Third-Party Funding: Global and Ukrainian Perspectives

What is Third-Party Funding?

Third-party funding (the TPF), also known as litigation funding, is a financial arrangement between a party to a case and a funder, a third party not directly involved in the legal dispute. The funder is able to provide funding in various forms, such as covering legal fees and expenses or even advancing a portion of a claimant’s potential entitlement. Importantly, this funding doesn’t affect your control over a case, which remains with you as you are the claimant.

The ability to bring in the right professionals in the proper jurisdictions at a stage when there is a sign only of the tip of an iceberg has become one of Hillmont’s core competencies. In the last few years, third-party funders have become more interested in litigation involving Ukrainian businesses and assets in Ukraine. TPF shifts the financial burden of litigation or arbitration to the funder’s balance sheet, which makes this financing most suitable in cases where a client cannot objectively assess the likelihood of success or does not have the resources to pursue a claim[1]. We provide a brief overview below of the concept of TPF, its types, and perspectives.

General overview

Third-party funders find international arbitration to be a highly-appealing field for investment due to several reasons:

• high claim values;
• proceedings expediency;
• confidentiality of proceedings;
• minimized evidence-related expenses; and
• predictability of a case outcome compared to litigation.

Various funder-client amalgams give rise to a wide range of possible funding options, such as[2]:

1. Attorney Financing

Three key types of attorney financing should be mentioned:

• Pro bono representation is when an attorney provides legal representation to an indigent or financially constrained client for free.
• Contingency representation involves an attorney representing a client at the attorney’s own expense with the expectation that, if the client recovers money, the attorney will then be repaid along with an additional fee based on a fraction or percentage of the amount recovered.
• Conditional fee is similar to contingency representation, but the attorney only charges a discounted fee unless the client wins. If the client wins, the attorney receives their standard fee plus a “success fee” bonus.

2. Insurance

The insurance company agrees to fund legal representation in any action to defend against liability or recover damages or to pay any award, order, or judgment against the insured party.

3. Loans

A client may receive a loan from a legal counsel, law firm, bank or other financial institution, though the loan must be repaid regardless of the final disposition.

4. Non-Recourse Financing with Repayment on Success

Non-recourse financing, where repayment is contingent on the client’s success in the dispute, is the quintessential scenario for TPF in international arbitration. 

How Does TPF Work?

TPF can best be explained through the following steps:

1. Parties Involved

Different legal dispute participants can be interested in TPF: corporations, individuals, law firms, or even sovereign states. Typically, however, the claimant is the one to seek TPF first. The funders can also support respondents, but funding claims provide more significant upside potential and attract more attention.

Litigation funders are most often law firms, insurance companies, banks, or other financial institutions. Some institutional funders specialise in TPF, while others invest in litigation as part of a more comprehensive portfolio of conventional financial investments. Most specialised funding institutions are based in countries where the TPF industry is well-developed and regulated, such as Australia, Germany, England, the United States, the Netherlands, Canada, South Africa and New Zealand, with much smaller pockets of TPF – if any at all – in Continental Europe, Asia, Latin America, the Middle East, and Africa[3].

2. Initial Meeting

The funding process begins with an initial meeting between the party seeking funding and the litigation. During this meeting, the claimant presented an overview of the case and discussed their funding needs with a funder. The litigation funder evaluates whether the case meets its investment criteria, assesses its potential merits, and then ensures that the goals and desires of both parties are aligned.

3. Non-Disclosure Agreement

Before disclosing detailed information about a case, the claimant and the litigation funder typically conclude a Non-Disclosure Agreement (“NDA”) to protect the confidentiality of the information shared during the funding process.

4. Assessment of the Case’s Prospects

Following the initial meeting and execution of the NDA, the litigation funder assesses the case by examining essential documents, legal pleadings, and pertinent information furnished by the claimant to ascertain the merits, deficiencies, and prospective risks associated with the case.

