White & Case has partnered with the School of International Arbitration at Queen Mary University London, to provide an updated study* on various recent trends and opinions with regards the evolution of international arbitration. Over 1000 respondents participated in the survey, ranging from private practitioners, arbitrators through to in-house counsel and other experts.
The survey was broad ranging in its scope, for example, it identified that enforceability of awards was considered the top most valuable characteristic of international arbitrations and that London, Paris and Singapore continue to be the most dominant seats.
However, several of the results are directly relevant to the third-party funding and insurance market. We highlight some of the survey’s questions and findings and add some commentary from our perspective as one of the most active litigation finance brokers in the sector.
Question: what are the three worst characteristics of international abritrations:
- Cost: 67%
- Lack of effective sanctions during the arbitral process: 45%
- Lack of power in relation to third parties: 39%
The overwhelming majority of respondents placed cost as the number one worst characteristic of international arbitration.
This mirrors our experience. The cost of arbitrations is often higher than budgets we see for most commercial litigation claims. In the past few years we’ve seen a fairly consistent rise in budgets for international arbitrations by law firms when seeking funding or insurance for their clients. However, this isn’t necessarily as a direct result of a substantive increase in lawyers’ own fee budgets. The following are just a few examples of why costs budgets may have risen:
- Increase in cost shifting
Recent studies, such as Allen & Overy’s 2017 study** of investment treaty cases (cost, duration and size) has shown an upward trend in the number of arbitrators awarding costs to the successful party.
- Realistic cost budgets
In the early years of the litigation finance market, cost budgeting was far from scientific. Even today, predicting budgets is fraught with challenges given the number of variables at play. However, funders have become more adept in their scrutiny of budgets, which is not necessarily a bad thing for lawyers. Professional investors, like claimants, seek as much budget certainty as possible. As such, most funders would rather see a realistic budget from the outset rather than an underestimation. So, while claimants may wince at the legal budgets when tabled, if they are thoroughly considered (as is increasingly the case), it avoids unwanted surprises later.
- Greater recognition of enforcement expenses
International arbitration lawyers seeking finance or insurance on behalf of their clients will understand that one of the first considerations for any third-party stakeholders is what is the enforcement risk. In years gone by enforcement was often a footnote in memorandums and non-existent in lawyers’ budgets. Funders, insurers and clients are fully aligned in that their proceeds are only realised once damages have been recovered. An award which is subject to numerous future appeals, delaying and evading tactics by opponents, will be of little solace if it doesn’t result in a financial recovery. Lawyers are, therefore, increasingly requested to include a realistic provision in the budget to allow for enforcement expenses and potential appeals.
Question: Will Brexit impact the use of London as a seat?
55% of respondents think that Brexit is unlikely to impact the use of London as a seat.
Such confidence will be warmly received by the funding market. Much of the innovation in the litigation finance market originated from the UK and even more so with regards arbitration cost insurance, which is largely a UK export.
While the seat of the arbitration can be unknown at the time of making an application for litigation finance and insurance, invariably most funders and insurers will take great comfort in London being the seat. While many insurers might have a preference for a UK seat, for some it might be a prerequisite to their being able to offer cover e.g. due to their own licensing or internal restrictions over the territorial limits that apply to their underwriting authority.
Staying on the Brexit topic, while much of the discussion surrounds how negative Brexit will be on the UK legal market, finding more upbeat sentiments can be a challenge. Nonetheless, one arguable positive is that the usage of damages based agreements and other alternative fees appear to be on the rise in the UK, not only for arbitration lawyers but also among general litigation disputes lawyers. The increase has, in no small part, been because of new modelling occurring behind the scenes to help support law firms to grow their alternative fee book. Portfolio litigation finance is one option and contingency (or WIP) insurance is another. As UK lawyers engage more frequently with these products, and firms become more comfortable as a consequence to offer alternative fee billing, it will add a significant string to the bow of UK firms, and potentially a competitive advantage over rival jurisdictions post-Brexit where such fee arrangements are still not permitted.
