Authored by Maxim Osadchiy, Associate, Freshfields Bruckhaus Deringer (On Secondment At Vannin Capital)

In a contest for the most widely discussed topic in international arbitration, third-party funding would do very well, if not win first prize. But, while much has been said about legal issues surrounding third-party funding, little is known about its actual workings.

Joining Vannin Capital for a six-month secondment has presented a unique opportunity to discover the uncharted territory of the inner workings of disputes funding, bridging the gap between perceptions and reality. To be the first arbitration associate to gain that insight, to become part of the ever-expanding business of a leading disputes funder, and rather uniquely, look at the dispute resolution world through the disputes funder's eyes – the secondment promised to be worthwhile; and so it is.

A full account of my time at Vannin would be long and far exceed the limits of editors' indulgence. Not trying to squeeze a gallon into a pint pot here, I will discuss what I found most interesting about my time at Vannin, namely:

  • The dismantling of some common misconceptions about professional disputes funding,
  • The process of claim assessment (its salient features), and
  • A few tips I have for those considering applying for third-party funding.

COMMON MISCONCEPTIONS

One that persists is that disputes funding is akin to gambling. However, I did not detect a roulette wheel, dice, cards or other attributes of a gambling at Vannin's offices (surprising as it may seem).

In all seriousness, the professional standards that Vannin holds itself to as a responsible funder means that it undertakes a careful deep dive due diligence before it decides to commit any funds to a claim, eliminating the idea of random betting. While the risk that a funded claim may perform worse than expected, or indeed fail, is always there – such are the vagaries of litigation – winning is by design, i.e. careful selection of meritorious claims, not by accident or luck (unlike in gambling). It is hard to imagine a gambler who succeeds more than 80% of its bets; yet this is the success rate achieved by Vannin.

The perception that disputes funding is a prerogative of financially distressed claimants and is used out of necessity fares no better. In fact, most claimants that seek support from Vannin have made the decision to transfer the financial risks associated with mounting a claim on the basis of capital resource management. Often sophisticated and well-capitalised, they resort to disputes funding to make better use of their corporate coffers such that relevant funds are committed to achieving their core business objectives and not to costly multijurisdictional proceedings. An example of a joint venture between two very well capitalised organisations where only one of the joint venture parties was prepared to risk their own funds to pursue a very large and complex claim1 illustrates the point well.

Lastly, some continue to believe that litigation funding is used primarily in high profile commercial litigations, class actions and large investment treaty cases, and less so in other cases. This too finds no support in my experience at Vannin. Part of my role at Vannin is to support the team during the due diligence claim assessment phase, and I was surprised by the breadth and variety of cases that the Vannin team is involved in all over the world: from commercial, bankruptcy, antitrust and construction disputes to a wide range of investment treaty claims, bad debt recovery, IP and property disputes, and even on one occasion a request to fund proceedings to restore previously unrecognised inheritance rights to certain pieces of fine art of a member of a royal family. Non-commercial cases remain unfundable of course; and so they should be.

With common myths about professional disputes funding dismantled, we can further lift the proverbial veil and look at what often appears to be the most enigmatic part of the funding world: claim assessment.

CLAIM ASSESSMENT

Reviewing a claim at Vannin is potentially a two-stage process. It starts with a high level due diligence review of the funding opportunity. This serves two goals. The first is to determine that the claim has at least 60% chance of succeeding. The second is to ensure that the claim meets minimum funding criteria: has a value of at least £5 million and can pass the one to ten threshold, i.e. the amount of potential recovery should be at least ten times more than the amount of funding sought.

Counsel at Vannin, formerly top tier dispute resolution lawyers, rely on their own skills and knowledge to conduct the first assessment of a claim. The nature of the assessment is not dissimilar to the standard merits review in private practice, but it is broader as the funder's ultimate objective is to ensure that both they and the claimant benefit from the investment, not necessarily to win the case at a hearing (Vannin appear particularly attuned to the fact that the claimant must be commercially incentivised to commit time and energy to the claim for the best possible outcome). Therefore, the due diligence includes criteria other than jurisdiction and liability such as claimant's legal counsel, potential enforcement difficulties, quantum to cost ratio and financial standing of the defendants.2 This might sound like a lot of work for the initial review to be performed in short order (and there are multiple cases being assessed in parallel). In reality, however, it is "meatball surgery3" that is being performed at this preliminary stage:  akin to providing an essential temporary surgical fix performed at high speed (at battlefield), focus is on identifying foundational aspects of the claim which may prevent it from surviving.

