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THIRD PARTY FUNDING IN INTERNATIONAL ARBITRATION

Updated: Jun 16

Written by: Arushi Anand, Vivekanand Institute of Professional Studies

What is third party funding?


The concept of third party funding has gained light in international arbitration because of its underlining idea of helping the litigants in the disputes through the investment or funding. It fundamentally provides that an institution who is not a party to an international arbitration dispute goes on to finance the proceedings’ claims and expenses in reciprocity of a return of a percentage of the gain received when the party wins the case. Third-party funding is a financing method in which an entity that is not a party to a particular dispute funds another party’s legal fees or pays an order, award, or judgement rendered against that party, or both.[1] The agreement between the funder and the funded party may also include paying another party’s attorney fees if the funded parry loses the case or the decision maker (i.e., an arbitrator or panel of arbitrators) orders the funded party to pay the attorney fees of another party.[2] This principally means that if a party loses an arbitral dispute, then the funding party has to pay the proceeds of the loss as well and that they cannot oblige away from the proceedings on the ground that they are not a party to the dispute. If they are allowed to share in the proceeds on winning, they are to pay the expense when the dispute is lost.


The institution (third party funding institution) is not constrained by the same professional and ethical rules as an attorney, so it can exercise more freedom in deciding the extent of financial commitment.[3] It can, thereby, be said that the amount, or percentage, or even the particular expenses for which they finance the party is free to be decided by the institution itself. Though, it has a lesser control on the settlement of the dispute like an insurance company works and that is the reason that it is the reason that third party funding is a growing concept in the matters of international arbitration especially commercial trans-national transactions.


Third party funding is recently emerging as an attractive option (in international arbitration) facilitating access to justice to an impecunious party who may have a credible/ meritorious claim.[4] The party who might not be able to bear the costs and expenses that incur in international arbitration can have the aid from third party funding and get the justice of which they are wronged.


Issue of Conflict of Interest


Conflict of interest has proved to be a significant issue and a problem in regard to third party funding. This occurs when there increases the risk of partiality and the lack of independence of the arbitrators. Due to the increasing relation and the growing industry of the third party funding, the close relations often exist between the elite law firms and the leading arbitrators.[5] The root of the problem is in the fact that even if it is considered that the funding party are not the real parties in the dispute in the formal sense but they do derive their profit by investing in the case. They participate to a lot of varying degrees in various stages of arbitration.[6] In a situation, a funding party might have financed a party in a particular case with a counsel, and a situation may arise that the same counsel might be an arbitrator in another case with the same funding party financing a different party. In that case, the conflict of interest surfaces with complications when the arbitrators’ impartiality becomes a question and the judgement by him itself gets tainted.


The IBA Guidelines on the Conflicts of Interest in International Arbitration[7] exist that deal with the matter in general in international arbitration. It mentions and regulates under Explanation to General Standard 6 the third party funding procedures to be free from conflict of interest. But yet, the complete procedure guidelines do not exist in the matter as to the third party funding. That is why it becomes necessary to bring about amends in it. The repeat arbitrator in the matter needs to be disclosed because though, the funding party do not in formal sense forms part of the dispute, it regulate its functioning and influence the cost allocation. The disclosure by the arbitrator as to the connection between the funding parties will remove any doubt as to his impartiality and help in the smooth working of the proceedings. The issue arises when a funding party wants access to the confidential information related to the arbitral dispute because if they want to invest, they need to analysis the dispute as a whole and get access to its content which again raises and influences the proceedings related to such privileged information being disclosed. In relation to that, the ethics itself of such kind of practice is put under deep scrutiny and its legal validity. This leads to impact on arbitral awards or any kind of settlement. The deeper problem emerges on the lack of conventions and universality of the legal parameters on the matter and destroying the helpfulness that the international arbitration provides.


