Chapter 5: Speculating on injustice: Third-party funding of investment disputes

The whole theory is to take the legal system and turn it into a stock market.

John H. Beisner, Skadden, Arps, Slate, Meagher & Flom1

Imagine a multinational company eager to sue a government on the basis of an international investment treaty. It is about to hire a top arbitration law firm as counsel. But the lawyers charge astronomical fees – more than the company is willing to pay. Fortunately for the company, an investment firm offers to invest in the case. It pays parts of the lawyers’ pay cheque in exchange for getting a share of the potential profits at the end. Welcome to the world of third-party funding.

Commercial third-party litigation funding is most readily described as buying into someone else’s lawsuit in the hopes of sharing in the spoils if a payout is awarded. Typically, a funder will take between 20% and 50% of the final award2.

Little is known about the industry, but occasional reports suggest that litigation finance shops such as Juridica (UK), Burford (US) and Omni Bridgeway (NL) are becoming an established part of international investment arbitration. Banks, hedge funds and insurance companies also invest in international disputes. Brokers and electronic marketplaces where claimants can shop for potential funders and funders can shop for claims are emerging3. One lawyer from the law firm Debevoise and Plimpton recently claimed: “There’s no shortage of funders who want to step in [...] even when there is a rogue debtor on the other side”4.

Third party funding is a fast growing industry and will undoubtedly play a large role in investment arbitration in the future. Investors will need or want to outsource the financial risks involved with investment arbitration.

Dr. Eric De Brabandere & Julia Lepeltak, Leiden University5

Table 3

Buying into arbitration – some prominent third-party funders

FirmWorth knowing
Burford Capital (US)The largest litigation funder in the world claims “a particular specialty in investment treaty arbitration [...] often mak[ing] the difference between a meritorious case being heard and needing to be abandoned”6.
Juridica Investment LTD (UK)Juridica gained unwanted fame over an ongoing feud with its ex-client S&T Oil. Juridica first sponsored the firm’s claim against Romania with a US$3 million injection, but wanted its money back when the case was abandoned. S&T accused the funder of having an “unethical” business model and of fraud7.
Omni Bridgeway (NL)One of the oldest litigation funders specialises in distressed debt in emerging markets. Investors, who are waiting for their money from an arbitration award against Argentina, are invited to “contact [Omni] for advice”8.
Fulbrook Management (US)Fulbrook was only founded in 2011, by the co-founder and ex-chair of Burford, Selvyn Seidel. Seidel is probably the frontrunner in the industry and advocates a more active role for financiers in arbitrations – to drive up their value.
Calunius Capital (UK)

Calunius made the headlines with two recent investment disputes in the mining sector. It is sponsoring Canadian company Rusoro in a claim against Venezuela and British firm Oxus Gold’s US$400 million arbitration against Uzbekistan.

Staggering returns

Just how much money can third-party funders make? Top tier financier Burford commits on average US$8 million to a case, while Juridica averages US$7.5 million9. Returns vary between 30 and 50%10. No wonder litigation funders’ profits have been growing at staggering rates. Burford’s profits grew ninefold on their 2010 levels in 201111. In the same period, Juridica saw a 578% growth in its profits12.

A world flush with monumental settlements and glaring opacity, a place where public treasuries are treated like ATMs by arbitral bodies and awards can be enforced globally – this is a world that third-party funders are particularly interested in. Burford, for example, claims to have “a particular specialty in investment treaty arbitration”, a field where it expects significant returns in the form of “a multiple of the capital invested [...] together with a portion of the net proceeds”13. In other words, millions of dollars of taxpayers’ money.

The financial benefits and risks associated with [arbitration] claims mean that they are likely to provide attractive opportunities for third-party funders.

Susanna Khouri, Kate Hurford & Clive Bowman, litigation funder IMF14

Gambling with legal claims

In the aftermath of Wall Street’s subprime lending debacle in 2008, third-party funders got a fresh boost. James Tyrrell, a partner at law firm Patton Boggs and seemingly also counsel to Juridica and Burford, asserted that in a recession: “There’s a lot of money out there that’s looking to find a home”15. So, while the rest of the world was reeling from the excesses of credit-default swaps and reckless financiering, third-party funders received a fresh influx of cash to gamble with. In 2007, Juridica raised US$125 million (£80 million) at its initial public offering through the London Stock Exchange16. In late 2008 – when the global recession was getting into full swing – another US$116 million (£74.4 million) flowed into its coffers17.

Maya Steinitz from the University of Iowa asserts that the expansion in funding is due to a “de facto absence of professional regulations that enables funders and attorneys to operate outside of the disciplinary reach of bar associations”18. Indeed third-party funding has been called “a legal no-mans land”19, essentially unencumbered by legislation to regulate its behaviour. In a case of Wall Street déjà vu, what legislation that does exist has sometimes been written by funders themselves20.

