ISSUE VI - Vannin · Eastern Europe Litigation funding in offshore jurisdictions: funding in the...

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18Who wins, where and why? Eastern Europe

Litigation funding in offshore jurisdictions: funding in the BVI and Cayman Islands

High net worth trust claims: the coming wave

60 seconds Q&A with White & Case

Coming to America: Vannin Capital launches in New York

Latin America and third party funding: a growing phenomenon

Litigation funding: solving the CFO’s dilemma

Third party funding terms: it’s more than just the price

Will artificial intelligence replace lawyers?

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VANNIN CAPITALCONTENTS

Who wins, where and why? Eastern Europe 6 Iain McKenny, Managing Director, Vannin Capital

Litigation Funding in offshore jurisdictions: funding in the 20 BVI and Cayman Islands Eleanor Morgan and Simon Dickson, Partners, Mourant Ozannes

High Net Worth trust claims: the coming wave 26 Jonathan Hilliard, QC, Wilberforce Chambers and Andrew Jones, Managing Director, Vannin Capital

60 Seconds Q&A 32 Charles Balmain, White & Case and Rosemary Ioannou, Managing Director, Vannin Capital

Coming to America, Vannin Capital launches in New York 36 Alan Guy and Michael German, Managing Directors, Vannin Capital

Latin America and third party funding: a growing phenomenon 46 Carolina Ramirez, Managing Director, Vannin Capital

Litigation funding: solving the CFO’s dilemma 52 Tim Allen, Partner, PWC and Andrew Jones, Managing Director, Vannin Capital

Third party funding terms: it’s more than just the price 62 Tom McDonald, Managing Director, Vannin Capital

Will artificial intelligence replace lawyers? 70 Yasmin Mohammad, Managing Director, Vannin Capital

CONTENTS

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VANNIN CAPITALWELCOME

Welcome to the sixth edition of Funding in Focus, which once again leads the discussion and debate around the world of the latest innovations in legal finance, drawing both on the experiences of Vannin Capital and on the expertise of our esteemed contributors.

I joined Vannin this month as Chief Executive Officer and 2018 looks set to be extremely busy and exciting for our business and industry. As you will observe over the following pages, the breadth and depth of third party funding continues to grow, as we explore new markets in Eastern Europe, Asia, Latin America and beyond, and as our own business expands in Europe, Australia and North America.

As well as growing geographically, we also see the scale and complexity of the cases we are involved with increasing, and new opportunities opening up, such as high net worth trust claims. I’m particularly interested in getting the message out to finance executives about how powerful litigation funding can be as

a tool for keeping the costs of litigation off the balance sheet, shifting risk, and turning legal departments from cost to profit centres. We are witnessing an increasing appetite for our services from major corporates, and as experts in legal finance we are well-placed to service their sophisticated demands.

As ever, we are delighted to share the expert perspectives of all our contributors, and are immensely grateful to them for their time and commitment to the subject area. As our industry matures, the range of leading practitioners with whom we interact continues to diversify and we all see exciting prospects ahead. Funding in Focus will endeavour to carry on bringing you the latest insights, analysis and explanations.

I hope you enjoy this latest edition. Please do not hesitate to get in touch should you have any questions, or if you would like to draw our attention to a topic for future discussion. I look forward to working with you in 2018 and beyond.

WELCOME

Richard Hextall Chief Executive Officer

VANNIN CAPITAL

Funding in Focus is published twice a year. Subscribe to receive this publication in advance of its general release by emailing [email protected]

AS EVER, WE ARE DELIGHTED TO SHARE THE EXPERT PERSPECTIVES OF ALL OUR CONTRIBUTORS, AND ARE IMMENSELY GRATEFUL TO THEM FOR THEIR TIME AND COMMITMENT TO THE SUBJECT AREA

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Iain McKennyManaging Director

VANNIN CAPITAL

In this edition of who wins, where and why we delve into one of the largest regions of growth for the disputes market – Eastern Europe. Over the last few years Vannin has seen an increasing number of applications for third party funding from this part of the world. Through these applications and through our own research of the statistical reports published by the LCIA, SCC, ICC and ICSID and cross checking these results where possible with legal publications such as GAR and IA Reporter and the Investor State Law Review tools, we have been able to identify numerous patterns that have helped us to estimate:

• The approximate number of publically recorded arbitrations by country;

• The most popular dispute sectors by country; and

• Key leading local experts who can explain the disputes pattern per country and what the future may hold.

Our research has revealed the following findings:

• The three largest and most prevalent types of disputes are in the energy, finance and infrastructure sectors.

• There has been nearly a threefold increase in these types of disputes over the last seven years.

• From the leading local experts we have spoken to, the top three reasons for the cause of this increase in these types of disputes over the last 7 years are:

1. a shift in social policy to populist agendas;

2. slower than expected economic growth; and

3. the rise of geo-political isolationism.

WHO WINS, WHERE AND WHY? EASTERN EUROPE

VANNIN CAPITALWHO WINS, WHERE AND WHY? EASTERN EUROPE

OVER THE LAST FEW YEARS VANNIN HAS SEEN AN INCREASING NUMBER OF APPLICATIONS FOR THIRD PARTY FUNDING FROM EASTERN EUROPE.

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Countries analysed in our study

1. Estonia

2. Latvia

3. Lithuania

4. Poland

5. Czech Republic

6. Slovakia

7. Slovenia

8. Hungary

9. Croatia

10. Romania

11. Bulgaria


These findings are significant for funders, lawyers and claimants alike. Funders and lawyers are closely aligned when it comes to identifying rich sources of disputes and the sectors and jurisdictions from which they spring. These findings demonstrate in broad strokes that funders and lawyers who have developed knowledge and experience in finance/corporate, construction/mining and energy/utilities disputes have been and seem likely to continue to be engaged with a significant portion of disputes work in the region.

Funders and claimants are closely aligned when it comes to the transmutation of the hard fought and successful award through enforcement to financial recovery. These findings reveal that the causes for the disputes from these sectors in this region demonstrate that not only are there likely to be more disputes that need to be factored into business and project models as contingencies but also that they can expect enforcement to become increasingly hard fought, slower and accordingly more expensive as companies and new governments seek to obfuscate their obligations in respect of awards.

The methodology

This type of analysis is slow and painstaking but as with all such correlational analysis from quantitative data into qualitative assessment, parameters must be imposed for fear that the conclusions drawn may be a bridge too far from the data collated.

As always, time and resources are a factor. A deeper analysis of the litigation disputes sector of each country for instance would have been highly revealing but would have resulted in an article about each sector in each country, each year going far beyond our remit here. Instead, we limited the research to the last seven years encapsulating ongoing recovery since the height of the last recession and then reduced the number of EEG countries to those that are within the European Union.

EEG countries outside our study:

• Albania

• Armenia

• Azerbaijan

• Belarus

• Bosnia and Herzegova

• Georgia

• Macedonia

• Moldovia

• Montenegro

• Russian Federation

• Serbia

• Ukraine

FUNDERS AND LAWYERS ARECLOSELY ALIGNED WHEN IT COMES TO IDENTIFYING RICH SOURCES OF DISPUTES AND THE SECTORS AND JURISDICTIONS FROM WHICH THEY SPRING

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The reason for reducing the analysis to these 11 countries is two fold; (i) limited enforcement risk owing to EU membership (at least for commercial cases) and (ii) because these are jurisdictions from which we have received statistically significant funding applications for claimants with either commercial or investment treaty arbitrations.

This still produced a data set that was too unwieldy to produce statistically significant results from a funding perspective. There may be many more disputes from each one of these countries but not all would have quantum ranges that would fall within fundable parameters. Industry standard investment dictates that funding facilities are limited to a maximum of 1/10th of the realistic quantum claimed. Consequently, a claim of 30 million USD for instance would attract a maximum funding facility of 3 million USD. Given the costs typically associated with sophisticated commercial and investment treaty arbitrations, we used a quantum figure of 30 million USD as a cutoff point.

Finally, owing to the sheer volume of applications for arbitration and investment treaty disputes and the plethora of institutional reports from the main arbitral centers and the high quality of the core publications, the data set swung undeniably towards arbitration with some limited local litigation enforcement.

In summary, our analysis was conducted on these 11 countries of the EEG, using our own data pool of funding applications, statistical reports from the ICC, LCIA, SCC and ICSID and from publications from GAR, IA Reporter and the Investor State Law Review, over the last seven years and for disputes worth at least 30 million euros.

The analysis

Number of publicly reported arbitrations within analytical parameters:

Arbitration sectors within analytical parameters:

Countries Energy/Utilities Infrastructure Finance/shareholdings Mining Other Total per country

Estonia 2 2 4 1 9 18

Latvia 6 3 2 1 11 23

Lithuania 10 2 2 5 20 39

Poland 8 5 20 3 40 76

Czech Republic 43 30 20 6 100 199

Slovakia 8 6 16 6 30 66

Slovenia 10 6 4 0 22 42

Hungary 19 9 7 3 35 73

Croatia 20 8 4 2 35 69

Romania 17 23 10 7 30 87

Bulgaria 8 15 4 3 30 61

Total per sector 151 110 93 37 360 753

Countries 2011 2012 2013 2014 2015 2016 2017 Total per country

Estonia 3 2 3 2 2 2 4 18

Latvia 2 2 4 4 2 3 6 23

Lithuania 3 7 7 5 5 6 6 39

Poland 13 9 10 10 12 12 10 76

Czech Republic 16 25 29 33 30 33 33 199

Slovakia 6 9 10 12 12 8 9 66

Slovenia 4 4 3 5 10 10 6 42

Hungary 9 8 11 9 11 13 12 73

Croatia 3 3 21 6 12 10 14 69

Romania 10 5 10 13 15 16 18 87

Bulgaria 6 6 6 8 10 8 17 61

Total per sector 75 80 114 107 121 121 135 753

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Conclusions

As with all statistical analysis, even under tightly defined parameters, the results are most valuably understood as a trend. An upward trend in the number of disputes, a spike of disputes in specific years and across particular sectors, for example. We cannot know the sum total of all the disputes and thus our picture of the disputes market in any one country or region or group or sector is inherently incomplete. With this qualification in mind, the trends identified are positive from a disputes market perspective.

Of the 753 identified disputes within the analytical parameters for these countries in the EEG across the last seven years, the Czech Republic, Romania and Hungary account for almost half of the disputes (359). Across the group, there is an average of almost 70 fundable cases (at least based on quantum – i.e. greater claim sizes of greater than 30 million USD for the purpose of this analysis) per year, an impressive number. Furthermore, there has been a steady rise in the number of disputes across the group increasing by approximately seven cases per year peaking this year with a total of 135 arbitrations and related processes.

Delving a little deeper into the data set, it seems that across the region, the largest single identifiable dispute sector is in energy/utilities with infrastructure a close second. These two sectors account for over a third of the disputes in the region. It seems that energy/utilities dominates the disputes market in six out of the 11 countries with infrastructure dominating the disputes markets in Romania and Bulgaria and Finance/shareholding disputes dominating the disputes markets in Slovakia, Poland and Estonia.

This type of quantitative analysis is useful for pattern recognition but for a qualitative assessment of what it means, we must turn to the experts. From the number of funding applications Vannin has received for disputes originating from this region we have noticed that the vast majority of successful claims are managed by international counsel and indispensable local legal teams working together. We wanted to know what some of the local law experts thought and the conclusions that could be drawn from our analysis.