Disclosure of Third Party Funding Agreement


The third party funding and the complexities that arise with it gives rise to the concept of transparency to emerge and take charge so that international arbitral proceedings are conducted in a manner which is impartial and on the basis of the rule of law. Though the contents of the arbitral proceedings remain and hold the general principle of confidentiality on its pedestal yet it cannot be ignored that the transparency is required when conflict of interest emerges between the essential stakeholders. That is the reason that the disclosure of the third party agreement becomes utmost important. The reason for the disclosure arises because such agreements are signed between the investor and the third party funder and consequently, they are legally disconnected from the arbitral agreement itself.[8] Because of the justification that these agreements do not form part of the agreement in dispute (i.e., the arbitral agreement) but a separate agreement between the parties; the tribunal, thereby cannot in its power exercise jurisdiction over such agreements. An imbalance is thus created because of the non-disclosure and no power over the agreement by the absence of transparency that cripples the arbitral proceedings. Therefore, in the context of deficiency of the obligatory disclosure of the third party funding agreement by the parties and the confidentiality clause in the funding agreement[9], there exists the stage when the independence of the arbitrators and the settlement or award is questioned.


The issue of ‘repeat arbitrators’, namely when arbitrators are appointed by the same party or the same law firm in different disputes[10], it presents a conflicting interest. That is the reason when it is seen that the voluntary disclosure should be the norm as can be seen through a famous case[11] whereby the funding party revealed the existence of the funding agreement. But even that is seen with complications when not many funding companies want to violate the confidentiality clause so as to prevent the allocation of costs and application of a negative cost allocation scheme.[12]


However, what the States are working on is to designate and permit for the mandatory disclosure of the funding agreement between the parties that will ensure more clarity in international arbitration disputes. Thereby conforming to that principle, Singapore introduced the Investment Arbitration Rules, 2017[13] and under its rule, it expressly deals with third party funding giving wide powers to the Tribunal for ordering the disclosure of such agreements, the identity of the funder and other important details.[14] Similarly, Hong Kong[15] had adopted the same approach in respect of the disclosure of the third party funding agreement and identity to protect the proceedings of the international arbitration and stopping any kind of biasness and prejudice by the arbitrators. These effects taken by the States to ensure transparency of international arbitration in regard to third party funding is important to note because the flourishing of the arbitration proceedings in international arena and relying on its exceptional approach needs that there is no unfairness of any kind. Furthermore, to deal with awarding of the costs and the increase in it as such will be necessary to tackle (as to the responsibility related to the cost) which will become easier by the way of disclosure of the agreement.


Conclusion


To end on the note that the third party funding is a global phenomena in international arbitration having advantage to both the funding party and the party to the dispute is definitely correct. But with its merits comes certain specific issues as to the requirement of the disclosure funding agreement to enable transparency and equality in procedures. So, when a conflict of interest surfaces, there is the mandatory requirement of amending the procedures by bringing disclosure of important and relevant information like the information of the funding agreement.

References

[1] Maya Steinitz, Whose Claim is This Anyway-Third-Party Litigation Funding (2010) [2] Lisa Bench Nieuwveld and Victoria Shannon Sahani, Third party funding in international arbitration (2016), 2 edn. [3] Supra n. 1 [4] Prof. A F M Maniruzzaman, Third Party Funding in International Arbitration- A Menace or Panacea?, 29th December, 2012 [5] M. J. Goldstein, Should the Real Parties in Interest have to Stand Up?- Thoughts About A Disclosure Regime for Third Party Funding in International Arbitration, 2011 [6] William W. Park and Catherine A. Rogers, Third-Party Funding in International Arbitration: The ICCA Queen-Mary Task Force, 2014 [7] Adopted on 23rd October, 2014 [8] Dr. Eric De Brabandere and Julia Lepeltak, Third Party Funding in International Investment Arbitration, 2012 [9] Global Arbitration Review, The Dynamics of Third-Party Funding, 2012 [10] Houchi Kuo, The Issue of Repeat Arbitrators: Is it a Problem and How Should the Arbitration Institutions Respond?, 2011 [11] Oxus Gold PLC V. Republic of Uzbekistan, decided on 17th December, 2015 [12] Supra n. 7 [13] Effective from 1st January, 2017 [14] Investment Arbitration Rules, 2017 (Singapore); Rule 24(I), 33.1 [15] Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2016; Effective on 2017; & Hong Kong Code of Practice for Third Party Funding in Arbitration, Effective from 1st February, 2019


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