Finance Seminar in Nigeria 25.06.2019 - Segun Osuntokun

On this seminar, it's always a good place to be amongst friends and colleagues straddling the British and Nigerian legal space. I want to talk about third-party funding in finance arbitration. I'll be honest with you—the finance arbitration bit plays a little part, not very much, because we're talking about third-party funding covering any type of arbitration dispute, regardless of subject matter.

Taking off from where fighting can be stopped, obviously finance disputes are an increasing breed of arbitration. They usually involve sophisticated claimants who have a CFO who is always looking at the balance sheet. So third-party funding, which involves a third party—and again for definitions, I'm not talking here about lawyers financing claims on behalf of their clients. This is not a seminar about discounted rates or contingency fees or conditional fees, which are of course a form of third-party funding if you consider lawyers to be third parties. I'm looking at third-party funding where another financial institution actually backs your claim by putting money into the pot and enabling you to fund the claim you're running.

I'll very quickly give you an overview of what I'll talk about. I'll look at the funding process—how to navigate it—a growing international market for funding. I'll give you a snapshot of how important this is, particularly in the Nigerian market, to be cognizant of it. Trends in the market, showing you where the market is going, what the players are doing, what the risks are. And finally, some key considerations for us lawyers to bear in mind if we have the opportunity to look at third-party funding—what other things we should be looking for in order to protect ourselves and our clients.

So some initial considerations: why fund at all? Funding is principally about sharing risk. We find that our clients want to consider third-party funding not because they can't afford to pay for the litigation, but because they're smart people. They have legal budget constraints. They've brought a piece of litigation to a standstill at a certain point, they're looking for some investment, maybe for the final push. As I said, where CFOs are involved in the decision, they're looking at the opportunity cost of deploying capital to fight disputes as opposed to building a power plant. It's all about risk allocation and resource allocation. It does allow you to fund and pursue a case which perhaps normally you would not choose to pursue.

You want to offset the risk of a dispute, you want to lay off the risk, you want to bring a third party in to share that risk both in regard to your own costs but also, where you have a cost-shifting jurisdiction, the adverse costs that you may face in the litigation. The types of cases that lend themselves to funding have changed enormously over the last ten to fifteen years when funding actually first started in the UK. It started from single cases, but now you have some quite sophisticated funders who are now looking at litigation and disputes as an asset class.

So there are funders who will set up their own capital, do their own capital raises, and they will go out and look for cases in which to invest it—as you would with a private equity fund. You want to back cases that are going to give you a return. So now you have models where you have a portfolio of cases, funders are spreading their risk, they're taking their bets. They have some strong cases in there, some perhaps not so great, but because of other merits they can demand a higher share of the payout. So they're quite sophisticated players, and I think it's going to be interesting to see how the market develops, particularly in Nigeria, because it's not entirely clear—particularly when you have Nigeria-seated arbitrations—how this works.

Now, what is the basic proposition in funding? I think I've already covered some of it. A funder has a pool of money, they want to make a bet, they examine the case. If they think it's a good prospect—and typically they're looking for a prospect of over 55%—now you and I and other litigators know that a 55% chance of winning is a 45% chance of losing. So it is a statistical game, but they want to back the strongest cases. They will seek counsel's opinion, and counsel will usually put a figure on the prospects of success.

They will back a case on a non-recourse basis, so they will put the money in, but if the case fails, they don't get anything back. That means they have to be very careful about the cases they choose. Success can be defined in a number of ways. Obviously, from the funder's disposition, the best success is when they've got some money back from the defendant. But typically, success is a bit of a hybrid—access is defined as a favorable final award, but you won't get paid from them until there's a recovery. And typically, the recovery will be capped at the recovered amount. Some funders will try and slip past you that success means an award and they get paid out regardless of whether or not you make a recovery. So it's something to be alive to, but the market standard is usually linked to what you recover on enforcement.

Just a quick canter through the position in the Nigerian market. The position in the UK is well settled—there's been a liberalization of funding, the rules of maintenance and champerty essentially are dead, and third parties, lawyers as well as providers of cash, can actively participate in the procedure. So that's clear. In Nigeria, it's not so clear, particularly as regards arbitration. There was the Arbitration and Conciliation Act Repeal and Enactment Bill 2017, which is making its way through the legislative institutions. The Senate passed the bill last year, and it's now before the House of Representatives.

That bill implicitly recognizes third-party funding in arbitration. It defines costs to include third-party funding, and it empowers tribunals to assess the costs of arbitration, and those costs include third-party funding. It defines third-party funding as an arrangement between an individual or corporate entity and a party involved in the litigation whereby the funder agrees to finance some or all of a party's legal fees in exchange for remuneration from proceeds of the award. So all the ingredients are there, except that there isn't actually an explicit, express statement that third-party funding is permitted.

