Focusing on recoverability in arbitration funding

In the short number of years since regulatory change in Singapore and Hong Kong in particular led to a more supportive environment within which professional litigation funders could operate in Asia, lawyers and clients alike have learned a lot about litigation funding. Indeed, deploying disputes finance to assist parties to pursue their claims via arbitration is on the rise, both for claimants that do not have the financial strength to pursue their claims and for well capitalised parties that see litigation funding as another form of corporate finance and an effective method for de-risking their disputes. This means that more lawyers and clients now have greater understanding of the process of applying for funding and satisfying a funder’s investment criteria, aspects which are crucial to obtaining funding. There is one area however which would benefit from further attention from those seeking funding and which is sometimes overlooked: the question of how the funded party and the funder are going to get paid.

It is important to understand that, although a party may have a strong case on the merits, this alone is not enough to gain a positive funding decision; rather, it is one of the various factors that a funder assesses. Generally, different funders have similar criteria, some of which overlap, others which differ by degree. These may include, in addition to strong prospects of success on the merits, that the key evidence can be obtained and is preferably in documentary form, and that the relevant legal principles are clear and tested. This helps to assure the funder that the case does not depend substantially on oral evidence (which can be unpredictable) and that the case does not seek to “make new law”, which, whilst potentially interesting and exciting for the instructed counsel team, simply presents additional risk and a large helping of uncertainty for a funder.

Many funding applications that LCM is invited to consider set out a comprehensive assessment of most of these criteria. However, frequently neglected pieces of the puzzle are the issues of recoverability and enforceability.

In contrast to a solicitor or barrister who is trained to focus on whether a cause of action has merit, funders often place more emphasis on the likely outcome of the dispute by seeking to identify where, and how, an award may be satisfied (and monetized) if, following a victory for the funded party, the opponent fails to make payment. Regardless of whether a party seeks funding for their dispute, such an assessment assists to focus a client’s mind on the inherent risks in pursuing the dispute at all.

At the very least, considering an opposing party’s financial health and location of assets can help gain a better understanding of the prospects of being able to make a recovery. This may include obtaining copies of a party’s recent financial reports and identifying tangible and intangible assets including known bank accounts, real estate and significant receivables in one or more jurisdictions. Although this recoverability position may change throughout the course of the dispute, taking the financial temperature of an opposing party both before and during the life of a dispute helps to assure a funder that due consideration has been given to this crucial issue. Funders naturally want to make a return on their investment; at the same time, there is an expectation that their funded clients will benefit significantly from the process of the dispute. Prevailing in the action does not generally trigger obligations to reimburse the funder and make payment of the contractually agreed returns. Only obtaining payment – whether willingly or through a contested enforcement process – will allow the funder to realise its investment. This is why proper scrutiny of both whether a prospective opponent has the means to satisfy an outcome of the magnitude contemplated and whether – if willing payment is not made – assets exist in jurisdictions where the judgment or award can be enforced, are such crucial elements of a funder’s assessment.

These considerations are at play in all types of cases which funders are asked to consider supporting, including cases by investors against states and their entities, which comprise a large proportion of arbitration funding applications. In many cases, the investment which was allegedly expropriated by the state was the only or predominant financial resource of the investor. Although it is common for parties seeking funding to rely on the assumption that states have sufficient assets around the world (as they often do) the question for a funder is whether and how such assets may be seized to satisfy an arbitral award. Indeed, whilst it is generally accepted that states waive immunity when agreeing to arbitrate disputes, this may not always extend to waiving immunity from execution against its assets. Consequently, funders seek to understand what weapons and useful information a funded client (and their lawyers) may have in the armoury to enforce against a state. For example, does the state have a history of satisfying awards made against it, or does it enter into protracted proceedings to resist enforcement, seek to have awards set aside and raise defences of state immunity? Is there any visibility on whether the state is concerned with its reputation to attract foreign investment, such that it would seek to satisfy an award so as not to prejudice its standing in the international community?

The New York Convention remains an effective tool, but is limited in its scope as concerns seizing state assets. The 2004 UN Convention on Jurisdictional Immunities of States and Their Property, which seeks to harmonise principles concerning the same, is still not yet in force. The question of executing against states – including for the enforcement of ICSID awards – therefore falls to domestic law. This gives rise to various risk factors that the funder, client and legal team must consider, including courts deferring to political agendas and foreign policy, all of which are likely to have the impact of increasing time and costs, and from a funder’s perspective, risk.

Beyond the New York Convention and other longstanding treaty instruments relating to the overseas enforcement of court judgments, there are other tools which applicants should consider and make reference to in their applications where relevant. Data relating to the rate at which different enforcement routes succeed and fail greatly enhance an application since they allow funders to weigh up the risks of investing in any given project with greater precision. If such data can be obtained, funding applicants should include it.

One example for which credible and relevant data is available is the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland of the Hong Kong Special Administrative Region which came into force on 1 October 2019. The Arrangement allowed parties to Hong Kong-seated arbitrations to seek interim measures – related to the preservation of property, evidence and conduct – directly from People’s Republic of China (“PRC”) courts. In October 2023, the Hong Kong International Arbitration Centre (“HKIAC”) confirmed that it had received 100 applications under the Arrangement since implementation. These applications were made to 36 different PRC courts. Interestingly from a recovery perspective, 94 applications were made for the preservation of assets, two were for the preservation of evidence and four were for the preservation of conduct with the total value of assets requested to be preserved amounting to RMB 25.1 billion or approximately USD 3.6 billion. The HKIAC confirmed at the same time that it was aware that 69 related decisions had been issued by PRC courts, with 65 granting the applications for preservation of assets upon the applicant’s provision of security and four applications being unsuccessful.

In addition to satisfying other criteria, the more information a funding applicant can provide to a funder concerning a respondent’s assets, routes to enforcement (supported by data) and the domestic law that would apply to seizing such assets in one or more jurisdictions (in particular against a state), and any visibility on an opposing party’s history of satisfying awards or judgments, the better the chances of funding being offered.


Sign up to receive the latest insights from LCM

This field is for validation purposes and should be left unchanged.