In this article, Director of Legal Finance Lucas Arnold looks at the complexity, delays, and costs involved in enforcement, and explores how litigation funding can mitigate these risks.
When Winning Isn’t Enough
A US$100 million award looks like victory. Often though, it isn’t.
Picture this, a claimant wins against a nation state or state owned entity after years of work. The tribunal issues the award, but the respondent’s assets sit in several countries. Courts move slowly, immunity rules block progress, and assets shift.
Years later, the claimant has recovered nothing. Legal fees grow. Finite staffing resources are consumed. The award drains money instead of delivering it.
While in theory the legal tools are available to enforce such awards, the nature of the defendant (a sovereign able to claim immunity) and the nature of the enforceable assets (often moveable, and in multiple jurisdictions each with different laws and procedures with respect to recognition and enforcement), make this a particularly complex and fraught area for claimants.
In addition, the sovereign will likely seek to annul the award, adding further risk, cost and delay.
ICSID data show the gap between “award” and “recovery.” Around 66% of damages awards lead to compliance or settlement. But the figure hides delays, discounting and heavy costs. In cases where claimants actively enforce, ICSID notes a 73% success rate, but “success” often means partial recovery after long campaigns.
In this environment, sophisticated claimants are turning to litigation funding to both fund this complex enforcement activity and, in a growing trend, allow for monetization pre-enforcement or judgment protection insurance to protect downside risk.
Enforcement: The Real Battle
Enforcement often outlasts the arbitration itself, even in a world where the original arbitration proceedings can take in the region of five years or more to get to a primary award.
As a first step, an unsuccessful sovereign will likely file an annulment challenge, usually as of right. This will be the first potential delay, as a sovereign will generally argue that enforcement should be stayed pending determination of the annulment hearing. A stay in itself can be devastating in terms of the duration, given the time to a decision on annulment can easily be two to three years.
Once either a stay is refused or if granted is lifted, claimants face a sequence of time consuming and expensive steps in seeking to actually enforce their piece of paper —
Recognising the award in multiple courts
- Tracing assets across opaque structures
- Seeking freezing or attachment orders actually realising the assets
- Each step costs money. Each step carries risk. This is particularly so in cases against a sovereign, where they can plead interest immunity at every stage. This not only limits the assets over which enforcement can take place, but slows down the process. Arguments over whether an asset is subject to immunity can itself become a long fought process: this complex area of law is ripe for time-consuming appeals.
How funders can add value, in more ways than just paying the bills
We look at two situations: where a funder provides funding from the outset, and post-award for the enforcement phase.
Have a plan for enforcement at the outset
Where a funder provides funding from the outset, they should already be alive to the risks and costs of enforcement. Often legal teams will focus on liability and not on how an award will be paid. As a commercial entity focused on the economics on a case, a funder will very much seek to focus the claimant’s attention on the desired end result (getting paid) and work back from there, focusing on a holistic strategy that includes enforcement.
This will include —
- Identifying assets over which enforcement may be amenable, at the outset
- Taking geopolitical advice, which may help identify: (i) pressure points against the sovereign and (ii) diplomatic and corporate embassies that may be able to assist facilitate settlement discussions
- In addition, claim value is often a key consideration. Even if the merits are strong, claimants and their legal team invariably overestimate the value of their claim. We see this borne out in the figures. Despite frothy claim values often mentioned in the process, ICSID figures show that only 10% of cases have resulted in positive awards in excess of $100m. In all ICSID cases that have been successful, in 21% of those cases the amount awarded was 10% or less of the amount claimed, and in 45% of the cases the amount awarded was between 10-50% of the damages claimed.
Getting the claim value right at the outset is important as it —
- Manages expectations of what ‘success’ looks like
- Allows any settlement discussion to proceed with a reasonable starting point
- Allows the economics of the case to be determined early: too often claimants end up spending nearly the level of the present value of the actual claim value, meaning they don’t come out ahead, even after years of litigation
Other solutions – insurance and secondary market
Even with a plan for enforcement, there is often no silver bullet to get paid quickly. There is a growing interest from corporate claimants in both protecting against the downside (annulment proceedings/unsuccessful enforcement) and using the paper award to turn cashflow (sale of the award to a third party funder).
In relation to judgment protection insurance, say an award is granted for $50m, subject to annulment and enforcement risk. The claimant takes out insurance for this amount, payable in the event the annulment challenge overturns the award, or after a defined period of time enforcement is unsuccessful. The cost of the policy is generally an upfront fee and a percentage of recoveries. The policy gives the corporate claimant comfort that come what may, it will receive payment. It allows the business to better manage cashflow and recognise an asset on the balance sheet.
Another growing solution is a secondary sale. There is an active market of funders, hedge funds and other players purchasing awards on the basis they have the experience and financial firepower to see them through to a conclusion. A sale (outright or in part) can be very attractive to a claimant facing the uncertainties of enforcement. Obviously the price paid varies on this level of enforcement, just another reason why a strong strategy at the outset is advantageous, even if the award is sold before enforcement.
Conclusion
The subject matter at the heart of an arbitration against a state can be critical for a corporate claimant. It will often involve the cancellation of a lucrative licence, after a large sum of sunk costs have already been spent. Success in the arbitration may be existential for the claimant. A win on liability may establish a moral right, but it is worthless without enforcement activity that is generally just as hard fought as those original proceedings.
Having a clear enforcement plan at the outset both helps manage expectations and enhances the prospects of successful enforcement. Funding is available for both of these stages. Just as importantly, there is a growing trend of both post judgment insurance and secondary sale to assist with managing cash flow and converting the piece of paper into cash. This is an area of law with a large amount of complexity, but where an experienced litigation funder can add valuable input on strategy and ultimately cashflow success.
If you’d like to discuss litigation funding further, please contact the team.
