As third-party funding continues to become more common in international disputes, particularly international arbitration, new concerns continue to emerge for parties and counsel who have sought to make use of this new resource. A recent decision of the US District Court for the Southern District of New York in the Chevron-Lago Agrio case highlights some of the complications involved with third-party funding in multijurisdictional disputes.

The New York action arose from Ecuadorian litigation which resulted in a $19 billion (later reduced to $9 billion) judgment against Chevron for alleged pollution in the Lago Agrio region of Ecuador by Texaco between 1964 and 1992.  Prior to the publication of the Ecuadorian judgment, Chevron filed an action in the Southern District of New York alleging fraud and violations of the U.S. Racketeer Influenced and Corrupt Organizations Act (RICO) by the Lago Agrio Plaintiff Representatives (the LAP Representatives) and their counsel. Much of the case's notoriety resulted from salacious details revealed through discovery regarding the unscrupulous practices of the LAP's former counsel.  Even after the departure of counsel, however, the case continues to attract significant attention.

Most recently, the court denied a motion to withdraw due to the non-payment of fees filed by the LAP Representatives' new counsel. The court’s decision to reject the motion was largely based on two factors: (i) the failure to disclose financial information regarding third-party funders, and (ii) the continued activity by the LAPs in other jurisdictions to enforce the Ecuadorian judgment.

The court appeared to draw conclusions from the LAP’s continued pursuit of related enforcement actions in other jurisdictions and the apparent decision not to fund the U.S. litigation to hold that the motion to withdraw was an effort to gain advantage through gamesmanship rather than the result of actual necessity.  The court stated:

[T]he claim of inability to pay is entirely unsubstantiated and appears to have been deployed in an effort to gain tactical advantage….   Indeed, every indication – including his clients’ pursuit (with others) of litigation against plaintiff in three other countries – is that those controlling the money simply have decided not to spend more for the defense of this action while using their resources elsewhere.

The court did, however, suggest that this decision might be different on different facts.  In reaching its decision on the facts of this case, the court noted the overriding ambiguity regarding the LAP Representatives' funding arrangements, which itself was the result of the LAP's decision not to make significant disclosures and to otherwise keep the terms of any financing arrangements confidential.  To this end, the court noted that counsel might be permitted to withdraw in the future, noting any renewed motion to withdraw would "perhaps [] be on a fuller evidentiary showing." Of course, this then presumes agreement between counsel and client to permit further transparency over the financing arrangements than had previously been provided.

The case thus touches on several tensions or ethical challenges that practitioners have previously identified with regards to third-party funding, which are highly relevant to the funding of international arbitration. 

First, third-party investors have incentives to fund claims offensively, but may not have the same incentive to defend related or ancillary claims where they may be liable for damages or payments of costs to the other side.  One potential consequence is that meritorious respondents will be left without meaningful recourse (e.g., payment of attorney costs) with regard to claims that are found to be lacking in merit once third party funding is withdrawn.  

Second, increased attention has also been placed on the potential conflict of interest that might arise due to the participation of undisclosed third-party funders and the related issues regarding when and how much, if anything, parties should be required to disclose regarding such arrangements.  This issue – and particularly the lack of disclosure –  featured prominently in the court’s decision. 

The Chevron-Lago Agrio case brings a new perspective on these issues, particularly as it relates to another stakeholder: counsel. The court's denial of the motion to withdraw leaves counsel in the difficult position of being compelled to continue representation even where funding has been withdrawn. Of course, as the court noted, counsel was aware of the particulars of the LAP's financing when he accepted the representation.

The court's decision in Chevron-Lago Agrio is another important development in the legal framework for third-party funding. While not risk-free, parties may still find recourse to third-party funding critically important to their ability to prosecute their claims. Great care, however, must be given to the potential consequences of this decision and to the terms of the funding arrangement.