Regulating third-party funding

Increasingly expensive cross-border arbitration has caused third-party funding to become the solution for parties that would otherwise be barred from seeking justice for lack of funds.

Increasingly expensive cross-border arbitration has caused third-party funding to become the solution for parties that would otherwise be barred from seeking justice for lack of funds. On account of the fact that third-party funding is also used as an investment for funders however, it is a mechanism with its own limits. Arbitral institutions have thereby engaged in discussions to determine whether third-party funding should be regulated. In this regard, the ICCA Queen Mary Task Force issued recommendations and principles in April 2018.

(i) Third-party funding or the gamble of arbitration proceedings

(a) The third-party funding mechanism

 Over the last decade, arbitration proceedings have become increasingly expensive and time consuming, thus excluding that cannot bear the costs. Third-party funding has developed to counteract this tendency. Third-party funding is an arrangement whereby an outside entity agrees to finance all or a portion of a party’s legal costs in exchange for an agreed return1. The third-party funder will usually earn an agreed percentage of the award (generally between 20%-50% of the amount awarded) or a success fee2. As third-party funding is becoming a profitable investment, a wide range of funders is available for parties seeking funding3. Banks, insurance companies, hedge funds, or even individuals can be the funders financing parties’ legal representation in return for profit4.

Such financial operations have become prevalent in arbitration proceedings and even more so in investment arbitration5. According to the 2015 Queen Mary and White & Case International Arbitration Survey, 39% of the respondent group had encountered third-party funding in practice and 19 investor-state arbitrations had been funded through this mechanism6. The case law has also confirmed this trend. In its procedural order, the arbitral tribunal ruling on the dispute between Eurogas and the Slovak Republic described third-party funding as a common practice7.

(b) Why should parties enter into a third-party funding agreement?

The common and increasing recourse to such a mechanism is the result of the advantages incurred by third party funding. Indeed, third party funding allows claimants to lay off some of the risks associated with costly arbitration proceedings. The funded party may then bring the claim before the arbitral tribunal without being concerned about cash-flow issues related to the arbitration cost8.

Third party funding may also pressure the opposing party into settling9. Indeed, funders are willing to invest in claims that are likely to succeed. Before investing, funders often conduct extensive and diligent investigations and carry out their own analysis of the merits10. It may therefore encourage early settlements once the other party knows that the claim has the backing of a funder.

Before entering into a third-party funding agreement however, the claimant should be aware of the cost of third-party funding. In exchange of funding, the claimant will have to share a significant proportion of his award with the funder11. Depending on the terms of the agreement, funders may reserve the right of approval when considering settlements12. The claimant may lose autonomy in the decision-making process.

Paradoxically, entering into a third-party funding agreement may be costly. Indeed, presenting the case to a funder will require many resources, which could be wasted if the application for funding is unsuccessful. Claimants should think about it carefully before applying as only one out of every 25 cases receives funding when requested13. It is therefore crucial to determine when third-party funding is appropriate14.

(ii) Third-party funding: to regulate or not regulate?

 (a) Ethical concerns raised by third-party funding

The increasingly prevalent role of this new funding method has raised several ethical concerns among arbitral institutions and commentators. Indeed, it is not uncommon for funders to forbid parties to disclose their identities, the relationship among funders, claimants and attorneys and the use of this financing method15. Therefore, arbitral institutions have started to question the confidentiality of such agreements as they may create conflicts of interest. The IBA Guidelines on Conflicts of Interest in International Arbitration extended the duty of disclosure between the arbitrator and the parties to persons or entities that have a direct economic interest in the award to be enforced16. In 2016, the ICC followed the IBA by adopting the Guidance Note for the Disclosure of Conflicts by Arbitrators. Under the general duty of all arbitrators to act at all times in an impartial and independent manner, arbitrators should disclose any kind of relationship with any entity having a vested economic interest in the dispute17.

When applying for funding, parties often disclose important documents and evidence to funders. The issue is then to determine whether this information falls within the scope of the duty of confidentiality. As a general rule, disclosure to a third-party funder is possible without entailing a violation of applicable confidentiality obligations as it constitutes an exception to the duty of confidentiality in all arbitral laws18. Furthermore, there is no requirement to disclose the participating of a third-party funder to the opposing party as a matter of general evidentiary19. Usually, arbitrators determine on a case-by-case basis whether the disclosure to a third-party has waived any applicable evidentiary privilege20.

Finally, scholars and members of arbitral institutions struggle to resolve the issue of allocation of costs in arbitration proceedings involving third-party funders. Although an English seated ICC arbitration held that under some circumstances, a successfully funded party could recover the cost of funding, such an approach is not automatic and will depend on the facts of the case21. To prevent jurisprudential inconsistencies, stakeholders have acted to regulate third-party funding.

(b) Regulation of third-party funding: an on-going process

Some countries have already regulated third-party funding in arbitration proceedings. In March 2017, Singapore amended its Civil Law Act to legalize third-party funding22. This legalization however is not absolute and is highly regulated. For instance, Section 49A and 49B of the Singapore Legal Profession Rules authorizes lawyers to introduce funders to their clients as long as they do not receive any direct financial benefit from the referral23. Furthermore, lawyers are bound to disclose to the tribunal and to each party to the proceedings the existence of any third-party funding contract24. Hong Kong has also regulated third-party funding by creating an obligation to disclose the existence of a funding agreement25. As opposed to Singapore, funded parties are the ones who shall disclose the existence of the funding agreement, regardless of their choice of counsel26.

