In the last decade, litigation funding has grown rapidly in many jurisdictions around the globe. It is becoming a mainstream financial product for claimants in high-value litigation or arbitration in the US, UK and Australia. Its use is also growing in many other jurisdictions, including in continental Europe and Asia.
Most of the focus has been on standard litigation funding (sometimes referred to as merits funding) whereby a commercial funder provides finance for some or all of the claimant’s costs of pursuing a monetary claim against a defendant (including lawyer and expert fees, arbitration fees or court costs). Some funders will also agree to pay any security for costs and any adverse costs (in jurisdictions where applicable) that the funded party is ordered to pay.
Unlike traditional forms of finance, litigation funding is non-recourse. Therefore, if the case is lost, the funder loses their investment in the legal costs they have paid. If the claim is successful, based on the settlement of the claim, a court judgment or arbitral award, the funder is reimbursed their funded costs and paid a fee which may be a percentage of the money recovered or a multiple of the funded costs. Therefore, the risks of pursuing the claim are transferred to the funder. These risks include the loss of the claim or the sum awarded being lower than the expected return.
For a commercial funder, the funding process focuses on assessment of the merits of the claims to evaluate the chances of obtaining a favorable settlement, judgment or arbitral award, and on the funding agreement, which regulates the funding arrangements agreed between the funder and the claimant.
Enforcement funding and management
A specific type of funding service which is offered by a few specialist funders is the financing and management of the enforcement of judgments or arbitral awards. Although it features less in legal articles and commentary, enforcement funding and management predates the standard form of litigation funding and has been available for cross-border disputes since the late 1980s. This specialist funding service includes both:
Finance for the enforcement proceedings, that is, the external costs of recognition and enforcement of a judgment or award.
Enforcement management. This will include a comprehensive strategy and management plan to formulate and implement the recognition and enforcement process. It includes asset tracing and coordination of a number of external advisors, lawyers and experts in different jurisdictions towards a recovery.
Why is enforcement required?
Debtors may delay payment and attempt to evade justice for various reasons. Sophisticated debtors may choose a number of different methods to hide assets. They will attempt to prolong any enforcement proceedings to benefit from local limitation periods, litigation fatigue or, at least, to postpone payment of any sum due to the claimant.
These tactics are best countered by experienced enforcement and asset-recovery specialists. Only a few funders have the financial capacity, knowledge and experience to invest in a case where enforcement is the main risk or one of the risks involved. Standard litigation funding of a case on the merits (merits funding) involves deployment of capital to the law firm acting for the claimant and allowing the law firm to handle the matter up to a distribution in the event of a successful judgment, award or settlement. If there is any doubt regarding enforceability and the ability to achieve a recovery, most litigation funders will decline to fund the case. However, a specialist enforcement funder will assess the enforcement risk and, if they consider that a favorable outcome can be achieved using their enforcement management services, will agree to invest in the matter.
What are the main differences between enforcement funding and merits funding?
Enforcement funding and management requires a different approach to case assessment, aspects of the funding process, funder involvement and the commercial terms offered than merits funding. In particular:
Assessment of a case that is likely to involve enforcement requires experience and skill in evaluating the enforcement risk, that is, the chances of a successful recovery. Enforcement cases worth considering for funding have a judgment debtor that is able but unwilling to pay. Where the debtor has the financial capacity to pay but is – or appears to be – unwilling, the enforcement funder will assess:
• the debtor’s asset position and whether those assets can be used for enforcement.
• the jurisdictions in which the assets are located, and whether those jurisdictions have a reliable, independent judiciary; and
• any procedural hurdles in those jurisdictions, for example, in relation to time limitation periods, service of documents, attachment procedures and sovereign immunity.
In an enforcement case, the overall strategy and management plan is likely to be more successful if an experienced enforcement specialist with a successful track record has oversight of the process and undertakes certain work in-house, for example, tracing and reporting on the assets of the debtor, rather than outsourcing that work to a law firm or external asset tracer. Therefore, where the enforcement specialist is also the funder, it will have more of an active role than it does when it only provides merits funding. This role of the funder is set out in the funding agreement and must be agreed to by the client. The enforcement process often involves more of a team effort including the client, the funder and the lawyers in various jurisdictions than in one typically sees in a merits-funding-only arrangement.
A cross-border claim against an unwilling debtor, especially if it is a sovereign or quasi-sovereign debtor, may have to be evaluated and executed in multiple jurisdictions outside the home jurisdiction of the debtor. Once assets are identified, these must be evaluated on their actual usefulness in the enforcement process in each of those different jurisdictions and whether their attachment can withstand legal defenses. This requires a management plan and legal knowledge in all of the relevant jurisdictions to coordinate and strategize the enforcement process, including at times multiple different enforcement actions. Therefore, it is important for the enforcement funder to have a full understanding of the overall strategy, in-house knowledge and experience of the process, as well as a network of local specialists that can execute the recognition and enforcement plan with the required legal skill in the relevant jurisdictions.
The commercial terms offered by an enforcement funder are usually different to those offered when the funder is providing merits funding only. As set out above, the investment by the enforcement funder is usually less capital-intensive and more labor-intensive, particularly when the enforcement funder has the specialist in-house skills and experience in the enforcement process, including in asset tracing. These in-house costs are typically not charged separately but are included in the overall fee due to the funder in the event of a successful recovery. In most cases, this results in a more cost-efficient process for the client.
Finally, in most cases, the agreement with a specialist enforcement funder will include involvement in any settlement discussions. (The client will have to consent to any final settlement but must not unreasonably withhold that consent.) An experienced and culturally sensitive enforcement team will know how to conduct settlement negotiations and avoid the usual ensuing non-payment tactics and to secure the actual payment. This can make a huge difference to the ultimate result.
