Third-party “funding in international commercial arbitration is one of the most current and controversial issues in international arbitration. Third-party funding is the system whereby a third-party funder finances, partly or fully, one of the parties’ arbitration costs. In case of a favourable award, the third-party funder is generally remunerated by a previously agreed percentage of the amount of the award. In case of an unfavourable award, the funder’s investment is lost. The last few years have seen a marked increase in funding activity, initially focused on investor-state arbitration, but now spreading to commercial international arbitration. However, unlike in national litigation “where disputes are decided by court appointed judges, the use of third-party funding in private arbitration, with party-appointed arbitrators, has given rise to various ethical and procedural issues”.[i] In this article, it is explained what third-party funding is and the practicalities of securing it, and then go on to outline the issues that are currently being debated.”
What is third party funding?
Third”party funding is “where someone who is not involved in an arbitration provides funds to a party to that arbitration in exchange for an agreed return”.[ii] Typically, the funding will cover the funded party’s legal fees and expenses incurred in the arbitration. The funder may also agree to pay the other side’s costs if the funded party is so ordered and provide security for the opponent’s costs.
As “the use of third-party funding has increased, so have the number and range of institutions that are prepared to finance litigation and arbitration. In addition to specialised third-party funders, insurance companies, investment banks, hedge funds and law firms have entered the market. As the market has developed, the range and sophistication of funding products and structures available has broadened. There is no one size fits all and the description above is funding at its most basic.” Third party funding, or “litigation finance” as it is commonly referred to, has evolved. In addition to funding one-off cases, “litigation finance” is being used for a broader range of purposes, with the “proceeds of the litigation or arbitration being used as collateral”. Another recent trend is the development of “portfolio funding”, where funders provide a funding package that covers a portfolio of cases.
Checklist for Qualification
Recent innovations in the products available have made third party funding appropriate in more situations than was previously the case. However, if looking to fund on a one-off case basis, the following is a useful preliminary checklist:
“Funders are unlikely to provide funding for cases that do not involve damages. Given that funders receive their return by reference to recoveries made, they are primarily interested in claims with a damages outcome. As such, funding is generally only available to claimants or defendants with a counterclaim.
Unless they specialise in funding smaller claims, funders will generally only fund one-off cases where likely damages are assessed at £10 million plus. Funding an arbitration matter is a high-risk investment, and funders will require a certain investment to quantum ratio. This usually requires a damages outcome of at least £10 million.
Funders will require good prospects of success. They will undertake their own separate analysis of the claim and only fund it if they have confidence in it and the way it is being advanced.
Funders will want to know if the target (i.e. the respondent) is able to meet the claim, costs and interest. Also, and particularly where it is a state, what is its payment record in relation to arbitration awards? The funder will also want to know where assets are situated; enforcement risk is a key concern. If situated in jurisdictions where enforcement is difficult, that may deter some funders. Other considerations, including whether the target will fight to the bitter end, may also influence the funder.
The seat of the arbitration is important as that will determine whether funding is permitted under local law. The place of enforcement will also be important as the fact of funding may be used to raise public policy arguments to frustrate enforcement”.[iii]
Risks and Challenges
Although “third-party funding has a considerable upside – improving access to justice is an oft cited advantage – it also carries certain risks and challenges, for example, those relating to conflicts of interest, disclosure and (security for) costs. The recent expansion of third-party funding in international arbitration and ongoing debates on this topic have spurred notable developments with regard to its regulation, both on a national and an international level.
Typically, courts have powers to make orders against third parties. With respect to funders, the situation is atypical and fact based. A funder may merely fund a genuine claim. To hold him liable as a ‘party’ by default would deter funding, thereby hindering access to justice. However, where “the funded claim is spurious, speculative and opportunistic”,[iv] such that “due diligence by the funder (rigorous analysis of law, facts, witnesses, review at regular intervals—not interfering with administration of justice thereby being champertous)”[v] would adequately reveal its nature and character of action, courts in the “United States and the United Kingdom have ordered costs against funders”.[vi] Where a funder uses a “spurious claim to gain access to justice, he usurps the ‘real party’ position”.[vii] It may exercise control over proceedings in a manner that steers the conduct of the party and has a causal link with its impact on the other party. Considering the extent of “economic interest, involvement, control and the derivative nature of a funder’s involvement”,[viii] courts ordinarily consider it just and equitable to order adverse costs against funders as it would be assessed against the funded party.”
