Financial experts predict the world to suffer its biggest-ever economic contraction after the COVID-19 pandemic. Litigation is on the rise because of contract terminations and tensions in a number of industries. The pandemic has already begun a new wave of legal proceedings. Typically, during an economic crisis, businesses bide their time before initiating arbitration or litigation because of costs (e.g. arbitration fees, legal fees). However, the use of third-party funding (TPF), a system well-established in Australia, might be the solution for this problem. This post explores third-party funding as an efficient mechanism for commencing future disputes in Ecuador.
Third-Party Funding or TPF means that a non-party to a dispute provides all or part of the funding for the legal costs of an arbitration or litigation claim in exchange for an agreed return upon the delivery of a favorable judgement or award. TPF has been used for many years and it is well regulated in countries such as the United States, Australia and the United Kingdom. In Latin America, TPF has gained more notoriety in recent years, particularly, for the funding of small and medium-sized companies. However, it is still a market under development.
In a TPF, the funder sees a dispute as a financial asset, which means that a litigation or arbitration claim can be monetized and generate economic value. Each litigation or arbitration proceeding has a different expected recovery value (ERV), which depends on the observed risks. The ERV is also determined by different aspects such as the merits of the case, economic situation of the counterparty, costs, time, and quantum (damages justification). In general, a party using a founder shall disclose this information, and sometimes even the funding agreement, before the arbitral tribunal and its counterparty in order to avoid potential conflicts of interest.
In Ecuador, TPF has been rarely used in the past. Domestic legislation does not make a specific reference on third party funding, however, there is no legal provision against it. Thus, a party may use a funder to finance an arbitration or litigation claim. In the wake of the COVID-19 pandemic and its impact on different industries across Ecuador, it is likely that there is going to be a serious tightening of available cash for litigation and arbitration. In light of this, TPF may be a good alternative for parties in order to fund the costs of legal proceedings and is reasonable to expect an expanded use of TPF in the country.
Disclaimer: This document is informative and does not, and is not intended to, constitute legal advice.