Third party funders are by definition in the risk business. The key attraction of funding to claimants in litigation and arbitration is that they can run their case at no expense to themselves. That’s the USP of third party funding.
In simple terms, if the case wins the funder recovers its investment and its profit, and if the case loses the funder’s investment goes with it. But to make good on its promise that the claimant can litigate or arbitrate risk-free, the funder will need to offer to cover the claimant’s exposure to adverse costs if it all goes wrong. It can do that by giving the claimant an indemnity, which it will then cover by insuring its own risk of having to pay out, or by arranging and funding adverse costs insurance for the claimant. The cover can be used to deal with security for costs, where a policy from a reputable insurer will generally be acceptable instead of a cash deposit or a bank guarantee, though the court or arbitration tribunal may require comfort the policy won’t be avoided if called upon. That comfort can be provided by a Deed of Indemnity.
Funders and lawyers are all familiar with adverse costs insurance, but there are other areas of the litigation and arbitration process, which might not be thought about when the process starts, where insurance plays a role. One example is insurance to cover the undertaking in damages that a claimant will generally have to give as a condition of obtaining an injunction which is later revoked. The defendant will be entitled to be compensated for any loss sustained as a result of not being able to do what, as it turns out, it was fully entitled to do.
But what about where the case wins and the funder can’t recover its investment and its profit? It’s true that many cases which satisfy the required tests of merits and liability and quantum fail to get funding because of the recovery risk, so the chance of winning and non-recovery is to that extent eliminated. The risk doesn’t arise because funding’s been turned down. It’s also true that cases which are funded against, for example, major corporates will generally lead to a recovery, unless some unforeseen or highly unlikely event occurs which prevents it. The funder will have evaluated that risk as part of its funding decision.
But there is one class of defendant where it can be very difficult indeed to evaluate that risk, namely the sovereign defendant. This is because decisions to comply with court judgments or arbitral awards are as likely to be made on political as on economic or commercial grounds. This issue regularly arises in the sphere of investment treaty disputes, which is an area where Vannin, which has in-depth practitioner expertise, sees the appetite for third party funding growing at an ever increasing rate. The first, and often determinative, question is, will the sovereign respondent in this arbitration meet the arbitral award which we expect to get?
While assessment of political risk is outside the expertise of funders, it is within the expertise of the insurance market. That has led to the possibility of obtaining insurance which will pay out if a sovereign defaults on an arbitration award made against it. This is a highly specialised area of the market, and one which only funders such as Vannin or the law firms that practise in the area of international arbitration are likely to turn to. The pricing and availability of cover will depend on the level of political risk which the market assesses, but for the product to develop the cover will need to be generally, not restrictively, available. That means that, except in the few obvious cases of sovereigns which have made clear they will not comply with their international obligations, we should expect the cover to be available.
As with so many things, it may all be question of cost. But provided the economics work, Vannin sees this as having real potential benefits for claimants in international investment treaty disputes and for funders like ourselves who specialise in funding them.
For more information on Vannin Capital, please contact: Meika Aysal, Marketing at Vannin Capital, T: +44 207 099 5180, E: email@example.com