The following piece was contributed by Ana Carolina Salomao, Founder of Montgomery, Micaela Ossio, Solicitor in England & Wales and Peruvian Attorney, Jessica Pineda, Legal Director at Pogust Goodhead, and Diego Saco Hatchwell, Partner at GCS Abogados.
International commercial arbitration is today one of the most demanded mechanisms for resolving disputes in Latin America. The practice has been bolstered by sustained regional growth, ongoing market liberalization efforts, and the pursuit of a less time consuming and specialized route to address increasingly complex cross-border transactions. As of 2023, the region ranks second in terms of party origin and third in terms of the jurisdictions where ICC arbitrations were seated[1], evidencing the region's growing prominence in the global arbitration landscape. This push is building on the region’s growing appetite to attract new business opportunities by fostering safer and easier legal frameworks to do business.
A key legal innovation in this regard has been the promotion of third party funding mechanisms.[2] Two types of funding arrangements have particularly gained favor among investors: enforcement funding arrangements whereby investors provide non-recourse funding for the legal costs of the enforcement proceedings and realize returns only when the debt is collected, and award monetization arrangements where the funder advances capital to a claimant in exchange for a portion of the entitlement of the award[3].
In general, most major jurisdictions within the region contain express provisions that allow the assignment of economic rights arising from contracts or other legal sources and provisions that allow transferring rights that are subject to ongoing disputes, but not necessarily in the forms required by third party funding. As claimants (or their lawyers) seek to secure funding, they must thoroughly consider the jurisdictions where such arrangements are legally binding agreements[4]. As such, this article explores the financial case behind third party funding for litigation, particularly arbitral awards, as well as the market dynamics currently shaping the sector in Latin America. It also highlights the importance of designing adequate policy to promote the responsible growth of these practices in the region as well as gives insight to potential funders looking for attractive investment opportunities in a fast-evolving market.
The rise of litigation finance – why is it gaining momentum?
Even though the practice of litigation finance is not necessarily new – external funding of legal cases goes back at least a few decades – the understanding of legal claims as a financial asset class is still, in many ways, nascent. Currently, only around 50 dedicated funds exist globally, and in a 2019 survey, more than three quarters of respondent firms indicated they had significantly expanded their litigation finance practice and foresaw important growth moving forward.[5] Considering that the ICC docketed 890 cases in 2023, and far more civil claims of different nature flooded the worlds’ most mature litigation ecosystems (with close to 400,000 claims filed in the US alone), the industry has big room for growth and newcomer absorption.[6]
Despite a total industry value of USD13.5 billion as of 2023, investment in legal claims and legal futures is still largely concentrated in traditional litigation finance firms, particularly in the US, the UK and Australia.[7] Nonetheless, asset managers like BlackRock, PIMCO, KKAR and other alternative investment funds, notably credit funds, have recently entered the space, as a result of the asset class yielding an average return on investment of 20% over the last five years.[8] In fact, most litigation finance firms now target a hurdle rate of 15% to 35% and a holding period of two to three years (especially for commercial arbitration awards), placing returns at par or even above private equity companies.[9]
Despite this attractive return profile, a positive outcome on each individual investment largely depends on the merits of the funded claim, which creates uncertainty and concern for traditional institutional investors. Among other factors, insufficient precedents on certain matters hinders reliable predictions of returns and the asymmetry of information between the parties seeking funding and the capital providers still thwarts more skeptical investors to emphatically support this asset class. To close this gap, law firms and specialized litigation funders are working on investor-friendly frameworks to provide greater transparency relating to risks, expected returns and time to recover.
Investor concerns have also been heightened by recent regulation, particularly in Europe, a global hub for litigation finance. As shown by the recent frenzy caused by the Supreme Court decision in PACCAR[10] in the United Kingdom, or the Voss Report[11] in the European Union, regulation coming to the sector in up-and-coming regions such as Latin America seems to be inevitable. But despite these challenges, the outlook for market growth remains positive with large commercial arbitration cases currently dominating the market due to their significant value, international enforceability, and relatively swift proceedings.
The investment case for arbitral awards
In recent years, arbitral awards have emerged as a new and dynamic asset sub-class for investors in the litigation finance space. The main reason is that pursuant to the New York Convention[12], arbitration awards can be enforced within the jurisdictions of all signatory states and the process of enforcement tends to be easier and less politicized[13] than that of other asset classes, such as private or sovereign debt. In other words, arbitral awards can be fast-tracked on a global scale, ensuring the award’s commercial value. For example, the holders of defaulted Venezuelan/PDVSA notes have had little success in collecting their debt when compared to investor-state award holders, such as Crystallex,[14] Rusoro,[15] and ConocoPhillips,[16] who have been more successful in attaching Venezuelan assets abroad.
