Too Poor to Protest?

Too Poor to Protest?

November 10, 2016

10th November 2016

As oil prices continue to languish in the mid $40s, producers who sanctioned exploration and development plans and refiners who hedged their crude oil supply at price levels higher than today and ship owners suffering low freight rates and rising costs from environmental legislation are all feeling the pinch. So the last thing any company in this position needs is to find itself involved in a dispute that it cannot afford to fight.

As an independent expert witness, by definition, I do not concern myself with who ultimately pays the cost of litigation, including my bill, so long as I am comfortable that I will be paid. Any doubt about that and my ability to prove my neutrality to the outcome of the case is compromised.

So I have only just become aware, thanks to the judgement in the Essar versus Norscot arbitration, of the growing number of third parties whose business model is to fund disputes in which they otherwise have no interest. The arbitrators in the case referred to above made the loser cough up for the winner’s bill from its third party funder.  This is old news for lawyers, but the idea of “champerty” is new to me.

Champerty, as I understand it, means sharing the damages awarded by the court or panel between the successful litigant and the third party funder (TPF). If the TPF backs the losing side then it picks up the costs for both, if the arbitration panel or judge decides that the loser is liable for the other side’s costs. However the TPF may take out “After the Event” insurance to cover the opponents costs, i.e. insurance taken out after the case has arisen but obviously not after the case has settled.

But beware: there are jurisdictions that have a “no champerty” rule. I understand that Eire is one such state. As with most legal concepts there are bells and whistles attached to the TPF idea that need to be explored by lawyers on a case by case basis.

Coming from a risk management background I am intrigued by the TPF business model. I have to wonder how TPFs calculate risk and whether typical value-at-risk (VaR) models apply to these activities. This question will be brought sharply into focus when TPFs have an IPO and encourage others to invest in their business model.

Is it possible to measure the risk involved in bringing a case to court or is the risk of winning or losing an entirely subjective matter? Forecasting the outcome of a case is likely to be every bit as difficult as forecasting the next move in oil prices, yet we rely on models to assess oil price risk. In the case of litigation we have the body of case law and the track record of particular barristers, judges and arbitrators to potentially populate a risk model with data.

If you can measure risk you can trade it and hedge it. From there it is a short step to commoditising legal risk as a new asset class and having TPF market makers quoting a bid-offer spread on the risk of funding a case.

TPFs are not regulated, although they have a trade association, the Association of Litigation Funders, and are self-regulated on a voluntary basis, i.e. they are not really regulated at all. If legal risk is commoditised it too could be subject to the new financial regulation that the rest of the commodity trading community is now hiring lawyers to implement.

But these developments are years in the future if the legal profession allow them to happen at all. The real point for right now is this: there will always be corporate bullies who ride roughshod over the little guys, safe in the knowledge that their resources will buy them more and better champions of their case.  Right now, with oil prices at low levels, the chances of a small company having the cash to put up a fight are pretty low. But the little guys who don’t have the funds to stand up for themselves can potentially bring in a TPF, if their case has merit.  If it doesn’t have merit then running it by a TPF first will at least save them money and management time to deal with the real problem of low oil prices.

From my perspective as an expert witness, if litigants are forced to get their act together and consult experts at an earlier stage because they have to convince a TPF to bankroll the proceedings, that can only be a good thing. There is nothing worse than having to advise a litigant that, in your opinion, their case fell at the first fence when they have already galloped half way round the track.