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Arbitration awards: A new asset class

Secondary market players show a growing appetite for acquiring rights to the proceeds of international arbitration awards. The sale and purchase of arbitration awards make commercial sense for both the award‑creditor and the buyer. However, these transactions raise novel practical and legal issues to consider, over which arbitration practitioners can advise.

An emerging secondary market in arbitration awards

We are now accustomed to the involvement of secondary market players in international arbitration proceedings and investment arbitrations in particular. Most prominent, of course, are third-party litigation funders, which fund the claimant’s arbitration costs in return for a share in the proceeds of the arbitration, should the claimant succeed.

The secondary market for participation in arbitration proceedings is expanding, however, with various investors - in particular, investment funds - showing a keen interest in investing after the arbitration proceedings are over, and an award has been rendered in favour of the claimants. At that point, some claimants, wishing to avoid potentially protracted enforcement proceedings, will ‘sell’ their award to a third party, typically at a discount on the face value of the award.  In exchange, the ‘buyer’ assumes the risks associated with the award-debtor’s compliance with the award. Funds that do this regularly will be experienced in the enforcement of awards and price their purchase according to the risk and costs they see in that process.

This growing interest is particularly acute in relation to investment treaty awards. Driven in part by the greater transparency around investment treaty proceedings, as compared to commercial arbitrations, investors also see certain sovereign States refusing to comply voluntarily with a number of final and binding awards issued against them.

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Sale and purchase of interests in arbitration awards are win-win transactions

There are a variety of reasons why an award-creditor may want to monetise its award. One should also not underestimate the ‘fatigue’ that a successful claimant may feel, after potentially spending several years and a substantial amount of capital arbitrating a dispute, only to see their counterparty refuse to honour the tribunal’s final award. This is particularly acute in investment arbitration, where the prospect of enforcing against a State’s assets may seem daunting. Accepting a discount on the nominal value of the award can, therefore, be an attractive and commercially sensible way for an award-creditor to achieve a positive outcome, without committing further resources to a long-running dispute.

Funds, on the other hand, are in a good position to take over: once an award has been rendered, they no longer face any uncertainty as to the outcome of the underlying dispute. They often have the necessary financial means to bear the costs associated with lengthy and difficult enforcement proceedings. Some increasingly specialise in asset tracing and enforcement procedures, in addition to strategies. Whether or not a fund decides to go ahead is ultimately a business decision and depends on its risk appetite, as well as its time horizon for obtaining a return on its investment. That decision is partially informed by the legal advice the fund receives, which will analyse, among other things, an award’s susceptibility to annulment and the likely obstacles to enforcement. 

Practical and legal issues for buyers to consider

Buyers will need to take into account several factors in order to decide whether or not the prospective investment will be profitable, and the price they are willing to offer to the award-creditor. Amongst these issues are assessing the prospects of success that the State may have in annulment proceedings, and the steps that may need to be taken to enforce the award. The enforcement considerations will include the location of the State’s assets worldwide, sovereign immunity issues that could arise in the various jurisdictions where enforcement may be sought, any asset-freezing and asset-location procedures that may be available, and the standing of the assignee to seek enforcement before local courts. These considerations will in turn inform the advice on how to structure the acquisition to avoid any potential pitfalls. These are complex issues and are increasingly turning asset tracing and enforcement into a distinct sub-specialism for investment treaty practitioners.

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