Question: How familiar are you with other types of external funding (e.g. liability insurance, before the event insurance, after the event insurance) of parties in the context of international arbitration?
- Aware of it but have not seen it in practice: 57%
- Have seen it used in practice: 18%
- Not aware of it: 14%
- Have used it in practice: 10%
This was an interesting and welcome question omitted from previous surveys, as it shows the widening landscape of other available and active products being utilised in this sector. While the volume of respondents not aware of such alternatives was higher than for third party funding, 14% compared to 3%, it still demonstrates a significant increase in overall awareness. Very little media coverage is granted to the insurance market by comparison to the third party funding market, yet understanding of these products has clearly seen exponential growth in the arbitration market in the past few years.
At TheJudge, a significant volume of the arbitration cases that are referred to us for funding ultimately include some form of arbitration cost insurance.
Such protection can provide self-funding claimants with an indemnity for the fees and expenses they pay their own lawyers against the risk of the case losing or an award being unenforceable. In addition, policies exist to cover a claimant’s adverse cost exposure in arbitration, and there is even a market of judgement enforcement protection.
The fact that 57% of respondents has not seen it used in practice, requires some qualifying. Clearly many of the respondents will be arbitrators or defendants in international arbitration. Notwithstanding debates surrounding disclosure of funding arrangements in international arbitrations (see the Queen Mary ICCA Report 2018), in certain circumstances it can be fairly obvious when a third-party funder might be supporting a case (e.g. where say an impecunious company has engaged top tier counsel and is evidently incurring substantial fees) but it’s harder to determine which clients will likely have some form of insurance arrangement in place.
In our experience, once suitably advised of the full suite of options available, many corporate claimants will choose to self-finance their claim backed with insurance protection against an unsuccessful outcome. The reason for such an election over thid party funding is often price led; it’s often significantly cheaper to insure the fees and expenses a claimant pays than it is to use third party finance. So, for clients with strong liquidity, arbitration cost insurance provides all the assurance (risk management) they need. However, such arrangements are, as it stands, confidential, and thus it would be completely unknown to both arbitrators and the respondent’s legal team that such a corporate claimant is insured for their legal fees and expenses outlay.
As previously mentioned, we expect to see a continued rise in the use of contingency fee insurance in international arbitration cases going forward. At TheJudge, we arranged our first such policy for a well-known leading US law firm some 8 years or so ago. By contrast today, we now have a significant volume of requests for such covers from international arbitration lawyers, both for individual cases and portfolios of cases.
Question: If a successful party is in receipt of external funding from a non-party to the arbitration (e.g. non-recourse third-party funding, insurance), should they be able to recover any contingency or success fee as part of a costs order in their favour?
This question likely stems from the decision in Essar Oilfields Services Ltd v Norscot Management Pvt Ltd  EWHC 2361 (Comm). In this case, the arbitrator allowed the claimant to recover the cost of the litigation funding success fee as part of the cost award. We brokered the funding arrangement for Essar. As such, we were asked to provide evidence to support the recovery of the success fee. We did so by demonstrating how we undertook a market search for competitive funding options at the time Essar sought their financing to demonstrate the reasonableness of the third-party funding success fee sought inter-partes.
Interestingly, when breaking down the subgroup of respondents further, the survey results confirmed that nearly 60% of full-time arbitrators believe that recovery should not be possible while just over 40% believe it should be.
Given the fact that such cost awards are often largely at the discretion of the arbitrators, a 40% supportive view is still significant and would arguably suggest more claimants ought to try and claim such fees where they feel it’s warranted and potentially allowable. However, as occurred in Essar, claimants and their lawyers need to pre-empt that they might want to run such an argument from the very outset when deciding their approach to securing funding, that is to ensure they collate sufficient evidence to demonstrate the reasonableness of the fee they might ultimately seek to recover.
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