Member Info for Fibonacci112

Hi NH

If you click on my name tag, you will see in my prior posts from 9 March two quite long posts providing an explanation as to how a typical litigation funding arrangement operates. The funders will not take a case unless they have a solicitor who has skin in the game in form of either a conditional fee agreement or damages based agreement. The risk sits very squarely on the balance sheet of the solicitors.

I trust that helps.

F

* after the event situation

Hi Sab

I understand what you are saying in relation to the maths. All I am saying is that real world practice differs from the theory here; there is absolutely no chance in practice in relation to litigation funding that the funder would take such a claim at a 35% CoS; that is, a case where it is likely they will lose and where they will have a negative leading counsel's opinion saying such. To present a case where there is a greater chance of losing than of winning would result in a very short application process. Indeed, the damage to credibility in trying to get a funder to consider such a case would mean that they would be unlikely to ever take an application from you seriously again.

Further, from my own experience, there would be no chance of convincing a group of (generally conservative) members of the risk management committee of a firm of solicitors that it would be a good idea to run a two year plus piece of litigation, where the tied up work in progress runs to several million dollars, on the basis of a 35% chance of success, where they personally will lose out on that lost WIP.

The reason that the returns in litigation funding are so high is because that is the price that a litigating party will pay for a free run at very high value litigation in an after the situation. There are numerous reasons why a party seeking such cover will do so. One of them is that they do not have the free cash to run the case.

I hope that helps.

F

Hi Ralph

60% is not light as regards chance of success. No solicitor or barrister, acting reasonably, will give a chance of success of more than 75%. This is due to the concept of litigation risk. Litigation risk is the possibility that anything to do with a case can go wrong on the day (eg, in this situation, the arbitral court hates the witness or the legal submissions, counsel does not perform, there is a problem with the evidence, and so on). 60% is a good chance of success.

The fact that King & Spalding were prepared to commit to a no win/no fee deal is highly important in relation to their view of the chance of success. This is because they then carry the case risk on their balance sheet through their partners' capital contributions.

I also do not know whether 60% is what was given as a CoS in this case. That is the figure that funders typically work to.

I hope that helps.

F

Hi Sabyam

It does not work like that. The way in which these sorts of cases are assessed by the funder is to take leading counsel's advice and to have the solicitor on the case so committed to either a discounted conditional fee agreement or a damages based agreement. Prospects of success have to be provided from leading counsel at 60% or more. That is based on leading counsel's feel for the case not an algebraic equation. A litigation funder would not back a case with a 35% chance of success.

Hope that helps.

F

Much, our opinions are aligned on that

Thanks Carroteater. A very balanced review of what occurred today.

From what you have said, we have the answer as to why the KPIs for the BoD made no reference to sanction of Sealion; they do not think it is going to happen in this FY and did not want to dilute potential bonus.

You have also addressed the view of the BoD in relation to the value of the OM litigation to RKH. As RPoodle and Grey Squirrel were commenting earlier this year, any (paid!) award from that could be vital to keep RKH afloat. It seems that SM is thinking that the award is going to be in the category of nice to have rather than game changer (albeit being kept afloat now seems to be game changing).

On balance, I think Sealion will get progressed, but not this FY (the BoD KPIs suggest the timing on this). It is also difficult to believe that the FIG would buy in and travel to the UK to make representations to UK Gov if that was not the case. More importantly, from PMOs position, TD would have a real credibility issue explaining to his investors why he simply walked away from such a high value investment.

One point (probably for the PMO board) that is still at large is what is going on with PMO and Apollo. I would be surprised if the news stories about PMO and Apollo in relation to possible North Sea asset purchases is the last that we hear of Apollo .

If the concern is that GS are acting on a possible takeover and they are buying and selling to keep a level price, then it is unlikely that anything substantial will happen on price until Zama 3 is assessed. Once that variable is covered, the value of the near-term PMO prospects can be more fully assessed and the price set for the offer.

Hi Ovets

As with all litigation for damages, there are two stages to receiving the damages: getting judgment (the recent arbitral proceedings); and, enforcement if money is due and not paid.

As regards enforcement, Italy is a signatory to both the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the ICSID Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. If the recent arbitral decision is in favour of RKH and provides for damages, enforcement should not ultimately be a problem since the judgment can be executed anywhere that the Republic of Italy has assets.

I trust that helps.

F

Hi Nigoil

I am not sure where the hostility is coming from.

For your information, all of my comments are my own from my own experience.

As to your suggestion that you might write something involved, great. Like you, I do not hold a monopoly on anything that is posted on this Board. Fernan has asked a question on ECA finance. Rather than posting "Stong buy", why not help with that?

F

Nigoil

I have simply presented an explanation of the typical sort of structure that occurs in litigation funding and I have suggested that if there is a reduction based upon the principle of contributory fault, the recovery might not be as high as is being suggested.

It is a possible outcome. Dismissing it as being a boiler room tactic because you do not agree with the position is surprising, not least because I posted some not dissimilar comments a couple of weeks ago and you liked them.

