Third party funding gains traction in construction

Third party funding for arbitration is gaining traction as margins continue to decrease in the construction sector

Suzannah Newboult is a construction specialist at DLP Piper LLP.
Suzannah Newboult is a construction specialist at DLP Piper LLP.

Third party funding for arbitration is gaining traction as margins continue to decrease in the construction sector.

It is not unusual for the cost of arbitration to be anywhere between $1.5m and $10m, and often at the higher end for complex, document heavy construction cases. With ever tightening margins in the industry it is not surprising then that the use of third party funding in arbitration has been growing over the last few years.

Third party funding, in the context of arbitration, involves a commercial funder agreeing to pay some or all of a claimant’s legal fees and expenses, in return for reimbursement of the funder’s direct outlays and a share of any sum recovered from the resolution of the claim.

The funder is willing to pay for your arbitration in exchange for a sizable return on his investment.

Typically, a third party funder will seek a 15% to 50% share of the sum recovered through the arbitration process (the median share is around a third). How much the funder demands in return will depend on the costs and risks involved in funding the dispute. This ‘fee’ may also increase over time to reflect additional costs and risks materialising.

If the claim fails, the funder receives nothing and typically, remains liable for any fees due to the claimant’s lawyer and other disbursements paid, together with any adverse costs that it has agreed to pay (if not insured against) which are incurred during the term of the funding agreement. The stakes are high.

The funder’s decision to fund a claim is a pure investment decision.

The funder will assess the factors that represent the financial risks it would assume, such as:

- the prospects of success of the claim;

- the quantum of the claim (in comparison with the likely costs and risks of pursuing the claim);

- the possibility of counterclaims;

- factors relating to the arbitration, including:

- the terms of the arbitration agreement;

- the substantive law of the dispute;

- whether there are any potential jurisdictional issues;

- the seat of the arbitration;

- the capacity of the other side to pay any award; and

- the risks associated with enforcing and obtaining payment under an award.

The process of obtaining third party funding varies, but usually a party’s legal advisors approach the funder. The funder will require detailed information about the claim and will carry out extensive due diligence in relation to the claim or require a preliminary assessment of the claim to propose a funding agreement.

The funder’s involvement in the arbitration varies but many funders are run by highly experienced former dispute lawyers who are focused on the timely, efficient and successful resolution of funded claims for the maximum achievable value. Mirroring your priorities, if you were self-funding.

In the past, third party funding was only taken up by claimants with no money and no other means to bring their claim. In this region that has been problematic because of the costs involved in working with the funder up to the stage of the funding agreement being proposed and also because of the unwillingness to accept the high share demanded by the funder.

Increasingly, arbitration funding is seen as an accepted commercial practice to remove the cost risk of bringing a claim and take the ongoing legal costs off the balance sheet and away from the profit and loss account. Preserving budgets to be used on the core business rather than legacy issues.

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