The litigation finance industry become an increasingly competitive space in recent years, with new funders looking to secure their own piece of this growing market. However, those funders who have been established for over a decade are often able to provide a view of the industry that underscores how far this market has come and the ways in which it is still evolving.In a profile on Law.com, Christopher Bogart, CEO of Burford Capital, discusses his launch of the litigation funding company, the evolution of the industry, and Burford’s business model. Bogart begins by explaining the formative ideas that shaped the launch of the funder in 2009, recognizing the difficulties faced by law firms’ business models that relied on hourly billing and the opportunity for a third-party funder to provide these firms with greater flexibility. Burford’s foundation is best placed within the context of the 2008 financial crisis, as Bogart explains that “law firms were going crazy looking for capital.”In the 14 years since its inception, Bogart has overseen the changing nature of the litigation finance market, noting that one of the most significant areas of development are the increasing volume of situations where “rather than just having distressed claimants, you now have large corporates who see a sophisticated way of risk transfer.”Addressing Burford’s current business model, Bogart says that on average Burford’s litigation investments have a two-and-a-half years life cycle, resulting in Burford “bringing back about 90-or-so cents on the dollar.” He also highlights how the funder’s business model has expanded far beyond single-case investments, stating: “We actually monetise the underlying value of claims. We do multi-case portfolio arrangements. The business is much larger and broader than it was when it started.”Bogart also sheds light on what is driving Burford’s clients to seek third-party funding, explaining that whilst many of these large corporates already have sufficient internal capital, but “they would prefer not to divert funds away from their operating business to spend on collateral activities like litigation.” Bogart succinctly summarises the position by saying that he’s never encountered a CFO “who is happy about spending money on legal fees”, and so if a funder can “give him or her an opportunity not to do that, then they get pretty interested.”In a brief exchange on the landmark $16 billion award in the YPF case with Argentina, Bogart acknowledges that whilst there have been public assessments of what portion of the award Burford may be entitled to, “everybody in the world realizes that, realistically, you’re going to end up applying a discount to that face value.”
Montauk Metals Inc. (TSX-V: MTK) (the “Company” or “Montauk”) is pleased to announce that it has secured litigation funding for its arbitration proceedings (the “Arbitration”) brought by the Company against the Republic of Colombia (“Colombia”) to enforce the Company’s rights to compensation under the Canada-Colombia Free Trade Agreement (the “FTA”), as previously described in its news releases of March 27, 2018, February 25, 2019, February 10, 2020, November 23, 2021, September 1, 2023 and October 5, 2023, and subject to certain conditions and approvals as noted below.Background of the ClaimMontauk contends that Colombia breached its obligations owed to the Company, including specific obligations under the FTA. The claims include Colombia’s refusal or failure to compensate the Company for the losses incurred as a consequence of Colombia’s prohibition of mining in the páramos (high altitude eco-systems). On March 21, 2018, Montauk filed a Request for Arbitration against the Republic of Colombia before the International Centre for Settlement of Investment Disputes (“ICSID”).The Arbitration is being conducted in two phases. Phase One will determine whether the ICSID Tribunal adjudicating Montauk’s claims (the “Tribunal”) under the FTA has jurisdiction over this case and whether Colombia has breached its obligations under the FTA and is liable for compensation to the Company. Assuming that ICSID decides in favour of Montauk in Phase 1 (the “Phase 1 Decision”), Phase 2 will involve determining the quantum of damages awarded to Montauk to compensate it for losses incurred. The Company estimates it has suffered more than USD $16 million in sunk costs and total loss of the value of up to USD $180 million in the Reina de Oro project, as well as legal and arbitration fees. Typically, an arbitral award will include an award of costs payable by the unsuccessful party to the successful party to reimburse it for its legal and arbitration fees.Certain costs of the proceedings, including arbitration fees and disbursements, have exceeded the Company’s original estimates as the Company was also required to pay Colombia’s 50% share of the arbitration fees. The Company must make an additional payment of US$200,000 to ICSID (the “ICSID Payment”) before a ruling on Phase 1 is rendered. If the Company fails to pay the required amount of US$ 200,000 to obtain a ruling on or before November 9, 2023 (the “Payment Deadline”), the ICSID Acting Secretary-General may exercise its discretion to discontinue the Arbitration. The ICSID Payment is expected to result in the issuance of a decision on jurisdiction and liability.Extension of the Payment DeadlineThe Company expects to apply today to ICSID to request an extension to the Payment Deadline (the “Extension”). The Company refrained from submitting an Extension application until it had received a litigation funding commitment, with such commitment being received today following the approval of the Omni’s (as defined below) investment committee. The Company strongly believes in the merits of its case and has obtained litigation funding to fund the ICSID Payment, subject to certain conditions as noted below. The Company is optimistic that ICSID will consider the Extension request.Litigation FundingMontauk has entered into a loan and option agreement (the “Loan Agreement”) with Omni Bridgeway (Fund 5) Canada Investments Ltd. (“Omni”), pursuant to which Omni has agreed to lend the Company US$200,000 (the “Loan Amount”) to fund the ICSID Payment in order for the Tribunal to render a ruling on Phase One.The Loan Amount will accrue interest at a rate of twenty percent (20%), compounded annually. In the event the Tribunal in the Arbitration finds that it does not have jurisdiction over the dispute and/or that Colombia did not breach its duties to the Company and/or any outcome which otherwise renders a Phase 2 Election (as defined below) non-viable in the sole view of Omni, the Loan Amount and any and all accrued interest must be repaid by the Company within sixty (60) days after Omni notifies the Company that Omni will not make the Phase 2 Election. The repayment of the Loan Amount and any such accrued interest shall be payable regardless of whether the Arbitration is successful and is a recourse obligation of the Company, payable from any and all assets of the Company. In connection with the Loan Agreement, the Company will deliver a promissory note (the “Note”) to Omni evidencing its obligation to repay Omni the Loan Amount and any accrued interest.In addition, the Company has granted Omni an option, exercisable in the sole discretion of Omni (the “Phase 2 Election”) to provide litigation funding to the Company pursuant to a litigation funding agreement (the “LFA”). The LFA is expected to provide an initial amount of up to US$2,325,000 (the “Non-Recourse Funding Amount”) subject to certain conditions. The Non-Recourse Funding Amount may be increased in certain circumstances as may be agreed upon between the Corporation and Omni.If Omni elects to provide the Non-Recourse Funding Amount for Phase 2 and the enforcement of any award obtained by the Company in the Arbitration, the Loan Amount and interest shall be repaid through proceeds recovered in the litigation (and in the event there are no proceeds recovered in the litigation, such amount inclusive of such interest shall be payable by the Company at the conclusion of the litigation).Omni’s return on the Non-Recourse Funding Amount (the “Omni Return”) will be limited solely to recovery from the amount of money for which the Arbitration is settled, or for which a final, non- appealable award is given in favour of the Corporation (the “Litigation Proceeds”). The Omni Return shall be an amount calculated as the sum of (i) a multiple of the amounts actually incurred of the Non-Recourse Litigation Funding Amount and (ii) a percentage of the gross recovery proceeds, both calculated when the recovery proceeds are received, as set out in the table below:
Months
Multiple
Percentage
0-12
2.0x
12%
12-24
3.0x
14%
24+
3.5x
16%
The Litigation Proceeds, if received, will be disbursed in the following order of priority: (a) Omni shall be reimbursed the Recourse Loan and the amounts actually incurred of the Non-Recourse Funding Amount; (b) Omni shall be paid the Omni Return and legal counsel shall be paid their legal fees; and (c) the balance shall be paid to the Corporation.In connection with the Loan Agreement, Note and LFA, the Company has agreed to grant Omni a continuing first priority security interest over any and all assets of the Company (whether presently held or acquired after the date hereof), including the Company’s interest in any Litigation Proceeds.The Loan Agreement is subject to certain conditions and the receipt of all necessary approvals and regulatory approvals, including the approval of the TSX Venture Exchange and the approval of the shareholders of the Company. The LFA is subject to the foregoing conditions and approvals and is subject to the settlement of the definitive LFA. The principal terms and conditions and the LFA have been agreed upon in the Loan Agreement. The Company has scheduled a special meeting of shareholders to be held on December 14, 2023 (the “Meeting”) at which shareholders of the Company will vote to ratify the Loan Agreement and approve the LFA. Additional information pertaining to the Loan Agreement and LFA may be found in the management information circular pertaining to the Meeting that is expected to be available