If the initial due diligence concludes positively, Vannin offers preliminary funding terms, which, if accepted, are memorialised in a term sheet. The claim proceeds to "level two review" and is subjected to further, in-depth scrutiny. The assessment at this stage is external: Vannin procures a targeted independent opinion on the merits of the claim (usually from a QC or equivalent) as well as an opinion on key issues which may have surfaced during the preliminary due diligence, such as quantum assessment or enforcement risk. The advanced due diligence typically lasts four to six weeks during which time the client may not seek funding of the claim from any person other than Vannin (the "exclusivity period").

If this last stage of due diligence concludes positively – the solidity of the claim is confirmed and Vannin is comfortable with its other aspects – it will seek to agree a formal funding agreement with the client that incorporates the terms agreed with the client in the term sheet prior to the exclusivity period. If the client does not accept the agreed funding terms at this late stage it will typically have to bear the costs of this due diligence stage as stipulated in the term sheet. After the detailed terms are finalised, the funding opportunity is submitted to Vannin's investment committee for its final approval. Once approved, the parties will sign the litigation funding agreement; the claim is now funded.

Finalising and signing the litigation funding agreement is typically the least burdensome part of the process and takes about a week to accomplish.

TIPS FOR APPLYING FOR THIRD-PARTY FUNDING

I am often asked how many claims make it that far. The answer is "a handful": approximately 5% of cases referred to Vannin obtain funding (while there are around 50 funding requests received monthly). Why is the number so low? In most cases, so significant is the disparity between the claimant's perception of the claim or its quantum and its actual merits (as assessed by Vannin) that most funding requests do not withstand preliminary scrutiny, and fail.

On other occasions, while a claim may appear to be potentially strong, the claimant may simply be reluctant to properly engage in its analysis – by not providing sufficient information about the dispute or the proposed budget, by refusing to invest in any additional fact finding (as may be needed for the initial review) or otherwise being unprepared to fully engage in the assessment. In such circumstances as well, the prospects of obtaining funding are slim.

One must appreciate that disputes funding, like any serious investment activity, is about confidence: unless Vannin is confident that the investment is worthwhile, i.e. that the potential reward exceeds the risk of taking the matter, it will not fund the claim. The better the claim is established and understood, the more likely that there will be a positive funding decision from Vannin and the better the terms it would likely be able to offer. This may sound like common sense. Yet, after having seen more than a dozen funding requests declined for lack of foundation, including due to claimant's unwillingness to fully assist Vannin in reviewing the claim, it is probably the single most valuable tip I have to share.

One would also benefit from a better understanding of the strategic advantages of engaging a professional disputes funder like Vannin. Far from being a mere supplier of critically needed cash, Vannin's assessment helps verify the strength of the claim; moreover, its experience in funding successful claims is in excess of 80%. In addition, its commitment of a nine-figure sum to funded cases over the last three years can offer valuable insight into the world of dispute resolution thus maximising the claimant's chances of success. This is an important consideration and should not be overlooked when considering which professional disputes funder to engage.

My Vannin days will soon be over. But, litigation funding is "here to stay, and not just for small or cash-strapped claimants.4" While the inside workings of disputes funders are often kept behind closed doors, there is nothing to fear or be sceptical about based on what I have seen at Vannin.

Footnotes

1 In Conversation Series, No. 2: May 2017 (Baker McKenzie & Vannin Capital): http://www.vannin.com/downloads/in-conversation/Vannin-In-Conversation-Series-No2.pdf

2 For a more detailed discussion of the funding criteria, see Litigation Funding Process, 28 February 2017 by Rosemary Ioannou, published by Lexis®PSL.

It is worthy of note that all of these criteria are important. Thus, even if the claim is potentially strong on its merits, Vannin may nonetheless decline to fund it if the commercial arrangement would not suitably incentivise the claimant to invest time and energy into the dispute or if the proposed legal team lack the requisite skills and experience to ensure that the claimant is getting the best possible representation or if chances of successful recovery are low – though the advent of award default insurance is significantly reducing recovery risk.

3 Credit to Iain McKenny, Vannin's General Counsel of Disputes, and American TV Series M*A*S*H.

4 Freshfields Bruckhaus Deringer, International Arbitration: 10 Trends in 2016 (No. 4): https://www.freshfields.com/globalassets/campaign-landing/international-arbitration/arbitration-insights-2016.pdf?_t_id=1B2M2Y8AsgTpgAmY7PhCfg%3d%3d&_t_q=trends&_t_tags=language%3aen%2csiteid%3aba2121b4-3779-4fa6-8e49-49e502a9987c&_t_ip=81.104.114.204&_t_hit.id=FreshFieldsWebsite_Models_Media_GenericMedia/_9c5bfefd-34fc-4351-b7d0-800ca14fdf78&_t_hit.pos=2

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