There has been much debate and discussion regarding third party funding in international arbitration. The question that is now being asked is whether parties should make full disclosure about receiving third party funding. In a recent ICSID decision which was covered here, the tribunal ordered the Claimants to disclose whether they were the recipients of third party funding, and, if they were, to disclose the names and details of the funder and some terms upon which the funding had been provided. Also the latest proposal of the European Union for the Transatlantic Trade and Investment Partnership contains an express rule on disclosure of third party funding:
“Where there is third party funding, the disputing party benefiting from it shall notify to the other disputing party and to the division of the Tribunal, or where the division of the Tribunal is not established, to the President of the Tribunal, the name and address of the third party funder.”
Given these developments, this article examines three questions: Why could third party funding be desirable in international arbitration? What are the concerns that third party funding entails? What is the current international practice with regard to the disclosure of third party funding arrangement?
What is third party funding and why is it used in international arbitration?
Third party funding can be defined as “any funding provided by a natural or legal person who is not a party to the dispute but who enters into an agreement with a disputing party in order to finance part or all of the cost of the proceedings in return for a remuneration dependent on the outcome of the dispute or in the form of a donation or grant”. Typically, a funder receives a share of the sum recovered by the claimant in the arbitration or a multiple of the costs invested. Such funding can be provided at any point in the arbitration: before the arbitration, during the proceedings or even after an award has been made.
There are principally two reasons why parties seek third party funding in international arbitration. Third party funding enables a claimant to pursue a claim which it would otherwise not be able to afford, and this facilitates access to justice. Another significant benefit of third-party funding in international arbitration is that it provides a mechanism through which the claimant can share with the commercial funder the financial risk and operational burden in pursuing his claim.
Concerns regarding third party funding in international arbitration
Two specific concerns have been raised with regard to third party funding in international arbitration:
First, the fact that a third-party funder covers a party’s legal fees could have an impact on the independence of arbitrators. It may happen that a party is funded by a third party funder with which one of the arbitrators has a conflict of interest. For instance, the arbitrator in the first arbitration in which one of the parties is funded by a funder, may be the counsel to the claimant in another arbitration in which the claim is funded by the same funder. This impairs the independence and impartiality of the arbitrator and may have a direct impact on the valid constitution of the arbitral tribunal, which in turn may make the award subject to challenge.
Second, the fact that a claimant is supported by third party funding might prove that the claimant is impecunious and thus unable to pay an adverse cost award. Tribunals often allow the prevailing party to recover reasonable costs from the losing party. Given the length and complexity of international arbitration proceedings, the amount of costs awarded to the prevailing party can be quite significant. The existence of third party funding is likely to give rise to a situation where the self-funded party may suspect that the party obtaining funding is impecunious, and will be unable to pay any adverse cost award. The arbitral tribunal lacks jurisdiction to order the third party funder to pay adverse costs because the funder is not a signatory to the arbitration agreement or a party to the arbitration proceedings. This may cause the self-funded party to seek security for costs, to avoid a situation where the impecunious award debtor may not pay.
Disclosure of third party funding
Given the above concerns, there is an ongoing discussion whether the funded party must disclose whether it is backed by a third party funder. In the most recent Queen Mary 2015 International Arbitration Survey, a clear majority of respondents (71%) were in favor of regulation of third party funding. When asked what should be regulated, respondents suggested a disclosure obligation which includes the use of third party funding (76%) and the identity of the third party funders (63%) but does not include the full terms of the third party funding arrangements (only 29% suggested such far-reaching disclosure duty).
EU’s Proposal for TTIP implements the wish for regulation and adopts a general duty to disclose the identity of the third party funder. The purpose of the proposal is twofold:
First, the disclosed information enables the arbitrators to assess possible conflicts of interest at the very outset of the arbitration. It could seriously disrupt the arbitral process if an arbitrator learns about the existence of the funding agreement during the course of the proceedings and needs to step down after a significant part of the arbitration has already been completed.
The General Standard 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration contains a slightly different disclosure duty. The IBA Guidelines require a party to inform the tribunal and the other parties involved about a conflict of interest between an arbitrator and a party having a direct economic interest in the arbitration (“interested person”):
“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 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.”
The official explanation to General Standard clarifies that a third party funder also qualifies as a “person with a direct economic interest”.
In practice, the party usually does not know whether there is a conflict of interest between the arbitrator and an interested person. Therefore, the party or its lawyers provide the name of the interested person on a confidential basis to the arbitrator who then runs a conflict check. Only if a potential conflict exists, the relationship between the arbitrator and the interested person is disclosed to the other members of the tribunal or the counterparty.
Second, it is often argued that if the tribunal is aware that a party to the proceedings has obtained third-party funding, then the tribunal is in a position to assess whether it is necessary to order the funded party to provide security for costs. The tribunal might order security for costs if the funded party lacks the financial means to participate in the arbitration but for the existence of the funding agreement, and is therefore likely to be unable to satisfy a future adverse costs award. ICSID tribunals have been prepared in appropriate cases to order security for costs from the claimant in order to ensure that funders (who are outside the jurisdiction of the tribunal) bear some of the risk of an adverse costs outcome in the arbitration.
While the rationale behind such orders to provide security for costs might be comprehensible, it is sometimes argued that a claimant should nevertheless not be requested to disclose the fact that it is backed by a third party funder. The essential requirement for a security for costs order is the likelihood that the claimant would be unable to satisfy a future adverse costs award. Generally, it is for the defendant to prove this requirement or at least to provide good reasons to believe that the claimant will be unable to pay the defendant’s costs. Against this background two arguments militate against a duty to disclose the involvement of third party funders: (i) The involvement alone does not prove that the claimant is impecunious. (ii) A duty to disclose the involvement of a third party funder shifts the burden of proving the (non)fulfilment of the requirements for a security for costs order to the claimant.
It remains to be seen whether institutional arbitration rules will adopt a disclosure duty comparable to the far-reaching duty suggested by the EU for TTIP, or whether the opponents of regulation will prevail.