Commercial arbitration is a key method of resolving business disputes, offering a private, flexible, and efficient alternative to litigation. Commercial arbitration allows parties to settle disputes outside the court system. The process is widely used in sectors such as finance, energy, and international trade.

It is crucial for any party pursuing arbitration to resolve a commercial dispute to have adequate financial resources to cover their case, regardless of the outcome. However, some parties may lack the necessary legal funding and struggle to finance their proceedings. Without an alternative method of litigation funding, a party involved may be responsible for covering all associated costs, including those of their opponent.

Annecto Legal fills the gap when clients require access to professional legal advice on any business-related issue. We help to remove financial uncertainties and the need for balance sheet protection against unforeseen legal expenses. We understand that legal disputes can be disruptive and inconvenient, and that covering the cost of the legal support you need is not always easy.

What is commercial arbitration?

Commercial arbitration is a private dispute resolution process where businesses agree to resolve conflicts outside of traditional court systems. Instead of litigation, parties submit their disputes to an impartial arbitrator or panel of arbitrators, who will hear the arguments and determine a resolution. Arbitrators are required to disclose any potential conflicts of interest that could suggest bias before proceedings begin.

Arbitration can be either mandatory, if specified in a pre-existing contract, or voluntary, if both parties agree to it after a dispute arises. The arbitrator’s decision may be legally binding- meaning the arbitration award cannot typically be appealed and can be enforced by the courts – or non-binding, depending on the terms agreed upon in advance.

Entrusting the matter to an independent specialist makes arbitration particularly appealing for resolving complex or technical commercial disputes. Various forms of arbitration exist, including ICC arbitration and investment treaty arbitration, each tailored to different types of disputes.

Commercial arbitration funding methods

Commercial arbitration funding is a financial arrangement where a third-party funder covers the costs incurred in an arbitration case in exchange for a share of the awarded damages if the case is successful. If the claim is lost then the investor would write-off their funding, at no cost to the client. The main methods of commercial arbitration litigation finance include:

Third party funding – Third party funding (TPF) is a financial arrangement in which an independent funder, with no prior involvement in the dispute, agrees to cover all or part of the legal costs of arbitration in exchange for a fee payable from any awarded damages.

With a third-party funding agreement, claimants can pursue arbitration without financial risk, as the funder covers the expenses in return for a portion of the recovered damages. If the case is unsuccessful, the funder bears all the costs – you pay nothing.

In return for taking the risk, the funder will typically seek in the region of a fifth to a third of any damages recovered. That means you keep up to 80% of the reward, having taken none of the risk. In larger cases, the costs might be such that you actually keep well over 90% of the returns.

Third-party funding can be combined with other financial arrangements, such as After-the-Event (ATE) insurance, conditional fee agreements (CFAs), and damages-based agreements (DBAs), to provide additional flexibility in managing arbitration costs. TPF is also widely used in international commercial arbitration.

After-the-Event insurance – After the event insurance offers financial protection against the costs associated with pursuing or defending legal or arbitration proceedings. It safeguards the insured party from the risk of having to pay the opposing party’s costs if the case is unsuccessful. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.

 ATE insurance can cover the opponent’s legal costs if the claimant loses the case and may also be used to provide security for costs when necessary. Additionally, if freezing injunctions are required, ATE insurance can cover cross-undertakings for damages and the costs of the injunction hearing itself.

ATE insurance can be obtained regardless of how a case is financed – whether the party is self-funded, has secured third-party funding, or is working with solicitors under a damages-based agreement or conditional fee agreement.

How can Annecto Legal assist?

In commercial arbitration, getting the right advice early without spending an excessive amount on legal fees is the best way to save money and protect your position. Annecto Legal helps clients realise the value of their commercial disputes and assists them in getting the access to justice they require. We work closely with our clients to navigate the world of litigation funders, insurers and lawyers.

If you have been involved in a dispute, get in touch with an expert member of our team to find out which commercial arbitration funding arrangement is right for you.