This article was first published in Global Arbitration Review.
For third-party funders and those who use funding, the enforceability of their awards is a key concern. Ben Knowles, the London-based co-chair of international arbitration at Clyde & Co, and senior associate Paul Baker consider whether enforcement of an award could be challenged in a jurisdiction that does not permit funding on the public policy ground that the award creditor was funded.
The Irish Supreme Court decision in Persona Digital Telephony v Minister for Public Enterprise in 2015 reminds us that in some jurisdictions third-party funding of arbitration is not sanctioned and falls foul of the torts of champerty and maintenance.
Maintenance is where an unconnected third party assists in maintaining litigation, for example by providing financial assistance. Champerty is a form of maintenance, where a third-party pays some or all of the litigation costs in return for a share of the proceeds.
Leading arbitral jurisdictions permit third-party funding for arbitration, with Singapore and Hong Kong recently joining their ranks. Whether Ireland follows suit is yet to be seen but the winds globally appear to be blowing in the funders' favour.
This leads to the question: would the courts of a jurisdiction where arbitration funding is not permitted in national law enforce an arbitral award made in another jurisdiction where the award creditor had received third-party funding to conduct the case?
Take for example an award made in London for £10 million damages plus £1 million costs where any costs award plus the first 20 per cent of the damages award was to be paid to the funder. Would this award be enforced by the Irish courts or other courts where litigation or arbitration funding is still prohibited under the funding agreement?
Would the courts refuse to enforce the £1 million costs award but enforce the damages award? Or would they refuse to enforce the entirety of the award as the first 20% of any enforced damages would be paid to the funder?
This article looks at the scope for refusal of enforcement on public policy grounds under the New York Convention, with reference to a 2015 International Bar Association report on that considered refusal of enforcement on public policy grounds.
It will then look at three key jurisdictions - Singapore, Hong Kong and Canada - to see whether the courts have grappled with this question and, if so, how. Of these three, only Canada now maintains the torts of champerty and maintenance and regards funding as illegal.
Enforcement under the New York Convention
In countries that are signatories to the New York Convention, enforcement of an award made in another signatory state shall not be refused except on certain specific grounds including that recognition or enforcement of the award would be contrary to the public policy of the country where recognition or enforcement is sought.
Public policy is not defined in the New York Convention nor is it usually in national laws (the laws of the United Arab Emirates and Australia are two notable exceptions). It is recognised, furthermore, that its meaning differs between jurisdictions.
In 2015, the IBA Subcommittee on Recognition and Enforcement of Arbitral Awards published a report following an ambitious project to define public policy as a ground for refusing to enforce an award under the New York Convention and to catalogue its concrete manifestations based on decisions of enforcing courts.
The IBA surveyed 45 countries finding few enforcement refusals on the grounds of public policy and none on the basis of a funded award. While little consistency was found, the survey did emphasise the extremely intense circumstances required for enforcement to be held to be contrary to public policy.
In its words:'[W]hile there is no uniformity in the extent of review of the award by the enforcing courts, the predominant trend is to limit the review to a conformity-check of the arbitral decision itself, not its reasons, with public policy as assessed in the country where enforcement is sought.'
The impact of disclosed funding
For an award to be set aside on public policy grounds on the basis of funding, it is apparent that the existence of a funding arrangement needs to be disclosed.
There is an increasing trend for tribunals to order disclosure of the existence of funding (see, for example, the SIAC Investment Rules 2017) but this is not yet the norm. Even if the existence of funding is disclosed, the terms of the arrangement seldom are.
In Singapore, amendments to the Legal Profession Professional Conduct Rules 2015 state that practitioners must now disclose any third-party funding relationship. In Hong Kong, parties are also required to disclose funding. In both, it is unclear how this requirement would be applied where an award was rendered outside the jurisdiction and where no local counsel are acting on the enforcement.
Self-evidently, if funding were to be held offensive on the grounds of public policy, it would only be a ground of recourse for award debtors who knew of the award creditor's funding. Since arbitrators seek to make enforceable awards, the knowledge that funding might have a potential impact on enforceability could lead them to routinely order the disclosure of funding where they have the power to do so, to put the parties on an equal footing when it comes to enforcements and resisting enforcement.
Competing public policies
Outside the context of funding, the 2016 English court decision in Pencil Hill v US Citta Palermo may be of guidance. It concerned the question of whether a New York Convention award could be enforced in England even though it gave effect to obligations which would be unenforceable penalties under English law. The English court enforced the award on the basis that the grounds for refusing to enforce a foreign arbitral award under the New York Convention are narrow, for example where a universal principle of morality needs to be protected or where there is a risk of injury to the public good.
The judge was satisfied that 'the important public policy against enforcement of penalty clauses [was] not sufficient to permit [him] to refuse enforcement' in this case. The judge also felt it was important that the governing law of the contract, Swiss law, empowered the courts to reduce a penalty clause.
Accordingly, he said "the public policy of upholding international arbitral awards…outweigh[ed] the public policy of refusing to enforce penalty clauses. The scales are tipped heavily in favour of enforcement."
Public policy in favour of enforcement
This last sentence is perhaps the key to our question - the public policy interest in enforcing the arbitral award may outweigh the public policy interest in 'protecting' the public from third-party funding.
In English law, the courts have stated that third-party funding is "an accepted and judicially sanctioned activity perceived to be in the public interest". Whether this public interest outweighs the interest in protecting parties from champerty and maintenance in other jurisdictions is a matter for their courts.