Regulations for Third-party Funders
First of all, domestic rules and regulations are likely to be inconsistent among jurisdictions, opening the door to “forum-shopping with parties selecting a governing law that is favourable or even silent on the matter”. Second, there is a risk of “over-regulating”, thereby effectively restricting the “use and application of third-party funding more than is necessary”. Third, it is virtually impossible to address all issues and concerns with a single set of clear and binding rules; the issues associated with third-party funding may “differ from case to case, from one jurisdiction to another and are bound to change over time, as will be the way in which third-party funding is practised and the way in which it is perceived”.[ix] There is no “one size fits all” and flexibility is key. This leaves us with the roles arbitral institutions and international guidelines can play, which in our view may be more effective in this context. Institutional arbitration rules have a broader applicability than domestic laws and are more specifically designed for the arbitral process. International guidelines are generally non-binding and offer greater flexibility. The 2014 IBA Guidelines on Conflicts of Interest were the first to address third-party funding to provide practitioners with guidance, and not without success. One would therefore propose “not to opt for a highly fragmented system of national laws regulating third-party funding, but to further develop a set of non-binding guidelines on which practitioners can rely when being confronted with issues of third-party funding in international arbitration”.[x]
Finally, we should not forget that the ongoing debate on third-party funding has given rise to more awareness of its potential risks than ever before. As long as the key players in international arbitration – “users, counsel, arbitrators and institutions alike” – are conscious of the potential issues associated with third-party funding, they can act upon those. It may not be necessary to “further regulate third-party funding if there is a common understanding thereof and generally accepted guidelines which can be relied upon in practice”.[xi]
Jurisdictions that permit third party funding
Legislation in many jurisdictions is silent as to the legality of third-party funding (particularly in the case of arbitration) and it is therefore difficult to ascertain whether the courts in those jurisdictions will strike down or uphold a particular funding agreement in relation to an arbitration.
Where third party funding is permitted, third party funders may be subject to regulation. Regulation of third-party funders is dealt with in various ways. Set out below are the forms of regulation in England and Australia.
England and Wales
Third party funding is not subject to formal regulation in England and Wales. Self-regulation is “preferred in the form of a code of practice. The Code of Conduct for Litigation Funders was finally published in November 2011 together with the formation of the Association of Litigation Funders of England and Wales. The Code is binding on all members of the Association and regulates the funding of ‘litigation, arbitration or other dispute resolution procedures’.
Contingency fees are prohibited and so lawyers cannot have a financial interest in any awards received by their clients (that is, they cannot be de facto litigation funders). However, independent third-party funders are permitted in both litigation and arbitration.
As a safeguard against frivolous or vexatious litigation, the court rules in each jurisdiction (and the common law) give courts the ability to safeguard the administration of justice and make orders concerning their own processes (including oversight of arbitral proceedings) to avoid abuses of process by litigation funders.
There is no regulation for capital adequacy of third-party funders in Australia (unless the funder chooses to apply for a financial services licence, but this is not mandatory). This is because the law exempts litigation funders from being regulated managed investment schemes on the condition that the funding arrangement maintains adequate practices for managing any conflict of interest that may arise and that those practices are documented, implemented, monitored and managed by senior management of the funder in accordance with the regulator’s specifications”.[xii]
In its recent years of development, TPF has been engulfed by diverse issues. Presently, the “restrictive nature of applicable laws (including the definition of ‘party’ and ‘costs’) and the exceptionally exercised jurisdictional powers of tribunals on third parties (except traditional principles of agency and assignment) result in a shortfall of arbitral practice vis-à-vis third-party funders”.[xiii] Interestingly, while the majority of applicable laws state that the award shall be binding between parties, the English Arbitration Act 1996 also includes within the ambit of ‘party’— “persons claiming under or through them”. This could be interpreted to include funders. However, courts have accorded a narrow interpretation to the term ‘party’ to only include parties by way of principles of agency and subrogation. Unless arbitral practice establishes, or applicable laws evolve, to expressly include funders in costs orders, this power remains largely subject to discretion and application of third-party principles, keeping alive the pervasive foundation of arbitration, that is, party consent. While it will be quintessential to consider the roots of consensual dispute resolution, arbitral practice beckons wider purview to encompass third party funders in certain circumstances to meet the interests of justice and equity.
Frequently Asked Questions
1. When evaluating whether to fund the legal costs of a claim, what are the key considerations that funders take into consideration?
The following factors must be investigated in the initial review:
“a. the ability of the defendant or the respondent(s) to pay, including consideration of the value of their assets and where they are located – this is of primary importance since success is only success if an award is paid;
b. strong legal merits;
c. reasonable economics, which we assess by comparing the estimated costs to bring the proceedings, how realistic they are, and what proportion we are being asked to fund with the realistic value of the claim (which will include consideration of the client’s view on reasonable settlement) – we look for a significant gap between the two; and
d. the legal team’s experience in the relevant area of law.”[xiv]
It is important to remember that a funder of a claim is taking all of the financial risk. If the claim is unsuccessful, the claimant does not need to repay the legal costs and the funder’s investment is lost.
