"[I]n those times . . . a man would buy a weak claim, in hopes that power might convert it into a strong one, and that the sword of a baron, stalking into court with a rabble of retainers at his heels, might strike terror into the eyes of a judge upon the bench. At present, what cares an English judge for the swords of a hundred barons?"
- Jeremy Bentham
It has been more than two decades since Australia passed the Maintenance, Champerty and Barratry Abolition Act of 1993, and nearly a decade since professional third-party funding ("TPF") firms began sprouting in the soils of English and American courts and international tribunals.
In that time, sophisticated courts and tribunals have welcomed the chance to administer justice in the face of complex financial and structural innovations introduced by the presence of TPF. Having taken root in the common law's home-jurisdictions and in international arbitration, TPF is now transitioning from nascent struggles for legitimacy towards full professional integration as an entrenched species in the global dispute resolution ecosystem.
This process has produced a wealth of information on the TPF industry, much of it disseminated by funders keen to educate a skeptical legal profession and public. Through surveying current literature and interviewing industry participants,1 I will dissect the most common policy justification for TPF: its ability to increase "Access to Justice." In the process, I will argue that in the realm of international arbitration, not only does TPF succeed in increasing access to justice, it also generates a positive effect on the quality of claims by inducing disputants to make more economically rational decisions regarding their claims.
II. ACCESS TO JUSTICE
The most common refrain of funders themselves on the benefits of TPF is that it provides greater access to justice for the impecunious claimant. But beyond justicedispensation at the macro level, TPF also provides numerous little-understood economic benefits and opportunities for consumers, providers, and investors in litigation alike.
A. Enabling Claims:
The universally echoed claim-enabling function of TPF is valid, and its effects are probably more visible in international arbitration than in the domestic context. Domestically, reputable funders in the major TPF markets do not engage in funding smaller claims such as personal injury suits, in part because it is a field already occupied by contingency-fee attorneys, and because the small size of the claims and potential returns are unattractive for funders with large amounts of capital to deploy. As such, the
1 Professionals at Burford Capital, Juridica Capital Management, Gerchen Keller Capital, Bentham U.S.A, and Lake Whillans were interviewed. This paper will not quote directly those interviewed except with express permission, and will otherwise summarize their views.
existence of commercial TPF provides little boon to the truly impecunious prospective litigant holding smaller claims. However, in the commercial litigation/arbitration arena, funders have been a welcome presence for both cash-strapped companies and law firms.
Not only do funders provide smaller, less well-resourced claim-holders the capital to challenge much larger defendants in the first place, that funding equalizes the parties' bargaining positions for more equitable settlement discussions.2 A larger defendant capable of bankrolling long-term litigation is ill incentivized to engage in settlement discussions with a small claimant incapable of sustaining similar costs, regardless of how solid the underlying claim. The disparity is amplified in investor-state arbitration, where states are generally better positioned for the long haul than claimants.3 This represents the traditional funding dynamic, where TPF supplies funds to prosecute a claim. But funding goes far beyond the prototypical, and offers many more avenues to "access" justice.
B. Monetizing Claims
Since funders treat claims as assets, the funded claimant can become the holder of more than just a good claim, but a monetize-able asset, and can use the asset to generate cash flow. For example, a growing startup is attempting to generate cash flow and faster growth. Such a cash-hungry business has neither ability nor positive economic incentive to prosecute a meritorious claim if that claim does not translate to capital it can presently invest. The introduction of a sophisticated funder means that the business can take a capital infusion from the funder in exchange for a portion of the claim, and deploy that money now for a much greater return on capital than it would obtain on money received years later, if and when the case is filed and resolved. By then, the company's growth could have slowed down, or worse, been stymied by lack of capital when it needed it the most--during its growth phase.4
According to Lee Drucker of Lake Whillans, this kind of "venture"-style participation by funders not only increases access to justice, it also spurs innovation through provision of much needed capital to growing companies, and helps deter monopolistic behavior by large companies seeking to drive upstart competitors out of business. If successful, such a strategy would contrast sharply with the "vulturous"
2 Christopher Bogart, "Overview of Arbitration Finance," in Bernardo M. Cremades and Antonias Dimolitsa, eds., Third-party Funding in International Arbitration, (Dossiers, ICC Institute of World Business Law, 2013), at 53.
