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The Singapore Law Gazette

Ringfencing Financial Uncertainty in a Dispute and in an M&A Transaction

Litigation is never certain, they can escalate, drain financial reserves, and impact profitability. The uncertainty in duration, costs and sums involved make it challenging for businesses to plan and allocate resources efficiently. In mergers & acquisitions (M&A), known legal issues such as litigation or contingent liabilities cause an impasse in negotiations – buyers walk away, investors lose confidence and the transaction does not proceed as neither party wants to bear these known risks. Litigation and contingent risk insurance solutions need to step in to facilitate a compromise and push the M&A deal forward. Outside of an M&A, corporates have this opportunity to ringfence these legal risks by providing coverage for such uncertainties, freeing up working capital.

A potential or ongoing litigation poses significant financial downside risks to businesses, and these can range from legal expenses, potential damages ordered by a court or tribunal, or reversals of favourable judgments. In some situations, settlement offers may not meet client’s expectations, resulting in parties litigating over a prolonged period with no certainty about its outcome.

Legal costs can quickly escalate, draining financial reserves and impact profitability. The uncertainty of the duration, costs and claim sum involved in a dispute can make it challenging for businesses to plan and allocate resources efficiently.

In a business-as-usual context, corporates need to make provisions to cover potential financial impact such as anticipated losses and future legal costs and expenses.

In mergers & acquisitions (M&A) legal risks are typically identified as red flags in the due diligence process. These risks range from regulatory, licensing, permitting, contractual or title issues to name a few. Often, neither party is willing to bear the risk and this prevents a transaction from proceeding. Otherwise, buyers may negotiate for a specific indemnity clause to cover any financial downside risks, demand an escrow or suppress the purchase price. A seller who prefers a clean exit after a sale may not find these requests palatable.

However, lawyers can never guarantee clients the outcome of a dispute and neither can they guarantee that a known legal issue would not eventually materialise. Globally, there has been a growing interest from both disputes and M&A lawyers in considering litigation and contingent risk solutions as a tool to manage the risk exposure of unfavourable outcomes. This provides some level of certainty to clients such that, even in the event of an adverse outcome in a dispute, their financial exposure would be limited to a pre-defined extent.

Within an M&A, litigation and contingent risk solutions has helped to break the impasse in negotiations. Outside of an M&A, litigation insurance solutions help to free up working capital and provide balance sheet protection while increasing access to justice. In this article, we explore the five main types of solutions that lawyers and their clients can consider.

1. After-the-Event (ATE) Insurance

In jurisdictions such as Singapore, Hong Kong, and Australia where the costs are shifted based on a “losers pay” principle, parties face the possibility of not just having to bear their own legal fees and expenses but also the costs of the opposing parties if they are unsuccessful in litigation or arbitration.

ATE insurance helps protect a party against the risk of having to pay the other side’s legal costs, the party’s own disbursements, and part of their own legal costs. When the insured party loses, ATE insurance pays out the party’s own disbursements (including expert fees, court fees / arbitration costs), the adverse costs ordered by the Court or tribunal up to the policy limit, and part of their own solicitor’s costs.

In the case of a claimant, ATE has also been used alongside third-party litigation funding to achieve a risk-free position where the insured and funded claimant does not have to pay its legal costs upfront while being insured against adverse costs orders.

If the claimant is domiciled overseas and more susceptible to security for cost applications in court, instead of providing a bank guarantee or sums in escrow, ATE insurers could provide cover by way of a deed of indemnity or an anti-avoidance endorsement. The insured claimant therefore does not need to provide collateral, freeing up cashflow.

Where a claimant makes an application for an injunction, it may be necessary for the claimant to provide a cross-undertaking in damages suffered by the respondent or third parties should the injunction be wrongly granted. ATE can provide cover and serve as security instead of the claimant having to purchase a bond or post funds into court, releasing cash flow for the client.

2. Judgment Preservation Insurance (JPI)

When a claimant (or counter-claimant) secures a favourable court judgment or arbitral award, this is typically not the end of the road for disputing parties. There is always a risk that the losing party may appeal against the favourable judgment or attempt to set aside the arbitral award. This process may prolong the time taken for the recovery by the successful party of the damages awarded.

JPI protects the successful party against the risk of the judgment or award from being overturned or quantum awarded being reduced on appeal or setting aside respectively. JPI provides certainty of outcome for most or part of the judgment won. To illustrate, if the claimant was awarded S$100M at trial, the JPI may insure S$90M of the damages awarded, with S$10M as the retention sum borne by the insured claimant to ensure that they continue to have “skin in the game”. If the judgment is overturned on appeal, the insured claimant would claim S$90m from the insurer. If the damages are reduced to S$50M on appeal, the insured claimant claims S$50M from the respondent and the remaining S$40M from the insurer.

Unlike ATE insurance, JPI does not cover legal fees and expenses. It also does not insure against enforcement risk – that is, the risk that the claimant is unable to collect on its judgment or award against the defendant’s assets.

The insured claimant continues to have the right to control the appeal and make strategic decisions in connection with the appeal, provided that such control and decision making are in good faith as if it was uninsured.

3. Adverse Judgement Insurance (AJI)

A defendant can find itself in a litigation or arbitration, facing the risk of a significant loss that could erode their shareholder value or force the company to provision for large sums in its reserves. In situations where the company is facing an ongoing or potential suit that could result in significant amounts of damages awarded against it, adverse judgment insurance provides defence-side coverage guarding against an adverse damages award, giving certainty by ringfencing the total adverse exposure.

