On 1 September, a task force of the ICCA and the Queen Mary School of International Arbitration published a draft report on third party funding. The draft report is still available for public comment until 31 October 2017. A final report will be launched in April 2018.
In the following, we want to give a quick overview of the 177-page report which can be downloaded here.
Pursued objectives of the report are, on the one hand, to promote the understanding of third party funding and its issues, and, on the other hand, to facilitate the decision-making with regard to third party funding.
In eight chapters the draft report addresses amongst others the following issues which are currently hotly debated in Commercial and Investment Arbitration:
- a definition of “third party funding”,
- disclosure and conflicts of interest,
- costs and security for costs.
Chapter 1 and 2 serve as an introduction to both the task force which was constituted in 2013 and third party funding in general. Especially the second chapter offers an overview about the mechanisms of third party funding and its development in the last years.
In Chapter 3 the task force presents a working definition of “third party funding”:
The term ‘third-party funder’ refers to any natural or legal person who is not a party to the dispute but who enters into an agreement either with a disputing party, an affiliate of that party, or a law firm representing that party:
a) in order to provide material support or to finance part or all of the cost of the proceedings, either individually or as part of a selected range of cases, and
b) such support or financing is provided either through a donation or grant or in return for remuneration or reimbursement wholly or partially dependent on the outcome of the dispute.
Chapter 4 deals with disclosure and conflict of interests – two controversial topics. Disclosure and conflicts of interest in case of third party funding has been a disputed topic in the past. Finding an appropriate solution has been disputed in the working group as well, so that in the end two alternative solutions are presented in chapter 4 :
1. A party should, on its own initiative, disclose the existence of a third-party funding arrangement and the identity of the funder to the arbitrators and an arbitral institution or appointing authority (if any), either as part of its first appearance or submission, or as soon as practicable after funding is provided or an arrangement to provide funding for the arbitration is entered into.
1. Arbitrators and arbitral institutions have the authority to, during the selection and appointment process, expressly request that the parties disclose whether they are receiving support from a third-party funder and, if so, the identity of the funder.
Other often debated issues in connection with third party funding are awarding costs and ordering security for costs. Chapter 6 addresses these issues.Chapter 5 contains some principles on privilege. While third party funding and the funder’s existence are not considered as privilege, there might be information, e.g. regarding the funding agreement, for which the tribunal should permit appropriate redaction.The two alternatives are a consequence of a disagreement about whether third party funding should be disclosed in every case (Alternative A) or only upon arbitrator’s or arbitral institution’s request (Alternative B).
As to the awarding of costs, the report focused on three issues:
1. Should a funded party that has prevailed in the arbitration be able to recover party costs at all where these costs have been funded by a third party?
- Yes, recovery of party costs should not be denied because of third party funding (Principle 1).
2. Where costs are allocated based on the outcome of the case and the funded party prevails, what type of costs can it recover from the opponent?
- At least the costs of funding will ordinarily be not recoverable as costs (Principle 3).
3. Where costs are allocated based on the outcome of the case and the non-funded party prevails, could an arbitral tribunal render a costs order directly against a third-party funder?
- No, generally a tribunal lacks jurisdiction against a third party funder (Principle 4).
As to security of costs, the task force suggests that any decision on an application for security for costs should be made irrespective of the fact of funding, but only on the basis of impecuniosity. The report first focuses on investment arbitration. Relying on a growing number of arbitration cases on this issue, the task force concludes that the trend goes to an understanding that the mere fact of third party funding is no sufficient reason for a security for costs order. Also in commercial arbitration cases the fact of third party funding is considered as an indication for the claimant’s impecuniosity. However, the task force warns that this might not necessarily be true – there are solvent claimants as well being funded by third parties.
The principles developed in the previous chapters are summed up in Chapter 7 as “principles and best practices”.
Finally, Chapter 8 deals with third party funding in investment arbitration. While the previous chapters considered investment arbitration as well, this chapter specifically discusses policy issues.
Until 31 October all eight chapters are open to public discussion; the results will be presented in April 2018. It will be seen whether the task force meets its objective of facilitating the decision making with regard to third party funding issues.