This article seeks to address the practical impact third-party funding (“TPF”) may have on parties’ strategy during the dispute resolution process and, in particular, regarding settlement.

It will discuss TPF in the context of a simple funding arrangement, whereby the funder will pay legal fees on a non-recourse basis for an agreed return, either as a multiple of their outlay or as a share of any award.

THE TRADITIONAL DECISION-MAKING PROCESS

In a traditional scenario, involving two opposing parties and their respective legal teams, the decision-making process is relatively straightforward. The legal team will provide advice to their client, and the client will make a decision as to the strategy to be adopted in the dispute. This permeates every stage of the dispute resolution process, from the possibility of preliminary informal commercial negotiations prior to a Request for Arbitration being served, to a formal mediation, to a formal settlement offer that may be made at any stage of the process.

The two key questions to be addressed by both lawyers and their clients are:

  1. What outcome would represent a “victory” for the client, considering the facts underlying the dispute and the situation of the parties? and
  2. What would be the best strategy to obtain this victory?

The answers to these questions depend on a myriad of factors specific to the facts of each case. However, one key factor, which this article would like to identify and which is influential to answering both questions, is the financial state of the parties involved in the dispute.

This crucial commercial factor must always be taken into consideration. If the client is a claimant in a precarious financial position, a “victory” could be achieved at a lower settlement figure than the client might be fully entitled to, taking into account the advantage offered to the client in receiving the money sooner rather than later. In this situation, time becomes an important factor and the added burden of legal fees may encourage the client to adopt a strategy of seeking expedited arbitration or, more likely, early settlement of the dispute via mediation or commercial discussions.

However, if the client does not have financial pressures encouraging settlement of the dispute as soon as possible, they may be more willing to pursue the dispute to its end to obtain the full sum they are legally entitled to. Early settlement at a reduced figure thus becomes less attractive.

These considerations must also be made regarding the other party in the dispute. What is their financial position? What are the motivations driving their strategy? What factors may be utilised to seek a more favourable outcome for the client?

THIRD-PARTY FUNDING

In the traditional scenario, it is relatively straightforward to identify the key financial drivers for both parties and analyse how these will dictate their strategy.

However, the existence of TPF adds an extra layer of complexity to the situation. If your previouslyimpecunious client obtains TPF, with the burden of legal fees shifted to the funder, the client may wish to seek a higher settlement figure. Similarly, if the opposing party who you understood to have financial pressures obtains TPF, this removes leverage against them that would be useful in early settlement discussions.

TPF may also have wider implications in encouraging unmeritorious claims being pursued at length. But this may be counter-balanced by the argument that TPF allows clients to pursue claims that would otherwise be prohibited by potential costs involved in the dispute.

Put simply, the relatively limitless pockets of TPF will change every aspect of strategy. TPF will have a direct impact on the answers to the two key questions considered above. What now represents a “victory” if legal fees no longer are a pressing concern? What is the best strategy in obtaining a victory if you no longer have leverage or different issues have taken priority?

WHO MAKES THE DECISIONS?

Another key question to ask in cases where TPF is being used is regarding who makes the decisions on case strategy. This point might appear quite straightforward at first glance. A third-party funder will not want to be seen to have any role in strategy at any stage (including in particular, settlement negotiations), in order to shield against any claims of liability in the dispute, for instance in the case of a a non-party costs order issued by the Tribunal and/or national court.

However, whilst a TPF may not wish to be directly involved in dictating strategy, there is no doubt that this scenario is more complex than in the traditional relationship between client and their legal team. Funders will seek to maximise their potential return on their investment, whilst the structure of the funding arrangement may influence the strategy adopted by the client. For example, the financial implications of when a dispute is resolved under the funding arrangement should be taken into account by the client. A typical TPF arrangement may include a time variable, whereby a lower success fee is payable if the case settles early, and a higher success fee is payable if the case takes longer to resolve. As a simple example, the funding could be arranged so that the success fee is 2 times the funded amount if the case settles within 12 months; 2.5 times the funded amount if the case settles within 12-18 months; or 3 times the funded amount if the case settles after 18 months or more.

TPF PRIORITY

A further factor of TPF which could play a role in dictating strategy is that the TPF will take their success fee as a priority in the event of any award being made. Accordingly, a client who is awarded the amount which is equal to the success fee will gain nothing from the arbitration (except the possibility of a costly After the Event insurance premium). Therefore, when this is considered, together with the value of the success fee increasing the longer a case goes on, the proposition of earlier settlement may become more attractive.

DISCLOSURE OF TPF ARRANGEMENTS

If we consider that the presence of TPF for either the client or the opponent will considerably alter the dispute resolution strategy to be adopted, then awareness of TPF becomes crucial. Whilst lawyers will usually be intimately involved in the process of obtaining TPF for their client, currently there is no clear requirement to disclose the presence of TPF and so it will not be clear if your opponent has TPF in place. However, arbitral tribunals have ordered the identity of the funder and even terms of the funding agreement to be disclosed in some cases. The issue of disclosure is, therefore, a key topic of discussion at present, with several arbitral institutions considering the possibility of introducing obligations on disclosure of funding arrangements. Unsurprisingly, funders are strongly against this proposition.

Accordingly, it is possible that lawyers and clients will not have concrete information regarding the presence of TPF and will be left in the dark as to the strategy to be adopted by their opponents. There is no doubt that this uncertainty will influence strategy, but whether it aids or proves to be a barrier to settlement, remains to be seen.

CONCLUSION

The strategy a client chooses when resolving a dispute using an arbitral process is driven by many considerations, of which the financial position of the Claimant and Respondent are pivotal.

Accordingly, TPF has the potential to drastically alter the decision-making landscape, with the risks of arbitration effectively being outsourced to third parties with significant capital available. It is unclear at present whether the increase in funding options will lead to a decrease in early settlements, as the pressures of legal fees in taking a case all the way to a hearing are removed. And case strategy will vary depending of the underlying facts and situation of the parties in each individual case. Nonetheless, it is crucial that clients and lawyers are aware the potential implications of TPF on case strategy when choosing a strategy for resolving their dispute.