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Three is a crowd! The rise of third party funding in international arbitration

  • United Kingdom
  • Construction and engineering - Articles

19-04-2018

Introduction:

The use of third-party funding has been a hotly debated topic in the international dispute resolution community for some time with all signs pointing to its continued growth. The ubiquitous presence of third-party funding internationally means that the debate has for the most part moved beyond consideration of whether third-party funding should be allowed, to evaluation of more specific issues that are implicated by third-party funding[1].

The funding market appears to be on a constant expansion trajectory, the number and geographic diversity of funders are increasing, with new funders continuing to enter the market with the consequent increase of aggregate amount of funding available.[2]

While the rising global prominence of dispute funding has led to some jurisdictional liberalisation and a rethinking of the status of champerty and maintenance in a number of jurisdictions, an exception is Ireland where the Supreme Court[3] has held that third-party funding was unlawful on the ground of champerty.[4]  Further, the presence of a third party involved in the arbitration process has raised concerns in relation to, among others, issues of confidentiality, privacy, privilege and conflict of interests[5].

How third-party funding operates in practice:

Third-party funding in its most basic form involves an entity with no prior interest in the legal dispute providing financing to one of the parties, usually the claimant. Traditionally, third-party funding was associated with those who would otherwise not be in a position to access justice, this is however no longer the case.

External funding of claims is not unknown in dispute resolution and has been in practice in US litigation for more than a century, and in Europe, while relatively new, has been permitted in several countries.[6] Historically, third-party funding was deemed unlawful due to the laws prohibiting maintenance and champerty but now third-party funding of arbitration is expressly permissible in numerous jurisdictions, including Australia, England and Wales, various European jurisdictions and the U.S.A[7].

In practice, third-party funders, agree to finance all or a portion of a party’s legal costs. The third party funder usually secures an entitlement to an agreed percentage (20%-50%) of the amount awarded, or by way of an agreed lump sum success fee, for defined “success” in the arbitration. Should the case fail, the funder generally loses all of its investment and has no recourse to any recovery of the money invested.

Third party financing agreements take different forms, such as insurance, attorney financing arrangements, loans, assignment of a claim or classic third-party funding in international arbitration in the form of non-recourse financing with repayment contingent on success.[8] Litigation Funding Agreements (“LFA”) between a funder and a claimant are individually negotiated after an application process by the claimant and decision by the funder to make an investment by entering an LFA with the claimant.

Arbitral rules governing third-party funding:

The vast majority of the major arbitral institutions rules contain no express reference, regulation or guidance about third-party funding arrangements in international arbitration, creating uncertainty and allowing tribunals to act at their own discretion. The conduct of funders is unregulated at an international level, and domestic regulation is largely voluntary or is currently being formulated. Current arbitral rules do not sufficiently regulate the independence of arbitrators and further, there is no provision of the international rules requiring a declaration of the presence of a third party funder.[9] Recently however, the IBA Guidelines on Conflict of Interest in International Arbitration were revised and regard funders and insurers as equivalent to a party to the arbitration. These guidelines have been largely followed by international arbitration practitioners, although they are not binding[10].

Common law jurisdictions approach third party financing:

The development of third party funding principles has been recognised globally. For the purposes of this article we have particularly examined the approaches of Singapore, Hong Kong, England & Wales, and the contrasting approach adopted by the Courts in Ireland.

(i)          Singapore

Until recently the preservation of champerty and maintenance stalled the growth of third-party funding in Singapore, however on 1 March 2017, Singapore introduced several amendments to its Civil Law Act to facilitate and regulate third-party funding of arbitration. The key amendments introduced have involved abolishing the torts of maintenance and champerty and stipulate the prescribed categories of proceedings in which third party funding can be used.

Now, in order for a party to be eligible to provide funding under the Act, a third party funder must  have "a paidup share capital of not less than $5 million”, and it’s funding of dispute resolution proceedings must be its "principal business"[11]. A third party funder that fails to comply with these requirements will not be able to enforce its rights under a third party funding agreement,[12] although a third party funder can apply for relief where it can show its non-compliance was accidental or inadvertent, or because it would otherwise be just and equitable to grant relief.[13]

Going forward practitioners must now disclose to the court or tribunal and to every other party to proceedings, the existence of any third-party funding contract related to the proceedings, and the identity and address of any funder involved, at the date of commencement of proceedings, or as soon as practicable thereafter. Following from this legislation, SIAC, have also 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.[14]

(ii)         Hong Kong

On 19 October 2015, the Law Reform Commission of Hong Kong (“LRCHK”) published a consultation paper, with the aim of clarifying whether third party funding of arbitration was unlawful under the doctrines of maintenance and champerty. As part of their findings, the LRCHK noted that the doctrine of champerty had been rendered obsolete, since its introduction 700 years ago[15]. The first recommendation of the LRCHK was that the statute governing arbitrations in Hong Kong be amended to permit third party funding of arbitration taking place in Hong Kong, and that Hong Kong lawyers and legal service providers may work for third-party-funded international arbitration proceedings, which are seated outside Hong Kong.

Following Government review, the LRCHK’s recommendations were adopted, and on 23 June 2017, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 was enacted motivated by a desire to enhance Hong Kong’s position as a global seat for international arbitration.[16]

(iii)        England and Wales

Maintenance and Champerty in England and Wales has not been crimes and torts since the passing of the Criminal Law Act 1967. This position was re-affirmed recently in the case of Essar Oilfields Services Limited V Norscot Rig Management Pvt Limited [2016] EWHC 2361 (Comm), where the Commercial Court held that an arbitrator may award costs incurred by a successful party to an arbitration for engaging a third-party funder.[17]

In terms of regulation, England and Wales are not subject to formal regulation, with self-regulation being preferred in the form of a code of practice. The code was first published in 2011 with the formation of the Association of Litigation Funders (ALF) of England and Wales[18], and was most recently updated in 2014. The code of conduct for litigation funding includes a number of requirements such as a requirement that all funders members of ALF must now have a minimum of £2 Million of Capital, be audited by a recognised law firm and the introduction of a new detailed complaints procedure which all members will be bound by. The Code is binding on all members of the Association and regulates the funding of "litigation, arbitration or other dispute resolution procedures".

(iv)        Ireland

In contrast to the above, the Irish Courts have taken a different approach to the subject of third party funding. The most recent Supreme Court decision on the issue was handed down in 2017, in the case of Persona Digital Telephony Limited and Another v The Minister for Public Enterprise, Ireland and Others [2017] IESC27 (“Persona”). Here, the Court was invited to interpret the rules in light of modern justice systems and permit funding provided proper protections were built in. The Court refused to develop the law in this way and affirmed that as long as there is a third-party funding in a case in return for a share of the proceeds it is automatically unlawful. It was held that third-party funding of litigation falls under the torts and crimes of maintenance and champerty, established in statutes dating as far back as the 14th century, and as such it was not for the Court to interfere and instead, it was up to the law makers to change the law. Consequently, the Court declined to allow Persona Digital Telephony Limited to obtain third-party funding.

Despite the position outlined above, it has been suggested that third-party funding in international arbitration may in fact be permissible in Ireland.

Two reasons have been advanced to support this position:

a)    Firstly, the Court has stated that “maintenance may be defined as the giving of assistance, by a third party, who has no interest in the litigation, to a party in litigation. Champerty is where the third party, who is giving assistance, will receive a share of the litigation succeeds.”[19] Given that arbitration, by definition, is not litigation, the Irish laws of maintenance and champerty may not be ruled as being applicable to arbitration. Further, the Court expressed its reluctance to apply the laws of champerty and maintenance to international arbitration, stating, “The Court was asked not to be seduced into changing the law in the interests of what the Court may perceive to be just. It may be said that in light of modern issues, such as… issues arising on international arbitrations… it might well be appropriate to have a modern law on champerty…”.[20]

b)    Secondly, international arbitration agreements define the governing law and jurisdiction that they shall be subject to with parties choosing to appoint governing laws where maintenance and champerty are lawful. Even if the Irish Courts eventually pronounce third-party funding in international arbitration to be champertous, they might not refuse to enforce foreign arbitration awards which involve third-party funding.

While the reasons outlined above may form the basis of argument for the permissibility of third-party funding in international arbitration in Ireland, however it must be remembered the Supreme Court in the Persona decision was clear in its conclusion that a change in the law to welcome third-party funding into the Irish litigation landscape was required at government level. With this in mind, it is very possible that arguments of a technical nature in support of the permissibility of third-party funding in international arbitration in Ireland will fall on deaf ears if advanced in defence to a challenge. 