5. Term Sheet / Memorandum of Understanding

After an initial case assessment period, typically lasting 30-60 days, the party seeking funding and the funder sign a term sheet setting out the key terms of the funding arrangement. The term sheet usually provides all the material economic and contractual terms that the parties will agree to if/when they enter a Legal Funding Agreement.

6. Due Diligence

The aim of due diligence of a case is for the litigation funder to verify the basis for investing in a particular case. This involves further examination of legal and factual issues in the case to be funded, assessing potential risks, and consulting with legal experts to ensure comprehensive understanding of a case’s prospects. At the end of the due diligence process, the funder shall decide whether to refuse or approve the investment, provided that from this moment onwards, it is exposed to the full range of risks associated with the case.

7. Legal Funding Agreement

After a satisfactory due diligence review and approval by the funder’s investment committee, the claimant and funder agree on terms and enter into a binding Legal Funding Agreement (the “LFA”). The LFA is the seminal document in third-party financing that sets out all the financial and contractual terms for the funder’s investment in dispute resolution. The financial terms typically match up with those in the term sheet, but they may be re-negotiated if issues arise during due diligence. Generally, these documents are not required to be disclosed.

Benefits and risks

Why is TPF crucial for Ukraine?

Funders perceive international arbitration and cross-border litigation claims as “assets” that can either be materialized or sold. Funders continue to invest in claims seeking damages from the breach of contract terms, mainly where liability has been determined, and the claimholder is involved in efforts to collect an award[4]. According to Custom Market Insights (CMI)[5], the Litigation Funding Investment Market size was estimated at USD 5.41 Billion in 2021 and is expected to hit around USD 7.12 Billion by 2030, and is poised to grow at a compound annual growth rate of 7.9% from 2022 to 2030. Commercial litigation is likely to retain its place as one of the largest recipients of TPF into the following year.

Alternative investment managers are particularly interested in entering Ukraine’s litigation funding market and financing emerging market litigations and arbitrations (especially governed by the laws of reputable common law jurisdictions such as England and certain U.S. states) When litigation funding involves a common law jurisdiction such as England and Wales, it is vital to obtain structuring advice from a local counsel to ensure that a claim cannot be attacked on the grounds of maintenance and champerty (centuries-old legal concepts that sought to eliminate the commercialisation of litigation).

As of 31 December 2023, the overall damages and costs of rebuilding Ukraine due to russia’s aggression were estimated at USD 486 billion. In 2024 alone, Ukrainian authorities estimate the country will need around USD 15 billion for immediate reconstruction and recovery priorities at national and local levels, focusing on supporting and mobilising the private sector alongside restoration of housing, soft infrastructure and services, energy, and transport[6].

Regarding trends related to a TPF in investment arbitration proceedings, it is worth mentioning that the market has reached the limits of its capacity to meet all of its demands. These days, funding litigations against russia is considered a high-risk investment due to the latter’s tactics and possible non-enforcement of arbitration awards. Another risk on the funder’s radar is the sovereign jurisdictional (under the UN Convention on Jurisdictional Immunities of States and Their Property[7]) and substantial immunity of the respondent’s state.

Nevertheless, at least 10 investment arbitrations have been filed due to russia’s unlawful actions in Crimea[8]. In every single case, the investors have been awarded compensation to be paid by russia for the breach of the Ukraine-Russia BIT. These cases include several claims brought by businesses with assets, including real estate, petrol stations, and airports[9], claims by Ukraine’s state-owned bank Oschadbank, and a claim from state-owned oil and gas company Naftogaz. The latter has recently secured an order from the High Court of Justice of England & Wales recognising its USD 5 billion final award on damages against russia and partial award on jurisdiction and liability[10].

There is also great interest from alternative investment managers seeking to enter the litigation funding market and funding emerging market litigation such as Ukraine’s.

