Overview of third-party funding internationally
October 2017 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
October 2017 Issue
The use of third-party capital to fund legal disputes has become increasingly prevalent in recent years, both domestically within certain jurisdictions and internationally. Through third-party funding, an entity with no legal status in a dispute will fund some or all of a party’s costs. In return, should the funded party’s claim be successful, the funder will generally receive a share of the amount recovered under the claim.
Generally, third-party funding of disputes can be a useful investment tool for corporations seeking to fund and capitalise on large, meritorious claims or law firms who may use it to support contingency fee opportunities. Third-party funding can be especially lucrative, however, when it comes to international arbitration, due to the high-value claims often made in these types of actions.
From the point of view of the funded party, third-party funding allows parties with limited access to capital to pursue a claim while keeping a positive cash flow. Third-party funding also has the opportunity to add value to the arbitration, by involving entities with expertise in a specific area, or allowing the funded party to spread the risks associated with litigation. Further, funders will have spent considerable time assessing the action before funding it to ensure that the side they seek to fund has a strong claim. Therefore, having the backing of a well-known funder may indicate that the funded side has a strong chance of winning; this then may encourage settlement from the opposing side.
Considering all of the benefits that both the funder and the funded party stand to gain in third-party funded arbitrations, why have these types of arrangements not been welcomed with open arms across jurisdictions?
Former view on third-party funding
Traditionally, funding litigation was thought to invoke the old common law doctrines of maintenance and champerty. While these doctrines have generally been repealed in most jurisdictions, the principles underlying them have resurfaced in relation to third-party funding agreements in litigation, and, by extension, arbitrations.
Maintenance is where a third-party becomes involved in the litigation process, in order to maintain the litigation (often through directing or financing the litigation). Champerty is a form of maintenance through which the funded party agrees to pay a portion of the claim to the funder.
Historically, wealthy third parties would financially back a party in the litigation, leading to the view that this side had a stronger case since it was being financially backed. The judge might be swayed to side with the ‘maintained’ party; similarly, the other side might choose not to challenge the claim, both of which are clearly contrary to the principles of justice. Therefore, in many common law jurisdictions these doctrines created civil as well criminal causes of action, the purpose of which was to prevent conduct that would promote frivolous litigation and abuses of process.
While maintenance and champerty may no longer constitute civil or criminal causes of action in many jurisdictions, courts and arbitrators may still be wary of the practice of third-party funding, no doubt due to the lingering fears of maintenance and champerty. However, as third-party funding may allow a party who is otherwise unable to pay for a court action or arbitration to maintain their claim, third-party funding can actually promote access to justice, whereas historically maintenance and champerty have inhibited it. It is for this reason, among others, that we have seen a steady increase in the use of third-party funding of litigation and arbitrations internationally.
Regulation of third-party funding
As the use of third-party funding of disputes has increased domestically, so has its use internationally. As stated by the ICCA-Queen Mary task force on third party-funding in international arbitration in its draft report, within the last 10 years, third-party funding has evolved from a tool used only sparingly in a “handful of common law jurisdictions to centre stage in the global commercial litigation and arbitration market”.
However, regulation of third-party funding of disputes, both domestically and internationally, has been used sparingly, and to date only two jurisdictions have moved toward regulating third-party funding of international arbitration. Jurisdictions in which legislation is silent on the legality of third-party funding of disputes, such as Canada, have gradually begun to develop their common law in response to third-party funding of disputes. Other jurisdictions however, such as Singapore and Hong Kong, have now embraced third-party funding of arbitrations, and have recently moved to amend their laws to reflect this.
Below we have briefly explored the use and regulation of third-party funding in various common law jurisdictions.
Fifty years after abolishing the doctrines of maintenance and champerty, there has recently been a surge in third-party funding of disputes in the UK. In recent years, third-party funding has become one of many major considerations that large corporate parties to a dispute will consider when entering into a complex court action or arbitration in the UK.
Both the judiciary and legislature have shown their support for third-party funding as a tool to increase access to justice. While the legislature has not specifically drafted legislation to regulate the third-party funding of disputes, the Association of Litigation Funders (ALF), has been charged by the Ministry of Justice to self-regulate litigation funding in England and Wales. The ALF has developed a code of conduct for third-party funding of disputes and governs the complaints procedure for complaints made against members of the ALF by funded parties. The code of conduct applies equally to arbitrations, however is silent regarding international disputes. Currently, there appears to be little or no regulation of international arbitrations in the UK, with the courts deciding on its admissibility on a case-by-case basis.
The doctrines of maintenance and champerty in the US have lost their standing, similar to other common law jurisdictions. Now, as the world’s largest litigation market, the US has developed a thriving third-party funding market. The use of third-party funding in the US extends to both domestic and international disputes, including arbitrations.
Despite the clear acceptance of third-party funding, the regulatory landscape of third-party funding in the US remains unclear and patchwork at best. Legislation is largely managed by the individual states, with some states legislating on this topic more actively than others and with varying degrees of support. Further, where legislation has been established, it generally only regulates domestic funding, remaining silent regarding international funding. However, despite the lack of regulation of international arbitrations, based on case law and the clear use of third-party funding in international arbitrations within the US, the majority of states appear to be in favour of third-party funding of international arbitrations.
Maintenance and champerty are no longer criminal offences in Canada, though they remain torts in some provinces. However, as public policy in Canada increasingly promotes third-party funding of litigation as a useful tool of litigation, the application of these doctrines to third-party funding appears to be happening at a lesser rate. There is currently no regulation of third-party funding in Canada, with almost all regulation coming from the courts.
Third-party funding of litigation in Canada is a relatively new trend compared to its use in other jurisdictions. Primarily, third-party funding in Canada is more commonly used to fund class-action lawsuits, and remains to be used as a regular tool in arbitrations. However, based on the use of third-party funding of arbitrations in other common law jurisdictions, it is likely that we will see increasing use of third-party funding in this area in Canada.
Singapore and Hong Kong
To date, only Singapore and Hong Kong have moved toward regulating third-party funding of international arbitration.
On 1 March 2017, Singapore introduced several amendments to its Civil Law Act, ushering in the ability of parties in Singapore to use third-party funding in international arbitrations. Prior to these amendments, third-party funding of arbitrations were prohibited in Singapore, due to the doctrines of maintenance and champerty. These amendments abolished the torts of maintenance and champerty, created assurances that third-party funding is not contrary to public policy and set out the qualifications of a ‘third-party funder’. Currently, third-party funding is only limited to international arbitration, and not domestic litigation or arbitration.
Similarly, on 11 January 2017, Hong Kong proposed the new Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 to the Legislative Council that would establish that the doctrines of maintenance and champerty do not apply in relation to the third-party funding of arbitrations, both domestic and international. The bill also proposes disclosure requirements for third-party funding agreements, and the creation of a Code of Practice to govern third-party funding of arbitrations.
The effect of the changes in both Hong Kong and Singapore remains to be seen, however. As leading seats of international arbitration, these new and proposed regulations in Singapore and Hong Kong will likely have major ramifications globally.
Timothy St. John Ellam is a partner and Sierra Bilyk and Elsbeth Cochrane are associates at McCarthy Tétrault LLP. Mr Ellam can be contacted on +1 (403) 260 3533 or by email: email@example.com. Ms Bilyk can be contacted on +1 (403) 260 3729 or by email: firstname.lastname@example.org. Ms Cochrane can be contacted on +1 (403) 260 3740 or by email: email@example.com.
© Financier Worldwide
Timothy St. John Ellam, Sierra Bilyk and Elsbeth Cochrane
McCarthy Tétrault LLP