Third Party Funding in International Arbitration: Problems & Recent Developments

By Shivansh Jolly

With the passing of time, the concept of third party funding in international arbitration has started attracting attention, and has consequently attained considerable significance. The concept involves providing monetary assistance by a third party (stranger to arbitration) to one of the parties to the concerned arbitration, generally supported by a formalized agreement laying down the terms and conditions governing the assistance provided.[1] Such agreements may entail a pre-decided incentive for a funder in the instance of a favourable award with respect to the party funded, such as remuneration to the extent of a fixed percentage of the award. The need for third party funding usually arises in cases where either the Complainant or the Respondent is financially incapable of bearing the expenses arising out of the dispute, more importantly, the costs following a possible adverse award. Another possible scenario which may invite third party funding may be an instance where a favourable result of a dispute benefits the funder in question, either directly or indirectly.

Consequences and Concerns:

Though third party funding motivates a party to initiate a bona fide claim it would otherwise avoid due to a lack of financial ability to bear the necessary expenses, it also entails certain issues which demand due attention. They can broadly be understood to be as follows –

(i) Details of the third party involved in funding the claim of a party should be timely disclosed, more so since third party funding can be invited at any stage of an arbitration proceeding. Such details could primarily be in the form of any connection which the concerned funder may share with the arbitrators adjudicating a dispute. For example, a funder in an ongoing arbitration could have funded an earlier dispute which was formerly counselled by an arbitrator of the present proceedings. A non-disclosure of such relations between a funder and an arbitrator could lead to annulment of an award on the ground of an alleged bias against the arbitrator concerned.

(ii) The funder concerned could command a significant leverage over the party being funded, thereby allowing it to dictate its terms in areas such as choice of the representing counsel for the funded party.

third-party-funding-arbitration-international(iii) Being a non-signatory to the relevant arbitration agreement, the Tribunal would command no control over the activities of the funder, for instance, it would not ideally have the jurisdiction to order the funder to deposit the necessary funds in the event of an adverse award against the party funded [controversial exception being the case of RSM Production Corporation v. Saint Lucia (ICSID Case No. ARB/12/10), Decision on St. Lucia’s request for security for costs, August 13, 2014 wherein the Tribunal ordered the funder to deposit security for costs in  advance on the request of the Respondent State].

(iv) Private players acting as funders could be significantly interested in a favourable award, thereby raising questions against the bona fide nature of claims which may be filed. Such concerns can aptly arise in cases of third party funding in an investor-State dispute, wherein the funder may directly or indirectly benefit from a favourable award striking down the impugned measure of the Respondent State.

(v) Influence and involvement of third party funders may also hinder exploring the possibility of seeking a settlement of the concerned dispute between the parties. Funding Agreements may empower the funder to exercise a veto if a settlement is sought by the funded party; primarily because a funder would rather be interested to earn an agreed remuneration in the event of a favourable award.

Relevant Developments:

As will be discussed henceforth, while the concept of third party funding has been largely accepted in the international community, an unconditional and an unregulated practice of the same has been sincerely questioned.[2] It has been fervently suggested by authors and practitioners to regulate the said concept in as much as to provide transparency and disclosure of details concerning the third party funder.[3] While none of the international legal instruments expressly provide for addressing this concern, a few developments in this regard merit due attention.

The first notable development to support such notions was witnessed in the form of a Code of Conduct which was voluntarily developed by the Association of Litigation Funders of England and Wales, an organization of third party funders, which was released in November, 2011. Though the said Code primarily concerned litigation third party funders, it is understood that it would also impact third party funding in arbitrations seated in the said jurisdiction.[4] While the Code did provide for a principle disentitling the funders from exercising any control or influence over the conduct of the proceedings in question, it remained silent on the issue of disclosure of necessary details regarding the funder.