OF THE 753 IDENTIFIED DISPUTES WITHIN THE ANALYTICAL PARAMETERS FOR THESE COUNTRIES IN THE EEG ACROSS THE LAST 7 YEARS, THE CZECH REPUBLIC, ROMANIA AND HUNGARY ACCOUNT FOR ALMOST HALF OF THE DISPUTES (359)

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Poland

Dr Marcin Olechowski

Partner

SKS LEGAL

“In terms of distribution, I believe the prevalence of the “finance/shareholdings” category most likely reflects post-M&A / corporate disputes which – in our experience – tend to be the most widespread type of arbitration rather than true finance sector arbitration. Larger M&A deals in Poland usually involve a foreign party (Poland is still largely an inbound jurisdiction), with arbitration as the preferred dispute resolution mechanism (local courts are slow and not viewed as sophisticated in terms of M&A documentation or shareholder agreements). I would expect the trend to continue for the near to mid future. Infrastructure arbitration is relatively small, because the public side has been pursuing a no-arbitration policy for the last several years, insisting on Polish courts. In terms of other trends, we see increased interest in energy investment arbitration (due to both the attractiveness of the ECT and recent measures enacted by Poland in the renewables industry). In the longer term, we expect BIT arbitration to peak and then slowly wane given that the Polish government is currently implementing a programme of BIT termination.”

LITHUANIA STRIVES TO BOOST ITS ECONOMY FURTHER AND IS LISTED BY THE WORLD BANK AS NO 16 OUT OF 190 COUNTRIES IN THE WORLD FOR EASE OF DOING BUSINESS


Estonia Latvia Lithuania

Arne Ots

Partner

ELLEX RAIDLA

Daiga Zivtiņa

Partner

ELLEX KLAVINS

Ramūnas Petravičius

Partner

ELLEX VALIUNAS

Giedrė Aukštuolienė

Partner

ELLEX VALIUNAS

“Since 2006, after the enactment of the new Code of Civil Procedure in Estonia, the number of commercial arbitrations has shown a constant increase. Whereas in the beginning the procedure was new and created somewhat hesitation and the courts were not too cooperative in adapting to their role, it has become customary by now to consider arbitration as a means of solving disputes, especially in cross-border contracts and for large multinationals. When it comes to industries, arbitration is most commonly used in energy, utilities and construction sectors as well as for disputes arising from shareholders contracts. As to innovative trends – as Estonia is a leader in e-solutions and often acts as a regional startup-hub, it has also been discussed whether to create a standard in VC and startup field that arbitration is the first choice for dispute resolution in the field. As to trends in the choice of arbitration institutions –often ICC is preferred over the local institutions if the seat is in Estonia, though often the seat of arbitration is also in the nearby Nordic countries, e.g. in Finland or Sweden.”

“During the last five years, the number of cases in international commercial and investment arbitration has a tendency to increase in Latvia. The investors have particular interest in energy/utilities and banking industries due to the recent unbundling of electricity (in 2015) and gas (in 2017) markets. Liberalisation of electricity and gas markets, as well as promotion of the renewable energy projects by the state potentially will result in new arbitration cases with involvement of the main players of these sectors. The financial institutions in Latvia have faced a stricter regulation on the part of supervisory authorities, which has led to liquidation of several banks, application of sanctions and new arbitration cases. In Latvia a considerable number of cases are, in fact, solved before arbitration is commenced or at its early stage. Settlements are very popular in Latvia and are publicly criticized by practitioners. Because of this trend the arbitral awards are rendered in a relatively small number of cases. At the same time the new state policy to actively defend its position to achieve the best possible results is a positive tendency.”

After joining the EU in 2004, Lithuania has made enormous progress in many areas, but its efforts put in gaining energy independence are perhaps the most apparent evidence of it. Lithuania started from being an “energy island” depended on a sole gas supplier and now it has not only successfully implemented the third EU energy package, but unique in the region liquefied natural gas (LNG) terminal operates in the port city of Klaipėda, high voltage electricity interconnectors with Poland and Sweden are in place, and Lithuania now fully complies with EU targets for renewable energy. These developments, combined with the former privatization procedures, increasing number of investments and international commercial transactions with both Eastern and Western parties, resulted in an increase of investment and complex international arbitration disputes, especially in the field of energy. This is evident from the statistics of major international and local arbitration institutions. Lithuania strives to boost its economy further and is listed by the World Bank as No 16 out of 190 countries in the world for ease of doing business. Thus, taking into account the investors’ intentions to resolve the disputes in a neutral forum, the trend is expected to continue.

Toomas Vaher

Partner

ELLEX RAIDLA

WHAT THE EXPERTS SAY

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Hungary

Dr Jéger Viktor

Associate

NAGY ÉS TRÓCSÁNYI

“In the past, we have been active in commercial arbitrations in seats such as Hungary, Austria, Sweden, Moscow, and Switzerland.

Hungarian entities involved in multinational energy deals, investing in foreign infrastructure or participating in cross-border M&As tend to settle disputes with their counterparties by arbitration on neutral ground. This trend is set to continue due to the parties’ need for confidential, efficient, and independent adjudication of disputes.

We have also experienced an increase in arbitration cases with a Hungarian seat arising from EU-funded infrastructure investments, where parties tailored a FIDIC contract template to regulate their legal relationship. While the largest Hungarian arbitral institution, the Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry, has seen a constant influx of cases, we expect this caseload to substantially increase with the new legislative and institutional reforms being enforced as of January 2018.”

Hungarian entities involved in multinational energy deals, investing in foreign infrastructure or participating in cross-border M&As tend to settle disputes with their counterparties by arbitration on neutral ground

Slovakia

Lucia Raimanová

Counsel

ALLEN & OVERY BRATISLAVA, S.R.O.

Juraj Gyarfas

Senior Associate


“We also see a significant number of claims in the sectors identified in the research above. Energy, infrastructure and mining sectors in particular require large capital investment and are heavily regulated by the State. Many companies active in these sectors were originally State-owned and subsequently privatised. Heavy regulation, legacy issues stemming from the privatisation process, high amounts at stake and occasional heavy-handed behaviour by the State frequently lead to clashes of interests and ultimately arbitration. While the finance sector exhibits many of the same hallmarks, we have also seen a rise in disputes arising out of high value trades in derivatives and other transactions.

A stable and predictable framework for arbitration is still evolving in Slovakia. Since the early 2000s, Slovak courts have been issuing unpredictable or even arbitration-hostile judgments. Although these were frequently driven by the desire to protect consumers, they affected the use of commercial arbitration more broadly. As a result, parties provided for Vienna or another external seat in their arbitration agreements and most major disputes involving Slovak parties were therefore heard abroad. A&O Bratislava are proud to have been involved in an overhaul of the Slovak Arbitration Act that came into effect in 2015. It may still be too early to draw conclusions, but the courts’ decisions are starting to be more predictable and arbitration-friendly, which may serve to boost commercial arbitration in Slovakia.”


Slovenia

Tilen Terlep

Partner

ODVETNIKI ŠELIH & PARTNERJI, O.P., D.O.O.

“We do not see many disputes being solved by arbitral tribunals in Slovenia nor do we see that arbitration clauses are often included in contracts (apart from M&A, construction and other contracts with a higher value, where VIAC is often opted for). On the one hand the foreign arbitrations tend to be quite expensive (and third party financing is not too common in Slovenia), whereas the domestic ones are not largely used as a substitute to judicial procedures (surprisingly as court procedures in Slovenia are rather lengthy). We have had a surge of mediation offerors in Slovenia in the past few years. It seems that this is a more budget friendly option as opposed to arbitration, which is usually a costly exercise. It tends to end so that the parties (once they reach agreement) go to the court to conclude a judicial settlement.”


Czech Republic

Marek Procházka

Partner

PRK PARTNERS

“Industry plays an increasingly pivotal role in the Czech economy, because it contributes the most to gross value added, around one-third, and manufacturing counts for more than a quarter. It is one of the biggest ratios in the European Union. Economic activity continued to grow in 2017 in consequence of a broad-based expansion. Foreign demand contributed strongly to growth, which is above potential. Strengthening of growth in Europe contributed to drive exports and industrial production. Household consumption also supported growth thanks to low unemployment and high wage increases.

The development of energy consumption corresponds to the economic activity. The energy efficiency index for the whole economy improved by 16.65 % during the period 2000 – 2012. The EU28 average improvement was 13.54 % in the same period. The improvement in the Czech Republic was faster than the EU28 average. The Czech government decided to use an alternative scheme to comply with Article 7 of the Energy Efficiency Directive and the selected alternative measures are mainly of financial character. Even though energy and mining industry production fell in the past year, their position remains strong.

The above-mentioned trends in the Czech economy are reflected in the distribution of major arbitration cases in energy and infrastructure as the foreign investors seek to resolve their disputes via arbitration.”

“WE EXPECT A TREND OF INCREASE OF THE ARBITRATIONS IN THE FIELD OF CONSTRUCTION, WHICH IS CURRENTLY BOOMING IN BULGARIA”

ALEXANDER STEFANOVPENKOV, MARKOV & PARTNERSBULGARIA

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Romania Bulgaria

Tudor Velea

Partner

ARCLIFFE

Edward Dobre

Partner

ARCLIFFE

Alexander Stefanov

Junior Partner

PENKOV, MARKOV & PARTNERS

“Romania has in the past encouraged foreign investment in the hope of generating a quick inflow of capital to boost the economy and take full advantage of Romania’s adhesion to the European Union. Investments were made in a politically unstable context where laws were confusing and changed rather rapidly every time a new government was put in place. In return this created a tricky business environment where any new actor could face potentially damaging lawsuits. The increase in foreign investment generated complex international arbitration disputes, especially in the field of infrastructure, oil & gas, and energy. Romania is occupying the 45th place in the World Bank’s ranking of countries where it is easy to do business. As Romania is striving to attract foreign investment to continue to boost its economy, foreign investors will wish to resolve any disputes in a neutral forum. The most notable arbitration case is in the mining sector in 2017 involved Gabriel Resources, the mining company. Similarly, the energy sector has seen some increase in arbitrated cases with the highlight of 2017 being the case of TPA against Enel Investment Holding B.V. and Enel S.p.A before the International Chamber of Commerce Paris. The arbitration award was a record sum of EUR 400 million. These cases show a trend whereby major Romanian based companies seek arbitration awards rather than taking the more classic approach of national litigation.”

“We are witnessing a trend among relatively smaller and more flexible companies (SMEs) or entities that can be governed directly with less formalities on taking important decisions – the state courts seem to be preferred than the arbitration for the reason that arbitration (even though in one instance) can be delayed as much as in court but then the arbitration award is subject to appeal before the Supreme Court where the practice is not constant and foreseeable and this creates bigger uncertainty than the courts. Last but not least, we expect a trend of increase of the arbitrations in the field of construction, which is currently booming in Bulgaria and we expect to see larger and larger projects, especially with high buildings; also, the IT sector can be expected to start resolving disputes in big and significant matters via arbitration.”


Croatia

Ivana Bačić

HANZEKOVIC & PARTNERS LTD

Damir Metelko


“In the Republic of Croatia, a trend of increase of arbitral proceedings is evident due the opening and expanding the market of international trade of goods and services since 2001., and further to the accession of the Republic of Croatia to the European Union (on 1 July 2013). Also, in addition, in the Republic of Croatia arbitration has also been recognized as a way of resolving disputes that offers a number of advantages to resolving disputes before state courts, primarily due to the time-consuming litigation procedures of state courts in resolving cases. Although the procedural costs in proceedings before state authorities are considerably lower than arbitration costs, the advantages offered by arbitral proceedings, primarily promptness and efficiency of a final resolution of disputes, are of more importance to Croatian and international clients than the procedural costs. Based on our experience, we can say that it is also important to clients in agreements and transactions of material financial value, the exclusion of the public which is another characteristic of arbitral proceedings due to which many clients choose arbitration as a way of resolving their disputes.”

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Eleanor MorganPartner

MOURANT OZANNES

Simon DicksonPartner

MOURANT OZANNES

In the second of two articles produced by Mourant Ozannes, we look at the availability of litigation funding in the British Virgin Islands (the BVI) and the Cayman Islands.

