Mesa Allen & Overy: Acquisition of awards market trends and challenges
After introducing the panellists, Antonio Vazquez-Guillen, the moderator, briefly presented the session’s topic – how arbitration awards have become a new asset for those seeking new revenue streams. As this industry has grown enormously during the last six years, the purpose of the session was to address the market trends and its key challenges.
Peter Griffin, founder and director of Slaney Advisor, opened the debate explaining, in his view, the factors that have generated remarkable growth of this industry in the last few years, which he attributed to two factors that coincided.
On the one hand, the recovery of the banks after the crisis of 2008 looking for other types of investments, and on the other hand, the narrowness of the yields available in the traditional financial markets, “These funds began to understand that you could make a far wider/greater profit investing in arbitration”. Peter also pointed out that sellers of arbitration awards often believe that it is sensible to let someone else take the award for collection.
Yas Banifatemi, Partner at Shearman & Sterling, explained that this trend identified by Peter equally applies to investment and commercial arbitration awards. Nonetheless, she clarified that unlike investment treaty awards, the enforcement of commercial awards is quite high according to recent ICC figures. When looking at investment arbitration enforcement, the situation is quite different and even more so because institutions do not hold records. Once the investor has prevailed, there is a high level of uncertainty.
Trends show that states are not always satisfying awards directly, which means parties must often go through annulment proceedings to collect their compensation. Statistics show host states tend to challenge awards although not always successfully, particularly those that are frequently sued.
“There is a huge difference between a setting-aside application in investment treaty awards and commercial arbitration awards and equally in terms of enforcement and that’s where the market opportunity lies” she clarified.
Jeff Sullivan added to Yas’ point “Indeed, there is a big difference. Also, there are sovereign immunity issues which you do not have with commercial awards, which is one of the reasons why it is more difficult to enforce. There is a bigger market within this industry”.
In terms of the geographics, the market trends show that award monetisation is all over the globe and award holders often make the commercial decision of selling their awards because of the uncertainty and risk that represent taking on enforcement themselves. Jeff Sullivan explained that when winning parties think of selling their awards, two key drivers lead them to do so:
1. The possibility of immediate payment, which although less than the award value, guarantees prompt collection while passing the risk of potential appeals and lengthy enforcement proceedings on to someone else, usually experts in an enforcement proceeding against the state.
2. Another reason is litigation fatigue from the main arbitration proceedings that usually last years.
Led by the moderator’s questions, the panellists touched upon some other points.
Peter Griffin touched upon the profile of funds and what they look for to identify the right markets and investment deals.
“The funds that we deal with are regulated financial institutions. The profile of the funds varies depending on the particular characteristics of the arbitration award but broadly speaking the population of investors would be investment funds, special situation funds, and, in some cases emerging markets funds. They usually have a vast range of investments. I’m not aware of a fund that narrowly focuses on arbitration awards against sovereigns”.
Peter pointed out that financial institutions’ involvement in other litigation stages is expanding and will grow in the future.
Jeff briefly explained how the transaction of selling an award is structured and its underlying rights and obligations. These transactions can be structured as a pure assignment of the award, a transfer of assets, where the buyer takes all the rights under the award. Or, the sale of the company itself if the entity that owns the award is a special purpose vehicle. The latter approach is usually pursued to prevent any issues linked to champerty as there are jurisdictions that prohibit the sales of awards. A third option is a form of litigation fund, more as a funding arrangement where the buyer funds the proceedings and has collection rights.
The panellists also addressed the key factors in terms of the transaction’s value and the impact of the potential impact/challenges of the champerty doctrine.
Peter explained that potential buyers would first and foremost look at the award, the award debtors, and the bonds’ price. It is essential to understand that a buyer will always pay less for an arbitral award than a bond because it is illiquid and expensive to trade. The next aspect to look at is the interest rate to identify any critical positive or negative point in coming up with the price that will be paid for the award. “We all have seen where no interest has been awarded; it is a negative declining value from day one” explained Peter. You will then look at the damages granted as there are awards that are simply too high to be able to be traded. In this regard, Antonio asked whether there are investors who would syndicate and buy together such an award. Peter clarified that such arrangements are not common but have been seen and it could be a trend in the future because the underlying strategy in such a situation is about spreading the risk by buying more awards.
Focusing on the champerty doctrine and the potential risk for the buyer, Peter explained that risk will be based on the jurisdiction and whether it prohibits such agreement or not. If the relevant jurisdiction prohibits such arrangements, then a potential buyer must be mindful of the issue. However, if the jurisdiction allows it, then it is important to be aware of any fraudulent conduct that can suggest improprieties, corruption, fraud or disproportionate control by the buyer bearing in mind the legal matrix of the transaction, (see for instance FG hemisphere v Congo). There is a difference between selling and assigning rights. Ultimately, we should differentiate between the lack of requirement as a legal matter and the appetite of arbitrators to be told and have disclosure as a matter of transparency.
To finalise, the moderator, Antonio, asked the panellist to predict the future of this industry and whether Covid-19 would be the end decline for the industry or an opportunity for new possibilities.
Peter concluded that he sees a bright future for the industry especially as financial institutions get more involved in this industry, “we will see the day coming when because of these financial institutions getting involved there will be pressure put on sovereigns to disclose their arbitration indebtedness along with the rest of the sovereign debt [..] This will lead to better behaviour”.
Yas added to Peter’s conclusions and explained that current trends in terms of EU law development look promising. For instance, having an institution that can support investors enforcing awards will increase access to justice, especially when individual investors are powerless when finding difficulties through the enforcement process. “It is not enough to have a title if the title is not satisfied” she concluded.
Jeff also insisted on the positive effects in terms of access to justice and satisfaction of awards as this industry promotes compliance with awards, which in turn strengthens the rule of law.