Tick tock – Could arbitration lawyers be in the firing line for failing to suitably advise their corporate clients on their funding/risk mitigation options?
We’ve previously discussed the importance of commercial arbitration lawyers (including international arbitration specialists) being familiar with the full suite of options when it comes to advising clients on their funding and risk mitigation options when pursuing a commercial or international arbitration claim.
Without question, we’ve seen some complacency emerge, for example, where lawyers are simply referring cases to a single preferred funder, often oblivious to other options available to the client. This could well result in issues down the track.
One such example is that despite the startling statistics in international arbitration demonstrating the increasingly willingness of tribunals to allow a full or partial cost shifting (adverse costs awards) against the unsuccessful party, some lawyers are still failing to advise their client on even the basics of adverse costs insurance. We suspect this is at least in part because clients can often be pigeon holed into two categories: the individual or small business claimants, who will likely have the greatest need for litigation finance, and secondly the corporate claimant with a strong balance sheet and a history of engaging panel firms by the hour.
Arguably, the man of straw/very small business claimants (or SPVs as can often be the case) have the least to gain from adverse costs insurance. If, for example, the business has limited or no assets, there is little for a successful respondent to enforce their cost order against. Of course, a successful security for costs application by the respondent would change that dynamic. However, it can be that the corporate claimant has the most to lose from an unsuccessful arbitration. As a cash rich claimant enterprise, a respondent will be confident of its ability to enforce any cost award against such a claimant, if unsuccessful. Yet this is an exposure the corporate company didn’t need to take. Assuming the inhouse legal team were advised at the outset that their case appeared to be reasonably strong (one would assume that most cases that they choose to pursue fit this criteria), the adverse cost exposure could potentially have been insured. Furthermore, most of the premium (if not all) for this type of cover is often contingent upon success, meaning the claimant only pays the premium if they succeed in the arbitration.
While professional duties require lawyers in England and Wales to advise upon such options, such standards will vary jurisdiction to jurisdiction. However, clearly given the availability of such covers, it potentially creates a ticking time bomb of future claims against law firms who failed to appropriately advise on such options. One only need look at a host of recent arbitration awards where large enterprise claimants have lost their claim and now face adverse cost bills in the millions or even tens of millions of dollars. This double loss (given the write down of their own fees outlay) potentially could have been easily mitigated.
Such covers needn’t be limited to adverse costs either. Insurers can also potentially insure a portion of the fees the claimant is paying their own counsel, which means they are reimbursed for the fees they’ve paid if the claim is unsuccessful. Similar mechanics can apply with regards premium structuring.
Have a case? Speak to us first to learn about the full range of options
If you have a client considering pursuing a commercial or international arbitration claim and would like to better understand their funding and insurance options, then speak to one of our specialist team: