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Thought Leaders

Thought Leaders

Thought Leader

Thought Leaders - Third-Party Funding 2020


WWL Ranking: Thought Leader

WWL says

Jonathan Barnett is well versed in funding high-value commercial disputes and is distinguished for his extensive experience in international proceedings.

Questions & Answers

Jonathan Barnett is Head of Austria & CEE at Nivalion, focusing on Austrian and Central and Eastern European disputes. He was previously an investment manager with an Australian disputes funder, focusing on international arbitration in Singapore, Hong Kong and Australia. Jonathan is admitted to the courts of England and Australia, and was in private practice for over 15 years specialising in international arbitration and litigation at leading law firms in London, Paris, Sydney, Vienna and Zurich. He was also counsel at the ICC Court Secretariat and a researcher at UNCITRAL.

You have experience with third-party funding across Europe and in the Asia-Pacific region. How do the markets and the appetite for third-party funding compare?

Both markets have taken well to the introduction and development of third-party funding, albeit they are at different stages. 

In Asia-Pacific, funding started in Australia where the market is well developed – funders are considered in many cases to be an integral part of the legal team, especially for class actions. The scope of funders’ roles has led to governmental reviews over the years, most recently culminating in the decision to regulate funders. Regulation may lead to greater transparency, which may instil further trust in funders from a public perspective. Although this would contrast with the proven (unregulated) track record of funders to have provided access to justice, and may conflict with the concept of “if it ain’t broke, don’t fix it”, I doubt this will adversely affect the appetite for funding – if anything, it will further cement funding’s legitimate place in the litigation/arbitration landscape. 

Singapore and Hong Kong have been strong supporters of funding since recently opening up their markets, restricted to funding international arbitration with some exceptions (eg, insolvency). Whether this extends beyond, in particular to commercial litigation, remains to be seen. There is, nonetheless, an interest and appetite for funding in these jurisdictions, which will likely grow over time. 

In Europe, the markets are diverse. England is a global funding hub for litigation and international arbitration, where many leading funders are based and operate side by side with lawyers. 

In continental Europe, however, the picture depends on the jurisdiction. At Nivalion, our key focus is on continental European litigation and international arbitration. We therefore see a broad spectrum of cases: from markets where funding has a strong track record, such as Germany and Switzerland, to other jurisdictions where it remains in its infancy and is sometimes considered a “unicorn”, in that many have heard about it and are keen to see it, but the opportunity has not arisen – yet. 

In these jurisdictions, lawyers and parties have an interest in learning about funding and gaining experience. We are seeing this reflected in lawyers/parties approaching us to discuss the option of funding a pending or prospective case, or a portfolio of cases. The message is therefore getting through to the market that funding is a viable and accessible option. 

There is also a fundamental difference between the common law and civil law worlds’ approaches to funding, reflected in England and the Asia-Pacific (predominantly common law), and continental Europe (civil law). This difference is based on the existence of the doctrines of champerty and maintenance in common law, and its absence in civil law. 

In common law, these doctrines (where they continue to apply) regulate, inter alia, the extent to which a funder may engage in a case that it funds. In general, the common perception is that funders can and do take a more proactive role in Australian proceedings than those in other common law jurisdictions. 

In civil law jurisdictions, funding arrangements are a matter of private contract, so the parties can agree whatever terms they choose subject to certain limitations (eg, abuse of dominant position). Courts in various jurisdictions, including Switzerland and Austria, have endorsed funding and confirmed the enforceability of funding agreements. There is therefore a firm basis for funding to continue to develop and integrate into the legal landscape. 

How does your legal background complement your third-party funding practice?

Having over 15 years’ experience in private practice in various jurisdictions (Vienna, Zurich, London, Paris, Sydney), and having worked at a leading arbitral institution (ICC), have given me a wide perspective on legal, factual and commercial matters, and how they may be handled in different jurisdictions. Local culture also plays a key role to understanding local perspectives. 

These experiences and skills have seamlessly transferred into my funding practice, which focuses on business development and case assessment. I came into funding with a network of lawyers and corporates, which has helped to develop business and promote funding in various jurisdictions where there is little experience or knowledge. 

Wearing my lawyer’s “hat” allows me to assess a case from different angles, and enables me to focus on issues such as enforceability/recoverability; scrutinise the legal and factual bases; and, overall, stress-test a case to challenge its prospects of success. 

What types of cases and parties are you seeing currently attracting third-party funding?

We see many applications for investor-state (BIT) arbitrations, both prospective and pending, and an increasing number of applications for class actions in Europe for all types of claims (cartel, shareholder class actions). We are also seeing the results of our business development in Central and Eastern Europe, with applications for international arbitrations involving parties from the region, insolvency disputes, and commercial litigation. We have also seen a significant increase in applications to fund portfolios of cases. 

What types of cases would you like to see more of? 

An attractive category of cases are those that are strong on the merits with substantial amounts in dispute against well-resourced counterparties that have a track record of paying awards/judgments when ordered. 

We generally approve claims for €7.5 million and above with strong prospects of success. We would like to see more claims against well-resourced counterparties where we have visibility on their financial position, and where we can gain comfort on enforceability and recoverability. 

Where cases are brought against states, we would like to see a proven track record of that state paying awards without needing to exhaust additional stages (challenging enforcement, applying for set-aside/annulment). We still consider and fund cases against recalcitrant states, but having visibility of these issues can make a funding application more attractive. 

