In different ways, Spain may become the leader or model of what goes on in linked countries. Portugal and Brazil come to mind immediately. In all three, there is common ground on a number of commercial and cultural and professional grounds. The experience and leadership of Spain can be important.
A. Introduction and Overview
Litigation Funding is generally perceived as third parties advancing cash to fund prosecution of a claim in return for a portion of a recovery if it occurs, and without recourse against the claimant or any other if there is no recovery. It is a new and emerging industry, unknown to the vast majority of the population. It is growing with each day that passes.
Within this new industry, there is an even newer phenomenon: litigation funding of international claims. This category of funding takes specialized experience and skill, just as international litigation takes specialized experience and skill beyond domestic litigation.
A further sub-category of funding international claims, is funding of international arbitration claims. Given the deep differences between international arbitration and international litigation, this sub-category carries its own needs, experience and skills. It is a world unto itself. It has not yet been written about or studied in an important sense. It is the topic of this article.
The article takes one country to illustrate its points, Spain. Spain is a particularly good country to use since it has a strong arbitration bar and practice; it is a country that is and will continue to experience the growth of international arbitration and the need to fund arbitrations; it is linked closely to other similarly situated countries (like Brazil and Portugal). It provides a context important in itself, and important to reflect the points and issues in a substantial number of other international arbitrators and of other countries.
One critical caveat to all that is presented in this article: the topic is enormously complex, with countless subtleties and innuendos, and with evolving ideas and products being constantly born. This short article can only brush the tips of the mountaintops. The goal, however, is to present enough to alert everyone to the possibilities that exist in everyday practice that may enhance one’s practice and the client’s interests, and provide a platform to explore the possibility in more depth, as useful, and on an informed basic understanding.
B. Basic Background
1. Recent Birth and Growth of Investing in Claims
(1) Descriptions and Definitions
From 40,000 feet up, Investing in claims might be viewed as nothing more than (for the most part) funding the prosecution of a meritorious claim, receiving a return if successful, such as a portion of the recovery, and absorbing the entire loss if unsuccessful. (In different situations, advances in addition are used to meet other needs, such as paying arrears to bring the attorneys current, or business expenses of the claimant to keep the business going, or possibly needed personal expenses) Such investing is developing into an industry, with a distinct market and demand. The industry has become commonly known as “Litigation Financing” or “Litigation Funding”. These terms are not yet established usage. In view of the newness of the industry, definitions here are still being created, changing and becoming more established as time goes by. The industry may be considered, however, an industry which “Invests in Claims”, and for this article it is referred to as “Investing in Claims”.
The industry is based on the emergence of a new asset class: the Claim. The “Claim” is something that can be and is being examined and valued as any other asset. It is therefore being treated as any other asset — for buying, selling, pledging as collateral, and so on. The asset can, so far as this article is concerned, be compared to a share of stock and other well-known assets. It can be considered equally tangible, and equally subject to comparable valuation.
Commercial Claim. All “Claims” are not equal. To the emphatic contrary, they are different and unequal, each unique like a fingerprint or snowflake.
To begin and broadly speaking, there is a sharp overriding difference between Commercial Claims, and Consumer Claims or Retail Claims. The former belong to the business to business variety. The latter are usually claims of individuals, such as personal injury or domestic dispute claims.
The differences are dramatic. For example, the personal claimants are often less able than the commercial to protect themselves — they may not have the lawyers and other professionals available to them, or they may not have the business and finance and legal experience personally as does the commercial claimant, and so on. These differences call for different regulatory and other rules relating to personal and commercial claims.
This broad distinction must always be kept in mind. International Investing is usually in Commercial Claims. However, there are a number of occasions when investments are sought for human rights cases, class actions, mass torts, and other cases which can fall in the Consumer Claim category.
Beyond this Commercial versus Consumer distinction, there are a host of other differences, all having their relevance, some of which are illustrated below.
Claimants own the asset. They form the demand side of the equation. Many Claimants cannot afford to maximize the value of the asset through prosecution in an arbitration or litigation. Those Claimants form the bulk of the market today. They need financial support to maximize the asset’s value. Without it, the asset is devalued badly or lost absolutely.
In addition, some Claimants who can afford the costs, are stepping into the demand side and the market. They do not want to spend what it takes on disputes. They prefer to use the money on business or other uses. They thus want to cede the expense to an Investor in Claims. At the same time, they want to hand off the risk of loss.