Negotiating with foreign governments
Engaging enforcement and recovery expertise is crucial when assets are controlled by state-owned entities and government officials. Dealing with sovereign and quasi-sovereign entities around the world requires specialist knowledge about the political forces that influence how governments conduct their affairs, and familiarity with nuanced sovereign immunity laws in the jurisdictions where assets are located. Experienced specialists in this area are able to anticipate typical defense strategies and deceptive behavior and can navigate relations with the relevant parties and overcome seemingly insurmountable asset seizure challenges.
Upfront monetization of judgments and awards
Many successful claimants are interested in a sale of their judgment or arbitral award in whole or in part. The reasons for selling may be due to the claimant’s need for cash now over (possibly more) cash later, a liquidation deadline or a regulatory issue that led to a preference or requirement to remove a non-performing asset from the balance sheet.
Some funders consider the purchase of judgments or awards, but there are certain issues to consider, for example, whether the involvement of the claimant is required after the sale has taken place to ensure a recovery.
In some cases, this may be less of an issue and an outright sale in full may be appropriate. For instance, if the sale relates to a full and final award against a specific debtor in which the chances of recovery are high, or there is a predictable debt reconciliation regime in place, such as in liquidations or insolvency schemes or sovereign debt reconciliation regimes. However, in most cases, the enforcement funder will prefer a partial monetization for a variety of reasons. For example:
The successful claimant still has a stake in the recovery, lowering the ‘moral hazard’ risk that would occur if the claimant was no longer involved due to the information asymmetry advantage that the claimant seller holds over the enforcement funder/buyer.
The recovery action can often benefit from or require the knowledge of the successful claimant about their adversary or the underlying dispute that led to the judgment or award from earlier dealings. In some cases, the claimant’s involvement may be beneficial in settlement discussions, for example, with certain sovereign debtors. (On the other hand, in some cases it can be a detriment to successful enforcement when emotional considerations connected to the history of the matter play a role.)
Evaluating the enforcement risk and price of funding
The relevant factors that an enforcement funder will consider when evaluating the enforcement risk and determining the price to be offered for funding include:
- Status of the judgment or award (final or still subject to appeal or setting aside?)
- Jurisdiction and applicable law
- Amount: a high amount can be too high to expect a satisfactory settlement to be agreed whereas a low amount may not be sufficient to cover the transaction or enforcement costs
- Counter-party identity and expected recovery risk
- Age of the judgment or award against the relevant local limitation periods to enforce it
- Post-judgment or award interest level
- Currency of judgment or award
- Regulatory issues (US Office of Foreign Assets Control, UN sanctions or Paris Club).
- The enforcement funding process
- The funding process for an enforcement matter is similar to the process in a merits funding case, as follows:
- Signing of a confidentiality or non-disclosure agreement, to protect confidentiality and privilege over any information and documents provided to the funder.
- Initial review by the funder to check whether the matter falls within their broad investment parameters.
- Initial discussions about price and commercial terms.
- If indicative terms are offered, they may be recorded in a term sheet or in the form of a conditional funding offer with an exclusivity period. For example, this may be for 6-8 weeks, during which the funder will conduct due diligence (DD) on all aspects of the case including both an assessment of the merits and enforcement risk. This DD often means that significant internal and/or external resources are spent investigating legal and factual issues surrounding the case. In enforcement matters, the DD includes asset tracing and the legal position of the assets that are traced.
- If the outcome of the DD is positive, the case will be submitted to the funder’s board or investment committee (IC) to be approved.
Once approved by the IC, the parties will negotiate and sign a funding agreement and, from that date, the funder will pay all of the costs that they have agreed to pay under the funding arrangement.
- In some cases, the funder may agree to monetization of a judgment or award and pay the client advances as agreed. This may be a bullet (or lump sum) payment immediately after signing the funding agreement but may also be by payments in instalments spread over time or following certain milestones.
When conducting DD on an enforcement matter, the DD involves a combination of asset-tracing and debtor investigation combined with the legal investigation into enforcement and execution procedures in the relevant jurisdictions. In assessing a case on the merits, the main risks usually relate to the legal merits that form the basis of the claim, for example, its contractual or tortious basis, causation issues and damages calculations. Any risks associated with the enforcement of a judgment or award will also be considered but not to the same extent as when an experience enforcement funder is involved.
In general, the upfront monetization of a judgment or award will provide cash in hand. This may be attractive or required by a successful claimant, particularly in the current economic environment. However, an outright sale will provide, on average, a (much) lower return compared to an enforcement funding agreement.
Enforcement funding provides non-recourse finance for the enforcement of a hard-won judgment or award. Partnering with a specialist and experienced enforcement funding team can also add significant value to the process and facilitate the achievement of a successful recovery in many ways, including:
- Identifying assets, including those that might be owed to the debtor by third parties.
- Knowing and interpreting the local legal requirements for enforcement, debtor ownership, sovereign immunity, and piercing the corporate veil doctrines.
- Providing expertise on local procedural requirements for recognition and enforcement including freezing orders, pre and post recognition, discovery or disclosure mechanisms, service requirements, and forensic cooperation with local authorities.
- Advising on limitation periods applicable in different jurisdictions.
- Deploying past recovery experience to devise an appropriate enforcement strategy.
- Having an extensive network of external advisors, local law firms, experts, local investigators, and politically relevant persons.
- Identifying and leveraging pressure points.
- Contributing to settlement negotiations to achieve the maximum possible outcome and securing actual payment.