With third-party funding on the increase, particularly of portfolio claims, those jurisdictions that have accepted and embraced funding as a part of modern dispute resolution stand to improve their reputation as dispute resolution centres. Enforcement is key to all dispute processes and funders and lawyers must keep a keen eye on it from the outset, including considering the impact of any funding arrangement and any impediments to recovery for both sides.
The review of three jurisdictions begins with Singapore. In 2017, the city state passed into law its Civil Law (Amendment) Bill to permit third-party funding of international arbitration and related proceedings before the courts. The Singapore legislature has taken a cautious approach initially but will to assess at a later date whether to extend the permission to domestic arbitration and litigation.
Before this law, third-party funding was prohibited in Singapore save in certain exceptional circumstances. Arbitration was not specifically noted as an exception but a funding arrangement would not be struck down if there were a realistic possibility that the administration of justice would suffer, taking into account matters such as the extent of control the funded litigant retained over proceedings, the interests of vulnerable litigants and access to justice.
The 2015 IBA report shows that Singapore had not at that time refused to enforce any awards on public policy grounds and we are aware of no cases in which the existence of funding was raised as a ground for refusal of enforcement under the International Arbitration Act (Cap 143A). Certainly none have been successful. In a public consultation on funding last year, the issue of enforcing arbitral awards was not raised.
In domestic arbitration in Singapore, where enforcement is not governed by the New York Convention, the Court of Appeal in Otech Pakistan v Clough Engineering issued a judgment reinforcing the applicability of the torts of champerty and maintenance laws.
The court recognised as a 'well-established doctrine' the fact that 'a champertous contract offends public policy and is therefore unenforceable'. The court also stated that '[p]ublic policy is offended by [a champertous] agreement because of its tendency to pervert the due course of justice'. Note that domestic arbitration is not affected by the new laws on third-party funding.
In June 2017, the Hong Kong government passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill on 14 June. This opened the way for third-party funding of arbitrations, whether international or domestic, under the Hong Kong Arbitration Ordinance and any covered proceedings before the court or an emergency arbitrator or mediator.
Hong Kong did not participate in the IBA study in 2015 but we can find no evidence of enforcement of a New York Convention award being refused enforcement in Hong Kong because any element of the award was funded in breach of Hong Kong public policy.
Canada - Ontario
In Canada, the doctrines of champerty and maintenance continue to be enforced by the courts. However, the law has 'progressed' so that third-party funding is not champertous per se but only if there is an improper motive.
The IBA Report on Canada shows that the public policy exception would only be applied in extreme circumstances. In its words:
"The concept of imposing our public policy on foreign awards is to guard against enforcement of an award which offends our local principles of justice and fairness in a fundamental way, and in a way which the parties could attribute to the fact that the award was made in another jurisdiction where the procedural or substantive rules diverge markedly from our own, or where there was ignoranceor corruption on the part of the tribunal which could not be seen to be toleratedor condoned by our courts."
The report also states that a breach of Canadian law would not be considered a breach of public policy in most circumstances. It is therefore unsurprising that the IBA report disclosed only two refusals of enforcement on public policy grounds, neither of which related to funding.
The court did, however, consider an application for refusal of enforcement on public policy grounds in Banglar Progoti Ltd v Ranka Enterprises Inc. In this, Ranka argued that money loaned by one family member to another to cover the legal fees in the dispute made the award contrary to public policy.
The court dismissed Ranka's application under the Ontario International Commercial Arbitration Act on the basis of both law and fact, holding that the allegations were purely speculative and were unsupported by evidence. Even if champerty and maintenance had been made out, the court held it was an open question as to whether they applied to arbitration or were sufficiently serious to be considered as contrary to public policy in Ontario.
We can find no decision of any Canadian court where funding has been successfully considered contrary to public policy when seeking to enforce an arbitral award.
Outside the class action context, third party litigation funding is relatively new in Canada. In Schenk v Valeant Pharmaceuticals International Inc, the plaintiff was required to seek the court's approval for a third-party funding arrangement where there was no precedent in a commercial context.
The court considered the principles of champerty and maintenance but it was uncontested that third party litigation funding is not per se objectionable. In this case, furthermore, the terms of the litigation funding arrangement were open ended, meaning that the funder could potentially receive the majority or all of the proceeds.
The court also considered Ontario's regulation 195/04, which prohibits contingency fees that are in excess of 50% of any award.
The court refused to approve the unprecedented funding arrangement on the basis that it constituted champerty and maintenance. However, it said this was without prejudice to the plaintiff's ability to renegotiate the terms of the arrangement with the funder and seek approval thereafter.
How the Schenk decision would be applied in the context of an application for enforcement ofan arbitral award is uncertain. The courts have applied the public policy provision to refuse enforcement of foreign awards in only rare circumstances. They have, on the other hand, continually limited the scope of champerty and maintenance as contingency fees and litigation funding for class actions have become more prominent.
Competing public policies
As discussed earlier, the public policy in upholding awards may 'outweigh' public policy in upholding local laws. The paucity of cases challenging awards on grounds of third-party funding offending public policy could be because this principle is generally recognised and accepted.
Alternatively, the paucity may be because the existence of funding is not disclosed in many cases and the award debtor thus misses the opportunity to object to enforcement.
With third-party funding on the increase both in terms the number of funders in the market and the varieties of funding available, it will be interesting to see whether new challenges are raised as arrangements come before the courts for the first time.
If so, it will be for the courts to balance their local laws and international obligations and decide how to resolve the challenge.