, pursued by motivated claimants”. Thus, making it clear that they are not in the business of funding frivolous claims. While every TP funder has their own approach towards the decision-making process prior to funding a claim, most processes would involve an internal assessment of the case (taking into account factors such as the merits, claim value, legal landscape, etc.) followed by a detailed due diligence process which may or may not involve external counsel. This due diligence process would include delving into whether the costs are proportionate to the likely recovery, whether the governing law and jurisdiction afford relative certainty , and also whether the legal team (if already appointed) has the necessary experience to successfully pursue the case to its conclusion.
(b) Mitigating risks through the funding agreement
At the stage of entering into the funding agreement, there is generally not much a TP Funder would be able to do, considering there is an obvious non-recourse nature to the entire arrangement. Therefore, if the claimant does end up losing the case, there would not be any recourse for the TP fFunder against the claimant in the funding agreement itself. Clauses to ensure that the TP funder is would not be madenot liable for any costs that may need to be paid by a losing claimant will nevertheless find mention in the funding agreement. Additionally, water tight confidentiality provisions in funding agreements whether with an individual client or a law firm are important to ensure protection of information and minimize any future liability. It is interesting to note, however that Christopher Bogart, the co-founder & CEO of a large investment firm, Burford Capital,a funding agreement entered into by one of the largest international dispute funding firms, Burford Capital would has stated that there would inevitably be typically contain a contractual provision in a funding agreement whichwhich permits the funder to act in a manner that may be inconsistent with the claimant’s interests, if the TP funder came under pressure., permitted the TP funder to act in a manner that may be inconsistent with the claimant’s interests.
2.3.2. The Risk of not having a say
Based on the above, it may be seen that typically, The TP funders does spend a considerable amount of time, resources, and effort in ensuring that all background checks with respect to the case are conducted. , hHowever, this does not mean that during the actual proceedings of the case, the TP funder is protected from other risks. When decisions in relation to certain aspects of the case are taken it would generally be the counsel acting along with the claimant, that takes the call. Thus, this would lead to a risk of the TP funder being ‘left out’ of a decision that may have a direct consequence on the TP funder’s role. For example, decisions in relation to whether the claim should be settled or not. More often than not, the TP funder would therefore seek to be able to ‘case monitor’ the progress of the dispute and be on ‘stand-by’ for the law firm, to mitigate such a risk.
Just as private equity investors would want to haverequire regular updates about the companies they have invested in to know about the growth of the company, so too TP funders would ask to be updated with regular progress reports, timelines, budget plans (similar to use-of-funds clauses in the other investment deals), etc. For instance, a number of members of the Woodsford Litigation Funding team, that make regular funding commitments to arbitration disputes, are high caliber legal and financial experts that stand ready to assist the claimant’s legal team at all stages of the arbitration;. iIn the words of the director of this fund, “[o]ur objective is to assist but not to interfere” .
2.4 Conflicts in the Role of Attorneys & Funders
In case of a TPF arbitration, there could be problems that arise from potential conflicts between the duties owed by a lawyer to his or her client and the lawyer's real or perceived interest, exacerbated by the presence, in the ‘triangle structure’, of the TP funder. One of the fundamental professional obligations of a lawyer is to act in the interest of its client and this is codified in almost all jurisdictions. Further, almost all rules regulating the legal profession also contain provisions on maintaining attorney-client privilege and confidentiality. Thus, the TP funder must be cautious with respect to potentially intruding on the attorney-client relationship and the attorney’s professional and ethical obligations to the client. As seen in the previous section, a TP Funder may be willing to and almost always would have the resources to assist the law firm involved. The extent of this assistance, however, this must be done with caution is questionable and gives rise to conflicts, which are discussed below.
2.4.1. Who’s advice is it anyway?
The questions of (ia) who an attorney must take instructions from during the arbitration proceedings and (iib) who a TP funder may take advice from prior to the start of/during the arbitration, are the most common conflicts in TPF arbitration cases. In the case of the former i.e. (ia), attorneys in most jurisdictions, would be bound by the obligation to act in the interest of its client, and consequently take instructions as to the conduct of the matter and the course of action of a dispute, also from the client.
In some arbitrations, where the claimant has narrowed in on a TP funder, prior to appointing a counsel, there could be a considerable amount of feedback and influence from the TP funder on who to appoint as a counsel in the first place. This influence could potentially have a bearing on the counsel during the arbitration proceedings with respect to its obligation to take the client’s instructions if they conflict with the requirements of the funder.
In the case of (iib), above, if the TP funder relies on the advice of the claimant’s counsel based on which it decides to fund the claim, a question would arise of whether such counsel could run the risk of being held liable by the TP funder if the decision to fund had been made on the basis of negligent or inaccurate advice. It is interesting to note that in a recent litigation case, a United Kingdom disciplinary body fined the law firm, Clifford Chance and a member of its international arbitration practice, £50,000 each over their role in a controversial litigation that left a group of TP funders on the hook for tens of millions in legal costs.
This case involved the operation of an ‘illegal’ no-win, no-fee deal, wherein Clifford Chance represented Excalibur, an oil exploration company that was in a £1.6 billion dispute with two larger US energy businesses () over an exploration deal over oilfields in Kurdistan, Iraq.
While this sort of a consequence would of course vary depending on the jurisdiction of the case and the domestic regulations, it may be noted that in England, it is a well-established rule that lawyers may be made liable to parties who are not their clients but nonetheless suffer damages as a result of a negligent misstatement. One of the ways in which this conflict and a potential liability on the law firm can be limited and such a risk mitigated, is to have the TP funder, rely instead on its internal legal team to decide on whether or not to go ahead with the funding of a dispute. While this may potentially benefit both the TP funder and the law firm, it still gives rise to other issues such as confidentiality of information and privilege, which brings us to the next conflict.
2.4.2. Confidentiality of information
Client-attorney privilege and maintaining confidentiality of the matters discussed/information exchanged between these two participants is a basic tenet of most domestic professional ethics codes for lawyers. The practice followed by TP funders is however to ensure that there is a robust confidentiality agreement in place and signed between the client and the TP funder. Such an agreement would ordinarily set out the basis of maintaining legal privilege on shared materials and may also be incorporated by reference into the funding agreement itself. Further, clients may also be asked to or decide to waive their attorney-client privilege by giving clear instructions to their legal representatives and permitting them to disclose information regarding the case proceedings to the TP funder.
Another area where confidentiality may prove to be a concern is when both the claimant and respondent agree to submit the arbitration to rules which provide that information regarding the arbitration’s existence and the documents submitted in the course of the arbitral proceedings are to be kept confidential. During the initial stages of the case, should the claimant approach a TP funder and disclose the details of the case, this could potentially result in a violation of the claimant’s confidentiality obligations. In such a situation, the opposing party would have a (legitimate) fear that the TP funder might use information about itself obtained during the case assessment for the purposes of financing subsequent disputes involving or affecting the opponent, or otherwise profit from this information to the detriment of such party. It may however be noted that this situation has been addressed in a number of arbitral rules that provide exceptions to confidentiality provisions and allow disclosures to a TP funder without entailing causing a violation of applicable confidentiality obligations.
While confidentiality of information will continue to remain a sensitive and delicate issue in international arbitrations, the safest way to address this concern would be to ensure that the TP funders themselves maintain the required secrecy and confidentiality of the information provided to them. After all, it is finally in their own interest to uphold this obligation and not use any information to the detriment of any party, as this would ultimately lead to a reputational hazard for the funder itself.
2.5. How much is too much?
Talk about how to determine the permissible degree of involvement of the funder in the strategy of the case or in negotiating and accepting settlement offers.