The role of third party funders in international arbitration has recently undergone an important evolution and expansion. An increasing variety of companies are now looking to third party funding as a means of financing their arbitral disputes. Correspondingly, more companies now view funding arbitration and litigation as a potentially lucrative investments. This increase and expansion in the use of third party funding, however, engages both new and old concerns about the role of the third party funder in the legal process. Different jurisdictions have addressed these concerns in different ways.
Third party funders have been generally accepted in jurisdictions like England and Australia, but are still predominantly self-regulated or subject to a decision maker’s power over its own process. Some jurisdictions are silent as to whether third party funding is legal. Until recently both Hong Kong and Singapore did not allow for third party funding (either explicitly or implicitly). However, both jurisdictions have moved to amend their laws to explicitly permit third party funding and to create corresponding regulatory schemes. This represents an important step forward in the establishment and regulation of third party funding.
An Overview of Third Party Funders
Third party funding allows a party with no legal status in a dispute to fund some or all of a claimant’s (or counterclaimant’s) costs. Generally, the funder will receive a set portion of the amount recovered under the claim, and will not be paid unless the claim is successful. Traditionally third party funding assisted parties limited capital in pursuing their claim. However, it is steadily being used more and more by larger, well-capitalized parties as a means of controlling risk and protecting capital from being otherwise tied up during the arbitration.
While third party funding may provide advantages to both the funding party and the claimant it also poses challenges. Historically, third party funding has run the risk of running afoul of the doctrines of maintenance and champerty. This includes concerns about a third party funder’s involvement in the litigation process and that the funder will support and encourage frivolous and/or non-meritorious claims. Other concerns include the disclosure of the existence and identity of a third party funder, which goes to larger concerns about transparency in the arbitration process. The effect of a third party funder on privilege, cost recovery, and/or security for costs are also important considerations.
On March 1, 2017, Singapore introduced several amendments to its Civil Law Act to facilitate and regulate third party funding of arbitration.
First, the amendments abolished the torts of maintenance and champerty. Second, the amendments ensure that funding provided by qualifying “Third-Party Funders” is not contrary to public policy or otherwise illegal, provided the funding relates to a prescribed dispute resolution proceeding. However, this does not affect the law in cases where a contract is to be treated as contrary to public policy or otherwise illegal. Third, the amendments allow for regulations concerning, among other things, the qualifications of a “Third-Party Funder” and the types of dispute resolution addressed by the legislation. A “Third-Party Funder” who loses their status as a qualified funder or fails to comply with the statutory and regulatory requirements will not be able to enforce their rights under a funding agreement.
Singapore also introduced corresponding regulations. These set out the specific definition and qualifications of a “Third-Party Funder”. A “Third-Party Funder” must carry on a “principal business” of funding dispute resolution and have a paid-up share capital of not less than SDG $5 million (or the equivalent in foreign currency). The regulations also define the “prescribed dispute resolution proceedings” which are currently restricted to international arbitration and related court or mediation proceedings.
Also of note are related amendments to the Legal Professions Act and its professional conduct rules. These allow a solicitor to introduce or refer a client to a “Third-Party Funder” so long as the solicitor does not receive a financial benefit. The professional conduct rules require lawyers to disclose the existence of third party funding contracts to a court or tribunal, as well as all other parties to the dispute.
On January 11, 2017, Hong Kong introduced the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 into the Legislative Council. The bill proposes a number of changes to Hong Kong’s approach to third party funders, and closely follows recommendations from the Hong Kong Law Reform Commission’s consultation and reports on the topic in 2015 and 2016.
First, the bill would establish that the common law offences and torts of maintenance and champerty do not apply in relation to third party funding of arbitration. However, this would not affect laws where a contract is to be treated as contrary to public policy or otherwise illegal. Second, the bill proposes specific requirements for the disclosure of funding agreements to the arbitration board and all other parties. These disclosure requirements also apply to situations where the third party funding ends for reasons other than the end of the arbitration itself. Third, the bill proposes specific definitions of “third party funding of arbitration”, “funding agreement”, “funded party”, and “third party funders”, among other terms.
The bill would also allow for the creation of a Code of Practice which could, among other things, govern promotional materials provided by funders; require that funding agreements set out key features, risks, and terms; ensure that funded parties obtain independent legal advice prior to entering into a funding agreement; ensure that funders carry a sufficient minimum amount of capital; and ensure proper procedures for addressing conflicts of interest and complaints.
Both Singapore and Hong Kong have set out to change their respective laws in a way that will facilitate parties’ ability to provide and receive third party funding. Both aim to relax the traditional legal constraints preventing third party funding and remove concerns that a funder will fall afoul of the doctrines of maintenance and champerty. Singapore’s amendments appear to abolish the doctrines themselves, at least with respect to torts, while Hong Kong’s bill appears to remove their applicability to third party funding of arbitration while maintaining their existence more broadly. Both jurisdictions, however, are careful to ensure that these changes will not affect laws addressing contracts that are otherwise illegal or contrary to public policy. The removal of these laws (or their applicability) allows for more freedom and flexibility for parties seeking funding for arbitration. However, even though the changes allow for increased ease in third party funding, they also provide for increased regulation to address other concerns.
One of the ways these concerns are addressed is through requirements covering who qualifies as a third party funder. Singapore’s requirements mean that realistically only professional funders will qualify. Presumably this restriction seeks to ensure that only legitimate funders with an interest in successful cases will participate. Since a funder generally only sees a return if a claim is successful, professional funders will only want to fund claims (or counterclaims) with reasonable chances of success. This should, in theory, help to address concerns about third party funders supporting frivolous claims. While Singapore’s requirements are currently more detailed, Hong Kong’s may provide a similar level of detail (for example, a specific amount for the funder’s minimum capital requirement) upon the bill’s passage and the creation of a corresponding Code of Practice.
Additionally, the changes in Singapore and proposed changes in Hong Kong set out further safeguards regarding disclosure of the presence and identity of a third party funder. Both jurisdictions have (or will have) established mechanisms whereby parties must disclose the presence of a third party funder. This ensures that all parties to the dispute are aware of the funder’s involvement, increasing the transparency of the arbitration process. This will also facilitate the ability of all parties (including members of an arbitration board) in managing and avoiding conflicts of interest.
Questions, however, remain about the effect of a third party funder on privilege as well as on costs. A party applying for funding from a third party funder will have to provide that funder with at least some of the documents relating to their case, in order to show the funder that they have a potentially meritorious claim. This could raise the danger that a party inadvertently waives privilege. Parties may guard against this by establishing confidentiality and non-disclosure agreements with the third party funder or by arguing that common interest privilege applies. Ultimately, however, the governing law of the jurisdiction will decide whether privilege has been waived.
Additionally, there are questions about whether a third party funder could be liable for costs. Currently Hong Kong’s bill would allow the Code of Practice to ensure that funding agreements set out the extent of a funder’s liability on various costs. Singapore could also address this through additional regulations. This concern could be addressed in a security for costs application, as an arbitration board could consider the presence of a third party funder as a relevant factor. However, it seems unlikely that an arbitral panel could make a costs award directly against a third party funder, since the panel has no jurisdiction over the funder.
The effect of these changes remains to be seen. The relaxation of the rules against third party funding, combined with regulations and standards may help to address some of the concerns that have traditionally surrounded the process. While questions and concerns about conflicts of interest, privilege, and costs remain, these may be addressed as the laws develop and are tested and further regulations are put into place.