Further on the demand side, there are some defendants who are “Claimants” in a real sense. These Defense Claimants are the subject of an unmeritorious claim. They too are starting to seek out an Investor in Claims to protect them through funding to battle the thin claim. The situation differs from when a Claimant seeks funding, but has enough common ground to enable a Funder to determine crucial elements to funding, such as the strength of a defense, the value to the defendant to winning, and the pricing. The Defense Claimants, like the offense Claimants, include not only parties who cannot afford the dispute fees, but also those who can afford them but want to opt out of them.
At the heart of this article is the term international investment in international arbitration claims. This description refers to an investment by a third party in an arbitration (a) between nationals of different countries, or (b) involving a Sovereign or its entity.
(2) Short History of Industry, and Identification of Industry Participants
Investing in Commercial Claims is New. It started in Australia a little over twenty-five years ago. It then immigrated to Europe, taking deeper root in the UK about ten years ago, but including other countries such as Germany, Switzerland, and the Netherlands. About three years ago, it emerged in the US. It is being sighted in Brazil, Canada, Hong Kong, and a few other countries.
Institutional Funds have been formed to specialize in the buying, selling, and financing of these claims. They have, for the most part, been formed during the last 10 or 15 years, starting with IMF in Australia forming a public fund in 2000. Today, there are between 15 and twenty Institutional Funds, in varying sizes. Three major ones are public: Burford Capital, Juridica Capital, and IMF. A number of others are private, in the UK, and elsewhere. Some recent entrants have appeared, and others are expected to appear.
Beyond institutional funds, others have become funders. They usually invest on a one-off basis and into a particular case. Banks, hedge funds, insurance companies, various substantial individuals, and others, belong to this group.
Lenders to law firms, contingent fee lawyers, insurance companies, and some others, also support prosecution of disputes in various ways that can be compared to institutional funders. For example, a contingency law firm in the US, with proper cases, agree to prosecute a case to conclusion with no charge to the claimant, sometimes even absorbing out of pocket expenses, in return for a portion of the recovery. (These contingency arrangements are not allowed in almost any other country apart from the US, although other countries, like the UK, have some variation of this under what’s called “conditional fee agreements” which cap the recovery of this firm at some figure like twice the hourly rate it otherwise would have charged) Such firms sometimes compete with capital funders, and sometimes collaborate with them, sharing the risk. Various entities loan money to such law firms, to assist in prosecuting cases, and taking as security an interest in a package of contingency cases being pursued. Insurance companies have for many years paid claims of their insureds and then taken over through subordination the prosecution of the insured’s claims. These “funders” have existed for many years.
(3) Access to Justice
Access to Justice is coming to be known as an inherent and integral ingredient of most claims. Funding enables worthy cases to have their day in court. It “levels the playing field.” Properly performed, investing in claims confers social benefits. This concept was well captured and in a poignant way by a woman whose claim in a divorce proceedings against a well-financed and fierce adversary, when she said that the investment she received was “an investment in my future.” NY Times, December 5, 2010, p 2. In a way, it is a double investment. One is by the funder. The other is by the claimant who is committing certain funds from her recovery in order to pursue and obtain a recovery that otherwise was beyond her reach despite a deserving claim.
(4) Issues, Solutions, Rules
The industry has raised issues, especially given its relative newness and the lack of awareness of it by most people, even the most experienced litigators and arbitrators. Issues concerning champerty and maintenance have often been raised. These issues stem for the most part from principles formed centuries ago in situations where the courts sought to protect a relatively helpless claimant, such as an individual who has been injured, from being taken advantage of by a third party buying an unfair interest and return on the claim. They have, as indicated above, substantially outlived the usefulness they may have had then, when dealing with commercial claims and claimants who can protect themselves and want to benefit from funding. Other issues, sometimes appearing under the champerty brand name, have been raised. They can be illustrated: is the Funder unduly interfering with the claimant-attorney relationship by dictating strategy, appointing the lawyer, or otherwise? Is the Funder interfering improperly with the settlement? Is the Funder financially able to fulfill its commitments? Is the Claimant being straightforward with the Funder? Is the Claim a virtuous or a sham claim?
Various solutions to the issues are being proposed, and d0ifferent ones being adopted. Courts have themselves imposed certain solutions, such as sanctioning a claimant and its Funder for pursuing a frivolous claim, or providing some guidelines disallowing certain “control” by the Funder over the Claim or Claimant or attorney. Other solutions are being proposed by various Funders or Funder Groups. The process is ongoing and important to address and solve issues for the market and the industry’s benefit.
Rules are also being proposed. In the UK, for example, a government organization and a respected group of Funders, under the auspices of a government organization, have proposed Rules. They are under discussion at the moment, with the hope that ultimately rules by the Industry will come into existence. Rules which specifically address and are tailored to financing of international litigation and arbitration have not yet been proposed.
