Considerations When Seeking Litigation Finance for Arbitration

Many business contracts require that the parties use commercial arbitration in the event of a legal dispute.  For a variety of reasons, arbitrations make particularly attractive investments for litigation finance firms.  As a litigant, it is important to know when arbitration is the best choice and how to fully leverage its benefits if pursued.

Arbitration is a method of alternative dispute resolution where litigants agree to allow a neutral third party to privately decide their case after reviewing evidentiary arguments.  In the commercial context, arbitrators are usually associated with an institution, such as the American Arbitration Association or JAMS.  Like a trial, litigants in an arbitration make opening arguments and introduce evidence, but unlike a traditional lawsuit, arbitrations in most circumstances are kept confidential, discovery is limited, and the evidentiary rules are less rigid.  At the conclusion of the hearing, the arbitrator issues an award.  Awards can be either “bare bones,” where the arbitrator simply gives the conclusion, or “reasoned,” where the arbitrator provides a fulsome explanation for the decision.

When seeking commercial arbitration funding, litigants should think about the following considerations.

1. Arbitration Can Be a Better Choice for Businesses

Unlike litigating in court, confidential arbitration allows businesses to keep the process generally private and out of the public eye.  With some narrow exceptions, litigants cannot disclose information concerning the arguments, proceedings, or awards in arbitration.  In contrast, when a case is brought before a state or federal court, all filings and proceedings are available to the public.

This privacy can be invaluable to large organizations when it comes to preserving their reputation and public image.  In addition, the privacy prevents the lawsuit or settlement from encouraging others to file similar claims.

Overall, arbitration is often faster and more efficient than holding a traditional trial.  For example, discovery is more limited, saving time and cost for all the parties.  It should be noted, however, that commercial arbitration can still be quite expensive, especially for a complex dispute. For this reason, more and more parties in arbitration seek litigation funding.

2. Third-Party Litigation Funders Have a Responsibility to Investors

Faced with an expensive arbitration, a litigant may turn to a third-party funder to cover some or all of the litigation fees and costs.  These funders earn a profit—either a percentage of the award, a success fee, or a combination of the two—if the litigant wins or settles their case. If the counterparty is unsuccessful, the funder loses its investment and the litigant owes nothing.  Depending on the risk profile of the case and the amount invested, litigation funders can earn up to 45% of the arbitration award as compensation when financing all attorney fees and costs in an arbitration proceeding.

Since third-party litigation funding firms have a responsibility to their investors, they want to be sure that a counterparty’s claim is likely to succeed.  Funders also typically focus on cases where the arbitration award is easily enforceable to limit their risk exposure.

3. Third-Party Funders Usually Request an Exclusivity Period to Review the Case

Due to the time and resources required to analyze a complex arbitration, third-party funders usually request a period of exclusivity during which they can complete the diligence process.  This also gives both parties time to negotiate the final terms of the financing agreement.

Third-party litigation funders consider a variety of factors before deciding to fund an arbitration case, including:

  • The potential amount of the award weighed against the complexity of the dispute
  • The estimated budget for the case and any additional amount requested
  • The claimant’s likelihood of succeeding or reaching a settlement
  • Other parties that may have a stake in the outcome of the case
  • The jurisdiction of the arbitration
  • Potential difficulties in enforcing the arbitration award
  • Whether counterclaims will be asserted by the defendant
  • The arbitral institution overseeing the case

Each one of these factors goes into the funders’ evaluation of the likelihood of success.

4. Pros and Cons of Commercial Arbitration and Third-Party Funding

Third-party litigation funding levels the playing field in commercial arbitration disputes.  It allows litigants with meritorious claims to pursue justice without worrying about how to fund the case. Litigants can push for a just outcome rather than choosing to settle due to a lack of resources.

Litigants with adequate funds use third-party litigation financing as well, especially when they wish to keep the costs of arbitration off their balance sheets. Litigation funding provides a better option for individuals and companies to maintain privacy concerning their legal affairs.

While there may be many good reasons to choose arbitration, it is important to remember that the final arbitration decision is difficult to appeal. Even if the litigant feels the arbitrator’s award is unfair or illogical, it is unlikely that they will succeed in overturning it. Additionally, a litigant who receives an unfavorable arbitration decision cannot pursue the same claim again in court. Other concerns include the possibility that an arbitrator may be biased if they are routinely chosen by a defendant.

Despite these concerns, many businesses feel that the overall benefits of commercial arbitration outweigh the risks.

If you are seeking arbitration for a commercial dispute and would like to learn more about the process and options for funding, please contact GLS today at info@glscap.com.  GLS specifically invests in businesses, organizations, and plaintiffs with commercial and IP-related claims.