A recent article penned by Professor Victoria A. Shannon at Washington & Lee School of Law, “The Impact of Third-Party Funders on the Parties They Decline to Finance” has given rise to some debate as to the appropriate inferences to be drawn when a funder turns down a case. Professor Shannon’s description of the relevant dynamics are very accurate.
Importantly, Professor Shannon highlights the service that funders render to claimants and the arbitral community at large, by informing claimants very early on in their procedures of the merits of their claim, the atmospheric facts about the law, if it is worth the costs of arbitration, and the chances of recovery. This “reality check” will often force claimants to consider whether it is perhaps better to settle early for less or not to pursue the claim at all. Funders spend a lot of time reviewing claims and most of us, also spend time explaining to the claimants the reasons for which we might decline to invest in a claim.
The two main reasons for declining to invest in a case are the following and neither of them have anything to do with the underlying merits of a claim:
1) The ratio between the budget needed to run the case and the reasonable quantum of the dispute is not large enough to support the return on investment for a funder and satisfy the claimant as well. Typically, funders will look for a minimum ratio of 1:10. The analysis is naturally undertaken bearing in mind that lawyers are not particularly gifted in estimating costs and that claimants tend to be very optimistic when announcing the quantum value of a claim.
2) After accessing that a proper ratio is in place, a funder will first look at the recoverability of a claim before even starting to consider the merits of a dispute or any jurisdictional questions that may arise. The recoverability is naturally contingent on the respondent; where its assets are located, whether it is a sovereign, its track record if any, etc. If the chances of recoverability are not solid, most often, the conversation ends there.
90% of the cases that do not get funded are declined for one of these two reasons. It would therefore be very inaccurate and inappropriate to infer that if a case is not funded, the merits must be weak.
Furthermore, the benchmark of a strong claim is scarcely the same for claimants, claimants’ lawyers and funders. The issue is obviously one of particular interest for each protagonist.
The claimant most often wants the recognition of the harm they have suffered and financial compensation. Sometimes however, it may be more important for a claimant to settle a case very early for little money, but with a renewed undertaking of continued prosperous commercial relationships.
The Claimants’ lawyers, are often less conservative than they would normally be as they view their role (right in part) as helping the claimant secure funding. Therefore, the traditional “likely” and “more likely than not” tend to be hiked up a notch to “very likely” and “likely”.
The funders on the other hand, are frankly only interested in the bottom line. Therefore, the assessment of the “likely chances of success” actually means, assessment of the likely chance of recovery of damages, substantial enough to satisfy the funders expected return on investment, whilst allowing the claimant to walk away with the lion’s share of the awarded damages. The benchmark is not quite the same.
Simply put, a case may have a good chance of “success”, but not be suitable for funding.
For more information on Vannin Capital, please contact: Meika Aysal, Marketing at Vannin Capital, T: +44 207 099 5180, E: firstname.lastname@example.org