Second such development concerning third party funding took place as the International Bar Association (IBA) revised its Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines). The Explanation to General Standard 6(b) of the said IBA Guidelines states that – “When a party in international arbitration is a legal entity, other legal and physical persons may have a controlling influence on this legal entity, or a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration. Each situation should be assessed individually, and General Standard 6(b) clarifies that such legal persons and individuals may be considered effectively to be that party.” General Standard 7(a) of the IBA Guidelines states that each party is duty bound to make relevant disclosures to the arbitral tribunal and to the other parties concerned with regard to “any relationship, direct or indirect”, “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 Explanation to General Standard 7(a) clarifies that such disclosures shall ensure that the arbitral award is effective and enforceable, which would also do away with possible challenges against the integrity or neutrality of the arbitrators concerned. The said Explanation further provides that General Standard 7(a) is inclusive of third party funders of arbitrations, representing the interests of the concerned funded party.

Thirdly, the need for disclosure in third party funding was evidenced by a survey conducted by the Queen Mary University of London, School of International Arbitration, in collaboration with White & Case LLP, which was released in 2015.[5] The said survey collaborated responses submitted by practitioners and corporate professionals who possessed considerable past experience in international arbitrations. While 48% or the Respondents in general, and 51% of the Respondents who have personally participated in third party funding responded in favour of the said concept, 71% of the total Respondents believed that such practice must be regulated. Interestingly, 58% of the total Respondents opted in favour of regulating the practice of third party funding through the IBA Guidelines, while 29% believed that self-regulation through a code of conduct could be workable too. Furthermore, 76% of the Respondents responded in favour of mandatory disclosure with regard to the particulars of a third party funding, while 63% favoured disclosure of the identity of such third parties involved. However, only 29% of the Respondents favoured full disclosure of the content and terms of a Funding Agreement.

The  most recent development in favour of regulated and transparent third party funding came in the form of a “Guidance Note for the disclosure of conflicts by arbitrators” (Guidance Note), adopted by the International Chamber of Commerce, on 12th February 2016. The note states that “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.” While shifting the onus upon the arbitrators to mandatorily disclose any existing relation that they may share with a third party funder, the Guidance Note answers the concern of mandating the parties to make such disclosures which would otherwise seem unachievable, given the general hesitance of parties to follow that route.

In the light of the aforementioned developments, an efficient manner to regulate third party funding would be to require a mandatory disclosure of details and identity of the funder by the concerned parties at the earliest stage of the proceedings, without obliging them to enumerate the particulars of the agreement which governs such funding. While the former would serve the purpose of determining any relation which an arbitrator may share with the funder concerned, disclosure of such particulars embodying the agreement which would have no bearing or impact upon the arbitration may go against the interests of the funded party.[6]  Concurrently, there is a need to necessitate disclosure of any relationship which an arbitrator may share with such funders so as to ensure efficiency in the arbitration proceedings while avoiding the possibility of annulment of an award on alleged grounds of bias against the appointed arbitrators.

(Shivansh is pursuing law from Gujarat National Law University. His area of interest is settlement of international disputes. He can be reached at shivanshjolly@gmail.com)

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[1] IBA Guidelines on Conflicts of Interest in International Arbitration, General Standard 6(b) – “…For these purposes, the terms ‘third-party funder’ and ‘insurer’ refer to any person or entity that is contributing funds, or other material support, 15 to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration.”
[2] 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration, http://www.arbitration.qmul.ac.uk/docs/164761.pdf.
[3] RSM Production Corporation v Saint Lucia, ICSID Case No ARB/12/10, Assenting Reasons of Gavan Griffith (12 August 2014) paras 17–18; Muhammet C¸ ap & Sehil Insaat Endustri ve Ticaret Ltd Sti v Turkmenistan, ICSID Case No ARB/12/6, Procedural Order No 3 (12 June 2015).
[4] Jean E. Kalicki, Third-Party Funding in Arbitration: Innovation and Limits in Self-Regulation (Part 1 of 2), March 13, 2012, http://kluwerarbitrationblog.com/2012/03/13/third-party-funding-in-arbitration-innovation-and-limits-in-self-regulation-part-1-of-2/.
[5] http://www.arbitration.qmul.ac.uk/docs/164761.pdf
[6] Jean-Christophe Honlet, Recent Decisions on third-party funding in investment arbitration, ICSID Review, Vol. 30, No. 3 (2015), p. 710.
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