Third-party funding in international commercial arbitration

May 2017  |  FEATURE  |  LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

Though parties commit a great deal of resources to ensuring their contracts are fair and amicable, commercial disputes will always occur. Resolving these disputes can be expensive and time consuming, and while litigation is an established form of dispute resolution, commercial arbitration has emerged in recent years as a cheaper and less time consuming alternative.

Third-party funding is a growing feature of international arbitration. It is well established in some key jurisdictions, including the UK and Australia, and is beginning to spread to other regions. For example, in December, Hong Kong introduced the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 to the legislative council, which established the standards and practices that third-party funders in Hong Kong will be required to follow moving forward. These measures include both financial and ethical standards. Further, in January, Singapore passed amendments to the Civil Law Act which legalised third-party funding in international commercial arbitration and related proceedings. In light of Asia’s increasingly prominent position in global trade and commerce, the opening up of both jurisdictions to third-party funding is a shrewd move and will help to reinforce their place as dispute resolution hubs. The use of third-party funding will aid the proliferation of commercial arbitration in the region.

Merits of third-party funding

Over the last few years there has been a marked increase in third-party funding activity. Initially focused on investor-state arbitration, it is now spreading to the commercial side.

In return for funding a case, third-party funders seek a percentage of the proceeds of a successful case, or a multiple of the financed costs, or an amount calculated using a combination of those factors. Smaller organisations, and parties that cannot or prefer not to pay for legal fees and expenses, are most likely to utilise third-party funding. For the last decade or so, they have been able to work with specialist providers of litigation finance.

The cost of bringing a claim to arbitration can be prohibitively high. By utilising third-party funding solutions, parties who might otherwise have been priced out of bringing their claim still have options.

However, third-party funding is often criticised due to the vague manner in which it is defined. The exact definition of third-party funding is nebulous and its legal and ethical implications within international arbitration remain uncertain. As such, not every jurisdiction is enthusiastic about its proliferation. For some commentators, third-party funding raises a number of ethical issues, particularly as it is often utilised by parties through choice, rather than necessity, as it decreases the level of risk if a claim is unsuccessful.

Further, there is ongoing debate over the disclosure of third-party agreements. Presently parties to a dispute are under no obligation to disclose their funding arrangements. Some parties, such as Oxus Gold PLC, voluntarily disclose their third-party arrangement. The company, which was involved in a dispute with the Republic of Uzbekistan, released a statement which noted 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”.

Conflicts of interest may arise under a third-party solution. For many arbitrators, the likelihood of discovering that they are involved in a case where there is a conflict of interest increases sharply in a third-party funded claim, given the small number of funders currently operating in the market. Presently, in the UK, there is no general obligation on a funded party to disclose the facts of its funding arrangement, yet, in light of the concerns regarding conflicts, demand for greater transparency is growing.

On 22 September 2016, the ICC International Court of Arbitration published a Guidance Note requiring arbitrators to disclose connections with parties and their affiliates and expressly extended this to parties with an economic interest in the outcome, again including funders.

Third-party funding is a valuable tool which has allowed parties to gain access to justice which may previously have been out of their reach. It is a global growth industry set to be a feature of international commercial arbitration for many years to come.

However, there are a number of issues which parties gaining access to third-party funding must take into consideration at the onset of their claim. Questions abound around issues such as confidentiality, the identity of the claimant, conflicts of interest, disclosure of the funder’s involvement in the proceedings, security for costs, as well as money laundering. These are issues which parties cannot simply ignore.

While it is important that parties are not deprived of financial support for their cases and are granted access to additional financing options, there is currently very little mandatory regulation of third-party litigation funding in most jurisdictions. Increased regulatory oversight could benefit the management of third-party funded claims in the future.

© Financier Worldwide

BY

Richard Summerfield