on the Company’s profile on SEDAR+ on or around November 22, 2023.The Company cannot guarantee that it will be successful at the Arbitration, or that the estimated amounts disclosed herein will not be revised as the Arbitration proceeds. The Company also cannot guarantee that it will be able to recover all or part of its legal and arbitration costs from Colombia even if it is successful at the Arbitration. Assuming the Extension is granted and the Arbitration proceeds, the ruling from the Tribunal would be expected to be on or about the first quarter of 2024. Management of the Company will continue to provide updates on material developments of the status of the Arbitration.RISK DISCLOSURE STATEMENT: At the present time, the Company’s payment obligations are substantially in excess of its cash balances and it has no other assets. The Company is not solvent and cannot continue as a going concern. Trading in shares of the Company and any investment in the Company is highly speculative. No trading in securities of the Company or investment should be made without being able to lose the entire amount of such funds. See below, “Cautionary Note Regarding Forward-Looking Statements”. Investors are advised to seek professional advice before making any decision to trade in or invest in the securities of the Company.
As we approach the end of the calendar year, it is always useful to take stock and assess the state of the litigation finance industry, with the publication of an annual market survey providing useful context for industry leaders as they plan their strategies for 2024.Lake Whillans and Above The Law announced the release of their 2023 Litigation Finance Survey Report, which sought feedback from in-house counsel and attorneys at law firms on their perspective of the litigation funding market. The highlights from the report begin with a booming endorsement for the practice, as 81% of respondents who used litigation funding services for the first time said they would use it again. Even more impressively, 85% of these first-time users said that they would recommend the use of third-party funding to others.The positive experience that first-time users are having is perhaps best reflected in the fact that 38% of respondents said that litigation finance has ‘become more relevant’ to their practice in the last year.The responses from lawyers also showed that clients were the main driver behind these legal professionals using litigation funding, with 61% of respondents saying that the client’s business leaders or legal department were the main drivers behind the decision to seek outside funding. The reason for this client-driven approach is also explained, as 43% of in-house counsel stated that their strongest motivation for pursuing funding was to hedge the risk of litigation. In contrast, 45% of law firm partners highlighted a lack of funds as the key motivation.When it came to the factors that lawyers considered when choosing a funder to work with, the ‘economic terms’ of the financing was ranked as the most important issue.The survey’s data consisted of answers from 314 respondents, with in-house counsel accounting for 33% of those surveyed.The full in-depth report can be read here.
While we often highlight the achievements in lawsuits that receive funding from large commercial litigation funders, it is also crucial to recognize the vital work that non-profit legal funders are involved in, especially in those cases that see disadvantaged and marginalized communities looking to seek justice and compensation from governmental authorities.Reporting by CHOICE covers the recent success in a case brought by residents of the Northern Territories First Nations community of Ltyentye Apurte (or Santa Teresa) against the NT government, over the local authority’s failure to provide habitable and safe housing. On November 1, the High Court ruled that the residents had a right to compensation from the government, due to its inaction when it came to maintaining these properties and thereby failing to meet the necessary legal standards.The case, which began in 2016 saw 70 households bring the case against the government, with legal representation from the Australian Lawyers for Remote Aboriginal Rights (ALRAR). The lawsuit also received third-party financing from the Grata Fund, which describes itself as ‘Australia’s first specialist non-profit strategic litigation incubator and funder.’In a media release from Grata Fund, the non-profit’s executive director, Isabelle Reinecke highlighted that this case “is the first residential tenancy case heard by Australia’s highest court in a generation, and this historic win will have far-reaching consequences for renters nationwide.” Dan Kelly, solicitor at ALRAR also said that “the judgement establishes an important principle that public housing tenants can be compensated for distress caused by failures to maintain a rental property, and has broader implications for all tenants across the country.” The summary of the High Court decision in Young V Chief Executive Officer (Housing) [2023] HCA 31 can be read here.