Investors can also expect attractive interest rates. According to a 2020 study of ICC awards where PwC and Queen Mary University of London analyzed damages awards in international commercial arbitration,[17] the absolute rate of interest for 180 cases that were reviewed, ranged from 1% to 18% annually. The study also noted that the rate of interest was frequently expressed as a mark-up over a benchmark such as LIBOR or by reference to a national legal interest rate. These interest rates can help to mitigate the economic downside in cases where the time to enforce the award takes longer than expected.
Finally, since arbitration proceedings are generally private and confidential, arbitral awards tend to be of confidential nature unless the parties agree otherwise. This means that in cases of assignment of awards, the awards can remain in the name of the initial claimant allowing investors to operate away from the media spotlight. Similarly, it is often the case that investments in arbitral awards do not have to be reported and disclosure requirements tend to be limited.
All these characteristics have led to a burgeoning secondary market in which awards are sold by award-creditors at a discount, to buyers who take on the role of enforcing the full award. Considering the increasing number of awards coming on the market and with only a few funds tapping into it, it can currently be described as a buyers’ market.
The market opportunity for Latin America
To become a regional hub in litigation finance, Latin America must stop addressing litigation merely as a “cost center” (i.e., a necessary but burdensome expense for those seeking justice). Contingent receivables arising from dispute resolution mechanisms shall be considered an asset class, one that can be monetized at various stages through mechanisms like litigation funding[18]. This mind shift needs to be rooted in the understanding that legal claims possess intrinsic value and can attract third-party investors who fund litigation in exchange for a share of the financial outcome if the case succeeds[19].
Brazil is spearheading this mindset shift and has been the first country to have arbitration chambers develop soft law regarding third-party funder involvement in arbitration procedures[20]. For example, Brazil’s precatórios offer private parties access to a well-established, constitutionally-recognized and liquid secondary market where they can assign their rights linked to a judicial or arbitral decision (a credit against a government entity) to investment funds. Colombia has also laid the groundwork for developing a secondary market for the transfer of judgments issued by courts in the context of the Armed Conflict. The Colombian state has established legal precedents that allow holders of these judgments to sell their rights in a secondary market, providing a liquidity solution for those seeking immediate capital.[21]
With the increasing recognition of arbitration as an effective dispute resolution mechanism across key economies such as Brazil, Mexico, Colombia and Peru, the region is poised for significant growth in third-party funding. As liquidity becomes an essential factor for enterprises, enforcement funding and monetizing of arbitral awards offers a way to unlock tied-up capital, allowing businesses to focus on growth while investors capitalize on the financial potential of their legal claims. It also enables smaller market players, such as SMEs and individual claimants, to finance complex claims against larger corporations or entities, expanding access to justice and promoting more equitable outcomes.
To this end, judicial systems in the Latin American region shall adopt pro-enforcement policies, like those seen in offshore jurisdictions like the Cayman Islands and Bermuda, as highlighted in recent case law involving arbitral enforcement[22]. While the New York Convention has been widely adopted across the region, the inconsistent application of arbitral award enforcement by local courts can still pose a challenge for claimants. Clear and consistent legal frameworks, aligned with international best practice, will help attract more investors into the sector. Examples of such practices include the use of freezing injunctions and receiverships, both of which are essential in securing assets and managing them until enforcement is completed, and the availability of Norwich Pharmacal orders or similar disclosure orders, already recognized in jurisdictions like the Cayman Islands and the British Virgin Islands, which allow claimants to obtain critical information about the debtor’s hidden assets or banking arrangements.
Building on the momentum
The momentum behind this market development in Latin America is growing, driven by a combination of factors including the asset class’s attractive return profile and an increased reliance on arbitration as a dispute resolution mechanism, particularly following the economic pressures created by the COVID pandemic. Furthermore, the increasing focus on environmental, social, and governance (ESG) factors in investment decisions is accelerating third-party funding in ESG-related arbitration cases, such as those involving environmental disputes or human rights violations. As judicial systems in emerging markets strive to expand access and provide a more equitable and fair administration of justice, transparency and simplicity in the arbitral award enforcement and monetization space might provide a very cost-effective and efficient way to achieve desired social and developmental results, all while promoting Latin America as a global investment hub.
This article was authored by Ana Carolina Salomao, Founder of Montgomery, Micaela Ossio, Solicitor in England & Wales and Peruvian Attorney, Jessica Pineda, Legal Director at Pogust Goodhead, and Diego Saco Hatchwell, Partner at GCS Abogados.
[1] ICC Dispute Resolution 2023 Statistics
[2] According to some experts in the field the two main factors that have brought this new market to the attention of institutional investors, have been the transfer of distressed debts from banks to private investment funds following the 2008 recession, and the search for higher yields in traditional financial markets. As banks recovered from the financial crisis and opportunities for distressed debt diminished, these private funds began to explore arbitration awards as alternative investments, recognizing their similarities to bank loans. While arbitration awards are often sold at a discount, sellers are not necessarily distressed; they simply find it commercially sensible to transfer the collection process. To know more about this topic, watch the 6ta. Edición de Open Arbitraje 2020 denominada “Mesa Allen & Overy: Acquisition of awards: Market trends and challenges.”