ICCA-Queen Mary Task Force on third-party funding in international arbitration (“Queen Mary Task Force”)

The Queen Mary Task Force published a draft report for public comment in September 2017, with a final report anticipated in 2018. The draft report acknowledges that a better understanding of what third-party funding is and the issues it raises in international arbitration is necessary and would be beneficial. The aim of the report was to open up discussion on this issue of third party funding and in doing so may provide for beneficial guidance, greater consistency and more informed decision-making in addressing issues relating to third-party funding

The report provides an analysis of the dispute funding environment and the issues currently faced including some of the key concerns that have arisen in respect of disclosure and conflicts of interest, privilege, and, costs and security for costs. The report also provides commentary on principles of best practice in third party funding arrangements, this commentary aims at “providing further guidance in the form of articulation of what constitutes good and responsible practices in entering a funding arrangement”[21].

Going forward, the report when published will aim to encourage the parties to an Arbitration to adopt the principles advanced in the report to their proceedings. Further, and perhaps more likely, parties, legal counsel and arbitrators may reference or invoke the principles to address issues that arise in the course of an arbitration, in entering into a funding agreement, and in discussions regarding third party funding[22]. In addition, national courts reviewing international arbitral awards or addressing issues relating to third party funding could also find the report useful[23].

Conclusion:

In conclusion, a constant issue in the dispute resolution environment is the high costs associated with most forms of dispute resolution, it is argued the availability of third-party funding will potentially address this issue.

However the use of third-party funding arrangements holds both benefits and risks for the claimant, funder and respondent and also adds complexity to progression of a claim and ultimately the administration of justice. Thus a party who is considering accessing third-party funding needs to understand how the use of funding will affect both the progression of their claim and its ultimate resolution.

That said, the appetite for the use third-party funding in international arbitration across the world has not abated, on the contrary it is only increasing, therefore it is difficult not to accept there is clearly a need for this form of financial assistance to be available, on this basis it is possible that international pressure may eventually bring countries (such as Ireland) into the fold.


[1] The draft report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration published in September 2017.

[2] The draft report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration published in September 2017, page 3

[3] Persona Digital Telephony Limited and Another v The Minister for Public Enterprise, Ireland and Others [2017] IESC27

[4] The draft report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration published in September 2017, page 28

[5] Mechantak, K [2016] Third-party funding in international arbitration: active funders as parties in arbitration proceedings, Arbitration 2016, 82(4), 371-379

[6] Maniruzzaman, "Third-Party Funding in International Arbitration — A menace or Panacea?", Kluwer Arbitration Blog (2012).

[7] Ibid., para. 4.145

[8] Details can be seen in Shannon and Bench Nieuwveld, Third-Party Funding in International Arbitration, (2012), pp.5–8.

[9] Osmanoglu, "Third-Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest" (2015) 32(3) Journal of International Arbitration 325, 337.

[10] Osmanoglu, "Third-Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest" (2015) 32(3) Journal of International Arbitration 325, 337.

[11] New section 5B(2) of the Civil Law Act.

[12] New section 5B(3)-(4) of the Civil Law Act.

[13] New section 5B(5)-(6) of the Civil Law Act.

[14] http://www.bailii.org/ie/cases/IESC/2017/S27.html

[15] 2015, Consultation Paper, Third Party Funding For Arbitration, Third Party Funding for Arbitration Sub-Committee, The Law Reform Commission of Hong Kong, at para. 1.2

[16] 2017, Report of the Bills Committee on Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016, Legislative Council of Hong Kong, at para. 8

[17]http://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Comm/2016/2361.html&query=(2016)+AND+(ewhc)+AND+(2361)

[18] http://associationoflitigationfunders.com/code-of-conduct/

[19] http://www.bailii.org/ie/cases/IESC/2017/S27.html,

[20] http://www.bailii.org/ie/cases/IESC/2017/S27.html,

[21] The draft report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration published in September 2017. Page 145

[22] The draft report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration published in September 2017. Page 9

[23] The draft report of the ICCA-Queen Mary Task Force on third-party funding in international arbitration published in September 2017. Page 9

For more information contact

Dermot McEvoy, Partner
Siobhan Marry, Associate

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