Steve Jones of insurance brokerage Arthur J. Gallagher considers the issue of recovery following litigation and arbitration, with a focus on cases against state respondents.
The recently published findings of Burford Capital’s ‘2016 Judgment Enforcement Survey’ threw into stark perspective the twin issues of enforcement and recoverability following successful litigation and arbitration. The results revealed just how important these issues are for claimants and their legal teams, as well as the extent to which they influence the decision to even pursue a claim.
Broadly, the research revealed that the full value of judgements is rarely paid out to claimants. To substantiate that statement, only 14 per cent of the private practice lawyers surveyed were able to report typical recoveries in excess of 90 per cent of award value. In other words, 86 per cent of lawyers regularly experience non-perfect recoveries, with 19 per cent revealing that their clients generally receive less than 50 per cent of the value.
The report then moved onto the costs of enforcement, which again produced some eye-opening statistics. More than one fifth (21 per cent) of those surveyed in relation to the costs of enforcement suggested that the enforcement budget alone is generally more than 50 per cent of the entire cost of obtaining the judgement.
Although Burford’s report stopped short of fully exploring and addressing expected timelines for enforcement, the expended budgets would suggest enforcement can take as long as the underlying proceedings to achieve an award in the first place.
It is little wonder, therefore, that ‘the enforcement question’ can have lawyers running for cover when inevitably asked by claimants alongside the two other core questions for which they will seek satisfaction, namely ‘Are we going to win?’ and ‘How much is it going to cost?’ At least with these questions the lawyer has some element of professional evaluation and control upon which to draw. But evaluating the outcome of enforcement proceedings is notoriously difficult, especially when the respondent is a state.
Following investor-state arbitration, there can be a variety of reasons for the non-recognition of awards, such as public policy, jurisdictional issues or judicial activism, which may be influenced by the social, economic and political situation within the respondent state at the time payment is due. If this wasn’t difficult enough to assess, given that most arbitrations take many years to conclude and the inevitable enforcement proceedings extend the road to recovery even longer, an element of crystal ball-gazing is also demanded by clients. Within that period, the political or economic situation can change dramatically, especially in emerging markets.
For these reasons, actual payment risk is an aspect clients will always consider at the outset of proceedings. Burford’s report suggests that lawyers discuss this with their clients at the outset in 93 per cent of cases and 74 per cent consider enforcement to be the most important factor when choosing whether to pursue a claim. Even the most determined of wronged entities fail to see the triumph in a pyrrhic victory.
In summary, the realisation that the battle is won but the war continues can be a deflating experience for claimants. All they want to do is realise the value of their award, as soon as possible. But they frequently discover that, in practice, this can be frustratingly hard to do.
This challenge has led to successful claimants seeking alternative options when pursuing judgement debtors, including selling off the debt, using litigation funding options to fund asset recovery or settling with the respondent for a much lower amount to achieve a quicker payment. None of these options represent a perfect solution and all will result in the claimant giving away a large part of what is rightfully theirs.
A less costly option more frequently being considered is insurance against payment default. At Gallagher, we have developed Arbitration Proceedings Award Default (APAD) insurance, which answers the enforcement question by providing certainty in place of unpredictability. The policy is taken out before the award is rendered and negates the need for lengthy and expensive enforcement proceedings by indemnifying claimants to the value of an arbitrator’s award, making full payment if the defendant fails to honour their payment obligation. It allows claimants to claim under the policy just 120 days following a default and addresses the primary purchaser motivations of certainty, speed and value — with the claimant retaining 100 per cent of their award.
The main differentiator of insurance against self-funding enforcement, litigation funding options or selling the debt would be price and certainty on timeframe. With premiums ranging from 4 per cent to 8 per cent of the expected award value, and knowing that a claim can be made within a set timeframe of 120 days, it is not difficult to see how insurance can present a real and affordable answer to the core recoverability question that clients inevitably launch at their legal team.
It must be remembered that APAD is an insurance product, which means that the premium is lost if the proceedings are unsuccessful or the award is complied with voluntarily. But this is the nature of insurance and these outcomes are reflected in the price, unlike the high costs of funding or selling the debt, which should arguably represent last–resort options.
Given the risks and costs of enforcement, an increased and informed awareness of all the solutions available is essential for any claimant looking to make the road to recovery as short and trouble-free as possible.
Steve Jones is director of the London-based major risks practice at insurance brokerage and risk management services firm Arthur J. Gallagher.