As litigation finance continues to serve a growing array of industries, it is important for funders to be able to demonstrate a keen understanding of the particular challenges facing these individual sectors, and how third-party funding can help solve these issues. In a blog post from Omni Bridgeway, Naomi Loewith, director of strategic partnerships for Canada, analyses the three main risk factors affecting the mining industry and how litigation finance ‘can help both mitigate and address the challenges in the industry’. Drawing upon insights from EY’s latest report on the mining industry, Loewith focuses on the three following risks: capital, geopolitics, and cost and productivity.Firstly, Loewith looks at the large amounts of capital required by mining companies, who are facing increased demand for vast quantities of materials to support the global transition towards clean energy. With this pre-existing demand for capital, Loewith suggests that mining companies look at dispute financing as ‘another route to capital’, especially where these companies are engaged in commercial or investment treaty disputes that we see regularly.Secondly, Loewith highlights the increasingly contentious state of geopolitics and EY’s warning that in some countries, precious minerals and materials may be nationalized. In these situations, companies may need to pursue litigation or arbitration to safeguard their investments, with dispute funding enabling companies to pursue these meritorious cases without taking on additional risk or financial burdens.Finally, Loewith examines the dual pressures of rising costs, driven by factors such as inflation, labour and decarbonization, and the need to maximise productivity without further inflating internal costs. Loewith suggests that third-party funding can provide a key tool to remove some costs off the books by offloading legal expenses, which can have ‘a positive accounting impact while helping the company demonstrate its commitment to cost efficiency.’
Entering into a litigation funding agreement can be a daunting prospect for lawyers who do not have experience engaging with funders, with the confidential nature of the industry leading to a lack of publicly available information on best practices for securing third-party funding. In a post on LinkedIn, Mikołaj Burzec, an independent litigation finance advisor and broker, offers a range of advice for lawyers when it comes to approaching litigation funders and achieving the best financing arrangements. Burzec suggests that the first and most important step for lawyers is to ensure they have a thorough understanding of what acceptance standards are held by litigation funders. In particular, this means bringing cases that will align with a funder’s ‘diligence processes and investment criteria’. Beyond this overarching maxim, Burzec emphasises the importance of choosing the right funders to approach, as individual funders will have different preferences when it comes to the size of a deal, specific type of litigation, jurisdiction, and current stage of litigation.As part of this process, he highlights the need for lawyers to demonstrate a detailed analysis of the potential risks and challenges involved with the case, explaining that ‘providing comprehensive information helps build trust with funders, increasing the likelihood of a positive response.’Once funders have expressed interest in a case, Burzec says that it’s equally important to have awareness of ‘the different negotiation processes employed by various funders and recognizing non-negotiable provisions in funding agreements.’Following on from this careful navigation of the negotiation process, Burzec recommends a ‘judicious’ approach when it comes to granting exclusivity to a funder. Taking this more cautious tone whilst closely analysing a funder’s approach, ‘can help lawyers avoid potential pitfalls and maintain flexibility in pursuing alternative funding options.’
As the litigation funding market continues to grow more competitive, enterprising funders are keen to identify regions where there is still room to build a dominant market share. Of these regions, Asia stands out as an exciting prospect for funding growth, but remains a market that is not as accessible for international funders.In an article for the China Business Law Journal, Mariana Zhong, partner at Hui Zhong Law Firm, provides an overview of the current state of litigation finance in Asia. The article provides a detailed analysis of the existing rules governing third-party funding in different Asian jurisdictions, explaining recent developments across both litigation and arbitration funding, as well as highlighting some up-and-coming domestic funders in China.Looking at the current state of regulation, Zhong points out that many of the major arbitration institutions have introduced rules allowing for the provision of third-party funding over the last decade. These institutions include the Singapore International Arbitration Centre (SIAC), the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing International Arbitration Centre (BIAC), and the Hong Kong International Arbitration Centre (HKIAC).However, Zhong also emphasised that there is little uniformity among these different institutions, with disclosure requirements varying significantly between CIETAC, which has imposed stringent disclosure rules, and SIAC, which requires a much narrower disclosure around the existence of funding arrangements.In terms of recent Chinese court rulings on the legitimacy of third-party funding, Zhong explains that there have been positive signs, such as Case No. (2022) Jing 04 Min Te No. 368, where the court recognised ‘that the parties’ choice to engage third-party funders was well within their legal rights.’ However, other rulings have raised issue with the presence of outside funding, including Case No. (2021) Hu 02 Min Zhong No. 10224, in which the court ruled against the legality of the funding arrangement due to concerns over the conflict between third-party funding and ‘with public order and good morals.’Zhong notes that whilst the global market is still dominated by large international funders, the Chinese market has seen the emergence of a few firms who are hoping to meet the demand in this burgeoning market. She highlights Hou Zhu (Hold Capital) and Ding Song (DSLC) as two Chinese funders who are ‘rapidly maturing’ and ‘engaging zealously in domestic and Asian-wide funding activities.’