Stewart Lee makes quite a good point about proving things with facts -https://www.google.co.uk/url?sa=t&source=web&rct=j&url=%23&ved=2ahUKEwjHqeGnkfXgAhXMURUIHV7HDBYQ8TUwAHoECAwQAw&usg=AOvVaw0VTJzWxrN8ZFOD4xbU2nov

Essentially, be open minded.

F

Sorry - there is also usually a priorities agreement which covers the split of the recovery. The order typically is funder, ATE, solicitor (and counsel if working in this way), and, finally, client.

As you will see from the previous message, you actually need a spreadsheet to work it out properly. However, if this is a DBA case rather than a CFA (which is what I was indicating), and a proportion of the recovered damages is paid based on a scale in the LoE, your previous hypothetical is a simplified version of how it works with the top slice going to the third party funder.

I should add that I do not know if there is a third party funder. However, it would be highly unusual for the solicitor to be responsible for counsel and experts disbursements.

I do not know what the outcome of this would be because I am not involved in the litigation; this is all based on a typical type of structure.

I should add that anyone who thinks these multi-party funding agreements are simple may not have a particularly good grasp of them. One highly respected insurance partner of many years standing that I know referred to them as highly complex and incredibly onerous.

Finally, I am not trying to play down OM; I think that a dose of realism is required. There may not be USD 160 million coming over the hill and it may just be a nice to have. The real issue with RKH is sanction of SL.

I hope that helps clarify what I was saying yesterday from a train.

F

GreyAll noted. Yes I do work in this area. The way in which litigation funding works typically is a relationship between the client, the solicitor (and sometimes counsel), a third party funder and an insurer. Clients seeking this sort either do not have the free cash to fund the litigation or are being commercially risk averse. The third party funder will be a listed commercial funding business such as Burford Capital (best known in the market), an insurer or other private funders. What the third party funders do is provide the funding for one of: litigation and disbursements (that is, the whole legal costs package including counsel, experts, etc); counsel and disbursements; or disbursements only. It depends on the type of case as to what is required in relation to the extent of the funding. A detailed application form is sent in setting out the likely costs in relation to the case. If the application is approved, the approved amount is the limit of the funding. It is possible to ask for more, but it becomes expensive because the requesting party is then on the hook for the funders costs in reviewing. The approved amount can then be drawn down against in accordance with the purpose of the funding. The risk capital involved comes at a high cost. It can be tied up with no return for several years during the litigation (and if it is court based, appeals). The funders rate of return typically increases for each 12 month (or part thereof) period that the risk capital is allocated to the claim. Year 1 at 30%, year 2 at 60% and year 3 at 90% are not uncommon. I am aware of some of the smaller funders who charge multiples of the money on risk. The risk capital and uplift are paid out of the recovered damages by the client.There is then an after the event (ATE) insurer. The role of the ATE insurer is threefold in relation to an ATE insurer: first to cover any adverse costs in the event that the claim is unsuccessful; second, to repay the risk capital only in the event of the claim being lost; and, third to cover the cost of the ATE premium and IPT in the event of the claim being lost. The ATE is taken out by the client (NB, not the funder as has been suggested). Unusually for insurance, the premium is deferred. As I have said above, in the event of the claim being lost, it self-insures; in the event of the claim being won, the client pays the premium and the IPT out of the recovered damages. Third, there is the solicitor (and, sometimes, counsel). Under the terms of the letter of engagement, they will have to operate on conditional fee or a damages based agreement ("DBA"), this being a requirement of the funder so that they have "skin in the game". From what you have said, this case is a DBA. DBAs can allow for up to 50% of the recovered damages to be paid (the extent of the recovery can be on a scale, as you have indicated applies). There is also a priorities

Grey

Thanks for this.

I think we are talking at crossed purposes. All I have done is explain what the typical structure of litigation funding is and how it works.

I am not saying that RKH will recover any particular amount by way of damages. In the event that any damages recovered, they are paid out in accordance with the priorities agreement. I have not seen the same. If you have, great. To be clear, typically, the litigation funder recovers first their risk capital together with their fee for providing capital, then it is the solicitors with their uplift, whatever that is, in accordance with the letter of engagement and then it is the client, RKH.

If that is not the case here, then fine. As I say, I have not seen the agreement.

In terms of the example that you have put forward, I do not know if that sum would be awarded as damages because I was not present in the case, I do not know it was presented and I do not know how it was received. That said, as you have clearly stated, it is a hypothetical.

Clearly, a point was going to get taken on the alleged due diligence failure. If RKH succeeds and recovers damages, also great. It is then open to the Arbitral court to consider contributory fault in relation to their assessment.

What RKH receives at the end, net of everything, may not be the hundreds of millions that are being talked about. That is my point.

As regards your example, as you say, it is hypothetical. That is really all that can be said about it.

To be clear, if RKH recovers hundreds of millions, great!

I hope that clarifies.

F

Mogger/Grey

You are confusing the entitlement to an uplift under the letter of engagement with the return on capital under the litigation funding agreement.

The former governs the entitlement to a success fee for K&S and the latter the return on risk capital for the litigation funder.

I hope this helps.