In this article we continue our look at the position of third party funding in offshore jurisdictions, looking at the Caribbean and contrasting the position in the BVI, where the position remains relatively undeveloped, with the Cayman Islands where the legislature is more actively engaged.

The Caribbean jurisdictions of BVI and the Cayman Islands are both United Kingdom overseas territories, unlike the Crown Dependencies of Bailiwicks of Guernsey and Jersey, which were considered in our

last article. There is no Norman or French law influence in either the BVI or Cayman, whose legal systems are more directly founded on English common law. Although, the Courts will consider authorities from other leading common law jurisdictions.

In both jurisdictions, as with Guernsey and Jersey, traditional English rules prohibiting champerty and maintenance prevented third party funding on public policy grounds, or at least that was the perception, but things have moved on.

LITIGATION FUNDING IN OFFSHORE JURISDICTIONS FUNDING IN THE BVI AND CAYMAN ISLANDS

VANNIN CAPITALLITIGATION FUNDING IN OFFSHORE JURISDICTIONS – FUNDING IN THE BVI AND CAYMAN ISLANDS

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(1) [A] legal practitioner and his or her client may either before or after or in the course of the transaction of any non-contentious business by the legal practitioner, make an agreement as to the remuneration of the legal practitioner in respect thereof.

(2) The agreement which shall be in writing shall provide for the remuneration of the legal practitioner by a gross sum, or by commission or by percentage, or by salary, or otherwise…

(3) The agreement may be sued and recovered on…

Section 44 of the LPA was drafted in wide terms. It is clear that the use of contingency fee agreements was envisaged by the BVI legislature. Indeed, further guidance on CFAs is provided in Schedule 4 of the LPA which contains the new BVI Code

of Ethics (the Code). Article 6(2), Part B of the Code confirms that it is not improper for a BVI lawyer to enter into a CFA with a client provided that such fee is fair and reasonable.

However, the LPA did not go so far as to limit or abolish the principle of champerty and although lawyers in the BVI may be tempted to argue that Section 44 and the Code of Ethics indicate that the use of third party funding is now permissible in the BVI it is unclear whether the BVI judiciary would be minded to agree.

Moreover, Section 44 deals only with non-contentious work, leaving the question of remuneration in contentious matters, including third party funding agreements and CFAs, to be decided under the BVI common law.

Given the lack of published authority regarding third party funding agreements,

it could be argued that the historic common law position remains unaltered and third party funding agreements are unenforceable on public policy grounds. After all, the BVI legislature did not expressly permit the use of such agreements in contentious matters when drafting the LPA.

On the other hand, the BVI legislature did not expressly prohibit third party funding agreements when drafting the LPA and, whilst Section 77 of ECSCA was repealed by the LPA, Section 11 remains in force allowing litigants to argue that the BVI Court should continue to follow the law and practice administered by the English Courts, including the modern approach to third party funding which has been adopted in England. Anecdotal evidence supports the proposition that the BVI Courts take this approach.

BVI

The BVI Court system was, until recently, governed exclusively by the Eastern Caribbean Supreme Court Act (Cap 80) (the ECSCA). The ECSCA remains largely in force, but has recently been supplemented by the Legal Profession Act 2015 (the LPA). Section 11 of the ECSCA provides that, where there is a lacuna in the laws or procedure in the BVI, the Court will look to the current practice in the High Court in England.

Section 77 ECSCA (repealed by the LPA) stated:

Subject to modification by the rules of court, the law and practice relating to solicitors, and the taxation and recovery of costs in force in England, shall extend to and be in force in the Territory and shall apply to all persons lawfully practising therein as solicitors of the Court.

In principle the BVI would follow England’s lead in this area in the absence of its own settled law.

Consistent with this, it appears that the BVI Court’s attitude to the use of third party funding agreements has relaxed somewhat. Given the absence of a clear rule in respect of litigation funding (the BVI Civil Procedure Rules were, and remain, silent on the matter) the BVI Court’s attitude to litigation funding is influenced by changes in English practice brought about by the Jackson reforms. Concerns about the cost of litigation and access to justice are as much a factor in the BVI as they are elsewhere.

Whilst there are no reported authorities in the BVI which definitively confirm the position regarding third party funding in contentious matters (unlike other Caribbean jurisdictions such as Cayman), and it remains the case that most BVI civil

litigations are privately funded, there are a handful of cases in which the use of third party funding was acknowledged by the BVI Court1 and anecdotal evidence suggests that the BVI Court is sympathetic to liquidators and trustees who obtain third party funding in order to pursue claims for the ultimate benefit of creditors/beneficiaries which they could not otherwise afford to pursue (in the majority of these cases the Court files are sealed and so cannot be cited as authorities).

The court system set out in the ECSCA has been reformed and modernised by the LPA, the majority of which came into force on 11 November 2015. The LPA repealed Section 772 of the ECSCA and contains new rules in respect of the remuneration of lawyers in the BVI3. In particular, Section 44 provides that:

GIVEN THE LACK OF PUBLISHED AUTHORITY REGARDING THIRD PARTY FUNDING AGREEMENTS, IT COULD BE ARGUED THAT THE HISTORICCOMMON LAW POSITION REMAINS UNALTEREDAND THIRD PARTY FUNDING AGREEMENTS AREUNENFORCEABLE ON PUBLIC POLICY GROUNDS

1 e.g. Hugh Brown & Associates (Pty) Ltd v Kermas Limited [2011] BVIHCV (COM) 2011/13 and14, in which Bannister J. acknowledged the use of two third party funding agreement but held that it was unnecessary for him to express any opinion upon their effect; and (i) Hualon Corporation (M) Sdh Bhd (in receivership) Acting by its Receiver and Manager Dr. Duar Tuan Kiat -v- Marty Limited (BVIHC (COM) 2014/0090) [2016] ECSC J0120-1; and (ii) Chelsworth Investments Ltd. (In Liquidation) -v- Amesby Limited (No.165 of 1994) [2001] 10 JBVIC 3104 in which it was acknowledged that third party funding often features in applications for Security for Costs.

2 Section 66 of the LPA3 Sections 40 – 44 of the LPA


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Any distinct offences arising under the common law of maintenance or champerty (but not embracery) are to be repealed under s.19 of the draft Bill (if enacted in its present form). The Bill also provides that the abolition of criminal and civil liability in respect of these doctrines shall not impact any rule of law regarding cases in which a contract is to be treated as contrary to public policy, or otherwise illegal.

The issue of whether disclosure of any litigation funding agreement is compellable has not yet been tested before the Cayman courts, but it seems likely that English case law would be followed in this regard,

i.e. that it would be. The draft Bill in its present format does not address this issue. Parties can be assured however that the Cayman courts will continue to be flexible in addressing such issues on a case by case basis and will exercise its discretionary powers to make appropriate orders for disclosure of litigation funding agreements subject to specific safeguards, such as ordering partial redaction of certain details, whenever necessary.

The role of funders in litigation in the Cayman Island, which has been somewhat circumscribed to date, is likely to change once the Bill is enacted. Litigation funding

agreements entered into post-enactment will have the additional layer of legislative protection (save in respect of criminal, quasi criminal or family proceedings). The Bill currently also provides that a costs order made in any proceedings may, subject to the rules of court, include provisions requiring the payment of any amount payable under a litigation agreement which will be welcomed by those considering engaging in litigation funding agreements in the Cayman Islands.

THE ISSUE OF WHETHER DISCLOSURE OF ANY LITIGATION FUNDING AGREEMENT IS COMPELLABLE HAS NOT YET BEEN TESTED BEFORE THE CAYMAN COURTS, BUT IT SEEMS LIKELY THAT ENGLISH CASE LAW WOULD BE FOLLOWED IN THIS REGARD, I.E. THAT IT WOULD BE

Cayman Islands

Cayman Islands law distinguishes between:

(i) Third party litigation funding agreements - a loan agreement whereby a third party lender advances purely financial assistance to a litigant to fund the prosecution in exchange for a portion of any award). Third party funding agreements have been judicially validated on many occasions by the Cayman courts in the context of official liquidation cases.

(ii) Conditional fee agreements - where a law firm pursues litigation based upon discounted rates if the action fails and uplifts if it succeeds. In DD Growth Premium 2X Fund (In Official Liquidation)4, the Grand Court confirmed its earlier decision in Quayum-v-Hexagon Trust Company (Cayman Islands) Limited5 in determining that conditional fee agreements could avoid being considered illegal and unenforceable between a lawyer and client if the agreement satisfied certain specified guidelines.

(iii) Contingency Fee Agreements: whereby a law firm contractually acts in return for a share (usually an agreed percentage) of the proceeds of the claim, if it is successful. In ICP Strategic Credit Income Fund Limited & ICP Strategic Credit Income Master Fund Limited6 Jones J. held that the considerations which apply to litigation funding agreements

generally apply equally to CFAs, save that there is an additional public policy element rendering all CFAs unlawful and unenforceable if they relate to litigation to be conducted in the Cayman Islands. However, he did not consider that position to be fatal to the different issue of sanctioning a litigation funding agreement for proceedings outside the Cayman Islands in a jurisdiction where CFAs are legal and enforceable.

In Latoya Barrett-v-the Attorney General7 the Cayman Islands Court of Appeal (CICA) determined that the loser of a case could not be made liable for any amount of agreed fees payable to the winner’s lawyer’s fees for success and recommended that legislative attention ought to be paid to this issue. The CICA left open the question of whether a contingency fee agreement could be enforced as between the winning client and their lawyer. This case led to the Attorney General requesting the Cayman Island’s Law Reform Commission (LRC) to undertake a review of litigation funding in the Cayman Islands.

The LRC commenced its review of litigation funding in 2015 and published a Discussions Paper on conditional and contingency fee agreements in December 2015 which incorporated a Private Funding of Legal Services Bill (the Bill) which has yet to be enacted.

If passed into law, the Bill will codify the manner in which CFA’s and litigation funding

agreements have been operating, in practice, in the Cayman Islands for over a decade in providing for contingency fee agreements comprising the US type agreement as well as the conditional fee style agreement with success fees. The Grand Court retains the power under the terms of the Bill to review agreements upon application by the litigants or lawyers involved.

Part 3 of the Bill provides for the following conditions in respect of litigation funding agreements:

(i) The funder must be a person/persons of description prescribed by Cabinet;

(ii) The agreement must be in writing and comply with prescribed requirements; if any. The requirements which Cabinet are to prescribe in this regard shall include (a) requirements for the funder to have provided prescribed information to the client before the agreement is made; and (b) may be different for different descriptions of litigation funding agreements.

(iii) The sum to be paid by the client shall consist of any costs, together with an amount calculated by reference to the funder’s anticipated funding expenditure; and

(iv) The amount funded shall not exceed such percentage of that anticipated expenditure as may be prescribed by Cabinet in relation to proceedings.

4 [2013] (2) CILR 361 5 [2002] CILR 1616 [2014] (1) CILKR 3147 [2012] (1) CILR 127


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VANNIN CAPITALHIGH NET WORTH TRUST CLAIMS: THE COMING WAVE

Jonathan Hilliard QC

WILBERFORCE CHAMBERS

Andrew Jones Managing Director

VANNIN CAPITAL

We have seen a notable recent increase in interest from law firms and clients seeking third party funding for high value contentious trusts disputes often involving a significant offshore, multi-jurisdictional element. In this article, we examine with Jonathan Hilliard QC of Wilberforce Chambers why it is that disputes of this type can be obvious candidates for funding.

Those offshore trusts that contain the largest sums are often set up by individuals who understandably wish – having generated their wealth – to retain some influence over its disposition even once it is housed in a trust for asset protection or other purposes. A close relationship between the person setting up the trust (the “settlor”) and trustee, and any other officers of a trust (such as the “protector”, who the settlor sometimes appoints to watch over the trustees) will ideally continue throughout the duration of the settlor’s life.