In an effort to makes the rules on third-party funding in arbitration proceedings homogenous, the ICCA- Queen Mary Task Force’s 2018 issued several recommendations. Relying on a survey from 2015 in which 15% agreed that disclosure of the existence of third-party funding should be mandatory, the report recommends an “affirmative duty for arbitrators to investigate potential conflicts”27. Such conflicts include cases where the arbitrator has been appointed in numerous funded case or received financing from funders28. The reports also discouraged law firms to engage in business relationships with funders29.

The ICCA-Queen Mary Task Force drafted an Appendix with key principles on disclosure, conflicts of interest, privilege, professional secrecy, allocation of costs and party security. Thus, pursuant to principle B.1., a funding agreement and the identity of a third-party funder is not subject to any legal privilege30. Principle C.1 states that “at the end of an arbitration, recovery of costs should not be denied on the basis that a party seeking costs is funded by a third party funder”31. Furthermore, Principle C.4 holds that “in the absence of an express power, in applicable national legislation or procedural rules, a tribunal would lack jurisdiction to issue a costs order against a third party funder”32.

Although this appendix appears as another step towards the regulation of third-party funding, such provisions should be construed as “soft law”. In other words, these principles and recommendations are binding only if arbitrating parties or legislators adopt them33.

Although third-party funding is an adequate mechanism for a party seeking to fund a meritorious arbitration claim, claimants should first determine whether such funding agreements best fit their interests. Indeed, third-party funding has raised many ethical issues, thereby pushing arbitral institutions and even States to regulate this funding method.

Stéphane de Navacelle
Stéphane de Navacelle
Lawyer - | Page

Stéphane de Navacelle has worked in the field of white collar crime/corporate crime in New York, London and Paris (at Engel & McCarney and Debevoise & Plimpton LLP). With over ten years’ experience in French and US white collar crime [...]

Read more

Thalia Gerzso
Thalia Gerzso
Phd Studient - Cornell University

Thalia Gerzso is a PhD student in the government department at Cornell University. Her research interests include democratic backsliding and constitutionalism in Sub-Saharan Africa,but also state-building and civil conflicts in Central Africa. [...]

Read more

  1. Victoria Shannon Sahani, Judging Third-Party Funding, 63 UCLA L. Rev. 388, p.388 (2016).
  2. International Arbitration Attorney Network, Third Party Funders for International Arbitration.
  3. A non-exhaustive list of third party funders in international arbitration is available at the following link: https://www.international-arbitration-attorney.com/third-party-funders-international-arbitration/.
  4. Victoria Shannon Sahani, Judging Third-Party Funding, 63 UCLA L. Rev. 388, p.388 (2016).
  5. James Egerton Vernon, Taming the “Mercantile Adventurers”: Third party Funding and Investment Arbitration – A report from the 14th Annual ITA-ASIL Conference, Kluwer Arbitration Blog, Apr. 21, 2017.
  6. Ibid.
  7. Ibid.
  8. Ashurst, Third Party Funding in International Arbitration, Jan. 13, 2017.
  9. Ibid.
  10. Ibid.
  11. International Arbitration Attorney Network, Third Party Funders for International Arbitration.
  12. Ashurst, Third Party Funding in International Arbitration, Jan. 13, 2017.
  13. International Arbitration Attorney Network, Third Party Funders for International Arbitration.
  14. Ibid.
  15. Dominik Horodyski & Maria Kierska, Third Party Funding in International Arbitration – Legal Problems and Global Trends with a Focus on Disclosure Requirements, p.70.
  16. Guideline 7(a), IBA Guidelines on Conflict of Interest in International Arbitration (“A party shall inform an arbitrator, the Arbitral Tribunal, the other parties and the arbitration institution or other appointing authority (if any) of any relationship, direct or indirect, between the arbitrator and the party (or another company of the same group of companies, or an individual having a controlling influence on the party in the arbitration), or between the arbitrator and any person or entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration. The party shall do so on its own initiative at the earliest opportunity “).
  17. §24, ICC Note to the Parties and Arbitral Tribunals on the Conduct of Arbitration (“Relationships between arbitrators, as well as relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award, should also be considered in the circumstances of each case. “).
  18. Jonas Von Goeler, Show me your case and I’ll show you the money – how to balance conflicts between third-party funding and confidentiality in arbitration proceedings, Kluwer Arbitration Blog, July 21, 2016.
  19. Victoria Shannon Sahani, Judging Third-Party Funding, 63 UCLA L. Rev. 388, 421 (2016).
  20. Ibid.
  21. Essar Oilfields Services Ltd v. Norscot Rig Management PVT Ltd EWHC 2361 (Comm)
  22. Christine Sim, Third Party Funding in Asia: Whose Duty to Disclose?, Kluwer Arbitration Blog, May 22, 2018.
  23. Ibid.
  24. Ibid.
  25. Ibid.
  26. Ibid.
  27. Christine Sim, 8 Key Points from the ICCA-QM Task Force’s 2018 Third-Party Funding Report, Kluwer Arbitration Blog, May 28, 2018.
  28. Ibid.
  29. Ibid.
  30. Principle B.1, Appendix, Report n°4 of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, International Council for Commercial Arbitration, April 2018.
  31. Principle C.1, Appendix, Report n°4 of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, International Council for Commercial Arbitration, April 2018.
  32. Principle C.4, Appendix, Report n°4 of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, International Council for Commercial Arbitration, April 2018.
  33. Christine Sim, 8 Key Points from the ICCA-QM Task Force’s 2018 Third-Party Funding Report, Kluwer Arbitration Blog, May 28, 2018.