Pros and cons of third-party funding
The number of the SCC cases funded by third parties has increased – and demand is growing. “We expect continued market growth in the Nordics”, says Thony Lindström Härdin, CEO at Litigium Capital. We asked him what kind of cases a funder would typically finance and what a party should consider before entering a funding arrangement.
The number of the SCC cases funded by third parties is increasing and the phenomenon is no longer new within international arbitration. Last year we analysed the appearance of third-party funding* (TPF) in SCC arbitrations, including the trends and legal issues dealt with by the SCC tribunals. In a new interview series – The SCC spotlight talk – we follow up on these issues with Thony Lindström Härdin, CEO at Nordic legal finance company Litigium Capital.
Thony, when discussing TPF, we often get asked about the criteria for getting a case financed. What kind of cases do you focus on, and are there particular cases you would not fund?
Litigium Capital focuses on arbitration and litigation disputes with strong merits, meaning the amount in dispute is at least 1 MEUR. We believe that any dispute in the commercial sphere can be funded, however, we are not funding “long shots” hoping for the dispute to settle. Another situation where it is challenging for us to commit has to do with binary cases (a complete win or complete loss) in which the outcome is too heavily dependent on oral evidence. Investments in disputes are high risk business to begin with, so relying on how someone will perform during witness examinations adds another layer of risk which is not ideal for investments.
What are the pros and cons of using TPF in arbitration?
The mere existence of TPF (which Litigium Capital would insist on being disclosed in arbitration) sends two clear messages to the counterparty. The first being, that a funder has vetted the merits of the case from A to Z and therefore invested money on a successful outcome. If the counterparty has doubts before, this can provide awareness that the funded party has a strong case. The counterparty will also be aware that the funded party has financial capacity to run the case to “the bitter end” if necessary. Any tactics from the counterparty aiming to obstruct or delay the dispute, or generate more costs, would be ineffective.
Financially, TPF has substantial benefits for a company, primarily through a stronger balance sheet, higher underlying profits (by eliminating legal expenses), as well as improved liquidity. If you are a listed company, the improved financial position will also lead to a higher market cap and other improved KPI’s. This is because TPF is non-recourse and not a loan, i.e., repayment to the funder is conditional upon the dispute being successful, and the client receiving payment from the counterparty.
Albeit biased, I do not see any obvious disadvantages with TPF in arbitration. However, one might admit that adding a funder to the mix adds another layer of complexity. This requires the client and the counsel to engage in a dialogue with the funder prior to the investment. Unless the law firm can participate in this dialogue pro bono, this will entail some extra costs which are covered by the funder only if the case is subsequently funded. Despite this, we always try to be as lean and efficient as possible to minimize the time and efforts necessary for the client and the counsel. In addition, we believe that the funding process will have positive side effects for the client, even in the cases that are not funded in the end. The client may also benefit from any potential findings we flag in our funding process, including other research results from our side, such as legal and quantum assessments made.
What should a client consider before entering a funding arrangement?
I would have proper due diligence done on the funder to feel secure with whom you are partnering. The funder’s responsiveness and ability to meet the client’s needs are important characteristics that will pave the way for a successful co-operation. To work with a local funder who has knowledge of the language, and the law will also save time and efforts throughout the dispute.
I would also ask the funder what influence they will require during the proceedings. There are passive funders (like Litigium Capital) leaving all the decision-making in the dispute to the client itself, including settlement decisions. By contrast, there are funders who want a more active involvement throughout the proceedings. Either way, make sure both you and the funder’s expectations are aligned on this to avoid unwanted surprises.
In the interview series The SCC spotlight talk, SCC meet practitioners to discuss current issues, challenges and opportunities in commercial dispute resolution of today.