[3] Although buying the entire award may be appealing to claimants in need of immediate cash, experts suggest that funders often prefer maintaining a relationship with the award holders or ensuring that the claimant remains involved in the process. Award holders typically possess valuable knowledge about the respondent, which can be beneficial for recovery efforts.
[4] In some civil law jurisdictions, the concept of retrait litigieux can be an impediment to a monetization agreement.
[5] https://clp.law.harvard.edu/knowledge-hub/magazine/issues/litigation-finance/investing-in-legal-futures/
[6] https://www.supremecourt.gov/publicinfo/year-end/2023year-endreport.pdf
[7] https://www.google.com/search?q=black+rock+investment+in+litigation+finance&sca_esv=969c9be58d3ff7ea&rlz=1C5CHFA_enUS837US837&sxsrf=ADLYWILynJMXdzxuFUmHYgDQCWx3Veqb0g%3A1729807553471&ei=wcQaZ663HJ2dptQP48yI-Ac&ved=0ahUKEwjum4Smg6iJAxWdjokEHWMmAn8Q4dUDCBA&uact=5&oq=black+rock+investment+in+litigation+finance&gs_lp=Egxnd3Mtd2l6LXNlcnAiK2JsYWNrIHJvY2sgaW52ZXN0bWVudCBpbiBsaXRpZ2F0aW9uIGZpbmFuY2UyBxAhGKABGApIkBdQmARYtBZwAngAkAEBmAH7AqAB5haqAQc5LjguMy4xuAEDyAEA-AEBmAIUoALQE8ICCxAAGIAEGLADGKIEwgIEECEYFcICBRAhGJ8FwgIIEAAYgAQYogTCAgoQABiABBgKGMsBwgIIEAAYFhgKGB7CAgoQABgWGAoYHhgPwgIOEC4Y0QMYFhjHARgKGB7CAgYQABgWGB7CAgUQIRigAZgDAOIDBRIBMSBAiAYBkAYEkgcIMTEuNi4yLjGgB79e&sclient=gws-wiz-serp
[8] https://www.pm-research.com/highwire_display/entity_view/node/167885/content_tabs#:~:text=Litigation%20finance%20is%20a%20rapidly,correlation%20to%20other%20investment%20areas.
[9] https://www.deminor.com/en/litigation-funding/what-is-litigation-funding/
[10] The Supreme Court in PACCAR Ltd v. (1) W.A. Bailey (Properties) Ltd & (2) C. Robert Wright & Sons Ltd clarified that litigation funding agreements should be treated similarly to damages-based agreements, influencing the regulatory framework for litigation funding in the UK; however, this ruling is expected to be revisited with the introduction of the forthcoming Litigation Funding Bill, which aims to reverse this classification.
[11] Voss, H. (2020). Report on the financing of litigation and the role of litigation funding in the EU. European Parliament
[12] See https://www.newyorkconvention.org/text
[13] Born, G. B. (2014). International Commercial Arbitration. 2nd ed. Kluwer Law International. Pages 473-510
[14] See https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/403/crystallex-v-venezuela
[15] See https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/483/rusoro-mining-v-venezuela
[16] See https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/245/conocophillips-v-venezuela
[17] See https://www.pwc.co.uk/forensic-services/assets/documents/trends-in-international-arbitration-damages-awards.pdf
[18] “How Litigation Finance Works” by Bloomberg Law. https://pro.bloomberglaw.com/insights/litigation/how-litigation-finance-works/
[19] The Justice Case for Litigation Funding by M. Todd Henderson
[20] This is the case of the “Camera de Comercio Brasil – Canada” (CAMCCBC)
[21] According to the Colombian Commercial Code (Article 884), interest rates exceeding the legal limit are considered usurious and illegal. The usury rate is set quarterly by the Superintendencia Financiera de Colombia (Financial Superintendency of Colombia), which establishes the rate at 1.5 times the current banking interest rate, based on average rates charged by financial institutions.
[22] Pro-enforcement policies in such countries have been pivotal in shaping favorable legal environments for arbitration awards enforcement. For instance, the Cayman Islands has demonstrated strong pro-enforcement tendencies through case law like Gol Linhas Aereas S.A. v MatlinPatterson Global Opportunities Partners (Cayman) II LP, where the court affirmed its commitment to enforcing arbitration awards in line with the New York Convention in 2022. Similarly, Bermuda has shown a similar approach, particularly in cases such as La Générale des Carrières et des Mines v F.G. Hemisphere Associates LLC (2012), which underscored Bermuda’s adherence to the New York Convention and support for arbitration proceedings.
