Arbitration costs insurance: A natural fit for mining disputes?

Mining companies face a unique set of risks when it comes to arbitration and litigation, especially when dealing with foreign markets and navigating shifting political landscapes. Mining operations, particularly in resource-rich countries, are often exposed to “resource nationalism,” where governments may take actions that affect the profitability and operational stability of mining ventures. Political instability, shifting regulatory environments, and disputes with host governments can all lead to significant legal and financial risks. In such a context, arbitration becomes a critical tool for resolving disputes. However, it also comes with its own set of challenges — most notably, the high costs and uncertainties associated with financing such claims. But what happens when resolution efforts fail, correspondence goes unanswered, and deadlines pass?

The financing challenge

The financial implications of pursuing arbitration are significant, and the approach to financing will vary depending on the size, liquidity, and risk appetite of the mining company involved. Large, cash-rich companies may be able to comfortably finance arbitration costs, which can range from several million to tens of millions of dollars. However, even large enterprises may encounter challenges when the costs exceed their planned budgets or when the dispute threatens a key asset in their portfolio. On the other hand, smaller companies may face a “bet the farm” scenario, where the outcome of the dispute could determine their financial survival. In such cases, the company may lack the liquidity to self-finance the arbitration and must explore alternative funding options.

Third-party funding: A growing option

For companies unable or unwilling to bear the costs of arbitration on their own, they may look to third-party funding to cash flow their legal budget. In this model, a third-party investor provides the capital needed to pursue the dispute in exchange for a share of any eventual damages award. While this option removes the financial burden from the claimant, it does come at a cost — funders typically expect a significant return on their capital, which can make this option unattractive for some companies.

Arbitration insurance: A middle ground

For companies that are financially capable of financing their own legal budget but nonetheless wish to mitigate their capital risk, arbitration insurance provides an appealing alternative.

Arbitration insurance products can cover the costs associated with arbitration, including legal fees, expert costs, and tribunal expenses. If the arbitration is unsuccessful, the insurer will reimburse the claimant for the costs incurred. This removes the outcome risk — if the claimant loses, they do not bear the financial burden. Crucially, the cost of arbitration insurance is generally significantly lower than third-party funding, making it an attractive option for companies that can self-finance but want to mitigate the risk of an adverse outcome.

Arbitration cost insurance is often structured in a way that the premium is paid in instalments, with the full amount due only if, and when, the claimant successfully recovers damages. While not widely publicized, many litigation funders use this form of insurance to mitigate the risks associated with their investments.

Award preservation insurance is another useful tool, especially for companies that already hold an arbitration award but face the risk of an appeal or annulment. This insurance protects the claimant from the financial impact of an adverse decision in the appeal process, ensuring that the value of the award is preserved.

Hybrid financial structures

Arbitration cost insurance products are not mutually exclusive and can be combined with third-party funding or other financial tools to create a hybrid structure.

Key takeaways

Financial risk mitigation: For mining companies that have the financial resources to self-finance their arbitration or litigation but want to mitigate the risk of a poor outcome, arbitration insurance is a valuable tool. It offers a cost-effective alternative to third-party funding, while also removing the financial risk of an adverse award.

Insurance options for arbitration: Insurance products like own-side cost insurance, award preservation insurance, and adverse costs insurance can all play a role in managing the financial risks associated with arbitration.

Be mindful of a knowledge gap by practitioners: Unfortunately, arbitration insurance products have not always been on the radar of many arbitration lawyers, with advice often being limited to either private funded versus third-party financing options. This awareness gap can lead to missed opportunities, particularly for larger enterprises who might benefit from a more nuanced, tailored approach to managing arbitration costs and risks.

Hybrid financing solutions: A combination of third-party funding and arbitration insurance can provide a balanced approach, giving companies the flexibility to manage both costs and risks in a way that suits their financial situation.

In conclusion, as arbitration becomes an increasingly important tool for resolving mining disputes, companies in the sector should explore the full range of financing options available. Arbitration insurance can present a compelling and cost-effective way to mitigate risk, offering an attractive middle ground between self-financing and third-party funding. While not a one-size-fits-all solution, when used strategically, arbitration insurance can help mining companies navigate the complex financial landscape of international disputes. 

Robert Warner is the director of TheJudge Global, part of the Thomas Miller Group of companies.

---