3 Id, at 51-52.
4 For the financial analysis behind such an endeavor, See, Lee Drucker, Financial Analysis of Litigation Funding, Lake Whillians Capital, January 7, 2015.
activity detractors of TPF have invoked. By fueling the growth of threatened young companies, TPF can nurture new life rather than scavenge for bankrupt-carrion.
Of course, such immediate claim-monetization can be attractive to not only earlystage startups, but also large companies that require cash to fund ongoing operations.5 In the most stark cases, companies whose sole asset had been nationalized by states have begun to rely systematically on TPF to pursue ICSID claims against states, classifying these claims as assets on the basis of investor backing.6
As long as a claim can be valued, the possible forms of monetization are endless. A capital infusion can come through a debt-issuance, a lump-sum payment that is some percentage of the risk-adjusted present value of a portion of the claim, an outright buyout of the company, or a direct equity investment in the company that reflects the claim-value-adjusted worth of the company as determined by the funder. At least one of the funders I spoke to already engages in purchasing large equity stakes in claim holders, and has even purchased one claim holder--not the claim--outright from venture-backers who are much more leery of litigation risk in a funded start-up than the litigation funder.
C. Justice for Who?
Critics have long maintained that the "access to justice" narrative is merely an excuse for encouraging litigation--frivolous or not--where there would have been none, and further that greater "access" is only granted to the claimants and plaintiff's attorneys, with arbitral respondents being denied the benefits of funding.7
With respect to the first criticism, the practices of funders and the returns they have achieved over the past several years have made it clear that any accusation of frivolity is unfounded. Critics have suggested that the merit of a case is merely one among many factors funders consider, and frivolous cases are easily capable of receiving
5 See e.g. Alisha Hiyate, "Gold Reserve wins US$740M in 'stunning victory' against Venezuela", Northern Miner, 22 October 2014. (Quoting TriMetals Mining's CFO's statement that, "in our case, we had money [for arbitration], but we decided that we wanted to use the money in what we do best, which is looking for mines and exploring -- not just paying legal fees.")
6 See e.g. Sebastian Perry, "Funder on Board for new Venezuela Claim," GAR News, 20 June 2012. (Discussing Crystallex and Rusoro's ICSID claims against Venezuela)
7 See Mark Kantor, "Third Party Funding in International Arbitration: An Essay About New Developments" (ICSID Review, 2009), at 74-75; See also, Rebecca Lowe, "Speculate and Arbitrate to Accumulate," (IBA Global Insight, April/May 2013), at 3.
funding given a high enough potential return to reward the funder for risk.8 However, every funder I spoke with considered the merits of a case their foremost due diligence priority.9 Several found it self-evident that managers of capital would avoid frivolous claims at all costs. This makes sense, given that litigation can only result in binary outcomes, and the only way for an investor in binary outcomes to succeed is to win or settle favorably. Since victory hinges entirely on the case's merits, the merits naturally become a funder's most important concern.
There is the worry that as the industry grows, easy money flooding in might increase appetite for risk and inevitably attract the unscrupulous. The response to this is simple: the markets do not reward the foolhardy, scrupulous or not. A funder who invests in a portfolio of bad cases, aiming for one spectacular win to cover every loss and still generate a sufficient return on capital to satisfy investors will find that suits with only nuisance value will either lose outright or settle for the miniscule nuisance value they are worth. Meanwhile, investors in such a risky strategy will demand high returns for the risk they are taking. These two facts taken together make the math behind an "unscrupulous" strategy difficult if not impossible.
Facts so far bear this out: no fund has collapsed solely as a result of bad investments, and while the conduct of counsel has resulted in costs being imposed on a funder,10 no arbitral tribunal or court has ever suggested that a funded case was frivolous or sought to sanction an ultimate funder. As for the utterly unscrupulous, they invariably exist in any profession, and are among the many things sophisticated investors must guard against.
There remains the criticism of TPF increasing the sheer number of litigations. While this view may have some traction in the domestic milieu, it is less persuasive an international arbitration context. Arbitral tribunals are constituted from among commercially sophisticated arbitrators, who are unburdened with immediate duties to the public--as courts are--and compensated from claim to claim. As such, the availability of arbitration, unlike the courtroom, is market-driven and does not diminish with every incremental claim. The fact that a few more arbitrations may be brought does not mean other claimants are denied expediency or access to arbitration. Instead, it bolsters the legitimacy of arbitral regimes. Even from a policy standpoint, a greater net number of
8 Kantor, "Third Party Funding in International Arbitration", at 74.
9 See also, Maxi Scherer, Aren goldsmith and Camille Flechet, "Third Party Funding in International Arbitration in Europe: Part 1 Funders' Perspectives" (International Business Law Journal, No. 2, 2012), at 213.