HIGH NET WORTH TRUST CLAIMS: THE COMING WAVE

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Question (1) has spawned a fascinating body of case law that is testament to the creativity of those attacking offshore structures, most recently in the Dawson-Damer v Taylor Wessing [2017] 1 WLR 3255 litigation in which the data protection legislation in England was used to obtain information about the offshore trust, as well as the use of information leaks from offshore jurisdictions such as the “Panama Papers” incident.

Question (2) encompasses – to give but a few examples – the issue of the flexibility allowed to trustees and other officers in exercising their discretions (see e.g. Pitt v Holt [2013] 2 AC 108), the grounds on which trusts can be held to be shams, and the

question of when an elderly settlor will lack capacity, or when his intentions in establishing the trust have been vitiated by the influence or pressure of others.

Question (3) takes one into the different “firewall” legislation in the offshore jurisdictions that serve as an important part of the financial products that they offer, and the potential vulnerabilities within such statutes.

Question (4) is generally a conflict of laws question, requiring an understanding of private international law and how this is modified by the special legislation on the topic in the jurisdiction(s) in question. Critically for the beneficiary having

succeeded in his action (and thereby having obtained an award in his favour) the successful navigation of these rules will result in the relevant jurisdiction upholding the award and allowing access to the underlying trust assets.

It is question (5), however, that is often in practice the most important one from the outset, because an attacking beneficiary is very often faced with a well-funded structure on the other side of the action but with no access to trust assets that may be required to fund the attack. The question of how to fund the action is therefore critical, and it is in this sphere that third party litigation funding has an important role to play.

ONCE THE SETTLOR DIES, SADLY EXPERIENCE TELLS US THAT THIS CLOSE RELATIONSHIP WILL NOT ALWAYS SURVIVE INTO THE NEXT GENERATION. THE SUCCESSORS TO THE SETTLOR MAY DISLIKE WHAT THEY SEE AS THEIR INHERITANCE BEING LOCKED UP IN A TRUST, MAY NOT HAVE A CLOSE RELATIONSHIP WITH THEIR SIBLINGS, AND MAY HAVE BUSINESS PLANS OF THEIR OWN THAT THEY WOULD LIKE TO USE THE MONEY TO IMPLEMENT

However, once the settlor dies, sadly experience tells us that this close relationship will not always survive into the next generation. The successors to the settlor may dislike what they see as their inheritance being locked up in a trust, may not have a close relationship with their siblings, and may have business plans of their own that they would like to use the money to implement. Add to this the possibility that the settlor may, on his death, have chosen to ask the trustees to pass some of the trust assets to a person (such as a second wife) that the next generation do not like and you have a combustible mix that has the capacity to spill over into

litigation, involving significant sums across multiple jurisdictions, in which different assets and elements of the trust structure are situated.

In light of this, it is unsurprising that the case law of the offshore jurisdictions has been littered over the last decade with litigation spawned by second generation beneficiaries seeking to:

• question trustee decisions;

• find out more about the structures into which assets may have been placed; and

• recover assets from those into whose hands they have been passed.

The critical questions for a party seeking to attack an offshore structure are:

1. how to obtain sufficient information about the structure in order to attack it;

2. the grounds upon which to attack the structure;

3. the jurisdiction(s) in which to attack;

4. how to enforce any award; and

5. (given the complexities of (1)-(4)) how to fund any attack when the funds are held in the trust structure.

Each of these questions is important, interesting and difficult.


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It is clear that offshore trusts disputes can present unique challenges to claimants, lawyers and funders alike. We recognise that multi-jurisdictional litigation and subsequent enforcement action takes time – measured in years, not months – and our non-recourse finance products are aimed at enabling claimants (if they wish) to pursue their claims to the fullest degree whilst not suffering an adverse financial impact. Moreover, our interests as the provider of non-recourse finance are fully aligned with those of the claimant (and, indeed, the claimant’s lawyers where they are acting on a full CFA basis). Put simply, we only receive a return on our investment if the claimant actually recovers proceeds from the litigation. If the case is unsuccessful, our investment is written off and the claimant pays nothing.

However, we can add value through more than just the provision of a multi-million-pound funding solution. We operate at the centre of the global dispute resolution industry, and our network of relationships with lawyers and experts around the world means that if the claimant needs to build a team to fight their litigation, we can help identify the right people. With the benefit of our relationships and our finance products, a claimant who either cannot, or does not wish to, fund the litigation himself, can engage a team of top-tier professionals to maximise the prospects of success. That success will most obviously come in the form of a favourable judgment. In many cases, however, it will be through obtaining a more advantageous settlement at an earlier stage of the proceedings, because the tactical advantage often enjoyed by well-funded trustees or other officers will have been eradicated, thus making an early settlement a more attractive proposition on the defendant side. This strategic – rather than purely financial – benefit of third party funding is something that is often overlooked.

WITH THE BENEFIT OF OUR RELATIONSHIPS AND OUR FINANCE PRODUCTS, A CLAIMANT WHO EITHER CANNOT, OR DOES NOT WISH TO, FUND THE LITIGATION HIMSELF,CAN ENGAGE A TEAM OF TOP-TIERPROFESSIONALS TO MAXIMISE THEPROSPECTS OF SUCCESS


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Rosemary IoannouManaging Director

VANNIN CAPITAL

Funding of group actions in the UK and across the globe has increased significantly in recent years. The most dramatic increases that Vannin has witnessed, is in the context of competition claims and shareholder actions.

In the US and, increasingly, in the UK and other European jurisdictions, the bringing of competition group claims is a well-trodden path. Claims are generally brought as ‘follow-on’ actions, following-on from a regulatory decision. Conversely, certainly in the UK at least, until recently, the bringing of shareholder group claims is not something that has had the same traction. This seems to have changed, with a number of high profile shareholder claims recently hitting the headlines.

But, is there real substance behind the growth of these claims? What is driving this growth? Our London based Managing Director Rosie Ioannou asks Charles Balmain, a Partner at White & Case London and head of the Firm’s EMEA Disputes Section for Commercial Litigation and White-Collar matters.

60 SECONDS Q&A WITH CHARLES BALMAIN WHITE & CASE

VANNIN CAPITAL60 SECONDS Q&A WITH CHARLES BALMAIN

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Finally, while in previous years there may have been negative reputational implications for institutional investors in pursing claims against the companies in which they had invested, such considerations appear to have given way to the need for accountability in the post-financial crisis world.

RI: A number of high profile claims are being brought by large shareholders – institutions, pension funds etc. – by means of group action. What impact does this have on the claims being brought?

CB: Claimant lawyers operating on the London market have unquestionably developed the know-how to manage and act for groups of institutional investors. The fact of acting for large shareholders means that a degree of rigour is present when the claim is initially conceived. As a result, while the number of claims brought in the UK may be modest in comparison to the US, those

that are launched must be taken seriously by the defendant. Further, by seeking to assemble a group of major shareholders, lawyers and funders aim to achieve a high degree of alignment amongst the group, facilitating the conduct of the claim.

RI: What distinguishes the UK system for bringing securities actions from that in the US?

CB: In the US securities litigation, in particular, class actions are ubiquitous. By contrast, in the UK there have only been a handful of large group actions to date, and they are not class actions in the strictest sense. Rather they are substantial pieces of multiparty litigation, brought on an opt-in basis.

In the US it’s common for securities claims to be launched very quickly after a disruption event—sometimes even in a matter of hours.

In the UK, the existing legislative framework and procedural regime (notably, the unavailability of opt-out class actions in securities cases and adverse costs exposure) means that claimants and their lawyers will be inherently more cautious in commencing an action as compared to the US.

RI: Do you think that there is scope for the English system developing in the way the US system has?

CB: We’re currently not seeing, nor do we expect, anything like the volume of securities claims that our colleagues in the US see, barring radical legislative changes in the UK. However, we do believe that the market in the UK has matured to the point that, in the future, meritorious securities claim against issuers in the UK are highly likely to be pursued.

WITH THE GREATER AVAILABILITYOF LITIGATION FUNDING AND ATECOVER, THE FINANCIAL RISKS OFJOINING A SHAREHOLDER ACTIONARE SIGNIFICANTLY DIMINISHED

RI: There has been a lot of discussion about an increase in shareholder actions in the UK in recent years. Has this increase materialised?

CB: Shareholder activism has undoubtedly found its footing in the UK in the past three or four years. A number of the biggest cases coming before the Commercial Court this year featured large groups of shareholder-claimants, with listed companies as defendants, among the most high-profile being the Lloyds and Tesco actions. These cases reinforce our view that securities claims are not a passing fad in the UK, but are here to stay.

RI: What is driving the growth?

CB: There are multiple drivers. The introduction of statutory causes of action (contained in Sections 90 and 90A of FMSA) created the potential for securities actions in the UK. That potential has been realised

in large part due to the availability of litigation funding and after the event (ATE) insurance.

In the past, when a claimant firm approached institutional investors, such as a UK pension fund or asset manager, with an opportunity to join a group action, they may well have been reluctant to take part due to the high barriers to entry for such claims: specifically, the high costs of bringing the claim in the first place, and the adverse costs exposure should they be unsuccessful. With the greater availability of litigation funding and ATE cover, the financial risks of joining a shareholder action are significantly diminished.

In terms of other factors, one could also point to the enforcement priorities of regulators like the FCA and SFO which have increasingly brought to the fore any shortcomings in listed entities’ systems and controls, which may ultimately form the basis of a claim.

VANNIN CAPITAL60 SECONDS Q&A WITH CHARLES BALMAIN

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VANNIN CAPITALCOMING TO AMERICA: VANNIN CAPITAL LAUNCHES IN NEW YORK

Alan GuyManaging Director

VANNIN CAPITAL

Michael GermanManaging Director

VANNIN CAPITAL

In August 2017, Vannin Capital announced the opening of its New York office, providing a foothold in one of the largest legal markets in the United States (and arguably the world). Leveraging the skill and experience gained through years of funding cases around the globe, Vannin has turned its focus toward the United States with six high-profile appointments.

COMING TO AMERICAVANNIN CAPITAL LAUNCHES IN NEW YORK

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Managing Directors

Vannin recently welcomed three new Managing Directors based in New York. As in our other jurisdictions, the Managing Directors are drawn from leading law firms and have primary responsibility for identifying and monitoring Vannin’s portfolio of funding opportunities. The Vannin team in New York includes: Michael German, a commercial litigator previously with Arnold & Porter Kaye Scholer LLP; Alan Guy, a commercial litigator previously with Freshfields Bruckhaus Deringer US LLP and Cravath, Swaine & Moore LLP; and Carolina Ramirez, a commercial litigator previously with Dentons US LLP and White & Case LLP. Together, this highly-experienced and well-credentialed team of litigators will usher in an expansion of focus on the United States market for Vannin.

Funding Committee

With the addition of the New York office, and further expansion in the United States on the horizon, Vannin recognised the need to expand its Funding Committee. As is typical of Funding Committee members in other regions, the Funding Committee in the United States is tasked with reviewing cases generated in the country and making recommendations on new funding opportunities going forward. Traditionally, Funding Committee members at Vannin Capital are well-credentialed, highly-experienced former judges who can provide unique perspectives when assessing cases. The United States Funding Committee members are no exception and will provide an unparalleled view from the bench and provide an unmitigated advantage to Vannin Capital and the clients it funds.

Judge Moreno is a former jurist in California with over 25 years’ experience at all levels of the state and federal judicial systems, including four years as a federal district court judge and ten years as a justice on the California Supreme Court. Prior to his appointment to the bench, he practiced in the private sector for over ten years with the law firms Kelley Drye & Warren LLP and Irell & Manella LLP.

