Third-party funding
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This article is written by R J Harshana Reddy, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

Globalization has led to a shift in the trends and dynamics of connectivity and relationships between countries of the world. It has paved the way for better communication and trade among various other changes. With the growth in trade and business between countries, interstate relations and business activities also grew at a rapid rate, forming international platforms for trade and business. Disputes certainly and surely as a consequence of business arise, and dispute resolution on international level slowly developed its mechanisms and institutions. To mitigate the problems of jurisdiction and applicable law among other problems in the international law pertaining to business and cross- border transactions, alternative dispute resolution mechanisms grew in their scope and practice. The most popular and reliable of such mechanisms is the process of Arbitration.

Arbitration is the most commonly used method of dispute resolution as it provides speedy justice. However, it is an expensive procedure and can take a hit on economically weak businesses. That is where Third-Party Funding has been playing a significant role in the world of international arbitration. Third-party funding (TPF) or litigation financing is simply the role of somebody who is not involved in an arbitration, usually funding a party (Claimant or Counter-Claimant) to arbitration in exchange for an agreed set of shares or profit that the funded party receives by the Award. The fund commonly covers the legal fees and costs of the arbitration process. The funder can be anybody who is monetarily interested in investing in a Claim with a calculated chance of monetary success.

The ICCA-QMUL Task Force on Third-Party Funding in International Arbitration[1] provides a working definition of TPF as:

An agreement by an entity that is not a party to the dispute to provide a party, an affiliate of that party or a law firm representing that party,

  1. funds or other material support in order to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases, and
  2. such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute, or provided through a grant or in return for a premium payment.

Disclosure of third party funding

It is no doubt that the prevalence and importance of arbitration have grown immensely in the international sphere. Arbitration has become a common way of resolving international disputes but the cost of arbitration has however been increasing tremendously. As a means of making arbitration more affordable and an available option to more people, TPF has been on the rise and opening up the scope of accessibility to arbitration and also investment options, at the same time. Third-party funding has paved a way for funders to invest in arbitration cases with foreseeable profits. This process has not just invited money flow on a larger scale but also a high and increased risk of conflict of interest. 

It is known that a conflict of interest can endanger the integrity of the arbitral proceeding. The existence of third-party funding as a factor plays a huge role in the proceedings of an arbitration. The relationship between the parties, the funders and the arbitrator or the tribunal is very crucial and simply can make or break the integrity of the proceedings. The presence of a funder in a proceeding can bring a reasonable doubt as to the independence and impartiality of the arbitrators. The conflict of interest of arbitrators may pose a threat to the overall fairness of the proceeding and harm the aim of attainment of justice. To regulate this issue, a possible way is the disclosure of third-party funding. It concerns the disclosure of the existence of Third-party funding, the identity of the funders, and in some cases even the terms of TPF.

The necessity for disclosure of TPF lies on the basis of providing justice through impartial means. Every party has a right to be well informed about the relationships and the effects and circumstances that may arise due to them to determine that their arbitrator is impartial and independent. It is also easier and saves time and resources if the parties disclose the identity of the funders so that the arbitrators will not have to carry out investigations of the funders each time. Disclosing TPF during the initial proceedings may also save the tribunal extra burden and costs by terminating the proceedings in the start itself, in case of conflict of interest, rather than carrying out the proceedings entirely to later render the award as void. There are also cases where Arbitrators have proved to be supportive of full disclosure. In Manuel Garcia Armas and others v. Venezuela[2], the Arbitral Tribunal ordered Claimants to disclose the terms of the Funding Agreement “invoking a duty to protect the integrity of the procedure.”[3]

Position of disclosure of TPF in international arbitration

TPF itself, though known and widely practised in the international space of arbitration, is not properly regulated. The UNITRAL, ICC and other arbitration Rules take into consideration and regulate arbitral proceedings and such other matters but areas like third- party funding and not regulated strictly, considering it plays a major role in the confidentiality and transparency of the proceedings and the independence and impartiality of the arbitrators. The trends are however pointing towards mandatory disclosure in TPF. Mandatory disclosure significantly reduces the risk of conflict of interest and helps prevent any challenges that may arise against an award in the future. It also helps the proceedings to attain maximum transparency and the right of the parties to be aware of their position in relation with the funders and arbitrators.