As LFJ reported last month, the effects of the Supreme Court’s PACCAR decision are already being felt in ongoing court cases, with disputes arising between funders and their clients. Following the High Court’s rulings granting asset preservation orders for both Omni Bridgeway and Therium in their disputes with Bugsby Property, the two funders have won yet another favourable decision.An article from CDR highlights a recent decision in the High Court of England and Wales in the case of Omni Bridgeway and Therium v Bugsby Property, where the court dismissed Bugsby’s application ‘for fortification of cross-undertakings in damages’ given by Omni Bridgeway and Therium. Bugsby had argued to the court that it required some form of security for the cross-undertakings to ensure that both funders would honour their obligations. Omni Bridgeway and Therium had argued, in their opposition to the application, that there was no significant risk that either funder would fail to meet the obligations of those cross-undertakings and that Bugsby had not provided evidence for its claim for loss.In his dismissal of the application, Mr Justice Jacobs held that Bugsby’s claim for loss was “speculative” and stated that the company had “failed to establish a good arguable case that the claimed loss will be suffered in consequence of the injunctions sought.” In response to concerns that the funders would not honour the cross-undertakings, the judge noted that both Omni Bridgeway and Therium possessed substantial capital, and there was “no real doubt as to their ability to meet a liability for GBP 5.14 million between them.”Neil Purslow, chief information officer at Therium, provided the following comment on the High Court’s decision: “We are pleased that in addition to the Asset Preservation Order, the High Court has again found against Bugsby who failed to establish that there was a realistic prospect of them entering the litigation funding market, and that as the judgement says, any claimants relying on funds provided by Bugsby might have “additional reasons for being cautious” in light of Bugsby not paying Therium and another funder what it owes them.”
Byron Sumner is the CEO and Co-founder of Ignite, a specialist litigation insurer built on its founding members' significant litigation and reinsurance expertise. Ignite offers large capacity limits on 'A' rated paper across various case types, along with an extensive product suite tailored to each stakeholder's unique needs. Their solutions range from straightforward contract disputes up to multi-billion pound international arbitrations. Ignite's mission is to transform the legal expenses insurance experience by providing swift and simplified solutions, transparent communication, tailored problem-solving, and unwavering support to help clients achieve their desired outcomes. Byron’s experience over the past decade includes a plethora of cross-class responsibilities within the (Re)Insurance industry, having held both analytical and transactional roles at several leading insurance organisations, including Argo Syndicate 1200, Chubb, and Aon. As well as founding an analytics and targeted client acquisition business, Byron has supported the capacity acquisition, product development, and growth strategies of several market leading MGAs. Byron’s commitment in the co-founding of Ignite is driven by a strong appetite to further develop the harmonisation of Insurance and Commercial Litigation. Below is our LFJ Conversation with Byron Sumner: Can you please provide the basics on Capital Protection Insurance (CPI)? At its most basic level, how does it work, whom does it protect, and what are the benefits? At its core, a CPI policy safeguards an agreed portion of a funder’s outlay. A CPI policy can be purchased for a single piece of litigation, or across several litigation assets that form a portfolio of investments. Simply put, if the agreed portion of capital is not generated by a specified date outlined in the policy wording, the insurer is obligated to pay a claim in line with the deficit between the funder’s return and the policy’s limit of indemnity. The benefits of CPI go beyond the scope of most conventional insurance products, which primarily focus on the provision of ‘sleep easy’ downside protection. When leveraged efficiently, CPI offers litigation funders the opportunity to unlock a wider pool of potential investment partners and more attractively priced debt capital. How does the rise of CPI within the legal services landscape impact litigation funders when it comes to their case selection and underwriting approach? The CPI policy does not intend to allow funders to dilute their DD approach to cases. Ignite collaborates with top-tier litigation funders who are not only expected to maintain the same high