There is even the possibility – heaven forbid – that we could fund a case and then resell it to third parties, a bit like credit default swaps.

Selvyn Seidel, Fulbrook Management21

There has even been talk of third-party financiers creating new ways to maximise profits, as outlined by Fulbrook Management’s founder and chairman Selvyn Seidel: “There are other products we’re considering [...] Anything from derivatives, where we fund a single motion rather than the entire case, to a basket of five or six cases put together as a mini-portfolio to give some security through diversification. There is even the possibility – heaven forbid – that we could fund a case and then resell it to third parties, a bit like credit default swaps”22.

If this all sounds a little bit too familiar, sometimes it is the same investors who enabled Wall Street’s addiction to unrealistic profit margins who are now looking to gamble in litigation. Hedge funds “want to invest, and it is those [hedge funds] that were involved in the distress[ed] debt market, so they are used to it. This is just a new class of risk to them”23. They are simply interested in the chance of winning, as John Jones of risk insuring company Aon explained: “In a typical case[,] a hedge fund, acting on behalf of already wealthy investors, will seek to accumulate yet more money – not by investing in business enterprise or wealth creation – but by gambling on the outcome of a legal action for damages. They have no interest in the justice or otherwise of the case – only in the chances of success – as they will demand a share of the damages awarded in return for putting up the stake money”24.

Dredging up disputes

By funding lawsuits that might otherwise settle quickly or die altogether, third-party funding has the potential to multiply the number of investment disputes brought before arbitrators. Lessons from the past support the claim that financing stirs up litigation. Australia saw an estimated 16.5% rise in litigation after liberalising its attitude toward third-party funding in general25.

A good funding agreement effectively removes the financial risk of an expensive claim. This means that a corporation can file a claim then pass the cash drain and the risk to a funder while waiting for a payout, making arbitration against states even more attractive for businesses. If the money doesn’t come, the claimant has nothing to lose, but the defendant (a government) has still been forced to pay top-tier firms for their services.

One particular concern is an increase in frivolous disputes which would go uncontested without external funding26. While there is usually little incentive for funders to fund weak cases, bubbles in the market for legal claims might incite exactly that27. Mick Smith, co-founder of Calunius Capital, indicates that is the case: “The perception that you need strong merits is wrong – there’s a price for everything”28. A condition in the funding agreement can always make a weak case worthwhile for the financier. Eventually, frivolous, high-risk claims might inflate the value of funders’ portfolios. As the Burford Group notes: “If we shy away from risk for fear of loss, as some litigation investors do, we will not maximise the potential performance of this portfolio”29.

It’s basically venture law these days. So you have private investors coming in and trying to say ‘Hey, who can we sue next? I’m gonna put up five million dollars and let’s do some discovery and see where we go from there and really try to reap a windfall’.

Peter Snyder, CEO New Media Strategies30

Driving up legal bills, investing in rule change

Third-party funding can also drive up legal tabs, burdening cash-strapped sovereign budgets with even heftier arbitration costs. One example is the investment dispute of S&T Oil Equipment and Machinery Ltd. against Romania. The case was eventually discontinued when the oil company stopped paying its legal bills, but only after having been kept alive for an extra two years thanks to a cash injection from Juridica. Romania is stuck with its legal costs, including for the two extra years31. An investor boosted by third-party funding is also likely to bring more experts and witnesses to the dispute, driving up the legal costs of the respondent state.

In their quest for selling more services, some litigation funders are also exploring “less passive business-models”, providing for more influence on the management and strategies of arbitrations32. Dutch litigation funder Omni Bridgeway, for example, offers “custom-made advice” on arbitrations, including on selecting expert witnesses and on fact-finding missions33. Scholar Steinitz expects that in a few important cases, financiers are likely to “invest in rule change,” that’s to say selecting a claim not so much for its end result, but for certain potential arguments in an award or procedural changes, leaving a lasting mark on the whole system and maximising the future value of their portfolios34.

There is a “push” by funders to get more control of cases and sell more services.

Global Arbitration Review35


Like law firms and elite arbitrators (see chapters 3 and 4), third-party funders act as gatekeepers of a close-knit arbitration circuit. They tend to accept cases with leading law firms as counsel and will suggest alternatives if they are not happy with the choice36. They may also influence who is appointed as an arbitrator. As Mick Smith of Calunius Capital puts it: “If somebody says to us that they’re thinking of so-and-so and the other side has proposed so-and-so and asks if we have experience of them, we’d certainly give our view”37.

The financing industry is highly-concentrated, and also symbiotically joined to the cadre of law firms with which many arbitrators in high demand are affiliated.