(5) Market Demand
How big is the market demand? It is impossible to tell with any precision, given the inadequate state of information available. But in general terms, and based on any number of ways to gauge the market, it is huge. If one only looked at the United States, the market for claims undoubtedly must be spoken of as having billions and billions of dollars of claims needing funding. If one then looks further at litigations and arbitration claims needing funding worldwide, the numbers are taken to levels not easy to comprehend. Beyond this market demand from claimants in need, there should be added a demand emerging from defendants in need. In addition, the market is expanding to include claimants and defendants who are not in need of money, but prefer to fund their positions, save the litigation cash flow, and shift the risk. This adds up, and is growing.
(6) Industry Supply
How big is the supply? This figure is also hard to calculate, since most Funders are private entities, and other suppliers such as hedge funds, do not reveal this information. Burford Capital, the largest public fund, just increased its capital to a little over $300 million. Juridica, the second largest public and fund, has about $210 million. However one might try to estimate the amount of money available for funding, it does not seem likely it will get above the quite low billions.
It is interesting to note that a recent article in the New York Times, referred to on page 4 above (under “Access to Justice”), discusses a little known special area of litigation financing supporting women’s claims in divorce against their husbands, and states that one specialty fund in this area funds at any given time over $1 billion of such claims. Among other things, it confirms a lack of information in the industry that exists. This lack of information and analysis is being addressed by various entities such as the RAND Institute of Civil Justice, perhaps the leading entity in analyzing the industry. It is doing an enormous amount of invaluable and ongoing work and study in the industry, holding leading Symposiums, publishing detailed analyses and reports, forming projects, and otherwise (including carrying on this effort, among others, with its affiliate in Europe, the RAND Institute of Civil Justice (Europe).
Despite uncertainties in precise numbers concerning market demand or industry supply, it is safe to say that the gap between demand and supply is enormous. It is also reasonable to conclude, despite lack of verifiable information, that the gap is widening.
C. International Disputes Discussed, in general
1. International Disputes Distinguished from National
(1) Basic Distinctions
Cross border disputes (involving a claim by the citizen or one country against the citizen of another, or against another country) can be and often are as different from national disputes (citizen of one country asserting claim against another citizen of that country) as night from day. They not have rules and requirements far different from domestic disputes, but operate in a context that brings to bear sharply different politics, policies, cultures, and values. The results are experienced on the substantive law and policy level, and on the procedural level, of international disputes.
Examples of substantive law and policy differences: a Spanish citizen sues a US citizen in the US. Public policy and substantive law differences permeate the dispute. Spain has a Civil Law legal system, the US a Common Law system, as one key difference from which radiates a host of others. Liability for certain anti-competitive acts exist in one jurisdiction, not in the other. Claims for certain whistleblower situations exist in the US but not in Spain. Public Policy differences abound, such as: public enforcement of laws is not a part of the Spanish system, while the vehicle is widely available in the US; trebled damages and punitive damages are not available generally in Spain, with the reverse being true in the US in some specified areas like antitrust. Indeed, the court in Spain may not permit a judgment secured under the US antitrust laws allowing for treble damages, to be recognized and enforced in Spain. (The UK goes a step further: it not only prohibits recognition, but for good measure, allows a defendant from the UK who has had to pay treble damages in the US, to “claw back” from the plaintiff the amounts that exceeded the regular, non-trebled, damages.)
Procedural laws and policies also differ dramatically. In Spain, there are stricter procedural and evidentiary rules; no civil juries as opposed to juries in the US as a rule; no depositions of parties versus depositions at the heart of every litigation; generally, no “discovery” is permitted versus the widest discovery in the world in the US — and this rule against discovery is sometimes enforced with criminal sanctions against one who violates the law, even if that party is ordered to produce the information as a part of discovery in the US; different attorney-client and work-product rules apply; different ethics rules; no class actions exist in Spain (and almost every other country in the world) as understood in the US (although there are “group” and “aggregate” actions); more limited derivative actions than in the US; contingency fees are allowed in the US, and have been for years, while this country virtually stands alone in its allowance (although quite limited versions are allowed elsewhere); loser pays in Spain, not so in the US.
(2) Conflict and Comity
As a result of these differences, the policy and laws of each country constantly conflict and often collide head on.
To try to harmonize and reconcile these differences, nations have entered treaties. The treaties leave huge gaps where they do not go. Courts as well as legislatures within nations have sought through “comity” to fill these gaps and recognize and respect differences, to a significant degree.
