Third Party Funders in Arbitration
In General
Third party financing or third party funding may be defined as the financing of arbitration costs of one of the parties by a third person who is not related to the claim[1]. It may also be defined as “any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration”[2].
The methods by which third party funders agree to finance litigation costs of a party vary[3]: The consideration of the third party funder may be the gain of an agreed upon percentage of an awarded proceed, a fixed success fee, or a mechanism combining the two. Funding may result in the issuance of equity or debt instruments, the transfer of a claim to the funder, or the funder gaining control over the party, and, consequently, of the dispute strategy and management. The clients of funders vary: they may be the claimants or the respondents, law firms, individuals, and even states.
Third party financing is relatively new in international arbitration, and its pros and cons are subject to numerous discussions. This article aims to refer to key concerns and touches upon the instruments regulating this funding.
Pros and Cons – Discussions on Third Party Funders
In General
Third party financing enables parties to initiate their meritorious claims without concern over scarcity of their finances. It is argued that third party financing is favorable and beneficial since it promotes access to justice for parties who financially cannot support a dispute, enables them to maintain their cash flows, and pursue their claims.
However, the increase of third party funders’ presence in arbitration has resulted in numerous discussions and concerns. The main concerns are governing impartiality and independence of arbitrators, and the necessity of security for costs[4]; which are briefly assessed, below.
Furthermore, it may be argued that the mere existence of financing, or the denial of financing, may result in bias as to whether or not a claim is meritorious. The funders engage in a thorough analysis of a case they are asked to finance; therefore, their choice of whether or not to finance a party may affect how a claim is regarded by third persons (for instance, the arbitrators). On the other hand, a party may also request a case assessment by a potential funder prior to initiating its claim. This way, if rejected by a funder, a party who decides to not initiate its claim may be spared unnecessary legal costs, which is considered practical and/or favorable[5].
Impartiality and Independence of Arbitrators
In international arbitration, the lack of impartiality and independence of an arbitrator may have severe consequences, such as the challenge and/or annulment of an award. Arbitration rules enable and govern procedures for the challenge of an arbitrator. Further, if and once an award is rendered, lack of impartiality or independence may prevent the recognition or enforcement thereof. This is an area of importance while assessing third party financing.
The scenarios where a third party funder may endanger the independence of an arbitrator may vary. When an arbitrator of a dispute, where a third party funder exists, acts as counsel to another party in another dispute funded by the same third party; or when repeated appointments of an arbitrator by parties funded by same third parties are concerned, doubts may arise as to the impartiality of the arbitrator.
These concerns raise questions as to whether an obligation to automatically disclose third party funders should be imposed, and, if yes, what the scope of such disclosure should be. However, it could be stated that there is a general inclination towards accepting a disclosure obligation. The regulations on this disclosure obligation is further assessed below.
Cost Issue
Third party financing also raises the question as to whether the arbitral tribunal may order security for costs against third party funders. This is especially important in the question concerning whether the prevailing party could recover its legal costs from the funder of the other party. These matters result in questioning the jurisdiction of the tribunal.
Unlike the discussions governing disclosure obligations due to impartiality and independence of arbitrators, there isn’t a general consensus governing the discussions on costs and security for costs[6].
Need for Regulation
When the present rules, non-binding regulations and other instruments are assessed, it may be observed that third party funding is an area yet to be regulated in international arbitration.
IBA Guidelines on Conflict of Interest[7] (“Guidelines”) was issued in 2004. The IBA Arbitration Committee commenced a review process of the Guidelines in 2012, and the revised version was published in 2014. The Guidelines do not provide legal provisions, but aim to act as a guide or indicator to be adopted in commercial and investment arbitration, and is expected to be applied with robust common sense (Introduction, Art. 6).
Pursuant to these Guidelines, both arbitrators and parties are expected to disclose any facts or circumstances that may give rise to doubts as to an arbitrator’s impartiality or independence.