Marc J. Goldstein, arbitrator38

Smith is an example of the web of interpersonal relationships that link financiers to arbitrators, lawyers and investors in countless ways. He is head of Calunius, one of the largest funders, but previously worked at the law firm Freshfields, maintaining close links with his former colleagues: “The relationships I made there are still important and they’re my first port of call,” he said39. So when the Canadian gold mining company Rusoro was looking for a funder of its investment dispute against Venezuela in early 2012, Calunius got the deal. Rusoro is represented by Freshfields and Smith was delighted to work with his old friends again40.

Smith and Calunius are no exception. According to Selvyn Seidel, now chairman of Fulbrook Management and a former partner at Latham & Watkins, his strong links with arbitration lawyers, firms and institutes “have been a big help to us and we hope to make our contribution to them through helping international arbitration”41. Burford boasts “more than 300 years of collective [...] experience at major law firms and corporations”42.

These close networks raise a long list of potential conflicts of interest43. For example, where arbitrators are also lawyers at firms that funders work closely with, or when arbitrators also sit as counsel in another case financed by the same funder. More likely still, arbitrators may have former partners that are now executives of third-party funders. In fact, some funders and law firms are owned (in part or full) by the same parties. These potential conflicts of interest seriously call into question the ability of arbitrators to evaluate a case impartially, fearing the consequences for their professional futures if they do not rule in favour of a financier.

Three easy steps to becoming a successful investment arbitration funder

Step 1: Raise huge sums of money in the middle of a global recession to gamble with investment arbitration proceedings.

Step 2: Cultivate a network of connections in the arbitration industry. Your friends from your former law firm could be very helpful in introducing you to their clientele, and you should probably call that old co-worker who’s been doing a lot of arbitrator work lately.

Step 3: Provide several million dollars for your friend’s firm to litigate the claim, for years if necessary. In the meantime, invest in a swath of new cases and find new ways to profit from disputes, like offering sovereign funding options and case derivatives.

Once you cash your first big cheque from the Sovereign Bank of Taxpayer Funds, you’re well on your way to a lucrative future in third-party funding!

A two-way street?

But could third-party funding not be a double-edged sword? Apparently, for-profit funders are currently developing products for defendants, including states in investment treaty disputes. Even though states can never really ‘win’ anything in these cases, but only rebut million dollar claims, Fulbrook’s Seidel claims: “We’ve often been blamed for stirring up litigation, but now we can say that we work on both sides of a dispute”44.

In a marathon case brought against Chevron on behalf of Ecuadorian indigenous groups, Burford Capital agreed to finance the claim resulting from dirty oil exploration activities, which had permanently destroyed the land and ecosystems of the rainforest inhabitants. But the seemingly responsible financing came with a catch. According to the contract, if a settlement of $1 billion had been reached, Burford would have received US$55 million for taking over the full US$15 million in legal costs. If the plaintiffs had recovered US$2 billion, Burford would have received US$111 million. But if the Ecuadorians were awarded less than US$1 billion (as low as US$69.5 million) Burford’s payout would have remained at the US$1 billion settlement level. In the case of a US$69.5 million judgement, Burford would have taken US$55 million, almost 80% of the judgement. Large chunks of the remaining 20% would have gone to other investors, only “the balance (if any) shall be paid to the claimants”45. Burford recently sold its interest in the case to another funder46.

There’s something about all this secret meddling in other people’s bitterest disputes and profiting from them that doesn’t sit well.

Roger Parloff, editor Fortune magazine47

References chapter 5:

  • 1. Alden, William (2012) Looking to Make a Profit on Lawsuits, Firms Invest in Them, New York Times, 30 April.
  • 2. OECD (2012) Investor-State Dispute Settlement. Public Consultation: 16 May – 23 July 2012, p. 37.
  • 3. See, for example:
  • 4. Ross, Alison (2012) The dynamics of third-party funding, Global Arbitration Review 7:1, p. 15.
  • 5. De Brabandere, Eric/ Lepeltak, Julia (2012) Third Party Funding in International Investment Arbitration. Grotius Centre Working Paper N°2012/1, pp. 18f.
  • 6. Burford (2012) Case Studies, [05-06-2012].
  • 7. Raymond, Nate (2011) New Suit Against Juridica Exposes Cracks in Litigation Funding Model, Am Law Litigation Daily, March 15, [03-07-2012].
  • 8. Omni Bridgeway (2011) Tango Lessons, TFR review July/August, p. 48.
  • 9. Burford (2011) Annual Report 2011, p. 1.; Glater, Johnathan (2009) Investing in Lawsuits, for a Share of the Awards New York Times, 2 June.
  • 10. van Boom, Willem H. (2011) Third-Party Financing in International Investment Arbitration, p. 30.
  • 11. Burford (2011), see endnote 9, p. 1.
  • 12. Juridica (2012) Final results for the year ended 31 December 2011, [02-07-2012].
  • 13. Burford (2012), see endnote 6.
  • 14. Khouri, Susanna et al. (2011) Third-party funding in international commercial and treaty arbitration – a panacea or a plague?  A discussion of the risks and benefits of third-party funding,  Transnational Dispute Management 8:4, p. 14.
  • 15. Jones, Ashby (2010) The Next National Investment Craze: Lawsuits!, Wall Street Journal Law Blog, June 4, [20-04-2012].
  • 16. Converted from British Pounds at the rate of 1GBP: 1.57 USD, accurate as of July 2, 2012. Figures taken from: The Lawyer (2008) Juridica Attracts Investment as the First Specialist Litigation Fund to Float in the UK, 14 January.
  • 17. Converted from British Pounds at the rate of 1GBP: 1.57 USD, accurate as of July 2, 2012. Figures taken from: Greene, Sophia (2009) Rich Pickings from Legal Cases, Financial Times, 25 January.
  • 18. Steinitz, Maya (2011) Whose claim is it anyway? Third-party Litigation Funding, Transnational Dispute Management 8:4, p. 1278.
  • 19. van Boom, Willem H. (2011), see endnote 10, p. 5.
  • 20. National Association of Mutual Insurance Companies (2011) Third-party Litigation Funding. Tipping the Scales of Justice for Profit, p. 1.
  • 21. Ross, Alison (2012), see endnote 4, p. 14.
  • 22. Ibid.
  • 23. U.S. Chamber of Commerce (2009) Selling Lawsuits, Buying Trouble: The Emerging World of Third-Party Litigation Financing in the United States Oct, p. 6.
  • 24. Ibid., p. 3.
  • 25. U.S. Chamber of Commerce (2009), see endnote 23, p. 9.
  • 26. See, for example, the profile of the Fostif case, Campbells Cash and Carry Pty Ltd. v. Fostif Pty Ltd. U.S., U.S. Chamber of Commerce (2009), see endnote 23, pp. 9f.
  • 27. Steinitz, Maya (2011), see endnote 18, p. 1321.
  • 28. This quote comes from a wider discussion of ways that funders modify terms of funding agreements to increase the likelihood of turning a profit in weak cases. This can include practices such as demanding more of a share of the award if the case is won. See U.S. Chamber of Commerce (2009), endnote 23, p. 6.
  • 29. Burford (2011), see endnote 9, p. 5.
  • 30. US Chamber of Commerce Institute for Legal Reform (2012): How the Practice of Law is Being Commercialized, 20 April, [26-04-2012].
  • 31. Cremades, Bernardo M. (2011) Third-party Litigation Funding. Investing in Arbitration, Transnational Dispute Management 8:4, pp. 25ff.
  • 32. Peterson, Luke (2011) Republic of Georgia Agrees to Pay 1/3rd of ICSID Award; Litigation Funders Eyes Recovery After Bumpy Ride, Investment Arbitration Reporter, 31 December, [19-11-2012].
  • 33. Omni Bridgeway (2012) Claim & Recovery Intelligence, [18-06-2012].
  • 34. Steinitz, Maya (2011), see endnote 18, pp.1312f.
  • 35. Ross, Alison (2012), see endnote 4, p. 24.
  • 36. Scherer, Maxi/ Goldsmith, Aren (2012) Third-party funding in International Arbitration in Europe Part 1: Funders’ Perspectives, 27 January, [20-11-2012].
  • 37. Global Arbitration Review (2009) Third-party funder raises US$130 million in flotation, Global Arbitration Review, 23 October, [06-06-2012].
  • 38. Goldstein, MJ. (2011) Should the Real Parties in Interest Have to Stand Up?, Transnational Dispute Management 8:4, p. 8.
  • 39. Ross, Alison (2012), see endnote 4, p. 17.
  • 40. Perry, Sebastian (2012) Funder on board for new Venezuela claim, Global Arbitration Review, [03-07-2012].
  • 41. Global Arbitration Review (2009), see endnote 37.
  • 42. Burford (2012) Who we are, [06-06-2012].
  • 43. See, for example: Kalicki, Jean (2012) Third-party Funding in Arbitration. Innovation and Limits in Self-Regulation, Kluwer Arbitration Blog , 14 March, [20-04-2012]; Khouri, Susanna et al. (2011), see endnote 14; Goldstein, MJ. (2011), see endnote 38.
  • 44. Ross, Alison (2012), see endnote 4, p. 14.
  • 45. Parloff, Roger (2011) Have you got a piece of this lawsuit?, CNNMoney, June 28, 2011, [23-05-2012].
  • 46. Gene, Sophia (2011) Debate on the ethical issue of investing in lawsuits, Financial Times, November 13.
  • 47. Parloff, Roger (2011), see endnote 45.

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