Overview of Third-party Funding Practices in International Arbitration

Overview Of Third-party Funding Practices In International Arbitration

Authors: Ayush Garg & Mridul Pateriya, Gujarat National Law University.

Abstract

In the ages of globalization with increasing cross-border transactions, international commercial arbitration has also boomed. Though it is efficient and time-saving compared to the traditional dispute resolution mechanisms the large costs attached to it cannot be ignored.  Its solution comes in the form of “Third Party Funding”, “Third-party funding (hereinafter TPF) arises when a third party (the Funder) provides financial support to another party (the Funded Party) to pursue or defend an arbitration or related court or mediation proceedings. Such financial support is provided in exchange for an economic interest in any favorable award or outcome that may ensue.”It is achieved by means of third party contracts (hereinafter) “it is an agreement by a Party to dispute Resolution Proceedings with a TPF entity for the funding of all or portion of the costs of the proceedings in exchange for a share or other interest in the proceeds of the proceedings to which the party may become entitled”.

Who are the funders and What kind of Disputes Are Funded?

Third-party funders typically are natural or legal people other than the disputing party who supports part or all of the costs of the arbitration in return for remuneration as a part of the compensation awarded by the tribunal. The funder can be investments banks, hedge funds, insurance companies and pension funds also claim as an asset class.  Commercial contracts, international commercial arbitration, class action suits, tortuous claims like medical malpractice and other like claims that have a calculated chance of resulting in a substantial monetary award are the kinds of disputes under funds.

Advantage and Disadvantage of Third-Party Funding from Party’s Perspective:

Advantages:

Arbitration can be costly. On the off chance that an claimant doesn’t have the way to seek after a meritorious case, TPF likely could be its lone choice. Even if the claimant possesses the fund to take part in arbitration proceeding with the unforeseeable expenses and deposition of security severely clouds the claimant ability to use resources for business purposes in such cases TPF allows the company to invest that resources somewhere else. Funders are just keen on monetarily rewardful cases. Thus they will conduct due diligence and complete their own examination before financing. This examination helps the claimant to shape his case, and may likewise energize early settlement.

Disadvantages:

An effective claimant usually needs to pay a huge remuneration to the funder. Although funders are commonly disallowed from putting undue influence in arbitration, there might be some loss of independence with respect to the claimant as funders may hold the privilege of endorsing the settlement. TPF may result in Respondent’s demand for the disclosure of terms of the agreement as there might be concern of arbitrator’s independence and impartiality that it may result in biased arbitration Award. IBA Guideline on Conflict of interest in international arbitration 2014(soft law)[i] but still it is a step forward. General standard 6(b) states that if any legal entity or person has any direct interest in the arbitration award can be considered as party in the proceeding given TPF has direct interest they fall in this definition. General standard 7 puts obligation on parties to disclose any relationship that may influence proceeding; they shall do so by their own violation and the arbitrator is under due obligation to take reasonable inquiry to identify any conflict of interest. SIAC in its 2017 Rules in Art. 24(f) provided that tribunal additional powers to direct any party to produce to the tribunal and to the other party for inspection of any documents in their possession which is material to the case.

Advantage and Disadvantage of Third-Party Funding from funder’s Perspective:

Advantages:

TPF provides opportunity for the funder to invest and gain capital. Profits can be generated in the form of remuneration for funding the arbitration. Venture returns are not dependent on market conditions; It provides a level of control in deciding the path of arbitration proceeding. If provided in agreement, right of approval of the settlement as well.

Disadvantages:

By funding the claimant funder essentially incurs financial risk that is contingent on the result of the arbitration proceeding. if done bad may result in significant losses. A high cost of funding is also at times results in losses as many times settlement does not produce expected results causing losses for the funder. Sometimes past relationships between arbitrator and funder may result in satellite disputes, including arbitrator’s appointment and disclosure of TPFA and again applicable rules and regulation concerning arbitration proceedings will play a role in such cases. Disputes can also arise at enforcement stage if the enforcing court’s jurisdiction holds TPFA against public policy resulting in substantial loss.

Issues to consider when dealing with funder:

TPFA and international arbitration are often associated together with great risk, high costs, and large amounts at stake in these disputes.

  1. Privilege and confidentiality:  As the preliminary stage starts, the funder will need to be provided with confidential information. Hence it is sensible to enter into a non-disclosure agreement at this early stage.
  2. Exclusivity:  When the funder is about to incur significant outlays in reviewing a case at that time the funder will ask for exclusivity. Although justifiable from the funder’s perspective, it could be disadvantageous as it would keep different funders from taking a look at a case, and there is no assurance that the specific funder will choose to fund toward the end of the due diligence process.[ii]
  3. Settlements:  The elements of settlement conversations can be contorted by virtue some degree skewed interests of the funded party and the funder. A specific jurisdiction methodology towards subsidizing may likewise decide the degree to which the funder can take an interest in settlement conversation.

Regulate or not to regulate the third party funding:

On 1 September 2017, the ICCA QMUL Task Force on TPF distributed its Draft Report for Public Discussion on TPF in International Arbitration.[iii] The Task Force has created standards with the point of giving direction to parties and national courts when confronting TPF related issues. Moreover, and considerably more outstandingly, the Task Force demonstrated that the report might be valuable for arbitral organizations.

