INTRODUCTION

Over the last few years, many people have heard of litigation and arbitration finance for the first time. Despite extensive press coverage of this rapidly growing practice, however, third-party funding of dispute resolution remains a subject of some mystery, even to sophisticated lawyers, arbitrators and corporate executives. In this paper, we hope to dispel some of that mystery and to illuminate the advantages that arbitration finance brings to both corporate clients and their lawyers.

As a preliminary matter, it is important to clarify that financing of litigation and arbitration claims by third parties is neither new nor capable of being characterized in the rather black and white manner so often employed in the press and academic writing. In reality, the practice is complex and multi-faceted.

Indeed, arbitration finance is really just specialty corporate finance that focuses on arbitration claims as assets. Virtually every corporate activity, from buying photocopiers to constructing skyscrapers, has access to specialty corporate finance, and businesses elect to make use of such finance in a variety of ways and for a variety of reasons. In some instances of arbitration finance, financing is necessary for a claim to proceed at all and for justice to be obtained, as in the case of an impecunious claimant, one facing liquidity or budgetary challenges or one whose assets have been expropriated. In others, the use of external capital is a choice motivated by accounting issues, risk intolerances or financial analysis.

Moreover, there are a vast number of structures in use by businesses to meet their litigation and arbitration financing needs, including: recourse financing of a claim (from banks or specialty providers); non-recourse financing of a claim; derivatives; senior, subordinated, mezzanine or equity financing of a business that owns a claim; the use of special purpose vehicles into which a claim is assigned or indeed that become the parent of the claim owner; and many others.

As just one example, a Canadian court recently approved the provision of $36 million of debtor-in-possession financing to enable a Canadian public company to pursue a BIT claim against Venezuela. That financing came about after the company had tried, along with a major international investment bank, to raise pre-insolvency financing for the claim using a structure that tried to sell to investors a bond stapled to a contingent value right.1 In another example, a UK public company used a pending BIT claim as collateral to obtain financing for its business operations. That financing was not related to providing for the costs of the arbitration proceeding.2

Thus, one must not engage in over-simplification in this complex and fast-evolving financial area. Moreover, the provision of external capital in all those forms is in no way nascent. What has changed is that, over the last few years, we have seen the rapid professionalization of arbitration finance as an asset class, with specialist providers like Burford, now the world's largest provider of capital for dispute resolution, entering the market.

With a dedicated specialist - and, crucially, investors that understand the long-term nature of disputes as an asset class - users can now get a high degree of subject matter expertise from a finance provider, making for a more efficient process, a better assessment of risk and a better understanding of pricing.

We now turn to some of the specific issues raised and questions typically posed with regard to the use of third-party funding in international arbitration.

1 ACCESS TO JUSTICE AND DUE PROCESS

Arbitration finance provides substantial benefits to the entire dispute resolution system. These benefits flow not just to the parties and firms that employ arbitration finance but also to our procedural systems as a whole. Open and equal access to arbitration for parties that want to make use of it - not just in theory but also in practice - is a fundamental characteristic of any meaningful legal system. But access to justice is not always equally achievable for all parties, mainly because problems arise when there are bargaining imbalances.

Arbitration finance has developed quickly because it allows corporations to unlock the often substantial value they have tied up in unresolved claims and because it allows them to proceed with arbitrations while retaining control of their exposure to loss. Litigation and arbitration, and particularly investor-state arbitration, are unduly expensive and frequently inefficient, and those deficiencies interfere with their ability to deliver justice. As just one example, the cost of simply adjudicating jurisdiction is vastly higher in investor-state arbitration than in any other type of proceeding of which we are aware. Third-party arbitration finance makes access to justice possible and levels the playing field.

Sometimes arbitration is a contest of equals. Consider a dispute between two companies arbitrating over a failed business venture. If the companies are of equal size and the dollars at stake are manageable for both parties alike, then one would expect the dispute to be resolved based on its merits. To be sure, both parties will complain about the costs and burdens of the process, but given that they are equally well suited to bear those burdens, one would expect them to settle based on their perceptions of the merits of the case.

However, what if one of the parties is much smaller than the other? The failed business venture may have been central to one company's development - the core project on which it had pinned its hopes and to which it had devoted a large proportion of its financial resources. For the other company, the failed business venture might have been one of dozens that it pursues every year, and the dollars at stake not at all significant. A dispute between these two would present very different settlement dynamics than the arbitration between two equal adversaries. The smaller company - very often the plaintiff - typically would not have the financial resources to hire top-flight hourly counsel to handle the case. Having devoted so much capital to a business venture that failed, it would have a hard time raising more to arbitrate over that failed project.

The larger company, typically the defendant, would have no such difficulty. Indeed, faced with a claim from the smaller company, the larger company might not only hire the best counsel money can buy but might also give its lawyers free rein to pursue a strategy designed to drag out the process and inflict as much pain as possible on its adversary.