On the treaty side, a number of important illustrations exist. One consists of bilateral and multilateral treaties concerned with the International Center for Settlement of Investment Disputes. The treaties enable certain citizens of one country that is a party to a treaty to assert claims against a Sovereign who has confiscated or otherwise improperly harmed an investment by the party within the Sovereign. Another set of bilateral and multilateral treaties provide for the enforcement of arbitration awards issued in one country in all other countries that are part of the treaties. A third consists of various rules established under treaties relating to obtaining evidence in one country by a party in another, under Hague rules and requirements. The Uniform Code of the International Sale of Goods is yet another substantive law that falls in the category of uniform laws to be respected internationally.
Relating to treaties, the United States has stood out in one particular respect that has caused continuing consternation on the part of many other countries. The US has refused to enter a treaty on the recognition and enforcement of court judgments of other countries. Certain other countries have entered such treaties. The treaty among the European Union countries is an example.
Beyond treaties among nations, the harmonization of differences is, as indicated above, up to the domestic legislative and judicial comity that governments offer each other. In New York, for example, State statutes have been enacted aiding the recognition and enforcement of judgments from abroad, specifying features of the judgment and related proceedings needed to justify recognizing this foreign judgment even though the judgment was entered in a jurisdiction with different substantive and procedural laws. Other States, and various countries, have done the same. Reciprocity is sometimes a condition to and trigger for domestic law respect.
Similarly, Courts in the States and federal courts, as well as courts in other countries, have a policy recognizing and respecting foreign laws and policy notwithstanding differences, providing various requirements are met. The law books are full of such decisions, and they reach back a long time. Even when legislation exists providing for enforcement, the Court still usually have to go to work and determine that the foreign judgment meets the statute’s requirements.
D. International Arbitration
International arbitration, in the dispute resolution universe, has been a relatively recent entrant. It has only gained real currency in the last half of century. This growth has stemmed from and parallels the growth of international travel, technology, and commerce. International arbitration clauses have been embedded in a huge number of international transactions to eliminate the uncertainty that international judicial disputes held for the parties. At the same time, international arbitration offers many other benefits, such opportunities for speed, cost efficiency, confidentiality of proceedings, decision makers either chosen by the parties specifically or with the parties having an impact on the selection. International arbitrations have come, in many areas and ways, to dominate international transactions.
As a result, international arbitration has carved out for itself important differences from the general rules. One central one was mentioned above: under many international treaties, the award of an arbitration tribunal in one country must be recognized and enforced.
Beyond this, many national statutes and regulations have grown up governing arbitration proceedings. In the United States, for example, there are federal statutes, and there are also statutes in each of the States, dealing with arbitration, domestic and international.
In addition, various regimes for arbitration have developed. Rules of The International Chamber of Commerce, The American Arbitration Association, the United Nation’s Committee on Transnational Disputes, come immediately to mind as illustrations.
What is also important, are what might be described as ad hoc personal rules that develop among experienced international arbitrators and experienced international arbitration panels. Rules of practice develop and are honored that can be exceptionally helpful and positive. They of course vary from nation to nation, community to community, culture to culture, person to person. The rules are sometimes unwritten, sometimes instinctive, among the participants.
As can be seen, the rules of the road for international arbitration are different from international litigation. First, there are the hosts of basic differences in the different rules, regulations, requirements, cultures, and values. Second, of course, the general methods of resolution — through affidavits, and other evidence not permitted in a court; through hearings typically before a panel rather than one judge; through limited discovery, as a rule; through strictly limited appellate rights; through different costing regimes; through specified rules to govern, and designated venues; all by agreement of the parties — mark this dispute device off dramatically from judicial solutions. Third, there is a menu of choices, to be selected by agreement, that will govern the dispute resolution, such as, the law to govern (subject to certain public policy restrictions), the arbitrators, the venue, and the procedural rules.
This choice in some respects extends to public policy requirements. As a result, the policy and ethics that apply might be agreed upon, rather than left to the Courts, at least to an extent. As another result, there may be more freedom for a Funder with its own special capacity in understanding and funding international arbitrations, to assist in strategy, consulting, and other methods to enhance the value of the claim and investment, while of course still paying close attention to and giving full respect for the claimant’s rights and the claimant-lawyer special relationship. As a further result of the parties’ agreement, advocates from one jurisdiction, like Spain, can conduct arbitrations in other jurisdictions, such as the United States, even though not qualified to practice there and thus not able to conduct court proceeding in the US.
The parties can thus with few restrictions agree how their disputes will be resolved. While to a limited extent courts can be inserted into the dispute, and public policy comes into play, freedom to contract is a cardinal precept of international arbitration, fundamental to its life and success.
