The feasibility of a third-party funding market for arbitration claims in Puerto Rico
| Autor | Félix M. González Nieves |
| Páginas | 70-87 |
THE FEASIBILITY OF A THIRD-PARTY FUNDING MARKET FOR
ARBITRATION CLAIMS IN PUERTO RICO
FÉLIX M. GONZÁLEZ NIEVES
I. Introduction ........................................................................................................................ 70
II. Legality of TPF in Common Law Jurisdictions ........................................................ 72
III. Legality of TPF in Puerto Rico ...................................................................................... 73
IV. Factors Affecting the Prevalence of a TPF Market: A Valuation Approach .... 76
A. Analyzing TPF of Arbitration Claims through a Real Options Approach ... 77
B. Understanding TPF through Venture Capital Funds ......................................... 80
V. Legal Environments and Third Party Funding ......................................................... 82
A. Market Determinants Model ..................................................................................... 82
B. International Arbitration Perspective ..................................................................... 83
C. Federal Arbitration Perspective ................................................................................ 85
VI. Conclusion .......................................................................................................................... 87
I. INTRODUCTION
Arbitration has become an increasingly desired mechanism for dispute
resolution for its “quicker, less expensive, and more private alternative to
litigation.”
1
Therefore, businesses turn to binding arbitration to lower costs and
time of claims. However, it seems to be that even arbitration cannot offset the
risks associated with the costs of pursuing or defending from claims. Hence,
recurring to market investors to bring solvency to the legal claim industry could
prove a viable solution to reduce the cost and accessibility to dispute resolution.
Third-Party Funding (hereinafter “TPF”) is a type of financing for legal claims
that has taken a rise in recent years. TPF occurs when an unrelated party to a
legal claim provides financial support to a party related to the case. In exchange
the TPF receives a portion of the proceedings of the claim if successful.
2
If the
claim is unsuccessful and no favourable outcome is rendered, then the TPF
receives nothing.
3
The party to the claim being funded is transferring all or part of
the financial risk of pursuing the claim to the TPF. TPF may rise in litigation and
arbitration claims, however, this paper is focused in arbitration claims only.
This article contemplates how the interaction of TPF and arbitration
could form a powerful mix in providing effective l egal claim resolution to parties,
1
Murray S. Levin, The Role of Substantive Law in Business Arbitration and The Im portance of Volition, 35 AM.
BUS. L.J. 105, 106 (1997).
2
See Je nnifer A. Trusz, Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in
International Commercial Arbitration, 101 GEO. L .J. 1649, 1653-54 (2013).
3
Id.
No. 1
The Feasibility of a Third-Party Funding Market
for Arbitration Claims in Puerto Rico
71
specifically businesses. It has been noted that “the use of third-party funding in
major arbitration cases is a development that is here to stay
4
,” and Puerto Rico
should, if possible, capitalize in this growing international trend. It is expected
that TPF will continue with the tremendous growth it has shown in the past
decade and will likely play a large role in transnational legal claims.
5
Puerto Rico
may offer an untapped market for established TPF companies looking to expand
internationally.
6
Cassandra Robertson argues that “[o]utside funding can also
affect forum choice, potentially offsetting the traditional magnet effect in the U.S.
and making it easier to maintain suit in other countries.”
7
By developing a TPF
market, Puerto Rico can become a magnet forum for transnational cases. The
parties in international disputes may choose a country as a dispute resolution
forum, based upon whether arbitration financing is available. The end result may
translate into greater business development and foreign investments, as Puerto
Rico becomes a dispute resolution headquarter.
TPF is a great opportunity to examine arbitration from a multidisciplinary
perspective. This paper undertakes the examination of the current arbitration
framework as a variable in the risk assessment functions of financial-economy
theories. TPFs’ investments depend on an evaluation of financial risk, which
requires the use of financial models and economic theories to grasp its extent. An
important variable of such a model is legal risk. Therefore, this paper will not
follow traditional legal analysis, because arbitration claims will be evaluated as
assets, and arbitration’s legal environment as a variable of the risk assessment of
TPF’s investment analysis.
The purpose is to provide a framework to evaluate the feasibility of a TPF
market in Puerto Rico. To achieve such a framework, it is necessary to determine
the factors that affect the valuations performed by TPF on arbitration claims.
TPFs are looking for a fair return on their risky investment. It is my contention
that if arbitration law and jurisprudence is too hostile for parties using
arbitration to solve disputes, the value of arbitration claims in Puerto Rico will be
reduced, and a TPF market will not surge. By identifying the factors that affect
the valuation of an arbitration claim, a hospitable legal environment can be
created for a TPF market to grow. In determining such factors, I use a real options
valuation approach to determine how current arbitration doctrines would
increase or decrease the valuation that TPF performs. However, before entering
to discuss the profitability and surge of a TPF market in Puerto Rico, it is
necessary to examine whether such type of legal claim financing is legal in our
jurisdiction.
4
Id.
5
Cassandra Burke Robertson, The Impact of Third-Party Financing on Transnational Litigation, 44 CASE
W. RES. J. INT’L L. 159, 168 (2011).
6
Id. (The author argues that “countries such as Spain, Brazil, Mexico, Argentina, Bulgaria, Latvia,
and Estonia may offer an untapped market for established companies looking to expand out of
Australia, the U.K., or the U.S.”).
7
Id. at 163.
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