For example, if a defendant is being sued for S$100M in damages, it could be covered by the insurer for S$90M with a S$10M retention, which acts as the deductible in the policy. Similar to JPI, AJI also has a retention sum to ensure the insured defendant has “skin in the game”. In the event the defendant loses and is ordered by the Court or tribunal to pay S$100M in damages, the insurer pays out S$90M while the company bears the S$10m retention. In such circumstances, the company will only need to provision for the S$10M retention instead of the original S$100M in its books.

AJI is sometimes used by defendants as a strategic tool in settlement negotiations and a deterrent against frivolous lawsuits. In applying the same example above, the claimant may make an offer with an unreasonable amount for the defendant to pay to settle the suit, say S$60M. The defendant may use the AJI as a leverage to show strength in negotiations that it currently only has to provide for S$10M in losses given the AJI, so any offer above the S$10M plus anticipated legal fees and expenses would be a non-starter.

Similar to JPI, the insurer does not take control of the litigation. The insured defendant is required to share with the insurer all information and updates including any substantive orders, decisions and judgments on a regular basis.

4. Arbitral Award Default Insurance (AADI)

Unlike AJI and JPI which do not cover enforcement risks, AADI covers losses arising from the non-payment of an arbitral award against a host state in bilateral or multilateral investment treaties. This helps the insured claimant mitigate the risk of enforcing an award in international disputes, especially where there may be challenges arising from the differences in legal systems and enforcement mechanisms.

This insurance is suitable where respondent states are International Centre for Settlement of Investment Disputes (ICSID) or New York Convention signatories. A claim is paid under the policy once the claimant obtains an award for damages in its favour, and when the host government has failed to honour the award after the waiting period of 120 days from the date of issuance of a legally enforceable award.

Once the insurer has made payment for such claims, the insurer has the right to pursue recovery against the defaulting sovereign counterparty including all legal or enforcement costs, as well as rights of settlement.

5. Contingent Risk Insurance

When there are known legal risks but litigation has not yet arisen, corporate counsels are sometimes confronted with the need to manage these risks on an ongoing basis. Some of these include legal risks which are capable of legal analysis and evaluation. Such risks are usually low in probability but high in severity.

Bespoke contingent insurance can be considered as a tool for business decision-making. It can also be used to break an impasse in an M&A deal negotiation, especially in situations where the buyer refuses to undertake certain known risks faced by the target company. When this happens, the buyer could choose to walk away, suppress the purchase price, insist on a specific indemnity to be borne by the seller or require an escrow to be put in place.

Some instances include a risk arising from the uncertain interpretation of clauses in a contract, an adverse interpretation of a law, risks arising from changes in law or regulations, or risk of defective goods and clean title to shares due to past irregularities. In distressed situations, contingent risk insurance may also cover the risk that transactions undertaken prior to a sale be considered as “transaction at an undervalue” and set aside as void.

Litigation and Contingent Risk Insurance – An Essential Tool

Unlike most conventional insurance policies which guard against common perils that have not arisen, litigation and contingent risk insurance aids M&A transactions. Increasingly, sellers are looking to these solutions to close off these known risks before a sale or an auction process. In a non-M&A setting, these solutions provide coverage for identified legal risks to manage a corporate’s overall risk exposure.

The policy terms in each litigation and contingent risk insurance are unique and the underwriting process is heavily dependent on the legal issues and factual matrix in each case. Insurers would consider the prospects of success in the litigation and the likely or realistic damages awarded. The insurer reviews the legal analysis, favourable case law and supporting evidence, as well as any reasonable prospects at settlement and the appeal process in the particular jurisdiction.

Litigation and contingent risk insurance is not for every dispute or known legal issue but when used strategically, it becomes a safety net for companies and a useful tool in managing their working capital to focus on business growth.


The information contained in this article is solely for information purposes only. Although we endeavour to provide accurate and timely information and use sources we consider reliable, we do not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of any content of this document and can accept no liability for any loss incurred in any way by any person who may rely on it. No individual or entity should make decisions or act based solely on the information contained herein without appropriate professional advice and targeted research.

Head of Transaction Solutions
Aon Asia
E-mail: [email protected]

Xianwei is the head of Transaction Solutions for Aon in Asia and is responsible for designing and developing tailor-made solutions for private equity and corporate clients across the region. He assists clients in securing favourable terms and policies and manages and maintains relationships with the insurers to ensure that clients have access to the best providers. Xianwei has practiced in Singapore and China as an M&A lawyer specialising in regional and international cross-border M&A for both multinational MNC and private equity firms.

Associate Director (Litigation and Contingent Risks)
Aon Asia
E-mail: [email protected]

Cathryn has broad commercial disputes practice with experience in international arbitration, litigation, insolvency and restructuring, and mediation. Prior to joining Aon, she practiced at a leading international law firm and a boutique disputes firm in Singapore. She also assisted arbitral tribunals as tribunal secretary for leading arbitrator, Dr Michael Hwang SC. An accredited mediator with the Singapore Mediation Centre, she is also a Fellow of the Chartered Institute of Arbitrators (FCIArb) and the Singapore Institute of Arbitrators (SIArb). She was recently shortlisted as a finalist in Euromoney’s APAC Women in Business Law 2022 and 2023 awards under the category of Rising Star (Arbitration). She is qualified in Singapore, England & Wales, and Australia.