Financing arbitration: Someone wants to pay your legal bills

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Arbitration is quicker and more cost-effective than court. And no one likes paying legal bills.

Life can be strange, however, and, in the arbitration context, perhaps neither of these “truisms” stands up any longer. It is now generally accepted that arbitration is at least as expensive as litigation, and takes just as long. More surprisingly perhaps, there are now people who actually want to get your lawyers’ invoices. Imagine that you have a sound claim against another party – Party A – which has to be resolved in arbitration. Party A is unscrupulous but wealthy. He could pay your claim if he wanted to. His assets are in a place where arbitral awards are easily enforceable. And he knows something you wish he did not: that a consequence of what he has done to you is that you can no longer afford to pay for a contested arbitration case.

Party A, therefore, refuses to pay your claim, because he can. He knows you cannot afford to chase him. He does not care about his reputation. He has no incentive even to negotiate a discounted settlement. In short, Party A holds all the aces.

In some countries, your financial problem might be solved by state-funded legal aid, but that is rarely available for commercial disputes. Likewise, contingency fee arrangements with lawyers are forbidden in many places, and it can be illegal to ask a disinterested third party to pay your costs in return for a percentage.

There is good news, however. As a result of recent amendments to Hong Kong’s Arbitration Ordinance, it is now legitimate to get financial assistance from a third party to pursue your case in an arbitration taking place in, or being run from, Hong Kong, in return for a share of the recovery.

Obviously, there is no such thing as a free lunch. The so-called “third party funder” will typically receive about 30% of your winnings, but you may sleep easier knowing that your rights are being asserted, that your legal expenses are being paid for you, and that if the unthinkable happens, and you lose, the funder will cover Party A’s costs, too.

Third party funding is likely to be extremely attractive to capital-challenged claimants. But even well-off claimants may have a use for it. They might take the view, for instance, that the cost of the funder’s cut is acceptable if it enables them to have their cake and eat most of it. They pursue their claims at someone else’s expense while spending their money on something else more profitable.

If what you have read so far encourages you to think that third party funding may be for you, please read on and pay attention to a few tips.

First, do your due diligence. Don’t just shop for the best price, but instead identify a potential funder in a mindful way. For instance, the funder needs to be able to see your claim through. Hong Kong permits a broad range of potential funders, and while the financial risk associated with well established international funders may be low, smaller funders or market entrants need more scrutiny, although under a draft Code of Conduct (not yet finalized), funders must have sufficient assets to fulfil their obligations for at least 36 months.

Second, ask yourself if your case is as fascinating as you think it is. You have lived with your case against Party A for a while. You know the facts and its subtleties inside out. But do not mistake funders for charities. They are hard-headed investors who are in it for the money. They will look carefully under the hood of your case before taking it on. Investment criteria are likely to vary between funders, but they will generally require, among other things, good merits, a claim at least 10 times greater than the estimated costs, and a liquidated demand.

Proceedings to vindicate a principle, actions for injunctions or specific performance, and claims for declarations are likely to prompt wishes of good luck rather than cheques. The bottom line is that funders will only take up meritorious claims by motivated claimants against solvent defendants. You need to be in it for the money as well.

Third, it follows that you need to package your case attractively. Funders will run extensive due diligence. Make sure you have good lawyers on hand from the beginning. Ensure you have complete data. Funders will require the key documents and evidence, solid legal opinions, information on Party A’s finances, and a detailed budget.

Fourth, be smart. Consider signing a non-disclosure agreement (NDA) when you start talking to funders to preserve confidentiality and privilege. But do not rush into an exclusivity agreement. It is like marriage: take your time to assess the range of potential partners.

Fifth, remember that your funding agreement is a commercial contract. Do not allow your funder to become Party B. Ensure, for example, that the agreement specifies what happens when you decide that you are ready to settle – perhaps, curiously, you may decide Party A is not as bad as you thought, and decide to preserve the relationship – whereas the funder sees the potential for a fatter recovery if you persist. You need to have agreed how to resolve differences of approach.

Third party funding under the revised Arbitration Ordinance is potentially a win-win for all stakeholders (except the smug respondent). Claimants get access to justice, lawyers stop worrying about cash flow, and funders get their slice. The legislation should come into force later this year. Party A should be on guard.

Charles W Allen is a partner and Carmen Wong is an associate at Orrick, Herrington & Sutcliffe in Hong Kong