10 See, Excalibur Ventures LLC v. Texas Keystone Inc. et al.  EWHC 3436 (Comm).
arbitrations is not undesirable if they result in greater access to justice granted to claimants who would otherwise not have come before tribunals.
Finally, while it is true that funding goes almost exclusively to the claimants,11 this is not necessarily a bad thing. The same entities that are often in the respondent's seat can just as easily access TPF as claimants should they have a viable claim. And as already discussed, there are a variety of financial reasons even large companies might want to make use of TPF. Moreover, as the TPF marketplace becomes more efficient, and providers of capital seek new ways to deploy money, innovative risk-shifting products have become increasingly available to defendants.
There has been speculation on reverse contingency fees, where a funder gets a percentage of the respondent's savings, this being the difference between the amount originally claimed and the amount ultimately awarded.12 Several funders I spoke to expressed skepticism to reverse contingency structures, citing the psychological difficulties inherent in asking defendants to value savings even when they have lost. Funders did say, however, that so long as the parties in a funding relationship can identify and value "success" upfront, defendant funding can occur without much trouble. For example, if the defendant can value success as any settlement payout below 50 million dollars, then the funder can share the defense risk, and be paid a premium if success is achieved. Other, non-monetary indicators of success also exist, for example the avoidance of an injunction. Tellingly, some have begun to fund generic drug makers defending claims brought by patent holders, where the value of a successful defense is easily quantified.13
The same model can be applied to any dispute where the respondent can comfortably value a successful defense. Even states are welcome to apply to be funded. In the words of Burford's CEO, funders are entirely "agnostic" as to who they fund, and the fact that states are not typically customers "has more to do with the fact that governments have access to capital at a lower cost than [TPF providers] do."14 This being the case, as the industry matures and the cost of capital declines, defensive financing may soon become be economical for smaller, developing states with low credit ratings. Indeed, given developing states' relative unsophistication vis--vis their often well-resourced and sophisticated corporate opponents, the introduction of an experienced
11 See Scherer et al. "Third Party Funding in International Arbitration in Europe", at 211.
12 Bernardo.M. Cremades, Jr. "Third Party Litigation Funding: Investing in Arbitration", (TDM, Vol. 8, Issue 4, Oct. 2011), at 19-23.
13 Jack Ellis, "Lines of defense", (Intellectual Asset Management, Nov/Dec. 2014), at 64.
14 Lowe, "Speculate and Arbitrate to Accumulate", at 3.
funder may help level the playing field for states in the investor-state arbitration equation. Such a possibility may not be far off: several interviewed funders reported experiencing competition in the international arbitrations arena, where there is an increasingly robust network for referring and shopping claims. III. CONCLUSION
At the end of our conversation, one funder asked for the subject of the present article, and upon being presented with a slippery slope versus levelling the playing field dichotomy, exclaimed that "[TPF] is neither! It is a commercial reality, because litigation is expensive."
Indeed, we have good reason to be weary of slippery-slope arguments against TPF. The modern TPF provider is almost always a highly sophisticated investor, focused on sound returns and setting positive precedents for a rapidly growing industry. Through their efforts, funding is increasingly becoming a standard feature of the international arbitral landscape, where the thought of arbitrators being intimidated by "the sword of a baron", or sophisticated enterprises coming before tribunals to frivolously "vex" each other is more specter than reality. So far, no institutionalized ambulance chasing by unscrupulous "vulture" funds has materialized. Instead, TPF has introduced more economically astute decision-making to the analysis and prosecution of claims, and provided succor to law firms and companies who face an environment where already expensive litigation and arbitration costs are continuing to grow.
As the TPF industry matures and the cost of capital declines, such benefits will only inure to more consumers and providers of arbitration, with the most robust claims funded at the lowest cost. In time, justice could become not only more accessible as a social good, but be dispensed immediately as an asset to benefit the aggrieved.