Third party funders constitute a novelty in the Guidelines as they are included among the persons considered to bear the identity of the party they are funding. As revised in 2014, this disclosure requirement also concerns third party funders, as follows: The Guidelines state in Art. 6(b) that a person may be considered bearing the identity of another party, if such person has a controlling influence over a party, or a direct economic interest in, or a duty to indemnify a party for the award to be rendered in the arbitration. The explanations state that third party funders may be considered to be the equivalent of the party.
This relationship needs to be taken into consideration when assessing an arbitrator’s disclosure duty. The Guidelines also charge the parties with the duty to inform the arbitrator, the tribunal and the other party of any relationship between the arbitrator and such party or an entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered.
Accordingly this duty of disclosure by the arbitrator and by the parties comprises of any relationship between a third party funder and an arbitrator.
While the Guidelines provide insight to the disclosure obligations aiming to solve any conflict of interest due to funding, its non-binding nature should be taken into consideration.
In UK, the Association of Litigation Funders (ALF) provides a code of conduct whereby its members are expected to abide in relation to the funding of disputes within England and Wales[8]. This Code of Conduct for Litigation Funders[9] obliges the funders to refrain from steps that do or may cause the solicitor or barrister to act in breach of their professional duties. However, this code is also criticized for not having a binding nature. Further, its scope is limited to disputes in a certain region, only.
The arbitration rules, in general, do not regulate the funding of arbitration by third parties. The disclosure requirements and the rules of conduct constitute areas that are open to further legislation.
Bearing in mind the fact that third party funding is a new concept, it is quite heterogeneous, where both the funders, the funding method, and the funding agreements widely vary, and it may be expected that rules or guidelines for funding in international arbitrations are established in the near future.
Conclusion
Third party financing is new, vibrant in international arbitration, both appealing to arbitrators and parties, and also raises concerns among the practitioners. While it promotes access to parties with weak financial conditions, it raises questions and concerns governing impartiality and independence of arbitrators. However, the arbitration costs remain an unresolved issue when third party financing is concerned.
While the Guidelines of the IBA provide useful insight on how to avoid or solve certain effects of third party financing on the healthy functioning of arbitration, this remains an area to be regulated and clarified. Beyond any doubt, third party financing will continue to stir debates among scholars and practitioners in the near future.
[1] See Burcu Osmanoğlu, Third Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest, (2015) 32 J. Int. Arb. 3, Kluwer Law International, p. 325; as defined by Yves Derains. This article provides useful insight and detailed explanations on the forms of third party funding, and focuses on its assessment from a conflict of interest point of view.
[2] See IBA Guidelines on Conflict of Interest, Explanation to General Standard 6, para. (b), p. 14, 15.
[3] Osmanoğlu, p. 330, 331.
[4] For further information please see Carlos González-Bueno and Laura Lozano, Third Party Funding Again Under the Spotlight http://kluwerarbitrationblog.com/blog/2014/10/08/third-party-funding-again-under-the-spotlight/ (accessed on 18 September 2015).
[5] For further assessment on the impact of third party funders on the parties whose financing requests have been denied, please see Victoria A. Shannon, The Impact of Third-Party Funders on the Parties They Decline to Finance, http://kluwerarbitrationblog.com/blog/2015/07/06/the-impact-of-third-party-funders-on-the-parties-they-decline-to-finance/ (accessed on 22 September 2015).
[6] For further information on this discussion and relevant jurisprudence, please see González-Bueno and Lozano; and Paula Gibbs, Chapman Tripp, Third party funding in international arbitration – lessons from litigation? http://kluwerarbitrationblog.com/blog/2014/12/15/third-party-funding-in-international-arbitration-lessons-from-litigation/ (accessed on 22 September 2015).
[7] These guidelines may be downloaded from http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx (accessed on 18 September 2015).
[8] See http://associationoflitigationfunders.com/wp-content/uploads/2014/03/ALF-info-for-solicitors.pdf (accessed on 18 September 2015).
[9] January 2014, accessible on http://associationoflitigationfunders.com/wp-content/uploads/2014/02/Code-of-conduct-Jan-2014-Final-PDFv2-2.pdf (accessed on 18 September 2015).
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