The Dilemma of Exclusivity Periods When Arranging Arbitration Finance
Any lawyer that has explored arbitration finance will doubtless be familiar with the scenario. You approach a funder who expresses interest in funding the case, perhaps gives you a quick indication of likely funding terms, and then requires a period of 4-6 weeks exclusivity to consider the case.
The logic behind a funder requiring this exclusivity period is understandable. After all, they are likely going to appoint external counsel to provide a review of the case and clearly would be reluctant to incur the time and expense if ultimately their chances of securing a deal with the client are far from certain.
However, on the flip side of the coin are the needs of the client. The client is most likely under some time pressure to get their arbitration moving– perhaps they’ve already filed their Request For Arbitration. If the funder’s offer is reasonable, and they ultimately crystallise their offer into a binding offer to fund at the end of the due diligence period, then all is well However, we live in an imperfect world, which equally applies to the funding market.
It’s not uncommon for a funder to ultimately pull out of a deal once they get into their due diligence. Assessing cases is a highly subjective process. Even if the funder’s own assessors initially liked a case their external advisors or experts may well take an opposed view. If a funder doesn’t ultimately complete, it leaves the client still in need of funding, but now in the unenviable position of having to explain to other funders why their case has been rejected elsewhere. In some instances the funders’ due diligence can take significantly longer than anticipated. In this situation it can be difficult to advise the client on what is the best course: Does the client stay with the funder if they are continuing to make positive noises yet are still failing to deliver a binding offer? Or do they cut their losses and look elsewhere? By this stage the client’s lawyers may have already incurred a significant amount of fees in dealing with the funder’s due diligence queries.
To complicate matters further, not all funders operate in the same manner. Some funders will complete their due diligence upfront and without any exclusivity period. Clearly this is a better scenario for the client. However, with funders taking different positions it can cause a client a dilemma. For example, what does a client do when face with a tabled (binding) offer from a funder who has completed their due diligence, but whose price is higher than another funder who has given a lower indicative price, but crucially one that is still subject to that funder undertaking further due diligence? Does the client roll the dice and hope the lower priced funder’s due diligence ultimately yields a positive result or do they play safe and take the bird in the hand deal (albeit at a higher cost)? Unfortunately this scenario is not uncommon, particularly with funding for international arbitrations. Even as brokers, who are likely exposed to more deals in aggregate than anyone else in the market, we still face this dilemma and have to carefully navigate clients to achieve the best outcome possible, but there is a rarely a black and white answer.
If there is one point we would stress is to ensure that the client’s expectations are managed. A very quick indicative offer from a funder is not really an “offer”. In our view an ‘offer’ in this context needs certainty. If the offer is coupled with a large degree of uncertainty (as is clearly the case with any funder yet to do their “heavy lifting”) it really is no more than an informal and non-binding indication.
As mentioned, it’s understandable some funders insist on this exclusivity approach to due diligence, they might be operating on a constrained management fee from the fund, but perhaps it needs to be recognised that we are in an imperfect world and as such we don’t always get to have our cake and eat it too. The signs over the past few months are encouraging. There appears to be movement afoot that an increasing number of funders are moving to the non-exclusive approach, which is clearly a better scenario from the client and lawyers perspective.
Matthew Amey, Director
If you have a case in need of arbitration finance speak to our team on 0845 257 6058