So it's got all the implicit recognition in the bill, but that last mile—to say it overrides the common law of champerty and maintenance to allow a third party to come in to fund litigation—there's quite a bit of debate. I can give you references if you wish to some pretty scholarly articles on this whole debate about whether the bill will go far enough. The weight of opinion is that it doesn't, because I think Nigerian law is quite clear that where there's a conflict between statute and common law, then statute overrides. But it's got to be pretty clear, and the statement in the bill doesn't go far enough.

So very quickly, let me talk a little bit more about the funding process and how you go about it. If you have a claimant—an active claimant who has an arbitration with the seat in a jurisdiction that does allow third-party funding, you have an arbitration which is governed by English law and operating under an institution whose rules allocate discretion on costs—how would you go about looking for a funder? A number of ways to do that. The best way, particularly given the market, is to look for a broker. In the same way you would go to a broker to get the best insurance quotes, there are a number of brokers in the market who will guide the development in the right direction and will see the entire field and be able to get something that approaches your payment requirement.

When do you make the approach? Obviously if you've got a well-developed case and you can persuade the funder that this is a good piece to back, then you can move very quickly. Some funders want to be involved right from the start—we want to see them, they want to be involved in instruction. Most of them require counsel's opinion, the latest draft pleadings, they want to know who your witnesses are. If you want to do some serious work, you might actually focus on it. You need to check with yourself and your client how much the client wishes to move the risk of litigation to a funder. Do you want to slice it up? Do you want to take just solicitors' fees? Do you want to take counsel's fees? Do you want to go for experts? What bit of the risk do you want to share?

I've mentioned earlier that the best way to share risk is not just third-party funding. As a law firm, are you prepared to share some of that risk? Do you want to go through damages-based agreements or costs to recovery? Operation one to ten: very simply, if you have a claim worth ten million pounds, they want to see costs limited to a million, because if it's more than that, if it doesn't work—and they will typically look for the equivalent to three times funding or 35% of recovery. Now if the solicitors' costs are more than a million pounds in that case, the recovery which the funder makes will wipe out much of the damages which the claimant recovers. So there's a fine balance between getting your economics right.

I know that time is pressing on, so at least the slides will be available, and I can follow up with my notes if you want to take a look at some of the more detailed references. So there's a great international market—Bridgewater Fund talked about, Burford being a good example—has an investment portfolio of 3.2 billion dollars invested in litigation. You have big hitters in the UK, you have smaller players who are more niche, maybe backing certain types of arbitrations—finance arbitrations, tech arbitrations, third-party American market arbitrations—where there's a certain skill to making recoveries. So there's a big field to choose from if you do have a case that fits the bill.

I've talked about trends in funding a little bit. There are more players, that hasn't necessarily reflected in lower pricing. As I've said, typically they're looking for a return of three times their investment. If they back a case to the tune of one million, they want to recover three million. So in a ten million dollar case, they wanted three million out of the ten million. Now, as I said, if the costs are actually two million and they want three times that out of a ten million dollar pot, they're covering six million and they will be happy with that. But that leaves the claimant with four million, and they simply won't go near it. So that's where the question comes in.

I mentioned disputes developing as an asset class, which adds to the attractiveness of it. And I'll finish very quickly on some key considerations for lawyers. First and foremost: do not forget your duty is to your client. Your duty is to ensure that you represent the best interest of the client, funding or no funding. And of course, the moment you bring in a third party, it creates all sorts of conflicts—whose interests are best served when a settlement offer is made and the funder wants to cash out but your client wishes to pursue the litigation? That's why any funding needs to be carefully negotiated, carefully memorialized in an agreement, so you know exactly where you stand.

Increasingly, we find that one of the first questions our clients ask is: 'I've got this great claim, how do I fund it? How do I defray the risk of this?' Which is why I think, particularly in a market like Nigeria where it's just growing and starting, lawyers who can steal a march by researching what's available, looking at the uncertainty around the Nigerian law position, getting themselves comfortable with what could be in dealing with third-party funding—I think you will have a huge advantage. We in the UK are under an obligation to advise our clients about all available funding options, so we have no choice. Maybe you don't, but as a professional standard, get to know the market, start to meet those funders who will play in the Nigerian market—and there are some of them, and I'll be happy to put you in touch with our own funding in-house if you want to learn more about those funders who might be prepared to look at funding claims arising out of Nigeria. Understanding how the funders work is fundamental.

So that's been a nutshell. I've probably exceeded my slot by a few minutes, but I hope you don't mind. It's an exciting area. I think it gives litigators real firepower to play in the boardrooms. The CFOs are very interested in this because, for them, it saves them a lot of grief if somebody else is carrying the can. So I would suggest that you do get more comfortable with the prospect, and I'm happy to take questions.