Judge Smith is a partner at Friedman Kaplan Seiler & Adelman LLP in New York, where he heads the firm’s appellate practice. Before joining Friedman Kaplan, Judge Smith was an Associate Judge of New York’s highest court – the New York State Court of Appeals, where he served for more than a decade. Since joining Friedman Kaplan, Judge Smith has been active primarily in appeals, trial-level commercial litigation, expert witness testimony, and alternative dispute resolution. He is a fellow of the American College of Trial Lawyers.

Judge Urbina has 31 years of service on the District of Columbia federal and superior courts. He served 18 years as a US District Court Judge for the District of Columbia and issued well over a thousand memorandum opinions. In April 1981, Judge Urbina became the first Latino ever appointed to the bench in the District of Columbia.

Michael German

Judge Moreno

Alan Guy

Judge Smith

Carolina Ramirez

Judge Urbina

THE APPOINTMENTS OF JUDGES MORENO, SMITHAND URBINA ARE ANIMPORTANT ADDITION TOVANNIN’S US PRESENCEAND CAPABILITY.THE US WILL BE A VERY EXCITING OPPORTUNITY FOR US IN THE YEARS AHEAD AND WE ARE LOOKING FORWARD TO THE CONTRIBUTION THAT THEY WILL MAKE. I AM DELIGHTED TOHAVE ADVISERS OFTHIS CALIBRE ON OURFUNDING COMMITTEE.DAN CRADDOCK,CHAIRMAN,VANNIN CAPITAL

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The risks and rewards of funding in the United States

The decision to enter the United States market was an easy one for Vannin Capital. The United States offers a sophisticated and stable legal environment, the decisions and judgments of which are recognised globally by other nations and dispute resolution centers. And the jurisdictional reach of courts in the United States is also exceptionally broad. Multi-national corporations and other large businesses, government and governmental actors, and high net worth individuals invariably conduct business that has at least some touchpoint to the United States. And even when they do not, those same actors typically are engaged with large banks and other financial institutions that have significant ties to the United States. The result of this constant contact with the United States is that many disputes end up being litigated in United States courts or through dispute resolution programs sited in the United States, and the results of disputes resolved elsewhere are often enforced here.

However, the decision to resolve disputes in the United States is often a high-risk, high-reward proposition. In exchange for a neutral judiciary and a deep-bench of talented advocates, litigants in US courts often face substantial costs associated with resolving disputes. And while arbitration often serves to limit those costs to some extent, the bloat of costs in the United States is often felt regardless of the form of dispute resolution chosen. This presents a unique opportunity for clients to benefit from funding – it provides a mechanism for clients to control costs, improve financial statements, and manage risk, all while benefitting from the advantages the United States offers as a forum.

COMPELLING CLAIMS ARE OFTEN ABANDONED OR COMPROMISED AT UNREASONABLE DISCOUNTS IF THE CLAIMANT LACKS FUNDS TO LITIGATE EFFECTIVELY AGAINST AN OPPONENT WITH SUPERIOR RESOURCES. LITIGATION FUNDERS CAN EVEN THE PLAYING FIELD. THE THOROUGH ANALYSIS OF ACLAIM THAT IS PART OF A FUNDER’SDUE DILIGENCE, MOREOVER, CAN PROVIDE A REALISTIC ASSESSMENT,FOCUS LITIGATION STRATEGYAND FACILITATE SETTLEMENT.CHARLES G. BERRY,LITIGATION PARTNER,CARTER LEDYARD & MILBURN LLP

“LITIGATION FUNDING IS ONE OF THE MOST IMPORTANT DEVELOPMENTS IN THE LITIGATION LANDSCAPE OVER THE LAST DECADE, PARTICULARLY IN THE ANTITRUST ARENA. ANTITRUST CASES CAN BE EXPENSIVE, AND IT IS DIFFICULT TO PREDICT HOW EXPENSIVE AT THE OUTSET. THIS CAN SCARE FIRMS FROM TAKING POTENTIALLY MERITORIOUS CASES. LITIGATION FUNDING ALLOWS A FIRM TO LAY OFF RISK AND BRING CLAIMS THAT OTHERWISE MIGHT NOT BE PURSUED. IT EXPANDS THE PIE FOR LAW FIRMS AND ACCESS TO THE COURTS FOR LITIGANTS.”

DOMINIC SURPRENANTPARTNERQUINN EMANUEL URQUHART & SULLIVAN, LLP

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Benefits of dispute resolution in the United States

The legal system in the United States draws on a substantial body of substantive and procedural laws that govern everything from where a claim may be properly litigated, to the types of claims that are recognised, the evidence that may be offered (or not) in support of those claims, the method and by whom decisions are to be rendered, and an appeal process to ensure that the rules are followed correctly and fairly. This system of jurisprudence draws rules from the US Constitution and similar documents adopted by the US states and territories, federal and state legislation, rules of procedure, decisional law, administrative law, and traditional common law. And, as noted previously, the rules are administered by neutral, well-trained and highly-experienced members of the judiciary and there is a deep bench of able advocates available to assist clients as needed.

While not entirely equivalent, arbitration and other private methods of dispute resolution are similarly supported. The existence of numerous agencies that provide fora for dispute resolution, well-established and stable procedural and

substantive rules often incorporated into agreements to privately resolve disputes, a deep-bench of experienced neutrals, and private decisional law all play to the strengths of private dispute resolution in the United States.

While benefitting from these systems of justice, litigants in the United States also enjoy financially substantial judgments and awards. A number of factors contribute to large damages awards in United States courts. Once again, clients vindicating rights in United States courts benefit from the talent possessed by the judiciary and the bar: courts and counsel can be expected to understand the evidence regarding damages in even the most complex cases. And because there is a robust system of review, even when lay juries are involved, post-trial motions and appeals provide litigants an opportunity to challenge awards that are not consistent with the evidence.

More importantly, rules governing damages are generally designed to put a claimant in the same position it would have been in but-for a defendant’s misconduct. The measure of make-whole damages is often uncertain, which the law tends to resolve in favor of the party that was wronged, not the wrongdoer. Moreover, certain

types of claims may also allow for trebling of damages or for awards of punitive damages. As a result, awards in the United States can easily reach into the billions of dollars. For example, in 2016, a database that amalgamates judgments and awards from all over the United States reported the largest verdict of the year, USD $3.01 billion in a contract law dispute between Hewlett Packard and Oracle. This case was not an outlier. In the same year, a patent infringement claim related to a Hepatitis C drug resulted in an award of USD $2.5 billion. All told, that same database was able to identify at least 100 cases in which damages awarded met or exceeded USD $20 million.

Importantly, these figures and averages only derive from publicly available information about judgments and awards. Out-of-court settlements and private dispute resolution awards are generally not public in the United States. In fact, the parties often contract to keep those figures private or settle on the basis that the agreement will remain confidential and not be disclosed. But experience dictates that these awards and out-of-court settlements can be just as significant as those awarded at trial.

Dispute resolution in the United States is expensive

Not surprisingly, the benefits of resolving disputes in the United States come with concomitant risks and expenses. For example, a recent survey reported that corporations spend in excess of USD $1.5 million per year on attorney fees for every USD $1 billion in revenue the companies generated. And a government report from 2008 suggests that companies spend on average nearly USD $115 million on litigation costs per year.

Aside from the costs of external counsel, there is one enormous driver of these expenses: discovery.

It bears noting that discovery is one of the major benefits of litigating or arbitrating in the United States. Indeed, the idea that a claimant is entitled to access information held by a defendant is ingrained into our judicial and arbitral systems (although on a more limited basis in arbitration). This is particularly so in situations where the wrongdoer retains much, if not all, of the information that the wronged party requires to prove their claim to degree necessary to be entitled to discovery.

But discovery of information, particularly in the advent of the information / digital age, comes with excessive costs. Most US courts will allow discovery of relevant information in a party’s possession, custody, or control. Accordingly, claimants are often able to obtain evidence held by a defendant’s affiliates or in jurisdictions where disclosure would not be required in a local suit. Moreover, a claimant may also be able to obtain discovery of relevant information from third-parties who are not even participants in the dispute. Rules governing discovery in civil cases may also require both sides in a dispute to collect and disclose large amounts of information and make witnesses available for depositions and again at trial. Overall this process is expensive. For example, the 2008 government report referenced above, reported that average discovery costs often run as much as USD $2.4 million in a given case, which undoubtedly has increased since the figure was reported nearly a decade ago.

United States litigation and arbitration makes its own case for litigation funding

Taken together, the case for dispute resolution funding in the United States is obvious. Clients are often left with the

need to make risk-reward calculations arising from limited resources and small or otherwise non-existent appetite for risk. In a high-risk, high-reward litigation and arbitration environment, the bar to entry for litigants with meritorious claims can be steep, and in many cases, insurmountable. Dispute resolution funding changes that calculus and can provide a significantly broader range of options for many claimants and in many types of cases.

“While third-party litigation funding has existed in the U.S. market for over a decade, its growth has accelerated rapidly over the last few years. An increasing number of contract and other kinds of commercial disputes now involve third-party funding of one form or another, the clients involved are increasingly sophisticated and diverse, and, as a result, firms like ours are much more likely to be engaged in these cases. Even large, well-capitalized clients are leveraging third-party funding to manage risk and cash flow in substantial legal matters. The U.S. market is still developing, but we expect funding to continue to grow in importance to a broad array of commercial clients and to the law firms that represent them.”

Mark Goodman Partner Debevoise & Plimpton

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David vs. Goliath Disputes

The paradigmatic example of dispute resolution funding, a small company deciding whether to take on its much larger and much better capitalised competitor, presents an even more acute situation in United States dispute resolution. Large corporate defendants often use discovery as a sword and a shield, dumping millions of pages of “responsive” documents on a smaller opponent with the hope of burying them in paper, and the expense required to review those documents. While litigants may turn to the court for relief, they are often stuck figuring out ways to sort through massive amounts of information to find that which is truly relevant to the dispute. The appearance of a well-capitalised funder, like Vannin Capital, changes the landscape of the litigation, often securing a change in tactic that focuses on the merits of the dispute and the potential for settlement.

Small / Medium-Sized Businesses

For small and medium-sized businesses facing the spectre of litigation, there is often a choice to be made: take a risk on litigating a case to right some transgression or push the business forward while ignoring the grievance. These businesses have limited capital and must constantly take stock of the resources at hand and the best way to deploy those resources, particularly as measured against risk. Engaging with a funder like Vannin Capital makes these choices unnecessary as funded businesses are able to leverage themselves on multiple fronts. Not only do they get access to capital allowing them to pursue the litigation and the business, they get access to a Managing Director at Vannin who is a trained attorney with years of experience to guide them through the process.

Well Capitalised Global Entities

For global entities, access to capital often is not an issue. Yet the demand for funding remains significant. Often, these organisations are far more interested in some of the ancillary benefits that arise from funding both single cases and portfolios. At its most basic, these types of entities are interested in risk transfer – funding from Vannin Capital is non-recourse, so if the litigant loses the case, they do not have to repay Vannin. In that sense, global entities can offload the risk of pursuing an offensive litigation strategy while at the same time enjoying increased cash flow, greater certainty in expenditures and relatively cleaner earnings and financial statements. In those instances, Vannin Capital is able to provide a unique and bespoke solution to fit the needs of the entity.

In summary, dispute resolution funding offers clients a distinct advantage in the United States, flexibility. In all situations, claimants may be reluctant to engage counsel on a billable-hour basis and major law firms may be reluctant to agree to alternative arrangements. By working with Vannin Capital, both claimant and counsel take cost concerns off the table when deciding whether to pursue a meritorious claim. Claimants can select the law firm best suited to their case and counsel can continue to serve important clients.

The law governing funding is still evolving in the United States, with different states and jurisdictions taking different views on issues like disclosure of funding and the discoverability of communications with funders. In upcoming articles and future editions of Funding In Focus, we will tackle these and other topics to provide continued insight into the law (and strategy) involved in funding claims in the United States. We see exciting opportunities to deploy our expertise and capital in the United States and look forward to exploring those opportunities with you.