International arbitration has become crucial to international commerce. More international commerce, more international arbitration clauses, more international disputes, more international arbitrations. As international commerce inevitably continues its growth, international arbitration is at its side guarding and encouraging its growth, and growing lockstep with it.
E. Investing in International Arbitrations and other Disputes
International Dispute Investing is unique. It calls on experience and skill in international disputes, first and foremost. Second, it requires experience and skill in international litigation financing, a rare commodity at this early stage of international financing.
As to the capacity on the international dispute side, the investor must know the ins and outs, the peculiar intricacies, of cross border disputes. That, in turn and as reflected above, requires capability in national dispute rules and regulations, as they are the bedrock of the first stage of analysis. Beyond this, it requires capacity in at least two jurisdictions, since they both come into play at various times, independently. As the next layer of analysis, one must know how the jurisdictions and their rules interact, in harmony and dis-harmony. In this sense, there must be an understanding of comity in all its forms, legislative, judicial, political, social, cultural.
As to the international finance side, the investor must have capacity in international finance, business, economic, and social sides as well. They all come into play in analyzing the cross-border litigation financing. For example, determinations of what investor expectations are in different countries, is important. Other examples include understanding and analyzing: currency exchange fluctuations; complicated international and national tax considerations; local and international requirements relating to security; the attitudes of different countries to the industry of funding; and a vast array of other considerations which can and do change from case to case.
With respect to both the international dispute, and international investment in that dispute, there are pervasive political considerations. What differences exist between the governments (Democratic, Socialist, Oligarchy, Dictatorship, etc). How do the differences impact the relations the governments have to the businesses and its citizens? How closely aligned is the political and the judicial? How much risk does the political inject into the judicial?
The analysis is often more intricate, the risks often more plentiful and bigger, than in domestic litigation financing.
It should therefore comes as no surprise that, until recently, most financings have occurred by Funders of claims within their jurisdiction. By and large, most Investors dare not step outside their jurisdiction to fund litigation in another jurisdiction. The risks of the unknown and unknowable have been too great, the multilayered experience and information too little.
Nonetheless, because of the clear and present need, the industry has a mandate to expand. Just as international arbitration has grown so rapidly over the past generation, so also should international investing in international claims grow. International commerce continues to grow. International litigations and arbitration disputes follow suit. International arbitrations are prominent among international disputes. International finance will be pushed to keep up.
Investing in international arbitrations calls for a special experience, a special approach, because rules apply different from those in investing in international litigations, let alone different from those investing in domestic disputes. But when the Fund has capacity to make such investments, international arbitration provides an environment with real opportunities. By the same token, the claimants have significant additional opportunities opened up for them.
International investment and financing of international arbitrations has relevance to Spain. Spain is, after all, the home of some the major international businesses and financing institutions. They become embroiled in complicated and expensive international arbitrations in Spain, and outside of Spain, such as the US and the UK
At the same time, Spain is the home of some of the leading international arbitrators in the world. Unlike in litigations, these arbitrators can be lead counsel in whatever jurisdiction the dispute erupts. Also, the panel for the international arbitration, can be drawn from anywhere in the world.
Spain is already active, one way or another, relating to international arbitration. With the ever increasing international arbitrations, and the active commercial and financial environment in Spain, it is likely that the current situation has no where to go except to become more intensive.
Beyond this, with the worldwide economic problems, Spain will, like a vast number of countries, see its citizens starting international arbitrations abroad, and will see international arbitrations brought within its borders or against its citizens. Under ICSID treaties which are being invoked more frequently, citizens of Spain, and governmental entities such as a Sovereign Wealth fund, are likely to find themselves initiating international arbitration claims abroad, and the reverse. These quite distinct international arbitrations, might well seek or need to be funded. The possibility also exists that defendants in international arbitrations here, and in other international arbitrations, will seek funding of defenses when the claims lack merit and the defenses are good ones.
Moreover, Spanish international arbitrators will likely be drawn into representing the Government’s positions. Even here, knowledge of funding, and how it works during arbitration, is valuable for the defense.
It is also worth remembering that Spain is linked tightly to other countries in commerce, disputes, and so on. One obvious link is to Portugal. Another is to Brazil (and other Latin American) countries. Brazil illustrates a linked country which has, recently, been gaining a significant interest in litigation funding. The experience and leadership of Spain can be important.
We anticipate a corresponding heavier interest in and demand for investments in international arbitrations in Spain and linked countries. We think this will reflect comparable developments in other countries. No doubt, developments here will benefit from experiences elsewhere; and equally certain, developments elsewhere can look forward to decided benefits coming their way from Spain.
Selvyn Seidel is Chairman of The Burford Group of Companies. He can be reached via firstname.lastname@example.org.