2. What does a funder need to be able to assess the legal merits?
One of the first questions will be: “has the client received written legal advice, and from whom? In that written advice funders would expect to find answers to questions such as: is the case on liability good? Is there a clear basis to claim damages? How long will the case take to come to trial or final hearing? Is settlement a possibility, and how likely?”[xv]
They focus on understanding the key issues, formulated by the lawyers who have reviewed the wider documentation.
3. What are some examples of the kinds of disputes these institutions fund?
Globally funders have funded a wide range of commercial litigation such as “breach of contract, breach of statute and competition law, IP and patent disputes, insolvency, fraud-related, tort and trust claims”.[xvi] They also fund “international arbitration, both commercial and investor-state”, under a number of different sets of arbitral rules in a variety of jurisdictions. In geographies such as Australia and the UK, “class actions” are another category of claims which receive funding. Such claims can include everything from “shareholder claims to product defects to environmental issues causing economic loss or personal injury”.[xvii]
4. Are there any upcoming developments we should be aware of?
Funders see new users and new uses of funding. TPF has moved from “financing impecunious claimants otherwise unable to access justice to well-resourced corporates who are interested in the risk management or hedging qualities of third-party funding”.[xviii]
The positive developments in Singapore, Hong Kong and Dubai related to third-party funding have consolidated its global acceptance. Singapore’s Ministry of Law recently launched a “public consultation to seek feedback on the third-party framework” they introduced in early 2017 to understand how the system has been received and “whether or not its expansion beyond arbitration should be considered”, and Hong Kong is expected to clear the final hurdle, implementation of its Code of Conduct, in Q3 2018.[xix]
[i]Kate Apostolova, Kluwer Arbitration Blog, 2017 Year-in-Review: Top 5 in International Arbitration, http://arbitrationblog.kluwerarbitration.com/2017/12/28/2017-year-review-top-5-international-arbitration/ (last
visited Feb. 12, 2019, 5 PM)
[ii]South America Silver Limited v. The Plurinational State of Bolivia,  PCA Case No. 2013-15
[iii]Ashurst, Third Party Funding In International Arbitration, https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—third-party-funding-in-international-arbitration/ (last visited Mar. 11, 2019, 8.30 PM)
[iv]Excalibur Ventures LLC v. Texas Keystone Inc & Ors.,  EWHC 3436 (‘Excalibur’)
[v]ibid at para ¶31
[vi]Arkin v. Borchard Lines Ltd.,  EWCA Civ. 655; Excalibur; Abu Ghazaleh v. Chaul, 36 So.3d 691
[vii]Excalibur at para ¶1.
[viii]ibid at para ¶27.
[ix]Abu Ghazaleh v. Chaul, 36 So.3d 691
[x] Napoleão Casado Filho, Kluwer Arbitration Blog, The Duty of Disclosure and Conflicts of Interest of TPF in Arbitration, http://arbitrationblog.kluwerarbitration.com/2017/12/23/duty-disclosure-conflicts-interest-tpf-arbitration/ (last visited Mar. 12, 2019, 8.45 PM)
[xi]Marc Krestin, Rebecca Mulder, Kluwer Arbitration Blog, Third-Party Funding in International Arbitration: To Regulate Or Not To Regulate?, http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate/ (last visited Mar. 12, 2019, 8.45 PM)
[xii]Norton Rose Fulbright, Third-Party Funding In Arbitration – The Funders’ Perspective, https://www.nortonrosefulbright.com/en-in/knowledge/publications/8b8db7d0/third-party-funding-in-arbitration–the-funders-perspective (last visited Mar. 12, 2019, 8.45 PM)
[xiii]Ylli Dautaj and Bruno Gustafsson, Kluwer Arbitration Blog, Access to Justice: Rebalancing the Third-Party Funding Equilibrium in Investment Treaty Arbitration,
http://arbitrationblog.kluwerarbitration.com/2017/11/18/access-justice-rebalancing-third-party-funding -equilibrium-investment-treaty-arbitration-2/ (last visited Mar. 12, 2019, 8.50 PM)
[xiv]Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, 75-76 (2016)
[xv]Marc Krestin, Rebecca Mulder, Kluwer Arbitration Blog, Third-Party Funding In International Arbitration: To Regulate Or Not To Regulate?, http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate/ (last visited Mar. 12, 2019, 8.50 PM)
[xvi]ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, April 2018, Chapter 6.
[xvii]Gary Born, International Commercial Arbitration, 2496 (2nd Edition, 2011), Kluwer Law International.
[xviii]Matthew Townsend, Kluwer Arbitration Blog, Arbitration in Hong Kong: The Year of the Dog in Hindsight, http://arbitrationblog.kluwerarbitration.com/2019/02/07/arbitration-in-hong-kong-the-year-of-the-dog-in-hindsight/ (last visited Feb. 12, 2019, 5 PM)