The rise of third-party funding in international arbitration
October 2016 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
No matter how well drafted a contract, no matter how amicable the relations between the parties, unforeseen risks and commercial disputes will always arise. Resolving complex disputes requiring detailed factual and technical evidence is unavoidably expensive. Funding dispute resolution procedures can be a significant burden on parties and funding difficulties arise as a consequence of the dispute itself. While various forms of traditional litigation funding have been around for a while, we are starting to see the emergence of more third-party funding in international commercial arbitration and investment treaty arbitration. Businesses that may find themselves one day a party to a dispute in international arbitration should consider the possible benefits that third-party funding can offer and should be acquainted with the potential risks.
The high cost of bringing a claim to arbitration, and progressing it, can be prohibitive. External funding can facilitate a claim that has merit, but would otherwise not be pursued simply because of the significant cost. Even a business with the funds to pursue a claim should consider the advantages of a finance arrangement with a third party; it lessens the impact on cash flow and minimises the risk if the claim is unsuccessful. There is no set mould for a funding agreement so parties can negotiate an arrangement which works for them. However, this flexibility can also give rise to uncertainty. International arbitration is largely confidential and so the structures of funding agreements, and the effectiveness of them, may not be widely known.
Another advantage of entering into a funding agreement with an external party can be the extra layer of scrutiny that comes with it. A third-party funder is a business like any other and is unlikely to back a claim that it does not think has a good chance of success. Third-party funders will often have their own legal experts to assess claims and will also evaluate the merits of advancing a claim from a commercial perspective. Litigation funding used to be prohibited in many common law countries because of the fear that it would give rise to unmeritorious claims being brought. However, given the funder’s interest in a positive financial outcome, experience suggests that this fear is largely unfounded.
While there may be a number of benefits to be had from entering into a funding agreement, parties should also be aware of the not insignificant risks. There is a lot of discussion at the moment around conflicts of interest that can arise when third-party funders are involved in international arbitration proceedings. Arbitrators, law firms and funders will often have repeat dealings with each other and it is imperative for the integrity of the arbitral process that conflicts are avoided. While most arbitral institutions have not as yet implemented mandatory rules on disclosure, this looks like something we could see in the near future. If a conflict is discovered, this could present enforceability problems for any award rendered. It is suggested that it is in the best interest of the parties, the arbitrators, and indeed the funders, that any funding arrangement be disclosed to the extent necessary for determining whether a conflict exists. Given that this is a relatively new practice in international arbitration, and as yet not overly regulated, we cannot be sure how exactly this will develop in the future.
There is no binding body of international law that specifically regulates third-party funding in international arbitration. However, we can look to bodies of soft law for some guidance. For example, the International Bar Association Guidelines on Conflicts of Interest in International Arbitration 2014 contemplate conflicts that can arise from third-party funding and what steps should be taken. While these guidelines may be regarded by some as best practice, parties would have to elect to be bound by them.
In addition to the risk of conflict, parties also need to consider the issues of confidentiality and autonomy. In order for a funder to assess a claim, it needs access to all the relevant materials which can often be commercially sensitive and likely subject to legal privilege. Parties need to make sure they have effective agreements in place at this initial stage, before funding is even secured, to protect their confidential information. They should also be conscious of their confidentiality obligations to the other party and make sure that they do not breach them in sharing information with a third party.
Where is funding of international arbitration seeing growth? It is hard to say definitively for a number of reasons. First, these agreements are confidential (however, see the Queen Mary 2015 International Arbitration Survey for a good insight). Second, international arbitration transcends borders and parties are not bound to seek funding from only one jurisdiction.
While the industry is still largely unregulated, certain jurisdictions are taking steps to recognise its growth. In many common law countries, the torts of champerty and maintenance (which prohibited a disinterested party from interfering in or funding a lawsuit) no longer apply. In Australia, general litigation funding is reasonably common and the torts of maintenance and champerty have been legislated away in several states.
England and Wales abolished the torts of champerty and maintenance long ago and now have a well-developed litigation funding industry. UK based litigation funding companies often offer funding products specifically for international arbitration as well as domestic litigation. While litigation funding is, to a certain extent, self-regulated, UK based arbitral institutions have not as yet implemented specific rules relating to third-party funding.
Singapore has been consolidating its position as a popular choice of forum in international arbitration. Up until very recently the preservation of champerty and maintenance has somewhat stymied the growth of third-party funding of these disputes. However, this year the Ministry of Law has proposed the Civil Law (Amendment) Bill 2016 and the Civil Law (Third Party Funding) Regulations 2016 which, if passed, would do away with maintenance and champerty and regulate third-party funding in international arbitration proceedings. This could create more certainty as to the legitimacy of third-party funding and facilitate arbitration proceedings which may otherwise have been unfunded. SIAC, one of Singapore’s preeminent arbitral institutions, has also turned its attention to the issue. In February of this year, SIAC released draft rules (specific to investment arbitration) which give the tribunal the power to order disclosure by the parties of any third-party funding arrangements.
In Hong Kong, there has also been a move towards accepting and regulating third-party funding. While no draft legislation has as yet been released, the Law Reform Commission released a consultation paper on third-party funding in arbitration late last year. While we are yet to see Hong Kong based arbitral institutions release rules specifically addressing third-party funding, the HKIAC established its own task force to address the Law Reform Commission’s consultation paper.
Businesses should take note of this emerging industry. For parties considering third-party financing, it is important to enter into a funding agreement which protects your interests, enjoying the benefits of the arrangement while still maintaining an appropriate level of autonomy over your case.
Frank Bannon is a partner and Nick Boyce is a lawyer at Clayton Utz. Mr Bannon can be contacted on +61 2 9353 4221 or by email: firstname.lastname@example.org.
© Financier Worldwide
Frank Bannon and Nick Boyce