The question remains whether further guidelines of TPF would be a positive development. While 71 percent of the respondents to the 2015 Queen Mary International Arbitration overview accept that TPF is an area that requires further guideline, we are of the view that managing TPF, at any rate on a national level, may not really be the most ideal path forward.[iv]

Firstly, there is a danger of over-regulating; accordingly, adequately confining the utilization and use of TPF more than is important. Secondly, it is essentially difficult to address all issues and worries with a single arrangement of clear and restricting guidelines; the issues related with TPF’s may vary from case to case, from one jurisdiction to another and will undoubtedly change after some time, as will be the manner by which TPF is practised and the manner by which it is perceived.

At the end, we ought not to overlook that the continuous discussion on TPF has given rise to its potential capacity than ever before. As long as the key players in universal arbitration– clients, Arbitrators and Institutions – are aware of the potential issues related with TPF, they can act up on those and develop general practices of TPF funding.

Enforcement in different Jurisdictions:

The enforcement of TPFA agreement with the attached arbitration award depends upon the where the award or TPFA are being enforced examples are:

The seat of Arbitration:

Say if, the arbitration award has to be enforced at the seat of arbitration then the legality of enforcement will depend on that nation’s policy regarding TPFA say in the case of Persona Digital Telephony Limited & Sigma Wireless Networks Limited v The Minister for Public Enterprise, Ireland and the Attorney General[v] The Supreme Court of Ireland set-aside the arbitral award due to the presence of TPFA as being against the Public Policy of Ireland.

Third party funding agreement entered into where the claimant resides:

Agreement is legally valid where the claimant resides at. Would this agreement be valid in jurisdiction of enforcement?  In Essar Oilfields Services Limited v Norscot Rig Management PVT Limited[vi], the claimant (Scottish Company) funded by a third party was allowed to recover costs. The arbitration tribunal set up to decide the issue upheld the TPF agreement and which was subsequently upheld even by the English courts while deciding enforcement of the award. Therefore, it can be safely assumed that the validity of the TPF agreement at the claimant’s location lends credibility to the validity of the agreement. At the same time the validity of the award would depend on the approach adopted by the court executing the arbitration award.

Validity of the third party funding agreement and the arbitration award at the place of execution:

It can safely be stated that the TPFA agreement can be legally valid where it was entered into but an arbitration award can be set aside if the policy of executing court jurisdiction does not recognize the same.

Example of jurisdiction policy regarding Third Party Funding:

  •  Singapore:

Singapore has adopted the Civil Law (Amendment) Act (08 of 2017) in March 2017. It has abolished tort of maintenance and champerty and, via section 5B allowed TPFA with conditions for qualification as valid funding.

  •   Hong Kong:

Hong Kong has adopted Arbitration and Mediation legislation (TPA) (Amendment) Bill 2016 in June 2017. It aims at regulating. What was previously prohibited in international arbitration. On 31 August 2017, the CIETAC released its guidelines on in arbitration[vii].

  •   India:

The concept of third party financing in not new in Indian Legal Jurisprudence, Order XXV of Code of Civil Procedure (1908) as amended in Maharashtra, Madhya Pradesh, Gujarat and Uttar Pradesh recognized that the court has power to secure cost of litigation by asking the financer to be a party and depositing the costs in the court. The Supreme Court of India in the case of bar council of India v. AK Balaji[viii] held that “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.”  Though the arbitration and conciliation Act, 1996 make no mention of hence it depends on being valid contract on Indian Contracts Act, 1872. Hence it depends on whether the TPF arrangement fails the Public Policy test in contract law.

Conclusion:

 TPF and international arbitration are often associated together because of the high risk, huge costs in these disputes. TPF allows those costs and risks to be mitigated. There has been an increase in the number of claimants seeking funding for international arbitration claims. Further the legal development of Arbitration has contributed to the growth globally. The recent rules by international arbitration centres have cleared some of the doubts like conflict of interest, Non-disclosure agreements etc. furthermore uniform rules need to be adopted in this regard in the form of general practice unlike guidelines (Soft law).


[i] Siac.org.sg. 2020. SIAC Investment Rules. [online] Available at: https://www.siac.org.sg/images/stories/articles/rules/IA/SIAC%20Investment%20Rules%202017.pdf [Accessed 2 May 2020].

[ii] Third Party Funding in International Arbitration, Ashurst, https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—third-party-funding-in-international-arbitration/ (last visited May 2, 2020).

[iii] Marc Krestin et al., Third-Party Funding In International Arbitration: To Regulate Or Not To Regulate? Kluwer Arbitration Blog (2017), http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate/ (last visited May 2, 2020).

[iv] Marc Krestin et al., Third-Party Funding In International Arbitration: To Regulate Or Not To Regulate? Kluwer Arbitration Blog (2017), http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate/ (last visited May 3, 2020).

[v] 10 [2017] IESC 27.

[vi] [2016] EWHC 2361 (Comm).

[vii] Hkarbitration.files.wordpress.com. 2016. Guidelines For Third Party Funding In Arbitration. [online] Available at: https://hkarbitration.files.wordpress.com/2016/05/cietac-draft-guidelines-17-may-16.pdf [Accessed 1 May 2020].

[viii] (2018) 5 SCC 379.

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