By George Benaur and Ben A. Rozenshteyn
Individuals, private and public companies, law firms and countries engage in litigation or arbitration of disputes and seek redress at the conclusion of the conflict by trying to collect on judgments. But what if the opponent hides assets or simply fails to pay? Judgment enforcement represents one of the most expensive and challenging problems in the legal industry. Creditors retain counsel to navigate the factual and legal hurdles that stand in the way of them recovering money once a judgment or award in their favor has been made. There are clearly lawyers that know how to obtain judgments, but not necessarily how to enforce them.
At their core, asset recovery efforts essentially boil down to monetization of legal paper. More often than not, the task is not so cut and dry. As the creditor, one has to play by the rules when the other party is blatantly cheating, shifting assets and dodging service. That is why there is such a tremendous demand for expert capability in asset tracing and judgment enforcement. Nevertheless, initial costs and lack of transparency remain two of the primary concerns facing the international recovery landscape.
According to FINRA (Financial Industry Regulatory Authority) Arbitration Statistics, about 34% of the awards issued in 2017 have been unpaid.[i] Asset tracing and recovery litigation is often a very expensive endeavor because:
- The owed or misappropriated assets have often been transferred through several jurisdictions, many of them offshore financial centers or company accounts, before resting at their current physical location;
- There may be a need for work to be carried out by specialist forensic accountants, licensed investigators and lawyers in a number of jurisdictions;
- The debtors are often able to use the misappropriated funds to hire experienced defense legal teams. Debtors may find creative ways of mounting defenses to prolong cases and make them very expensive;
- The litigation may need to be conducted in a number of jurisdictions simultaneously, and appropriate use will need to be made of interim reliefs such as freezing and tracing orders and their equivalents; and
- Courts may require the posting of substantial security to support undertakings for damages or costs, particularly in the case of creditors from overseas, to permit interim relief such as freezing injunctions to stay in place pending finalization of the litigation.
The cost of mounting a legal action for the recovery of assets may be divided into legal costs, court fees and the costs of evidence gathering by forensic accountants and investigators. In smaller cases, firms may agree with their client not to be paid until the outcome of the case is known (known as working on “success fees” or “on contingency”), but few firms or lawyers are likely to be able to take on larger cases, on a one-off basis, without being paid by their clients on an ongoing basis, given the investment of human and financial capital required.[ii]
Litigation finance offers a means to address this conundrum. The same need exists to undergo a scrupulous legal and forensic investigation, but the cost and risk is shifted from the creditor and instead taken on by the third-party funder. In exchange, there’s a promise that the judgment creditor receives a portion of the recovery. Otherwise, creditors typically agree on fee-based advisory services, contingent services (paid when cash proceeds are realized), or a buy-out of an unsatisfied judgment or award.
Judgment enforcement and asset tracing arrangements are enforceable contracts, if written properly. This is confirmed, for example, by the recent High Court of Justice of England and Wales decision in Islamic Republic of Pakistan et al. and Broadsheet LLC,  EWHC 1832. The Court upheld a roughly $21.6 million arbitral award issued to an Isle of Man company that Pakistan hired to track down assets stolen by government officials.
The underlying dispute arose from Isle of Man-incorporated Broadsheet’s asset recovery agreement with Pakistan and its National Accountability Bureau, which handles white collar crime and corruption. According to court documents, under the June 2000 deal, Broadsheet was tasked with recovering assets that corrupt government officials stole from Pakistan, and in exchange, the company was entitled to 20% of what it recovered.
But in October 2003, the National Accountability Bureau told the company that it was ending the deal based on serious contract breaches, as indicated by court filings, the resulting losses forced Broadsheet into liquidation in March 2005.
Broadsheet was ultimately reinstated and launched arbitration proceedings in Dublin in 2009. The company accused the government of breaching a contractual requirement to assist Broadsheet and of entering into improper settlements, depriving the business of its share in the asset recoveries.
In the end, the arbitrator sided with the company in December 2018, ordering Pakistan and the bureau to pay out roughly $21.6 million plus interest for violating the Broadsheet agreement. Most of the damages were based on Broadsheet’s claim that it lost its chance at compensation for recoveries, according to the High Court’s decision.
The next month, Pakistan and its accountability bureau challenged the award in the High Court. They claimed that the arbitrator failed to provide sufficient reasoning for his valuation of the claim. The Judge, rejected the challenge, noting that a court’s review of an arbitration award is limited under the Arbitration Act and that “the award contains reasons for its conclusion on the issues and the parties have agreed that the tribunal should determine matters of fact.”[iii]
In a somewhat similar twist, the Supreme Court, Appellate Division of New York reversed the New York Supreme Court’s dismissal of a breach of contract cause of action in Anderson & Anderson, LLP-Guangzhou v. North American Foreign Trade Corp. (106 A.D.3d 503, 2013).
Plaintiffs, law firms, sued to recover contingency fees allegedly due under written retainer agreements dating back to 2005 and 2009. Plaintiffs were retained under both agreements to enforce an arbitration award in the courts of the People’s Republic of China. The retainer agreements provided for the payment of plaintiffs’ fees out of the judgment creditor’s assets that were to be obtained and reduced to cash. Defendants sought a motion to dismiss based on the fact that plaintiff was in effect “dismissed” as a result of defendant’s 2010 transaction by which defendant, through additional counsel, sold its rights under the arbitration award and released its lien on the judgment creditor’s assets in exchange for cash. In granting the motion, the court of first instance adopted defendant’s argument that the retainer agreement lost its purpose and plaintiffs’ services were no longer needed once the sale was effected.
In reversing the decision, the Appellate Court stated that no particular formality is required for a discharge of an attorney. The discharge is effected by “[a]ny act of the client indicating an unmistakable purpose to sever relations …” (citing Costello v. Bruskin, 395 N.Y.S.2d 116 [2nd Dept. 1977]). Here, the defendant sold its rights under the arbitration award through additional – but not substituted – counsel. The motion to dismiss should therefore not have been granted because the amended complaint and the documents attached to it set forth no facts from which an unmistakable purpose to sever the attorney-client relationship could be discerned.
Governments and courts are becoming more open to the use of private asset recovery services. Creditors retaining asset recovery specialists and law firms are advised to carefully structure and abide by the contractual terms of their respective agreements. As evidenced by the cases cited above, this includes not engaging in under the table settlement negotiations or “side deals”, or selling the causes of action through additional counsel or otherwise. As this large growing business is expanding it is important to conduct proper due diligence and risk management before engagement in such projects, and to document the fee agreement through enforceable, well-written contracts that can later be enforceable in a court of law.