F

Thanks Mogger

If K&S have managed to negotiate with a third party funder that the funder will receive a variable amount based on the extent of the recovery, that is interesting. Typically, it is a percentage of the maximum available draw down under the litigation funding agreement in the event of a win. This enables the risk modelling of the funder portfolio to be accurately assessed. This is difficult to do if the outcome of a case to the funder is based on a variable such as what the Arbitral court awards over which they have no control.

LSE, you are absolutely right. The documents that are involved to set such an arrangement up are extensive. There will be a tightly drafted letter of engagement with the solicitors which provides the conditional fee in the event of success. If external funding is sought (which would probably be required for counsel in this case), there will be a detailed litigation funding agreement. There will be a priorities agreement which covers the order in which recoveries/damages from the case are allocated - client is last by the way). There will be the ATE policy. A report on the the onerous nature of the arrangement is required for the client so that they can confirm they are fully advised to the funder (it makes arguing duress impossible).

It is very good business. The rates of return in a balanced portfolio of cases are far better than can typically be recovered from standard investments or private equity. If you want a practical example, look at what the share price of Burford has done since being listed.

The point is, as I have said before, this sort of funding allows huge international arbitrations, such as this, to proceed.

You would also be astonished at the volume of documents that are generated in a case such as this (pleadings, lawyer/client correspondence, party/party correspondence, correspondence with the Arbitral court, disclosure (which will contain the purchase due diligence data room in this case), statements, instructions to experts, experts reports and so on). The time taken to prepare such documentation is huge. The time taken to master such documentation is huge: it is done by a team, not one person. It is not a cheap business running an international arbitration against a foreign government. And it is being done on an uplift because K&S are carrying the litigation risk on their balance sheet. Your example is also correct; but you are looking at it the wrong way; it gives the client 20 million more than they would otherwise have for no risk. That is a win/win.

RPoodle, thanks, I agree. The lower recovery you indicate is what I think is nice to have.

Hope that helps.

F

Hi RPoodle

I am not sure that too much importance should be placed on the OM case. The reason for this is first the way in which the litigation is being (a conditional fee agreement which will likely provide for an uplift on success, repayment of the risk capital/litigation funding cost, a fee for the risk capital engaged in the litigation funding, the premium for the after the event insurance ("ATE") and the IPT on that). Such arrangements can account for as much as 1/3 of recovered damages.

As I have previously said, the chance of success in such a case will likely have been reviewed by King & Spalding at better than 50% and if they are doing the case on a full contingency, the likelihood is more than 60%. This will have also been through the underwriter at the ATE insurer who will have relied on the solicitors and probably also on an opinion on merits from Leading Counsel. The merits of the claim will have been well risk assessed as good.

In terms of damagws, if there is found to have been a failure on the part of RKH to have carried out reasonable pre-purchase due diligence, the thinking from I have seen is that damages would be assessed and could be reduced by up to 50% for failing to undertake reasonable due diligence. Then the costs as above (whatever they are) will then be deducted from the recovered damages. To be clear, the costs will not be 1/3 of the recovered damages; they would be 1/3 of the pre-deduction damages.

Accordingly, whilst I would be bullish on chances of success due to the extent of the review that has gone on before, the recovery might be a "nice to have" rather than a game changer. My thoughts only.

Best

F

Given the way in which private equity companies such as Apollo operate, the due diligence they undertake prior to investing and the return on capital employed that they seek, I would be surprised if the Chevron assets is a one off. There is also an Argentine conflict free plan B for Sealion there as well if ECA funding does not materialize reasonably promptly.

Fuddstone

I am new on LSE, but have watched this Board for a number of years. You said "The no win no fee that people go on about is more than likely being underwritten by a very large insurance policy possibly being paid for by RKH jmho."
Actually, the way in which these cases are typically run is that the legal team run (in this case, where Rockhopper have confirmed that they are not funding the case), a conditional fee agreement, which provides for a nil charge in the event of a loss but a substantial increase on normal hourly rates in the event of success and recovery of compensation. Further, depending on the arbitration rules, costs are typically awarded against the losing party. In the event that this were to be RKH, after the event ("ATE") insurance is usually taken out. This pays the legal fees of the other side in the event they win. The premium for the ATE insurance is self-financing and is recovered from compensation in the event of a win and compensation being recovered.

Because the legal team and the insurer have such a significant commitment in terms of the risk they are taking, two things happen. First, the case is risk assessed both by the legal team and the insurer. They will not take the case on under such an arrangement unless they think there is a 60-70% chance of success and recovery.

Second, probably as much as 1/3 of the compensation recovered could be lost in legal fees and insurance premium. It sounds a lot, but it allows cases such as these to run.,

It is also worth noting that a 60-70% chance of success is high. No lawyer will give more than a 75% CoS because of the concept of litigation risk (that is, that the Arbitral court does not like you, the witnesses do not perform and so on).

To get a firm of this nature doing work like this on a conditional fee basis, very likely insured, is highly indicative of a good chance of success and recovery.

Quite what the recovery would be is open to debate - indeed, there is to be an arbitration on it.

Hope that helps.