In those circumstances, even if the weaker of the two parties has a very strong case on the merits, it would have a difficult time turning down a low settlement offer that would free it of the burdens of ongoing dispute resolution. The ultimate resolution of the case would likely be influenced as much by the bargaining imbalances between the parties as by the underlying merits of the case. Without a credible threat of taking the case through arbitration (and enforcement proceedings) - and lacking the resources needed to take full advantage of the process available to it - the weaker of the parties could not extract a settlement for the amount to which it is lawfully entitled.

Where bargaining imbalances threaten to skew settlements, the solution is more likely to be found in a market mechanism than in procedural reform. Indeed, arbitration finance, with its ability to allow even the most financially constrained party to pursue a meritorious claim in an appropriate manner, addresses this very important issue of access to justice and due process.

Let us consider the impact of the availability of arbitration finance on investor-state disputes. It is well documented that repeat litigants, such as states, have different levels of risk tolerance in litigated matters than claimants, who are likely to have only a single - and often a critically important - matter.

When differing risk tolerances are combined with differing resource levels - and the vast majority of states have greater litigation resources than most claimants - an unequal playing field results, and the goal of fair and even-handed arbitral justice is often thwarted by cost, process and risk.

Thus, anything that levels the playing field and enhances the ability of the adjudicative system to fulfil its goal of providing justice is desirable. Given the high cost of investor-state arbitration and the need for specialized counsel and expensive experts, the absence of adequate financial resources (whether from inability to pay or other causes, such as corporate budgets) can seriously hamper the achievement of that goal.

Arbitration finance is one tool that can assist in reaching that goal in appropriate cases. Given that a competent arbitral tribunal will only award damages if an illegal act has been committed, it is difficult to understand the argument that states should be permitted to get away with illegal acts if the victims need, or want, to use financing to seek redress. In the example of investor-state cases, arbitration finance removes the risk of a world where only rich claimants are entitled to justice for illegal state action.

2 ETHICAL QUESTIONS ANSWERED

Law firms unwilling to undertake contingency work can only serve those clients able to pay their fees, which is an obvious constraint that prevents many law firms from accepting interesting and worthy cases that they would otherwise be eager to take on. Arbitration finance allows these firms to accept such cases by ensuring that potential clients are properly resourced.

Arbitration finance effectively acts as a synthetic contingent fee, with the funder standing between the law firm and the client. To the client, it is a contingent fee arrangement - no different from those situations in which law firms take cases and agree to waive all or part of the payment for their services in return for a larger return in the event of a favourable outcome.

The issue is that many leading commercial law firms in the United States have never been willing to discuss sizeable contingent fee arrangements, and in England and elsewhere the use of contingent fee agreements has been prohibited. Law firms have a low appetite for risk at the best of times, and in the current economic circumstances they find themselves not set up to carry any meaningful degree of risk on their balance sheets.

For law firms, arbitration finance means payment of their fees, on time, in a way that works with their business model. In this way, third-party financing breaks the usual stalemate by offering a real financing alternative for large commercial disputes.

3 DISCLOSURE

With this risk-sharing arrangement in mind, let us consider the question of the disclosure of any non-party's financial interest in an arbitration matter. This is not an arbitration funding issue per se, given that there is no legal, logical or equitable basis for requiring the disclosure of funding without also requiring the disclosure of other parties with economic interests in the outcome of a matter.

In many national courts, this issue is settled and clearly defined, and the courts have decided which financial interests are to be disclosed and which need not be. For example, the Supreme Court of the United States requires the identification of a party's parent corporations and any public shareholder owning more than 10% of the party's stock.3 Providers of financing to a party or a case - whether litigation funders, banks or insurers - are not required to be disclosed.

The question is the same for arbitral tribunals: what corporate interests should be disclosed? All equity interests? All debt interests? All derivative interests? All contingent interests? The answer, at least pursuant to the International Bar Association's guidelines,4 has already been provided: only a "significant financial interest" in the outcome of an arbitration is the basis for an arbitrator to have a financial conflict. While that is a less clear standard than the laudably clear Supreme Court rule cited above, it is still clear that arbitration funding to a party would not create such an interest unless the arbitrator were also the funder.

Finally, questions have been raised about the spectre of a conflict if a funder is funding the action before the arbitrator and simultaneously funding a separate matter in which the arbitrator's firm is counsel. This is clearly not a conflict. Under the IBA guidelines, only parties and their affiliates can create such conflicts. Providers of financing are by definition not affiliates under prevailing law in any common law country of which we are aware and fall outside the definition of an affiliate in the IBA guidelines.

4 IMPACT ON SETTLEMENT

Leaving arbitration finance aside, it is rare to encounter a significant claim that has only a single stakeholder. That is more the stuff of academic oversimplification than reality. Major claims and their settlement are - and always have been - impacted by the views, positions and entitlements of multiple parties, including debt holders, equity holders, and all the other stakeholders that make up the modern business.