At the same time, in the Yukos case, the High Court of Justice in London found that russia could not invoke sovereign immunity as a defence to enforcement of awards worth nearly USD 60 billion awarded to the former majority shareholders of Yukos Oil Company. In particular, on 1 November 2023 in Hulley v Russian Federation [2023] EWHC 2704 (Comm), the English court dismissed a jurisdictional challenge brought by the Russian Federation in proceedings for the enforcement of two arbitral awards issued in favour of the former majority shareholders in OAO Yukos Oil Company for an amount in excess of US$50 billion. The central issue was whether Russia was precluded, based on issue estoppel, from re-arguing that it had not agreed in writing to submit the dispute to arbitration because of previous judgments rendered on the same issue by the Dutch courts in the context of setting aside proceedings in respect of the same awards. As all the conditions for applying estoppel (issue preclusion) were met, the High Court of Justice in London held that russia was precluded from raising a jurisdictional challenge, and russia’s application was dismissed. More recently, ex-shareholders of Yukos successfully seized a London property and the vodka trademark STOLICHNAYA[11], formerly owned by russia, in order to enforce an award worth USD 60 billion.

Although the concept of a TPF had not gained massive popularity in Ukraine earlier, it might become a valuable tool for receiving compensation against russian aggression by involving third-party funders in commercial and treaty arbitration proceedings.

Conclusion

TPF, as driven by the need of litigants for access to justice and the funder’s lucrative profit expectations, is expected to maintain its upward trajectory. Yet, the legal and compliance challenges, mainly related to the control of potential funders over or influence on litigation, will likely remain. While the concept of a TPF was not widely utilised in Ukraine previously, it is likely to become a valuable tool for Ukrainian companies that are seeking compensation for damages caused by russia’s military actions.

[1] James Hart and Serhii Nyzhnyi, Navigating Complexity, The Ukrainian Journal of Business Law, Vol. 18 # 11-12 (November-December 2020), https://hillmont.com/wp-content/uploads/UJBL_Hillmont-Partners_Navigating-Complexity-1.pdf

[2] Victoria Sahani and Lisa Bench Nieuwveld, Third-Party Funding in International Arbitration, Wolters Kluwer: 2012 (1 October 2012), https://ssrn.com/abstract=2349138

[3] Id.

[4] Robert Dillard, ANALYSIS: Expect to See Targeted Growth in Litigation Finance, Bloomberg Law (5 November 2023), https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-expect-to-see-targeted-growth-in-litigation-finance

[5] Custom Market Insights, In-Car Audio System Market (July 2023), https://www.custommarketinsights.com/report/in-car-audio-system-market

[6] European Commission, Updated Ukraine Recovery and Reconstruction Needs Assessment Released, Press Release IP/24/801 (15 February 2024), https://ec.europa.eu/commission/presscorner/detail/en/ip_24_801

[7] UN Convention on Jurisdictional Immunities of States and Their Property, New York (2 December 2004), https://legal.un.org/ilc/texts/instruments/english/conventions/4_1_2004.pdf

[8] David Pinsky and Paris Aboro, “Back in the U.S.S.R.” How Russia’s Invasion of Ukraine May Invite Billions in Arbitration Claims, American Bar Association (1 March 2024), https://www.americanbar.org/groups/litigation/resources/litigation-journal/2024-winter/back-the-ussr-how-russias-invasion-ukraine-may-invite-billions-arbitration-claims

[9] UNCTAD, Investment Dispute Settlement, https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation

[10] Naftogaz Group, Naftogaz obtains U.K. order recognizing USD5 billion Crimea award against russia, Naftogaz’s website (19 December 2023), https://www.naftogaz.com/en/news/naftogaz-obtains-u-k-order

[11] Susannah Moody, Russia loses final bid to keep vodka trademarks in Yukos dispute, GAR (25 March 2024), https://globalarbitrationreview.com/article/russia-loses-final-bid-keep-vodka-trademarks-in-yukos-dispute