THIRD-PARTY FUNDING
London’s litigation funders are turning their attention to international arbitration. Can this deliver their breakthrough?
No sooner had Excalibur begun to drift from memory than another setback befell the litigation funding industry: the decision in August of the RSM v Saint Lucia majority to award security for costs on account of an unnamed funder’s involvement in the case, the first time such an order had been issued in the context of investment arbitration.
The decision spells potentially grave danger for the ‘mercantile adventurers’ hoping to profit from treaty disputes, given that it is precisely those claims on which London’s litigation funders have their eyes – and wallets – fixed firmly.
Treaty cases have long been a staple for Calunius Capital, launched in 2007 by former Freshfields Bruckhaus Deringer lawyer Mick Smith and investment banker Mark Wells. Besides its successful involvement in one of the most politically-charged investment law claims to date, Ron Fuchs v Georgia, which included the imprisonment by Tbilisi of the Israeli businessman, Calunius is currently funding two treaty arbitrations: a $1.2bn dispute between UK miner Oxus Gold and Uzbekistan under the United Nations Commision on International Trade Law (UNCITRAL) rules, and Canadian gold explorer Rusoro’s expropriation claim against Venezuela, which is being heard at the International Centre for Settlement of Investment Disputes (ICSID).
Calunius is not alone. Harbour Litigation Funding has five arbitration cases on its books – under the London Court of International Arbitration, International Chamber of Commerce, ICSID, Energy Charter Treaty and UNCITRAL rules – and Woodsford Litigation Funding, Redress Solutions and Isle of Man-based Vannin have all handled, or are currently handling, arbitration matters, commercial and treaty alike. ‘In terms of the applications for funding that we receive, arbitration is certainly on the up,’ asserts Susan Dunn, Harbour’s co-founder, who is also funding litigation cases in Australia, Bermuda, Canada, Hong Kong, New Zealand and the US. ‘There can be big numbers in arbitration and to some extent there is a little more predictability, especially in ICSID cases,’ adds White & Case partner Robert Wheal, himself no stranger to funding, having worked with Vannin to secure a $13.8m pay-out for Pakistani bottling company Gul in its licensing dispute with British drinks maker Nichols.
Vannin’s director Matthew Cox says its portfolio, once weighted towards litigation, is now split equally with international arbitration mandates. That shift reflects a wider trend in legal practice – and indeed dispute resolution itself – whereby law firms are investing heavily in their arbitration and public international law departments, given the vast network of investment treaties under which to sue host state governments. One only needs to consider the experience of Anglo-American financier Burford as a barometer of just how profitable such disputes can be from the funder’s perspective. The AIM-listed company in June recouped $26m from British power generation firm Rurelec after it received a $31.5m payment from Bolivia in connection with an outstanding UNCITRAL award; Burford had provided $15m to cover the costs of the case.
Given such returns, one would expect the London funding industry to be a hive of recruitment activity. Yet with the exception of Nick Rowles-Davies, who left Vannin in March to join Burford as a managing director responsible for business origination in the UK and Channel Islands, the industry’s recruitment pool remains limited to the ranks of law firms. Expect that net to widen as the industry matures, however. Indeed, Legal Business understands that the waters have recently been tested on a number of inter-funder hires, all of which have been rebuffed – for now.
Still, 2014 has seen plenty of movement, with most funders having bolstered their ranks in one way or another. Vannin’s six hires, including the addition of legendary Belgian arbitrator Bernard Hanotiau to its investment committee, were followed by three apiece by Harbour and Woodsford – the former taking well-known underwriter Rocco Pirozzolo from QBE, and the latter recruiting CMS insurance duo Nick Moore and Vere Wheatley. For its part, Calunius, which in April closed a £50m fund, its second, recruited German lawyer Diana Gruen as a case assessor. In addition to the Rowles-Davies hire, Burford, whose profits increased 89% in 2014 to $18.2m, is currently beefing up its business development, marketing and public relations teams.
Class warfare
This year’s hiring sprees aside, few would accuse the London market of being fast-moving. Membership of the Association of Litigation Funders (ALF), the industry’s self-regulating body chaired by Calunius’ Leslie Perrin, has remained static for several years. The collective pot, as well as the number of cases being funded, is also broadly the same as it was 12 months ago. Yet 2014 can boast two significant events that make it a notable year for the industry: a much-publicised withdrawal, in the form of Argentum, from the ALF; and a new arrival in the market, in the shape of Australian outfit Bentham IMF.
Following press reports that Centaur Litigation, a feeder fund to Jersey-headquartered Argentum, was tied up in a £90m Ponzi scheme, the ALF in April accepted Argentum’s offer to withdraw its membership of the body. Two months later, Centaur was put into liquidation. Given concerns in some quarters as to the opacity of funding as a wider practice, however, the response has not been as destabilising as might have been expected. ‘The exit of Argentum, apart from being an unfortunate episode, highlights the role and the use of the ALF. The group has had its critics, but it dealt with that issue quickly and carefully,’ says Rowles-Davies. Predicting that the saga has yet to run its course, he nonetheless stresses the distinction between Argentum and Buttonwood Legal Capital, an adviser to Centaur, one which had often been overlooked in the clamour to condemn the funder in the legal and investing media.
