BTE heads third-party funding in backing international arbitrations

Lagerberg: third-party funding is area to watch

Companies are currently more likely to turn to before-the-event insurance rather than third-party funding to help with international arbitration cases, according to new research.

A study by PricewaterhouseCoopers (PwC) found that in contrast to the growing trend of third-party funding for litigation, that option remains “relatively uncommon” in international arbitration but is an area to watch.

Some 94% of those surveyed had not used external funding. The 6% who had opted for third-party funding did so because of a “lack of fluidity” to fund proceedings or because it was a more convenient and cost-effective way to sell on a claim or share the risk.

The report said: “It will be interesting to observe whether, and for what reasons, third-party funders will play a bigger role in arbitration proceedings in the future, either at the early stages of proceedings or at the enforcement stage.

The use of before-the-event insurance funding to finance proceedings was more prevalent – with 20% of respondents having used a policy to fund proceedings in the past five years.

The research quizzed more than 100 senior in-house counsel and arbitration practitioners. It concluded that the number of business hiring in-house specialist lawyers was set to rise after more than a third of respondents (35%) reported an increase in the number of international disputes.

The survey, conducted in partnership with Queen Mary, University of London, focused on the financial services, energy and construction sectors. It showed that twice as many in-house counsel opted for international arbitration to resolve their disputes than other forms such as litigation.

Currently companies tend to seek this specialist expertise from external law firms but under the current constraints of the economic climate and the rising cost of proceedings, many more are likely to start recruiting in-house.

Whilst 90% of respondents had a dedicated legal department, the survey revealed only half (49%) had a dedicated in-house disputes team.

The majority of companies were also looking to alternative fee structures to pay for arbitration, finding that increased pressure on internal legal budgets has made organisations “more cautious” before initiating arbitral proceedings.

Capped fees (61%) were the most popular alternative to the hourly rate, followed by discounted hourly rates and a success fee calculated as a percentage of the damages (27%) and discounted hourly rates plus a success fee calculated as a percentage of their external counsel’s hourly fee (22%).

One in ten used a pure contingency fee calculated as a percentage of damages awarded and 18% used “another” combination.

However, of those in-house counsel who thought arbitration wasn’t very well suited for their industry sector, the biggest proportion (22%) said it was because it was often more costly than alternatives such as litigation.

Gerry Lagerberg, PwC’s head of international arbitration, said: “Corporations are becoming more sophisticated in procuring international arbitration services. Concerns over costs and delays in proceedings persist and in-house counsel are increasingly focused on getting value from the arbitration process.

“The survey shows corporations are investing in in-house resources and demanding a variety of alternative fee arrangements to share both the workload and the risks of proceedings more with external law firms…

“The role that third-party funding plays will be another area to watch in the future as smaller firms may well need to secure financial back-up before commencing proceedings or at the enforcement stage.”

Overall 73% said arbitration was well suited to resolving transnational disputes, with preferences strongest in the construction and energy sectors.