It has been a year since Singapore took the landmark step of allowing legal finance for arbitration, bringing the country into line with the US, UK, Australia and numerous other leading centres of dispute resolution. Singapore took the prize for being the first Asian country to open up to legal finance. The Lion City is now in a highly competitive position to allow its users of arbitration to enjoy significantly lower legal costs to pursue meritorious cases, as well as improve their balance sheets and legal budgets. Following Singapore’s lead, countries and corporations across Asia are exploring how they too can enjoy the benefits of this innovative financial service.
The legalisation of third-party funding for arbitration has helped to solidify Singapore’s position as a leading seat of arbitration in Asia. This outcome was clearly on the minds of the bill’s drafters, who acknowledged that outside finance is “a feature in major arbitration centers around the world” and that allowing it would help to “consolidate Singapore’s position as a key seat of arbitration in Asia.”
Singapore’s reform has kickstarted interest in Asia around the availability of legal finance. Hong Kong was the first to follow, where financing provisions were already in place for insolvency cases (and certain other limited categories). After an extensive review, the Hong Kong Law Reform Commission recommended that legal finance for arbitration should be permitted and in June 2017, Hong Kong’s Legislative Council passed a law to allow third party funding for arbitration (though it should be noted that the reform is not yet effective). Hong Kong is developing the regulatory framework under the legislation, and we can expect clarity on this issue later this year. The reforms, once implemented, will put Hong Kong in a competitive position as a cost-effective seat of arbitration. This is especially important in Hong Kong’s drive to be the go-to jurisdiction for future arbitrations arising from the China’s “One Belt One Road” initiative.
Following news of the reform in Singapore, there has been an increasing number of large South Korean and Japanese corporations and trading houses enquiring about legal finance, and in particular, portfolio-based facilities that can cover the costs for multiple arbitrations or entire legal budgets. There has been considerable appetite in South Korea and Japan for innovative financial products that can alleviate the cost burden of pursuing arbitrations on already strained legal department budgets.
However, in addition to helping with costs, clients in South Korea and Japan are also discovering that legal finance can improve the company’s share price, as well as turn the legal department from a cost centre to a profit generator. In the US and UK, many corporations use legal finance to shift the cost of pursuing litigation and arbitration from their balance sheets to a legal finance provider. If a company’s share price is calculated on an EBITDA, EV or P/E basis, then cash spend on monthly legal bills will negatively weigh on its share price. By using legal finance, the company’s share price can be improved – this is can be highly beneficial, in particular when the company is publicly listed, but also when a company is considering share price-sensitive M&A transactions.
Legal finance enables Asian corporations to pursue meritorious litigation and arbitration claims without negative impact on their balance sheets, and with the financial risk borne by a legal finance provider. The only time the dispute has an impact on the company’s financial statement is when it records cash income from a success in the dispute. This has the effect that a legal department budget is relieved of dispute spending pressure, and the department can return significant profits to the balance sheet.
Historically, many users first approached legal finance thinking it was for single cases brought by companies in financial distress. Legal finance is no longer considered merely a last resort. These trends demonstrate how sophisticated legal finance, already used in the US, UK and Australia, is being adopted across Asia. Following the reforms in Singapore, Asian corporations are now developing their knowledge of legal finance as a tool to improve their balance sheets and reporting, and this is a trend we expect to see develop in the future.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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James MacKinnon is a Vice President of Burford Capital and a key member of Burford’s underwriting and investing team focused on Asia-Pacific, the UK and Europe.
A qualified solicitor in both England & Wales and Hong Kong, Mr. MacKinnon was a member of Herbert Smith Freehills’ International Arbitration practice in Hong Kong. He is an expert on third party funding law in Hong Kong and Singapore, and was a participant in the Third Party Funding for Arbitration Sub-committee of the Hong Kong Law Reform Commission (LRC) He began his legal career at White & Case LLP in London and Hong Kong, and later worked with DLA Piper in Dubai. Mr. MacKinnon also served as Counsel in the Secretariat of the Hong Kong International Arbitration Centre (HKIAC). Throughout his career, he has advised corporate and individual clients on high-value, complex disputes in the oil and gas, construction, financial and real estate sectors. Mr. MacKinnon received his law degree from Nottingham Law School and graduated from the University of Durham.