From the client side, by contrast, the episode seems barely to have registered. ‘I’ve been surprised how little anyone has asked us about it,’ says Dunn, whose longstanding chief executive, Brett Carron, left Harbour in July to join London-headquartered alternative asset manager Arrowgrass Capital Partners as general counsel. ‘Nobody has said: “What does Argentum mean for everybody else?”‘ That, of course, goes to the fact that large swathes of the profession still don’t properly understand – if at all – the funding game. As such, only when litigators and clients alike get to grips with the industry’s inner workings will they begin to appreciate how to avoid funding mistakes in the future.
‘In terms of the applications for funding that we receive, arbitration is certainly on the up.’
Susan Dunn, Harbour
Around the same time as Argentum’s withdrawal from the ALF, Bentham announced that it had joined forces with New York hedge fund Elliott Management to launch operations in Europe, focused initially on the Dutch and British markets. Given its fearsome reputation in Australia, where it enjoys a near-monopoly over the country’s funding market, it was only a matter of time before Bentham, which has two offices in the US, established a permanent European base. However, the company’s only previous experience of English litigation was chastening: IMF, as it was then known, in 2012 lost £3.3m in the InnovatorOne professional negligence dispute against London law firm Collyer Bristow.
Bentham Europe, which shares its name with English legal reformer Jeremy Bentham, an early advocate for the abolition of champerty, has looked at 40 cases to date, single claimant and group actions alike, with a similar ratio to IMF’s Australian deal flow – nine junk cases for every one worth a further look. ‘There are a lot of single-plaintiff cases being offered around town by law firms and brokers,’ says Simon Dluzniak, a Bentham investment manager who transferred from Melbourne earlier this year to set up and run the London office. ‘I’m yet to see many of high quality, although most of the cases Bentham funds in Australia are class action suits,’ he adds. ‘We’re having a really good look at cartel-type claims, which we think are going to be a big area for funders going forward.’ (The company as a whole is yet to fund an arbitration case.)
The European Commission has issued nearly €10bn in cartel-related fines since 2008, and earlier this year adopted an influential Directive under which citizens can bring private damages actions against anti-competitive corporates.
That the Commission remains opposed to such claims being bankrolled will do little to dampen the funders’ spirits, given the attractiveness of group claims from a settlement perspective and the willingness of national parliaments to table collective redress legislation. France, Belgium and Lithuania all did so earlier this year, while the UK Competition Appeal Tribunal in 2012 issued its first follow-on damages claim arising from a competition decision, raising the spectre of private enforcement within a jurisdiction long opposed to a formalised group action regime.
Small is beautiful
London’s funders have broadly welcomed the arrival of Bentham, which has already applied to become a member of the ALF, as further evidence of the City’s status as the pre-eminent – some would say only – litigation funding hub. As such, the company’s bank balance is somewhat less important than the gravitas and skillset that come as part of being one of the industry’s genuine pioneers. Woodsford, for one, studied the Bentham model of reinvesting its winnings into future cases; director Jonathan Barnes, whose company funds from its own balance sheet rather than going to the market, says Bentham’s success proved to him that the business model did work. ‘They’ve now outgrown their domestic market, which is why they are in the UK and Europe,’ he says.
‘The UK market is bigger than people think. We could deploy our capital ten times over.’
Nick Rowles-Davies, Burford
‘We’re very relaxed about competition, which keeps one on one’s toes,’ says Redress Solutions’ chief executive Marius Nasta, while Dunn and Rowles-Davies point to the market’s capacity to take many more new entrants. Yet what of claims that there aren’t actually enough big-ticket, slam-dunk cases to go around, hence the move by many funders into international arbitration? ‘The UK market is bigger than people think,’ says Rowles-Davies, who was elected to the ALF board in July, following the departure from Burford of Andrew Langhoff, its chief operating officer. ‘We could deploy our capital ten times over,’ he adds. ‘There are enough cases to keep everyone happy.’
The market is, as one would hope after nearly a decade, becoming more refined as its participants discover where their strengths lie – and, no less importantly, where the best returns can be found. Some funders, like Calunius, continue to deploy the majority of their capital beyond British shores, while the likes of Harbour and Woodsford can be found testing familiar principles in unfamiliar territories. The latter firm’s positive experiences of US patent litigation and big-ticket divorce cases, for example, point to potentially lucrative pockets of growth for an industry now starting to look more than the sum of its parts than at any point in its history.
Yet the most surprising development of all concerns a resurgence of interest in low-value cases – the type of matter which funders, including those now eulogising the opportunities for growth in high-volume work, once dismissed as unprofitable and ungainly. Well-known broker TheJudge has been offering such a service since late 2012. Burford’s version – known as ‘Swift’ – provides finance between £50,000 and £500,000 on an off-the-shelf basis. ‘There is a massive market in lower-value claims,’ observes Rowles-Davies, ‘but it needs a solution that is sensibly priced and a fast and efficient service to deploy capital.’ Having to apply large case due diligence techniques to smaller disputes makes, he says, ‘for a cumbersome process’.