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CIArb Features

From Litigation to Arbitration and Beyond: the Evolution of Third Party Dispute Finance

13 September 2018 Features
By Oliver Gayner

Dispute finance, in its modern form, originated in Australia in the mid-1990s following the enactment of legislation permitting insolvency practitioners to enter into contracts to finance litigation characterized as company property. The rise of litigation funding in Australia was also spurred on by the introduction of class action lawsuits in 1992 as a means of enabling the courts to deal with group claims in an efficient way.

In 2006, the Australian High Court in the well-known Fostif case held that third-party litigation funding arrangements served a legitimate purpose in lawsuits and were not an abuse of process or contrary to public policy. With litigation funding now legitimized and the use of class action lawsuits on the rise, litigation finance became a widely used service, akin to a form of legal aid, albeit for profit and provided by the private sector. In 2017, more than 50% of the major class actions filed in Australia were funded by private litigation finance companies; IMF Bentham alone has funded over 130,000 claimants since listing on the ASX in 2001.

Dispute Finance Spreads Across the Globe

Over the past decade, dispute finance has tended to advance just as the common law doctrines of champerty and maintenance have tended to recede.  It many jurisdiction, the practice is now established as an integral part of civil justice, providing a means of facilitating access to justice and offlaying litigation risk. Not only do providers like IMF Bentham finance the cost of proceedings in exchange for a portion of the recovery, but they also function as coordinators amongst claimants, provide access to legal resources, and (in some cases) underwrite the potentially significant risk of paying “adverse costs” (i.e. paying for the respondent’s legal bills in the event the claim is unsuccessful).

In essence, third-party dispute finance is a novel method of litigation risk allocation and a way to bring market forces to bear on the supply of money used to finance legal claims. This allows for an increase of access to justice and lowers the direct, or transactional, costs of litigation.

To give one example: according to data compiled by Professor Vince Morabito of Monash University in Australia, a funded class action is 21% more likely to settle than an unfunded class action (69% versus 48%, based on data up to July 2017). This suggests that the intervention of the market is helping to drive better and more just outcomes, since disputes are being resolved according to merit and not according to which party has deeper pockets.

Beyond Litigation to International Arbitration

Although parties to arbitration are often sophisticated commercial entities, the costs associated with pursuing arbitration can be high and as a result claimants can often find themselves disadvantaged when seeking redress against highly resourced respondents. The financial David vs. Goliath situation is particularly common in investment treaty arbitration. In fact, many jurisdictions are now embracing funding in the arbitration arena. In 2015, the Hong Kong Law Reform Commission recommended permitting third-party funding of international arbitration matters in Hong Kong provided certain “ethical and financial safeguards” were met. By 2017, these recommendations were codified into amendments to the Arbitration Ordinance and a draft Code of Practice was published for consultation.

That same year, Singapore introduced legislation abolishing maintenance and champerty as crimes and torts, providing a “safe harbor” regime for the funding of international arbitrations in Singapore (and related court proceedings) by professional funders who meet a basic capital adequacy requirement.  IMF Bentham’s newly established Asia office, led by arbitration practitioners Tom Glasgow and Cheng-Yee Khong, have seen strong demand by arbitral parties across Asia from India to the Philippines, and in February 2018 the team announced one of first SIAC arbitrations to be funded under the new regime.  Another notable development was the release of the ICCA / Queen Mary Taskforce’s Report on Arbitration Funding, announced during the 2018 ICCA Congress in Sydney, which has established valuable guidelines for arbitral tribunals the world over to follow when dealing with third party financing arrangements.

Litigation Finance is Here to Stay

Historically, well-heeled parties had certain and inevitable advantages in litigation and arbitration. They could hire the best lawyers and experts, and then grind the less well-off party into submission both because of a lack of resources and cash flow issues. There may have been a time when funding may have been perceived as primarily for the impoverished claimant. However, the market has now developed much more widely. As the English Court of Appeal recently held in the Excalibur Ventures case, “[l]itigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest”.

Banks, pension funds, insurers and well-resourced corporates are adopting these services as a sensible way of managing risk, as giving some equity in the success of a particular litigation or arbitration provides certainty instead of exposure.  As the legal industry continues to innovate, there is growing realization of the value of partnering with specialists whose involvement can save internal budgets and management time, whilst increasing the prospects of a favorable outcome.