Arbitration finance does not change that paradigm. To be sure, a claimant that takes capital from a provider of arbitration finance now has to consider the economic implications of that transaction when it comes to settlement, but a properly negotiated and understood transaction does not make settlement more difficult. There is no evidence to suggest that claimants hold out for higher settlements because they need to pay the funder something, any more than there is evidence of claimants wanting higher settlements to cover the bank interest they have had to pay to borrow money for their legal fees.

There is ready proof of this by analogy. Plaintiffs in the United States commence litigation actions every day with lawyers who offer contingent fees. Those plaintiffs know that by entering into a contingent fee arrangement, they will be giving up part of their eventual settlement. But they accept that from the outset as the price of the arrangement: there is no suggestion that plaintiffs in contingent fee actions do not settle at the proper settlement value of their cases because of the presence of the contingent fee. Arbitration finance is no different.

It has been postulated that arbitration finance could interfere with the use of non-monetary remedies as a means to resolve disputes. We disagree with this hypothesis. Burford regularly provides investment capital in situations where a non-monetary outcome is a very real possibility from a claim, and indeed one of our largest successes has been in a matter where there was no monetary payment at all and where we continue to have a partial interest in a desirable asset. If an investment fund has sufficient scale and confidence in the assets underlying the dispute, there is no reason at all not to be perfectly happy with non-cash resolutions.

5 ADVERSE COSTS

Providers of arbitration finance are entering into a contractual relationship with a claimant, just as a bank does when it lends a claimant money. No one would suggest that the bank should be liable for adverse costs if the claimant uses the bank's money to pursue an arbitration claim, and the same result should obtain for arbitration funders. The funder is not a party to the action and is not controlling it; the party is the proper obligor for any costs award.

If, of course, the funder becomes a party - perhaps by purchasing the claim outright - then the situation may be different, but simply because the general rule of parties bearing adverse costs would now catch the party - the funder-owner.

In England, there is a robust after-the-event insurance market, unique in the world as far as we know. It is common for a plaintiff in a domestic English matter to take out an after-the-event insurance policy at the time of commencing litigation. Under such a policy, the insurer agrees to pay an adverse costs award if one is rendered. The policy can therefore be used as security for costs if required. (There is typically no premium for such a policy; the premium is paid from the ultimate case result.)

We believe that every major litigation funder in England requires plaintiffs in English cases to have such insurance cover. Thus, if a funder and plaintiff together elect to "go naked" and pursue a case without the usual insurance, they are essentially gambling that the case is so strong that they can forego the cost of the insurance and thereby save the cost of the conditional premium. The courts have held that, if their gamble fails, they are proportionately liable for adverse costs. Without the protection of this unique insurance solution, attempting to impose liability for adverse costs on funders or requiring security for costs in arbitration claims will only further chill a system that already favours the well-resourced.

6 THE MODERN THIRD-PARTY FUNDING INDUSTRY

The considerable appetite for arbitration finance has attracted a number of providers into the market, the majority of them in the last five years. Most of these funders invest in commercial litigation in the United States or the United Kingdom, as well as in international arbitrations, and some, like Burford, are publicly traded.

Some funders assemble financing on a deal-by-deal basis ("brokers" would be a better label), while others are backed by major institutional investors. Burford is the largest fund in the world dedicated to litigation and arbitration finance by a significant margin, with more than $300 million in investment capital.

In addition to the "prototypical" arbitration funding example in which the financier funds a single case in exchange for a return on its results, third-party finance can take many forms. For example:

1. Arbitration finance can be employed to fund portfolios of cases in addition to individual disputes. Portfolio financing, which can be done for law firms as well as clients, distributes risk across multiple actions and thus allows the financier to offer better pricing.

2. Arbitration finance can be used to fund activities other than resolving the underlying claim. High-value claims can facilitate the financing of business operations.

3. Arbitration finance can provide an immediate, discounted payment on an uncollected award.

4. Arbitration finance can be employed to cover premiums on an insurance policy against the risk of an award not being enforced.

5. Arbitration financing can serve as a financial tool for respondents as well as claimants, working with insurers to open up possibilities for defendants to seek protection against worse-than-expected outcomes.

As the legal industry looks to lessen the financial pressures on litigants and law firms, it increasingly appears that litigation and arbitration finance may provide some of the best and most efficient tools for the task. As the services of these financiers are better understood and appreciated by those in the legal practice and their clients, interest only continues to grow. Indeed, it seems inevitable that both Burford and the disputes financing industry as a whole will continue to innovate and evolve, providing valuable opportunities for those involved in arbitration.

1
Contingent value rights are securities t hatmak epayments based on a specified contingent event. See generally: http://www.crystallex.com and specifically: http://www.crystallex.com/News/ PressReleases/PressReleaseDetails/2012/ Crystallex-Announces-Court-Approval-of-DIP-Financing1129104/default.aspx.

2
See: http://www.rurelec.com/news-and-publications/226-rurelec-completes- 15-45-million-fund-raising.

3
See Rule 29(6) of the Rules oft heSuprem eC ourt of the U nitedStates (2010).

4
See IBA Guidelines onConfl icts of Interest in International Arbitration (2004) , p. 8.