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VANNIN CAPITALLATIN AMERICA AND THIRD PARTY FUNDING: A GROWING PHENOMENON

Carolina RamirezManaging Director

VANNIN CAPITAL

The past few years has seen a significant increase in the use of third party funding in the US and this shows no sign of slowing down. What has also become evident, is that the growth of third party funding is in fact a global phenomenon, reaching previously untapped markets such as Asia, the Middle East and Latin America. As one of Vannin’s most recent hires in New York I have witnessed the potential for third party funding in Latin America first-hand. Many of the cases that have come across my desk have had a Latin American component to them, whether they have originated in the region or simply involved Latin American companies or Multinationals operating or doing business in Latin America. This article highlights third party funding in Brazil, as it is arguably the region’s largest market and has seen a major uptick in third party funding in recent years.

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Why Brazil?

Third party funding is a recent phenomenon in the Brazilian legal market, with practitioners estimating its arrival onto the Brazilian legal scene as recently as two years ago. Compared with other Latin American markets, Brazilian practitioners are highly attuned to the existence of third party funding and have embraced it as a potential tool in settling disputes. This growth has in part, been attributed to the liquidity crisis that has followed the economic recession that has plagued Brazil in recent years, as well as the fall-out in the aftermath of Operation Car Wash or Operação Lava Jato and the increased use of arbitration.

Perception of third party funding

Despite the increasing use of third party funding in Brazil, there remains a general perception that it is used predominately by companies facing liquidity constraints. This notion is changing, however, and “although many doubts still surround third party funding in Brazil (due to the lack of specific regulation and the market’s relative inexperience with third party funding) the overall sentiment in Brazil is that third party funding is beneficial for the dispute resolution system in the country as a whole.”8 Moreover, “general concern with respect to the nature and involvement of the funder’s role seems to have been overcome and third party funding is now perceived as desirable rather than risky financing arrangement.”9 However, as one practitioner astutely points out, “case law on the matter is scarce and major Brazilian arbitration chambers do not publish their precedents, so parties (be it funders, funded parties or adversaries to a funded party) still have to deal with a reasonable (and potentially damaging) degree of uncertainty.”10 Still, various practitioners already recognise the numerous benefits of third party funding such as minimising litigation risks, freeing up capital for companies to continue their operating costs, encouraging early settlement and allowing for simplified financial statements. One practitioner forecasts that “it will evolve to [allow] major companies seeking reasonable financing that allows them to pursue their core business objectives while conducting high level litigation.”11

Third party funding in practice

Unlike, the US, where the cost of litigation is high, Brazilian practitioners across the board acknowledge that traditional courtroom litigation offers few, if any, benefits for third party funders. “The limited use of third party funding [in Brazil] can primarily be explained by the relatively low cost of litigation here. For instance, to file the initial statement in a judicial Lawsuit the plaintiff has to pay Court Costs of 1% of the amount in controversy (limited to a cap of BRL 75,210.00/USD 23,130.00) and to appeal, the appellant has to pay Court Costs of 4% of the amount in controversy which is also limited to a cap of BRL 75,210.00/USD 23,130.00.”12 Therefore, the low cost of filing a suit and litigation costs in general disincentivizes clients and their lawyers from seeking third party funding since costs are manageable and using third party funding “would entail forfeiting close to one-third of the potential recovery obtained in a lawsuit as a return on investment to the funder.”13

Another obstacle facing third party funding of traditional courtroom litigation is that “court decisions are subject to several levels of appeals, meaning that cases can drag on for years before a final decision is made.”14 This protracted litigation process inherently makes it more difficult for investors to predict the timing of recovery and possible judicial outcomes.

By contrast, there is widespread consensus among Brazilian practitioners that arbitration is where third party funding will prove to be instrumental in enabling parties to pursue meritorious claims they may otherwise not pursue due to the prohibitive costs of arbitration in Brazil and to ultimately settling disputes.

Furthermore, “Brazil is an arbitration-friendly jurisdiction, where parties can count on a trustworthy legal system that is aligned with international standards, respects arbitration agreements and awards, and is willing to grant measures in aid of arbitration. For this reason, the largest and most notable Brazilian companies have regularly turned to arbitration to resolve their disputes, either

by including arbitration agreements in the contracts they enter into or by requiring arbitration in their by-laws. It is noteworthy that Brazil is currently the third user of the International Court of Arbitration of the International Chamber of Commerce (ICC), and that the ICC recently announced the opening of a branch in São Paulo, only its fourth office overseas. Moreover, the core changes made in the last 20 years to the legal framework of arbitration in Brazil has made this dispute resolution mechanism increasingly popular for disputes of a certain complexity and/or involving significant amounts. The downside to arbitration as opposed to litigation before state courts is the cost involved and this is where third party funding comes into play as a possible solution.”15


8 José Antonio Fichtner, Tomaz Tavares de Lyra and Marcela Levy from ANDRADE & FICHTNER ADVOGADOS (“A&F”)9 Julio and Antonio from TOZZINI FREIRE ADVOGADOS10 Id. 11 Id. 12 Antonio Celso and Erik from VELLA PUGLIESE BUOSI GUIDONI (“VPBG”)13 Id. 14 Guilherme and Rafael from DEMAREST ADVOGADOS 15 José Antonio Fichtner, Tomaz Tavares de Lyra and Marcela Levy from ANDRADE & FICHTNER ADVOGADOS (“A&F”)

“AN INCREASING NUMBER OF INVESTMENT FUNDS THAT TRADITIONALLY FOCUSED ON THE SECONDARY MARKET BY TRADING CLAIMS (E.G. COMMERCIAL LITIGATION CLAIMS, FINANCIAL CLAIMS AGAINST DISTRESSED COMPANIES AND CLAIMS ON PUBLIC JUDICIAL BONDS –PRECATÓRIO) ARE [NOW] ALSO OFFERING THIRD PARTY FUNDING.”

GUILHERME FONTES BECHARA, JUNIOR PARTNER AND RAFAEL VILLAR GAGLIARDI, DEMAREST ADVOGADOS

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Regulation

By and large, third party funding is unregulated in Brazil. Only recently did the Brazil-Canada Chamber of Commerce (“CAM/CCBC”) – one of the most renowned institutions in Brazil – issue a resolution specifically recommending that parties disclose the use of funding at the outset of an arbitration (Administrative Resolution 18/2016).16 Practitioners predict that other arbitral institutions will soon follow suit and promulgate further regulations on the use of third party funding since there are currently no specific set of rules or guidelines governing third party funding. Given the lack of regulation of third party funding, the current climate is ripe for funders to enter the market.

The need for education

It is clear that the Brazilian legal landscape is on the precipice of major change and many anticipate that the use of arbitration, which has already become a favourite dispute resolution mechanism, will only increase in the years to come as the economy recovers from the past year’s economic downturn. However, there is still a need for further education on third party funding. Clients are still relatively in the dark when it comes to the benefits of third party funding and as one practitioner points out, “stakeholders need more information about the creative financial solutions and benefits offered through third party funding. Lack of understanding of the industry [in Brazil] is still perceived as the main reason why the third party funding market in Brazil is still in its early stages.”17

The future of third party funding in Brazil

Overall, practitioners are confident that there is a growing demand for third party funding in Brazil. They are highly optimistic that in the near future, once clients and practitioners have gained a certain amount of institutional knowledge, third party funding will thrive in the Brazilian legal market as it already has in more mature third party funding markets such as the US, the UK and Australia.

The resounding message is that Brazil is ripe for third party funding and that the time to enter the market is now. Furthermore, third party funding in Brazil is much better suited for arbitration than litigation. It is also clear that practitioners are enthusiastic about the prospect of having foreign third party funders with significant experience enter the market and level the playing field which has thus far been dominated by a single local Brazilian third party funder. Only time will tell, but all signs point to Brazil as potentially becoming a major player in the third party funding space.


15 Id. 16 Guilherme and Rafael from DEMAREST ADVOGADOS

THE RESOUNDING MESSAGEIS THAT BRAZIL IS RIPE FOR THIRD PARTY FUNDING ANDTHAT THE TIME TO ENTERTHE MARKET IS NOW

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VANNIN CAPITALLITIGATION FUNDING – SOLVING THE CFO’S DILEMMA

Tim AllenPartner

PwC

Andrew JonesManaging Director

VANNIN CAPITAL

What is the dilemma?

Much has previously been written about the benefits of third party non-recourse litigation funding. Some of these are obvious: shifting the risk of adverse litigation outcomes, access to justice for impecunious claimants and bolstering the quality of a legal team.

Less obvious, but arguably more important for corporate claimants, are the financial, reporting and operational benefits that can be reaped when using a third party to fund litigation – namely the immediate improvement of EBITDA and cash flow, greater certainty over forecasts of legal spend and the potential to turn a legal department from a cost centre into a profit centre. A corporate may also be able to pursue claims that would not otherwise be pursued due to budget constraints, at no incremental cost to the business.

In this article, Tim Allen, a partner and accounting expert in the Disputes practice at PwC and Andrew Jones, Managing Director at Vannin Capital, explain how these benefits work and why it is that a CFO should be at least as interested in the utilisation of litigation funding as a Head of Litigation or a General Counsel.

As explained in this article, a professional funder and accountant working together can provide a solution to the dilemma faced by many CFOs: how to shelter core business performance from the impact of uncertain legal costs, without compromising on the quality of advisers and the protection of legal and commercial interests?

But how does this work in practice?

The benefits described are perhaps best illustrated through a series of worked examples.

LITIGATION FUNDINGSOLVING THE CFO’S DILEMMA

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1. The self-funded claim

In this example, we consider the impact of a company pursuing a new outbound claim (i.e. where the company is the claimant) based on the following assumptions:

• The quantum of the claim is £100m and the proceedings are expected to last three years at a total external cost of £5m;

• Initial annual revenues are £100m, growing by 4% each year;

• The core business consistently delivers an operating margin of 6%;

• The opportunity cost of allocating capital to pursue the claim is 6%; and

• If the claim is successful, proceeds are assumed to be received shortly after the award.

In this instance, the “above the line” costs associated with pursuing the claim are recognised immediately as an expense and impact Operating Profit in each year while the proceedings are ongoing. Capital allocated to fund the claim cannot be used for core business activities, thus further reducing profitability.

Pursuing the claim not only distorts the performance of the core business, but also depresses the market valuation of the company by a multiple of the costs incurred.

If the claim is successful, the proceeds are recognised as a one-off “below the line” gain and will likely only impact the perceived valuation of the company on the basis of injecting additional cash into the business. In short, these are impacts that a prudent CFO will want to avoid.

Year 1 (£) Year 2 (£) Year 3 (lose) (£) Year 4 (win) (£)

Revenue 100 104 108 108

Core Operating Profit 6.00 6.24 6.48 6.48

Core Operating Margin 6.00% 6.00% 6.00% 6.00%

Legal cost -1.25 -2.50 -1.25 -1.25

Opportunity cost -0.08 -0.23 -0.30 -0.30

Adjusted Operating Profit 4.68 3.52 4.93 4.93

Adjusted Operating Margin 4.68% 3.38% 4.56% 4.56%

One off gains 0.00 0.00 0.00 100.00

Table 1 – Example 1 new claim is self-funded

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2. Funding the same outbound claim through a third party funder

Using the same scenario as in Example 1, we now consider the accounting impact to the company of financing the new claim with non-recourse funding provided by a third party litigation funder.

In this example, the company no longer bears the “above the line” legal costs of pursuing the claim. The Operating Profit (excluding one-offs) reported in each year is reflective of the core performance of the business, likely boosting its valuation.

As with Example 1, the future benefits of a successful claim offer no benefit to the profitability of the company in Years 1 and 2. If the claim is successful, the company recognises a reduced one-off gain, but given the preservation of profitability during Years 1 and 2, a reduced net claim receipt will have a limited impact on the change in the valuation of the business.

