Increasingly mandatory disclosure of third-party funding in arbitration

November 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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There is an ever-increasing focus on third-party funding (TPF), especially in the context of international commercial arbitration and investment treaty arbitration. Still arguably in its infancy, at least with respect to international arbitration, reports suggest that global TPF already accounts for $10bn of committed funding. The increased involvement of TPF in international arbitration is unsurprising. Arbitration is often the preferred method for international dispute resolution, but the average cost of a single arbitration proceeding has sharply increased over time. TPF provides an opportunity for a party to pass the substantial costs of the arbitral process to an unconnected third-party with whom proceeds are shared if the claim is successful. Where the claim is unsuccessful, the money does not have to be repaid.

There are concerns about TPF and the extent to which it can negatively affect the running of an arbitration, the perceptions of fairness among the parties and the individual reputations of the arbitrators involved. This is particularly relevant as some TPF providers now employ prominent arbitrators to serve on their board of advisers and assess the merits of claims. Meanwhile, many defendants fear that a claimant that has sought funding for its claim will be unable to meet the costs of any adverse costs award. As a result, there are growing discussions around the adoption of rules requiring the disclosure of TPF and the appropriate scope of that disclosure. For example, is it sufficient merely to disclose the existence of the TPF and the name of the funder, or must the terms be disclosed too?

Mandatory disclosure of the identity of the funder creates greater transparency and reduces the risk of conflicts of interest from the outset, especially between members of the tribunal and the third-party funder. Failure to disclose the existence of TPF and the identity of the funder increases the risk that a court may set aside an award or deny its enforcement, citing the existence of such an undisclosed conflict. Setting aside an award could render the award worthless and thus, the arbitration and the investment would have been for nothing.

Meanwhile, defendants often seek disclosure of the terms of the TPF (and, in particular, whether the funder has provided adverse costs cover), asserting that such funding is a sign that the claimant is impecunious and so should be made to provide security for costs to cover any adverse costs award. In commercial arbitration, tribunals will typically only order security for costs after considering a range of factors, including whether the claimant would be able to meet any adverse costs award. However, the mere fact that a claimant has used TPF is not proof that it is impecunious. Rather, TPF is increasingly used by parties for diverse reasons, to manage risk or facilitate cash flow for example, and not necessarily because of a lack of funds. In such instances, an application for security for costs, and the associated costs and delays that such an application brings, would seem abusive.

The arbitral community is responding to these increasing discussions in differing ways. Due to rules of privacy and confidentiality, it is difficult to ascertain how these issues are being addressed in international commercial arbitrations. However, there are a number of indications.

In February 2016, the International Chamber of Commerce (ICC) issued its Guidance Note for the disclosure of conflicts by arbitrators which requires arbitrators to disclose, as part of the normal ICC disclosure process, “relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award”. This language tracks wording already included in the International Bar Association (IBA) Guidelines on Conflicts of Interest. The ICC has yet to fold this requirement into its rules, despite having updated them in 2017, after issuing its Guidance Note.

In March 2017, the Singapore International Arbitration Centre (SIAC) issued a practice note clarifying that tribunals were empowered to enquire into the existence of TPF, including by requiring the disclosure of the funder’s interest in the proceedings and whether it has committed to undertake adverse costs liability. Meanwhile, Singapore lawyers are now required to disclose to the tribunal the existence of TPF and the identity of the funder.

In June 2017, Hong Kong passed legislation requiring the funded party to disclose to the tribunal the existence of TPF and the identity of the funder.

The recent International Congress and Convention Association (ICCA)-Queen Mary report on TPF recommended that the party or counsel should, on their own initiative, disclose the existence of a TPF arrangement and the identity of the funder to the arbitrators and the arbitral institution.

On the investment treaty side, several recent multilateral and bilateral investment treaties have started to address the mandatory disclosure of TPF. The EU sent its finalised investment chapter of the Transatlantic Trade and Investment Partnership to the US, stating that any disputing party benefiting from TPF must notify the other disputing party and the tribunal. The EU-Vietnam Free Trade Agreement was quick to follow suit, containing a specific provision requiring that the existence of TPF be disclosed by the party benefiting from TPF, but this does not appear to cover the terms of the funding agreement. In February 2016, the revised version of the EU-Canada Comprehensive Economic and Trade Agreement was released with a provision requiring the disclosure of TPF. The EU is currently negotiating free trade agreements with Japan, India and China, so it seems likely that these agreements will include similar provisions.

Change is slow to come about. Investment treaties are renegotiated or replaced very rarely. As such, arbitral institutions have started to amend their rules, especially in the context of investment treaty arbitration, to reflect the modern day realities of arbitral practice. However, the institutions appear more hesitant than some of the draft investment treaties, in large part because the rules of the institution need to be attractive to parties in order for the institution to survive. Investment treaties do not have that problem. In February 2016, SIAC released new arbitration rules specifically tailored for investment arbitration, and which contain express powers for tribunals to order the disclosure of TPF, including, where relevant, the third-party funder’s interest in the outcome of the proceedings, and to take this into consideration when deciding cost matters. These rules stop short of ordering mandatory disclosure.

The International Centre for Settlement of Investment Disputes (ICSID) recently released its proposed updated rules for consideration and observation by states and the public. In relation to TPF, the proposed amendments include a mandatory and continuing obligation on the part of the funded party to disclose. A party would be obliged to disclose the existence of TPF and the source of the funding. There would be no obligation to disclose the contents of the funding agreement, although opposing parties are likely to argue that such information is relevant. Furthermore, ICSID proposes that the name of the funder be provided to the arbitrators prior to appointment to avoid potential conflicts of interest, combined with a declaration from the arbitrators that there is no conflict of interest with the named funder.

There are indications, though, that mandatory disclosure is increasing, whether as a result of the underlying treaty or by order of the tribunal. For example, disclosure was ordered by the tribunals in Sehil v. Turkmenistan, SAS v. Bolivia and Guaracachi v. Bolivia, all stating the desire to avoid a conflict of interest scenario. Tribunals are concerned to address any potential conflicts of interest sooner rather than later, in order to safeguard the integrity of the arbitration and to close off any potential accusations of conflict of interest which may sully or render the whole arbitration invalid.

In investment arbitrations, some funded parties have made voluntary disclosures. In Oxus Gold v. Uzbekistan, the claimant issued a press release stating that it had “entered into a litigation funding agreement” and that under the terms of this agreement, “the Funder has agreed to pay [its] legal costs in relation to the international arbitration proceedings…on a non-recourse basis”. However, the traditional view of investment arbitration tribunals is that the mere presence of a third-party funder has no effect on the arbitration proceedings. Some funded parties have even initiated voluntary disclosure. As a result, such voluntary disclosure of TPF is not common, with most parties opting not to disclose.

The issue is still being hotly debated within the arbitration community, but the direction of travel appears to be in favour of increased disclosure, at least of the existence of TPF and the identity of the funder. This comes with a risk. If disclosure is increasingly ordered, especially if that disclosure goes beyond disclosure only to the tribunal, funded parties should be prepared for an increasing number of speculative applications for security for costs, based on a simple and unfounded equation of funding with impecuniosity. Already, the future battleground, over how to restrain such applications, is being prepared.

Nathalie Allen Prince is counsel and David Hunt is an associate at Boies Schiller Flexner (UK) LLP. Ms Allen Prince can be contacted on +44 (0)203 908 0726 or by email: nallenprince@bsfllp.com. Mr Hunt can be contacted on +44 (0)203 908 0733 or by email: dhunt@bsfllp.com.

Nathalie Allen Prince and David Hunt

Boies Schiller Flexner (UK) LLP