level of DD, whether insured or not, but are also obligated to adhere to specific case selection criteria and other underwriting processes to satisfy the policy’s requirements. Eligible only for discerning customers, Ignite’s CPI policy is designed to be a highly utilisable safety net in the event of an unexpected loss rather than an instrument employed to eliminate legitimate litigation risk in its entirety. What would you say the interest level is from litigation funders around your CPI product? What sorts of questions are they asking you / what concerns do they have - and how do you allay those concerns? Interest in CPI products has steadily increased over the past three to five years. While most prospective insured partners encountered by Ignite are funders seeking to protect a portion of their capital, we now see requests for additional cover such as insured premiums and ‘upside protection’, which involves ensuring the return of a portion of capital in excess of the principal investment (>1X MOIC). The primary concern of litigation funders and their LPs/financiers regarding CPI revolves around the insurer’s ability to pay a claim in the event of a large loss. This concern is largely mitigated by Ignite’s capacity partners’ A- rating and market-leading internal underwriting team. Through adept policy structuring and procedural stipulation, we reduce the risk of a lost case to a minimum. When Ignite partners with litigation funders, what criteria are you looking for in your diligence? Ignite’s DD is extensive, and underwriting portfolio CPI ‘wrappers’ is a more complex, bespoke process when compared to single case, open market policies. Transparency is critical to the process; working in partnership with its prospective customers, Ignite’s underwriting team will initially explore a fund manager’s historical track record, as well as their internal experience and expertise, including that of their investment committee. To gain an early understanding of viability, Ignite’s team also evaluates a funder’s IRR and MOIC expectations underpinned by their assumptions around case success rate and associated recoverability. How do you see the continuing emergence of insurance products within the litigation funding sector contributing to the evolution of litigation finance over the coming years, and how will Ignite play a role in that ongoing story? Utilisation of insurance is still a relatively new concept to many funders, particularly in the context of CPI over more traditional ATE products such as adverse costs cover. I am confident that insurance products will play a significant role in the future of litigation funding and Ignite’s increased receipt of insurance applications unequivocally attests to this upward trend. A CPI policy can not only facilitate a reduced cost of capital for funders, but also unlock the litigation asset class through the utilisation of an investment grade rating for traditionally risk-averse investors such as pension funds and insurance companies. As a result of the growing harmonisation of insurance and commercial litigation, I anticipate a greater influx of appropriately priced capital and access to justice for those claimants/plaintiffs with meritorious claims. Ignite will continue to play a leading role in this evolution by providing specialist insurance products that fulfil the needs of our customers. Ignite’s offering, which itself is always evolving, aims to work back-to-back with funders on baskets of cases which are cross collateralised, allowing insurers to benefit from the familiar benefits of diversification. As litigation funders explore new avenues to mitigate risk, the role of insurance products like CPI becomes increasingly significant. Could you share some insights into how Ignite caters to the needs and expectations of litigation funders in this changing environment? Ignite dedicates a significant amount of time and resources to developing a profound understanding of its target market. The company collaborates closely with some of the world’s premier funders to explore innovative and well-established strategies to assist in the management of their portfolios to utilise their capital more efficiently to drive better returns for all stakeholders. Ignite’s success is intricately linked to the success of its insureds, and this dynamic serves as a solid foundation for future collaborations. For example, this strong working relationship typically manifests in the seamless adaptation of standard policy documentation to cater to the specific individual needs of the funder client. Ignite consistently maintains a sharp focus on delivering a catalyst for an increase in successful case outcomes, which, ultimately benefits plaintiffs and claimants.
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