Although the company gives up a portion of its eventual (but uncertain) gain as a premium to its funder, the funding arrangement has meant that there has been zero cost incurred in generating that gain. An in-house legal team has therefore utilised funding to generate profit.

Table 2 – Example 2 non-recourse funding of a single claim

Year 1 (£) Year 2 (£) Year 3 (lose) (£) Year 4 (win) (£)

Revenue 100 104 108 108

Core Net Profit 6.00 6.24 6.48 6.48

Core Net Margin 6.00% 6.00% 6.00% 6.00%

Legal cost 0.00 0.00 0.00 0.00

Opportunity cost 0.00 0.00 0.00 0.00

Adjusted Operating Profit 6.00 6.24 6.48 6.48

Adjusted Operating Margin 6.00% 6.00% 6.00% 6.00%

One off gains 0.00 0.00 0.00 76.00

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3. Funding a portfolio of inbound and outbound claims

Finally, we consider the benefits of a portfolio funding arrangement whereby a funder advances funds against a portfolio of cross-collateralised cases which could incorporate both outbound and inbound claims (i.e. where the company is the defendant).

Increasingly, corporate clients with large portfolios of disputes are seeking to lay off the risk and the cost of those portfolios to a third party funder.

The financial and accounting benefits of a portfolio arrangement would of course depend on the precise structure of the

funding arrangements and the composition of the portfolio, but they could include (amongst other things):

i) reduced costs and cash outflows relating to legal costs across a range of claims;

ii) an incremental revenue stream if non-recourse funds can be used to fund internal as well as external legal resources; and

iii) a lump sum cash injection.

Inbound claims in particular, complicate the CFO’s dilemma even further. These claims cannot be selected or planned. They can

generate significant costs, but the company has far less control over when and how those costs will be incurred, and at what level. Crucially, inbound claims must be defended not for the benefit of making uncertain future gains, but to avoid or minimize future losses.

The uncertain timing and value of costs associated with inbound claims can result in a CFO and/or General Counsel having to cannibalise investment and sales budgets, impacting revenue and profitability, with no short term financial benefit generated in return.

The requirement to recognise inbound “above the line” claim costs immediately, and the knock-on effect of having to shift capital away from core (profit generating) business activity, results in a significant reduction in profits as a result of an unexpected inbound claim. Using a portfolio arrangement to insulate the company from the impact of such unexpected costs would not only benefit profitability in the immediate short term, but ensure that (i) scarce capital is focused on investment and activity with long term benefits for the company and (ii) ensure the best advice and professional services can be secured to assist the company.

Further, if a proportion of the funding can be used to finance internal as opposed to external legal costs (for example, the cost of additional in-house legal resource to manage the relationship with the external advisers), this would effectively create a revenue stream for the internal legal team. Not only that, but the utilisation of funding to avoid external costs could have a potentially greater pound for pound impact on the internal budget as the profit margin on external services can be avoided. The in-house legal department can thus be transformed from a cost centre into a profit centre.

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Are there any other benefits to third party funding and what are the costs?

To summarise, based on our experience, the key benefits to businesses using dispute resolution funding are as follows:

Increased market value of the business – cash that is spent pursuing claims is not then available for general business building activities, meaning that the chance of growing the EBITDA of the business from the expenditure of those funds will be lost.

Risk shifting – in much the same way that insurance and other hedging products are used in commerce, litigation funding effectively shifts the entirety of litigation risk from the claimant to a third party.

Unlocking value – each potential claim is an asset of the company. In a world where growth is scarce, the importance of extracting value from all available company assets has never been higher.

Reduced drain on legal budget – with the costs of running the claim outsourced to a funder, the legal budget can be more effectively deployed on core activities.

Time savings – if Vannin Capital’s team are used to help run the case, management and legal team time may be used more effectively on other activities relevant to the business.

Improved settlement prospects – the fact that Vannin Capital is involved can send a powerful message to the respondent that an independent commercial entity, which only invests in meritorious claims (including an independent senior lawyer engaged by Vannin Capital confirming the strength of the claim) considers that the case has a strong chance of success. Involving a funder can give the other parties reason to pause and reassess their defence and their own advice on prospects, particularly when they understand that the claim is fully funding through to trial.

Expert assistance – as a professional dispute resolution funder, Vannin Capital brings to bear its considerable litigation and arbitration experience and can add real value by, if requested to do so, providing strategic input as the case progresses.

The role of lawyers – the quality of a claimant’s legal team is crucial to achieving the best outcome in a case. In Vannin Capital’s experience, using a top-tier legal team (lawyers and barristers) will get a better return, more quickly.

Alternative uses of funding – funding can also be structured whereby meritorious claims (i.e. where the company is the claimant) could be used as collateral to secure funding for ongoing operational cash requirements or as a way of crystallising a proportion of uncertain future gains sooner.

Costs – the “cost” of obtaining all of these benefits is not really a cost at all, at least in an accounting sense. Rather, the company will be giving up a proportion of future uncertain gains (some of which may otherwise not be pursued), which will only arise in the event of a successful litigation outcome and which in the short term carry no financial benefit for the business

And finally… how can an accountant help?

Evaluation of the value of claims – assessing the potential value of a claim is an essential part of the decision-making process relating to any dispute. An accountant can provide an early independent assessment of the range of claim values and the support and evidence which would be required to support this quantum robustly. This could help define the costs and challenges associated with pursuing a claim.

Effective use of capital – working with the CFO and General Counsel, an accountant can help assess the most effective use of capital within a corporate’s legal function, considering the most beneficial mix of funding sources, such as third party funding, which could potentially transform the legal practice from a cost centre into a profit centre.

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VANNIN CAPITALTHIRD PARTY FUNDING TERMS – IT’S MORE THAN JUST THE PRICE

Tom McDonaldManaging Director

VANNIN CAPITAL

Across the globe, Third Party Funding (TPF) is becoming more accepted and mainstream. This year, the major dispute resolution hubs of Singapore and Hong Kong have legislated to remove historical barriers to the use of TPF in international arbitration proceedings. Vannin continues to see an increase in the number of large companies who are using TPF to more efficiently manage their involvement in dispute resolution processes.

With increased use of TPF, comes different approaches to obtaining the right product. We have found that many claimants approach TPF in the same way they go about obtaining general finance or other financial products for their business (such as hedging agreements, insurance etc), and seek multiple offers from different funders for a solution. In this regard, the immediate comparator between funding proposals often becomes the premium that is payable to the funder on a successful outcome. Whilst this is clearly an important aspect of any funding arrangement, a narrow focus on price excludes many other features which should be of significant value to a funded claimant.

In this article, based on our years of experience in the global TPF industry, we outline what we consider to be the key additional features that claimants should carefully consider when negotiating any TPF arrangement.

THIRD PARTY FUNDING TERMS IT’S MORE THAN JUST THE PRICE

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Who is the funder?

In recent years, a number of new participants have arrived on the TPF scene. Whilst some of these funders purport to have track records, they often have corporate structures and are incorporated in jurisdictions which make understanding their business difficult. This can have important consequences for claimants. For example, funders who have external investors (eg, hedge funds or are listed), are likely to have obligations to regularly report on (and achieve) certain results. This may drive the behaviour of those funders in relation to their funded cases and “low ball” settlement offers. Claimants need to ensure their interests align with those of the funder to the greatest extent possible. Vannin is a privately owned company. This gives us many advantages, including that we are not sensitive to timing pressures to recognise revenue in the same way that some of our competitors are. Vannin is a patient partner in any case that it funds.

TPF is a difficult business and a prospective funder should be able to satisfy a claimant that they have navigated the ups and downs of TPF and have multiple years of experience in funding cases of the type being litigated by the claimant. When the going gets tough, a claimant needs to be satisfied that their funder will have the resilience to stick by them.

Claimants should also satisfy themselves that their funder has experience funding cases in the jurisdiction where their claim is being litigated. There are many important and significant regulatory differences between relevant jurisdictions where TPF is permissible. For example, in Singapore, TPF arrangements are permissible in the context of international arbitration, but only to the extent that the certain regulatory requirements are met, including that the funder meets the definition of a “Qualifying Third Party Funder.”

The financial wherewithal of the funder not only has overall importance, but is particularly relevant to the question of how security for costs will be dealt with in the dispute. Some funders will seek to manage the exposure on balance sheet through a deed poll lodged with the Court, but claimants need to understand how many of these exposures the funder might have and be satisfied that the funder can make good on them when called upon. Vannin insures all of its adverse cost exposures through insurance policies placed with a global “A rated” insurer, which we consider gives claimants additional certainty through a freestanding policy with coverage at whatever amount is required by the claimant.

Timothy Webb

Partner

CLAYTON UTZ, SYDNEY

“The market for TPF has evolved significantly in recent times with Australian funders and international funders with an Australian base, now funding a broader variety and scale of disputes. Funders are increasingly showing interest in a range of meritorious claims falling outside traditional insolvency and class action contexts, such as within the intellectual property sphere. However, given the varying levels of sophistication among funders, it is essential that potential claimants take the time to carefully consider a prospective funder – it could mean the difference between a successful or unsatisfactory outcome. A range of matters should be considered, including what due diligence is required to satisfy the funder’s risk and commercial policies in making funding decisions, and whether they have the financial backing to support the case throughout the entire dispute process.”


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How is the deal structured?

Vannin is a pioneer in the use of innovative pricing structures for TPF transactions. We regularly include a premium in our transactions expressed as either a multiple of the funding provided, a simple interest rate on the funding advanced or a share of recoveries (or a combination of those concepts). It is also important for any pricing structure to recognise that the applicable premium payable to the funder should change with the funder’s risk profile across the life of the dispute (which is generally affected by both the effluxion of time and increasing spend). For example, it would be appropriate for a funding structure to recognise a comparatively lower rate for an early settlement or where the funder expended less than a given amount of the funding facility.

Claimants should also clarify with their proposed funder that the headline funding premium represents the only fee that will be payable to the funder, or whether (and in what circumstances) additional costs might be payable. For example, we are aware that in addition to the premium, some funders choose to charge claimants a “project management fee” and charge a further premium amount to the extent that further defendants are joined to a case. Vannin does not charge either of these fees.

In addition, claimants might also wish to consider whether it may be commercially beneficial for them to include the primary claim within a broader portfolio of claims in which they are involved (which may include defendant exposures). Vannin regularly provides portfolio funding solutions which include multiple claims.

Timothy Cooke

Partner – International Arbitration

STEPHENSON HARWOOD, SINGAPORE

“For many people, the notion of third party funding is equated with an arrangement for the payment of an impecunious claimant’s costs of preparing and arguing a case, in return for a premium if the claimant is awarded damages. Although this description is accurate for many cases, it does not capture the broader and more sophisticated suite of structures available to the market. For example, funding is not the exclusive preserve of the impecunious. Corporates may use funding as a tool to manage the risks inherent in the prosecution of any claim, including the exposure to adverse costs orders which in large claims can be substantial. Claimants may also be involved in multiple claims (in some of which they may be respondents) that involve similar factual or legal issues, and which could be funded on a portfolio basis. These sorts of variables – and there are many others – will also shape how the funder’s premium is to be calculated.”


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Do we have the same case strategy?

In any TPF arrangement, funders should bring their extensive experience to the table, in both funding (and winning) disputes of the type the claimant seeks funding for. Most leading funders view themselves as partners in the dispute resolution process and provide their expertise as a non-additional cost to their funding (ie, no project management fee), as and when required.