What are the biggest challenges facing the third-party funding market at present?

Lawyers gaining experience in funding – which is hopefully positive and constructive – and building on that experience is currently rare in some jurisdictions on which we focus. As a high proportion of funding applications are declined, the threshold to access funding, and therefore to lawyers “dipping their toe” into the funding world, is a challenge. This will likely change as funding becomes more common, and funders have more capital to invest. 

Covid-19 has led to an influx of funding applications, which has resulted in a high increase in workload for us. Finding cases that fulfil our funding criteria, and are not based purely on force majeure or related legal bases (with all the contingencies and current unknowns), is something we are facing at present. 

Regulation is also an issue for the funding market. I would not consider it a challenge – more a welcome development if and where needed – but it does require an adjustment by a local funding market to adapt. For example, see the recent developments in Australia. 

Finally, a significant challenge is the misconception of funding in various jurisdictions, including for example that it promotes the pursuit of unmeritorious claims. Credible, established funders have entirely different criteria and objectives: to fund meritorious claims for a return on their investment. Changing this misperception will likely take time once funders have established a strong record of supporting cases, in particular those that are in the public interest. 

What short-term and long-term impacts do you see covid-19 having on third-party funding?

We have encountered a significant increase in funding applications driven by the covid-19 crisis. 

In the short-term, covid-19 has required us to assess the potential increased duration of prospective and pending cases, the health risks to key individuals (eg, parties, key witnesses), and the solvency of parties to a dispute to ensure recovery of a judgment/award. This last aspect is of crucial importance because the crisis has affected, and will likely further affect, the solvency and general operational viability of parties. 

An additional aspect is the perception versus the reality of settlement prospects in light of covid-19. One avenue in which cases could have developed was for there to be an increased appetite for parties to settle their disputes earlier than they would have before the crisis. This assumption was motivated by the apparent need for parties to direct their resources away from their legal spend and towards their business, and possibly to maintain relationships. This would be welcome news for funders, as it would ensure a return and a predictable outcome. We are, however, in reality seeing the opposite – that defendants are considerably less willing to settle because, it appears, they cannot afford to pay a lump sum, or other payment, due to more pressure on their financial resources arising out the crisis. So, the disputes continue. 

Further, mediation may gain more traction due to the crisis. Supported by, eg, the Singapore Convention, the option to resolve disputes via mediation with the assurance that such agreements are enforceable beyond their respective borders may attract interest from funders to focus on funding mediation. 

Another short-term, and potentially long-term, impact of covid-19 has been the legitimisation of video conferencing, or at its minimum the change in perception that business development and meetings need to be done in person. This has potential long-lasting benefits for funders, among many others, as it proves that funding can progress despite the change in circumstances. 

In the long term, the current uncertainty and its challenges for businesses and law firms have already led, and will increasingly lead, to a greater demand for litigation finance. We have already received expressions of interest from large corporates who previously may not have considered funding, and those that have expressly approached us because of the crisis. Portfolio funding provides solutions to address their various concerns. This applies to cases in which parties are acting as both claimants and defendants: portfolio funding opens up a myriad of possibilities to fund numerous cases, including those we would not necessarily have funded as a standalone case. The crisis has therefore led to a brighter spotlight being shone on portfolio funding and the benefits it can unlock. 

Other long-term impacts may be a move from litigation to arbitration, as parties look for more flexible procedures to adapt to the challenges brought by covid-19; arbitration gives the parties that freedom. 

To what extent is external regulation of third-party-funding necessary? To what extent might it hinder the process?

As stated above, there is a balance to strike. Until Singapore and Hong Kong introduced legislation to regulate funding in their respective jurisdictions, the funding market was self-regulated in most, if not all, jurisdictions. It has proven capable of functioning in numerous jurisdictions without the need for any regulatory oversight. Given, however, the ongoing growth of funding globally, there appears to be a need to go beyond best practices (eg, the ICCA Report on Funding, standards of the Association of Litigation Funders) and to require funders to meet core standards, including accounting transparency and capital adequacy. Australia appears to be heading in this direction with its recent decision to regulate the funding market. 

For credible, established funders, regulation is a welcome development that seeks to ensure the continued growth of the market. I doubt little will change for those funders if/when regulation is required in the jurisdictions in which they operate. It will also likely increase confidence and trust in the public, who will be assured that approved funders are compliant with the requisite standards. 

What tips would you give to a lawyer or client looking to bring a claim to a funder for consideration?

At its core, litigation funding is based on mutual trust – the funder and client (with the lawyers in tow) agree from the outset to embark upon a journey that will usually last two years, if not many more, with numerous challenges and pressures along the way. Having a transparent relationship is key; this can be created and developed in many ways, including for the client/lawyers not to shy away from the weaknesses of a case, but to explore in depth the real risks and how they expect a funder to address this. Open dialogue helps to strengthen the relationship, which may become the crucial element at a crossroads in a case, eg, settlement. 

In-depth consideration of enforceability and recoverability are also key. Although the legal aspects may be interesting, the main focus for lawyers needs to be on turning paper (judgment or award) into money/assets – a well-considered strategy, including executing against known/suspected assets, goes a long way to demonstrating to a funder that the lawyers are prepared to fight the claim to the end. 

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