The international community is taking different stances on the disclosure of TPF in arbitration. With the privacy and confidentiality of the parties and their funding agreements in question, full disclosure becomes a threat to privacy between the parties and its funders against the threat of conflict of interest of arbitrators in the absence of disclosure. Finding a middle ground in such scenarios is a priority and many institutions have been inching towards it in recent times. In Sehil v. Turkmenistan, SAS v. Bolivia and Guaracachi v. Bolivia, in the view of preventing a potential conflict of interest and to uphold the principles of independence and impartiality on the part of arbitrators and to attain justice, a full disclosure was ordered by the tribunal. Countries like Hong Kong and Singapore have been taking steps towards empowering the tribunals with the power to enquire the details of funding and even order for a full disclosure of TPF.

Challenges to TPF in international arbitration

Third-party funding in international arbitration is growing rapidly and many financial institutions, law firms, insurance companies, etc., have entered the market for funding parties. Although TPF has been widely practised and accepted throughout the world in almost all matters of arbitration, it faces downsides and some practical challenges that are holding its functioning and scope from growing. While third Party funders take the hit due to some drawbacks, the parties in other situations are put at disadvantage due to third- party funding.

One of the major challenges third party funding faces is the lack of regulation. Many countries are moving towards accepting and regulating arbitration but when it comes to third party funding, it is poorly regulated both domestically and internationally. This further causes ambiguity in the uniformity and validity of TPF. The next most concerning challenge in Third-party funding in the arbitration is the protection of confidentiality and privacy. When opting for third-party funding, the parties are often required to disclose information to the funders as a part of their agreement. This might lead to crucial information of the party being given out to the funding party which goes against the interest of the party being funded. Another important matter that calls for attention is the disclosure of third-party funding as summed up above. As necessary as it is for a party to disclose the existence to TPF to check for any conflict of interest, it is also the right of the party to not disclose his agreement with the funders to the arbitrator or the tribunal. The middle ground in such a case could be to determine ‘what to disclose’ instead of standing rigid grounds on whether it should or should not be disclosed. By doing this, both the funded party’s rights and the interest of the arbitration could be secured. The list of challenges in TPF goes on. Sometimes, the involvement of a third-party funder in itself is a challenge. The parties seeking TPF are most likely in a place to accept the terms of the funder and the funder may use his leverage to impose unfair terms to get control over the claim. It has also become a challenge to keep the involvement of private institutions and funders minimal, at least in terms of the welfare of the party. Since the funder is always looking to make most profits and receive most part of the claim, dispute resolution and peaceful settlement become a second priority.

Conclusion

The ever-evolving avenue of arbitration is slowly getting more regulated in a way to benefit the parties choosing it than detriment its parties. Third-party funding too is on the same path to getting more recognized by various institutions and countries. However, a balance has to be achieved between what it is meant for and what it could be to harm its own purpose. Third-party funding so far has proved to be a potential means for parties that cannot afford the cumbersome expenses of arbitration, to attain justice. By overcoming the challenges faced today by third-party funding in international arbitration, arbitration not just becomes more accessible and affordable, but the concept of Justice will be served right, guided by the saying “Justice delayed is justice denied”.

References

[1] The ICCA Reports No.4, Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, April 2018

[2] Manuel García Armas et al. V. Bolivarian Republic of Venezuela, PCA Case No. 2016-08, https://www.italaw.com/cases/6745 and LEVENTHAL, A.G., Towards an Exceptio Fundati? Assessing a (Potentially) Emerging Exception for Third Party Funding in Investment Treaty Decisions on Security for Costs in the Wake of Armas v. Venezuela, 2018 http://www.kluwerarbitration.com/

[3] LEVENTHAL, A.G., Towards an Exceptio Fundati? Assessing a (Potentially) Emerging Exception for Third Party Funding in Investment Treaty Decisions on Security for Costs in the Wake of Armas v. Venezuela, 2018 http://www.kluwerarbitration.com/


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