One of the key areas where funders can add value is in relation to the likely cost of running the dispute to final hearing. Based on our years of experience, we can generally assess whether anticipated legal budgets will be adequate or not. Vannin’s preference is to pay legal advisors the full amount of their usual rates as the case progresses. Claimants should be wary of potential consequences from funding arrangements where funders insist on risk sharing terms with legal teams in order to reduce the overall amount of funding they need to provide. In our experience, the performance of the legal team can suffer when budgetary caps are reached, and the legal team is required to continue work on the case without payment. Claimants should also understand whether their funding terms change (to become more expensive) if the original budget is exceeded.

Many claimants will have views as to how their case should be conducted, for example, including where the best evidence is likely to be found and how it should be introduced. This might include specific things such as views about what evidence might be relevant, or more generally, how much it might cost to litigate the claim. Claimants should discuss these topics with their legal advisors and prospective funder before entering into a TPF arrangement to ensure there is consensus as to how the claim needs to be conducted. However, most leading funders will be content to follow a case strategy which the claimant has determined in consultation with the legal team.

The strength of the legal team is crucial to obtaining a successful outcome in any case. In jurisdictions where external Counsel from a local bar will be used, it will be important for the team to have worked with this Counsel before and have confidence that they are the right person for the job. Funders often have significant experience working with various Counsel and can provide helpful input on selecting the best person for the job.

Can we work together?

The resolution of significant commercial litigation or arbitration can take many years. Accordingly, claimants need to be satisfied that they can work together effectively with their funder and that their LFA provides an appropriate framework for this. For example, the LFA should provide for a dispute resolution mechanism in the event that there is disagreement between the parties. Most LFAs contain a mechanism for a senior barrister to determine any dispute between the parties and provide that the determination is to be binding.

However, the funder’s track record will be most instructive – can the funder point to circumstances where it has successfully funded similar cases? At Vannin, we hope that our years of experience in the global TPF market will provide claimants with comfort and certainty that we can be a trusted funding partner.

Maria O’Brien

Partner and Australian practice leader – Restructuring and Insolvency

BAKER MCKENZIE, SYDNEY

“Litigation funders are professional litigants, and they bring to the table enormous practical experience of litigation including timing, costs, key procedural steps and choosing counsel and experts. There is also the immeasurable benefit of having another set of highly qualified “eyes” to consider all aspects of the litigation.

The funder’s financial interest as well as their considerable experience enables proactive and considered upfront planning to occur in consultation with the litigant and their legal advisers to optimise the conduct of the litigation including – critically – the approach to the evidence that will be led and the choice of appropriate expert witnesses. Ensuring consensus is reached early regarding the approach to the critical issues in the litigation is clearly for the benefit of both funder and litigant, to maximise the prospects of success and avoid any surprises.”


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VANNIN CAPITALWILL ARTIFICIAL INTELLIGENCE REPLACE LAWYERS?

Yasmin MohammadManaging Director

VANNIN CAPITAL

There is not a legal conference these days that does not address in one way or another the development of legal technology and how it is impacting the industry. First and foremost, legal technology has transformed the way document management is performed and the benefits derived from it. We can now digest and analyse thousands of documents in a fraction of the time and largely prevent the inevitable human errors in reviewing them.

WILL ARTIFICIAL INTELLIGENCE REPLACE LAWYERS?

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“The topic of AI has increasingly come up in discussions here in the United States. In fact, it was the subject of an international arbitration event in November at the New York International Arbitration Center. In the context of international arbitration, I am aware of various firms that have used AI technology in performing voluminous document reviews. There have been a number of studies on this and the results show that the use of AI can produce reliable results for clients at a lower cost. The process involves some level of “manual” review on a representative sample, which then feeds into the larger volume of documents. The reality of the volume of e-disclosure we are now faced with requires us to bring more discipline into the document review system and the various ways in which we can make it more efficient for our clients.”

Sammaa A.F. HaridiPatner

HOGAN LOVELLS US LLP


Furthermore, legal technology is now permitting the analysis of previous decisions in various forums (1) by specific judges, (2) on particular motions and (3) using all the information contained either in the dockets or the decisions rendered themselves to make educated decisions on case strategy, using information that was always available but never compiled and analysed as one data set.

It is obvious that the notion of “predictive” legal technology would be a considerable game changer in the world of litigation, arbitration and naturally, third party funding. In the United States, legal research and analytics firms, Ravel Law and Lex Machina are spearheading research and developments into this new era and developing insights into this truly predictive technology. I spoke to Daniel Lewis, co-founder of Ravel Law, on the latest technological developments shaping the legal industry today and this is what he had to say...

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How are lawyers using platforms like Ravel Law to facilitate their role in litigation and arbitration proceedings? People turn to Ravel to search caselaw more quickly and to discover analytical insights about judges, courts, cases, and firms. For example, a litigator can see what percentage of the time a judge grants a motion to dismiss in a particular type of case (e.g. product liability), and discover the language and cases that the judge commonly uses and is influenced by in such decisions. This enables lawyers to make data-driven decision about what is likely to happen in the case and how to make their desired outcome more likely.

How do we bridge the gap between analysing the past and predicting the future? This is a question we are actively working to answer to develop more prediction capabilities. Tabulating past examples of grants and denials, and carefully inspecting the individual circumstances of those outcomes, can be extremely useful. A formal predictive model, though, is more robust: because it has been trained on thousands of examples, it can generalise more confidently about the relative influences of dozens of factors.

Suppose you are interested in a motion’s odds of success given a particular set of circumstances—a specific court, judge, motion type, topic—for which there are very few direct examples. It would be difficult to reliably estimate a motion’s grant probability given just these examples, and even more difficult to know which factors most influenced the observed outcomes. Our predictive model is less brittle than simple tabulation, since it learns from all motion outcomes handed down from the particular court, all motion outcomes decided by the particular judge, and so on—and it learns to generalise about the average impact of each of those factors, bringing this generalised knowledge from thousands of observations to bear even when predicting outcomes of cases with few direct observations.

Can we talk about Artificial Intelligence or is that two/three steps removed from the existing technology? AI is perhaps best thought of in two different ways, specific vs. general. Specific AI is already taking place extensively; machine learning is being used to accomplish specific tasks. For example, we use machine learning throughout our systems to extract and classify information from legal documents (e.g. an algorithm that has been trained to identify any motions involved in the case). In contrast, general AI, which people think of as a self-functioning robot that acts like a human, is far off.

It is clear from our discussions with Daniel that the development of predictive technology is gaining pace and having a huge impact on the legal world as a result. This development is however in its infancy and there is some work to be done before law firms can fully embrace AI as an effective case management and business tool.


Daniel LewisCo-founder

RAVEL LAW

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The devil is in the data

The raw data set necessary for effective analysis and interpretation must be extensive to allow for patterns to be identified and analysed effectively. Clearly, the larger the data set, the more educated the technology and the more accurate the educated guesses become. If a judge has only handed down a handful of decisions on a particular type of motion, the analysis would remain inconclusive presumably. With the current technology, lawyers can learn from the past and make more informed strategic decisions. According to Daniel, for the analysis to become predictive, the data set would need to be substantially increased.

What we did not discuss with Daniel but which is clear, is that the system of stare decisis in the United States and most common law countries which binds lower courts to the decisions of higher courts is

conducive to more foreseeability. This calls into question the possibility of using predictive technology in the context of civil law jurisdictions and arbitration.

Analytical technology takes into account that a same judge is likely to react similarly in similar situations. Presumably, predictive technology will also take comfort in the fact that that subsequent courts of the same jurisdiction will follow the decisions of the higher courts before them.

That being said, it is not a huge stretch of one’s mind to consider that well educated analytical technology is in fact more refined and weighted than any use of the stare decisis principle.

Several academics have proposed algorithms for predicting case outcomes based on information such as the

composition of an appellate panel and the ideology, gender and background of the judges, and these algorithms have generally performed better than law professors’ predictions based on the legal issues involved.

In fact, the use of much broader information and publicly available data concerning any single potential dispute and specific judge or arbitrator has significantly changed the matrix of predictive technology. One can only imagine the impact of other data sets that could be used: social backgrounds, political affiliations, sexual orientations, family situations, financial situations etc. Should these “human factors” that lead to unconscious biases not also be taken into consideration? Would in fact Big Data also not become a very important parameter to consult?

Required Interpretation

For the analytical technology to become properly predictive, interpretation of the information is required. How does one teach a machine to go from highlighting patterns and correlations between facts and events to proposing causation and conclusions?

Saying two variables are highly correlated does not mean one is causing the other; both could be caused by a third, unidentified variable, or it could be a random correlation, or the dataset could be biased or simply too small. Dispute resolution analytical technology currently consists of identifying correlations. It takes an experienced lawyer to review the data and understand the valuable, actionable insights and random patterns that are irrelevant.

International Arbitration?

In the context of international arbitration, the hurdles are two-fold: (1) awards are not public information for the most part in commercial arbitration and only partially in investment treaty arbitration and (2) tribunals do look to certain decisions for guidance but only in an informative manner except for a dozen truly authoritative decisions most often quoted. Clearly, the fact that there is not a substantial amount of recorded precedents that can be used to educate the technology is a significant hurdle.

However, the amount of academic writing from individual arbitrators is on the other hand substantial. Moreover, arbitrators express their opinions about various legal or factual topics very regularly, whether directly online in forums or during conferences, and those opinions are recorded. What if all of those expressions of opinion and views could be also captured

and analysed when determining how a particular three-person Tribunal is most likely to decide on a dispute?

Another tool that could greatly aid parties’ views of settlement discussions post hearing is to use analytical and statistical technology to analyse the questions of the arbitrators during a hearing. Several studies in the United States have shown a correlation between the number of questions asked to each party and the overall result of a case. The more questions were asked of a party the more they were likely to lose and to lose more severely.

The possibilities to increase the data set seem endless but the interpretation will presumably always be required.

Lawyers can be reassured; their counsel will continue to be needed but their decision-making processes will be better informed.

THE RAW DATA SET NECESSARY FOR EFFECTIVEANALYSIS AND INTERPRETATION MUST BEEXTENSIVE TO ALLOW FOR PATTERNS TOBE IDENTIFIED AND ANALYSED EFFECTIVELY.CLEARLY, THE LARGER THE DATA SET, THE MOREEDUCATED THE TECHNOLOGY AND THE MOREACCURATE THE EDUCATED GUESSES BECOME


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VANNIN CAPITALCONTRIBUTORS

WITH THANKS TO OUR CONTRIBUTORS

Charles G. BerryLitigation Partner

CARTER LEDYARD & MILBURN LLP

+1 212 238 [email protected]

Timothy WebbPartner

CLAYTON UTZ, SYDNEY


Tomaz Tavares de LyraPartner

ANDRADE & FICHTNER ADVOGADOS


Maria O’BrienPartner

BAKER MCKENZIE SYDNEY

+ 61 2 8922 [email protected]

Alan GuyManaging Director

VANNIN CAPITAL


Andrew JonesManaging Director

VANNIN CAPITAL


Julio Gonzaga Andrade Neves

TOZZINIFREIRE ADVOGADOS


Antonio Marzagão Barbuto Neto

TOZZINIFREIRE ADVOGADOS


Carolina RamirezManaging Director

VANNIN CAPITAL


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DEMAREST ADVOGADOS


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DEBEVOISE & PLIMPTON


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ELLEX RAIDLA

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Richard HextallChief Executive Officer

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VANNIN CAPITAL


Ivana Bačić



Samaa A.F. HaridiPartner

HOGAN LOVELLS US LLP


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MOURANT OZANNES

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Eleanor MorganPartner

MOURANT OZANNES

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Jonathan HilliardQC

WILBERFORCE CHAMBERS


Charles BalmainPartner

WHITE & CASE


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ELLEX KLAVINS


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PwC


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QUINN EMANUEL URQUHART & SULLIVAN, LLP


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RAVEL LAW


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SKS LEGAL

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Lucia RaimanováCounsel



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Established in 2010, Vannin Capital is the global expert in legal finance, supporting law firms and corporations in the successful resolution of high-value commercial disputes.

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