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  • Paras Sharma

Third-Party Funding in International Arbitration

Authors:

Pratibha Dixit and Simran Kaplish, Students, Nirma University Institute of Law, Nirma University


Introduction:

Arbitration is the most widely used means of resolving disputes since it provides speedy justice. However, it is a costly practise that can damage small companies that are struggling financially. Third-Party Funding has played a major role in the field of international arbitration in this regard. Third-party funding or litigation financing is essentially the position of someone who is not personally involved in the arbitration, usually, a party (claimant or counter – claimant) is funded to arbitration in exchange for an agreed-upon set of shares or profit that the funded party earns as a result of the award. Legal fees and settlement expenses are often paid by the fund. The funder maybe someone who is financially interested in investing in a claim that has a fair chance of success.


Arbitral autonomy significantly impacts the regulation of third party funding in arbitration. The main motive to uplift autonomy is firstly by treating the parties on an equal platform, giving them equal opportunities and rights. There should be no elimination of any procedure, and due process of law should be followed. This is because third-party funding increases the scope of development.


The broad definition of third – party funding says:

“An agreement by an entity that is not a party to the dispute to provide a party, an affiliate of that party or a law firm representing that party,

  1. funds or other material support to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases, and

  2. such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute or provided through a grant or in return for a premium payment.[1]


Further, this type of funding will essentially entail two forms of funding, one of which is the legal fees and the other is the security for the damages incurred during the arbitration proceedings. Now, the question arises that who can be funded? Claimants are the recipients of TPF and there is the possibility of monetary awards if the claim is successful. This financial reward will be divided with the funder. Due to the risks inherent in TPF, there are also new trends emerging for the safety of both plaintiff and defendant such as insurance services etc. And who are the funders? Funders are individuals or organizations that specialize in TPF, such as insurance companies and investment banks. The expenses of the legal proceedings, counsel fees and arbitration fees are all included in the funding. The funders would also cover the costs of security and any losses that could occur in adverse circumstances. The courts have the authority to rule against the funders in this case and the funders are not required to act.


In this article, we shall be looking upon disclosure of TPF and its position in the International Arbitration, various risks and challenges faced by TPF in international arbitration and regulations of TPF.


Disclosure of Third-Party Funding and its Position in An International Arbitration:

It is a basic principle that the parties be fully aware of all the situations that may be important in their opinion in assessing the suitability of an arbitrator. The International Bar Association, the first organization to discuss third – party financing accepted this concept and elaborated on it the IBA guidelines on conflicts of interest in international arbitration. Although the disclosure concept occurs in various fields of law incorporating it into the TPF was not without controversy. TPF disclosure primarily involves the nature of TPF, the identity of Third Party Finder and the terms of the Funding Agreement. Many concerns arise in this respect including whether the presence of the third party funder should be revealed to the arbitral tribunal and the opposing party.


The need for TPF disclosure stems from the need to maintain the reputation and dignity of the arbitral proceedings. In other terms, by requiring the funded party to reveal the presence and identity of a third party funder, arbitrators and dignity of the arbitral proceedings. In other terms, by requiring the funded party to reveal the presence and identity of a third party funder, arbitrators and competing parties would be able to conduct a “conflict of interest check” to ensure that none of the arguable parties has a conflict of interest.


In India, the disclosure on third-party funding was fuelled by the Supreme Court’s decision in the case of Bar Council of India v. A.K. Balaji. When addressing the right of foreign lawyers to practice in India, the court passively admitted that third-party funding is not prohibited in India. Further, Order 25 Rule 1 CPC provides that the courts have the power to secure costs for litigation by asking the funder to become a party and depositing the costs in Court. In India, there is no statutory provision that allows or disallows third-party funding of arbitration disputes. Based on the judicial pronouncements, it is fair to assume that third – party funding of arbitration disputes is passively accepted in India. As India strives to become a global arbitration centre, relevant legislation for both domestic as well as international arbitration should be enacted.


Risks and Challenges

Third-party funding proves to be a great advantage in arbitration but there can be a sharp side of the sward too. There are certain risks and challenges that will be faced during commercial arbitration. May include conflict of interest or disclosure of cost and security. Third-party funding is usually ordered by courts. A clean can easily be funded, if it seems genuine. Many times, this goes against the party, where the funder makes default. Though, this concept was made to uplift justice but here it is deteriorating the objective of the act. There should be due diligence on the part of the funder, to be very alert and exercise due diligence. Most of the times, these claims are speculative, opportunistic and spurious. The funders should analyse the situation, the facts, consider the law in depth and then go for making such funding decisions. Many countries have made the funders liable in case they are unable to pay defaults. In this case, when there is delay injustice due to the default made by funders, they shall be considered in place of the real party.


Conflict of interest Can either be perceived or actual. Generally, in case the funder has a relationship with any of the party, there would be a sense of arbitrary behaviour or favoured behaviour. This can lead to various conflicts regarding the appointment of the arbitrator, disclosure of funding information for the agreement etc. There are some practical issues and flaws, including a lack of regulation. Most of the nations have laws related to arbitration but failed in making laws for third-party funding. Even if the laws are made, they have not been clear creating uncertainties. To make things stable, there should be rules and regulations that remove ambiguity and create uniformity.


Protection of privacy and confidentiality also becomes a challenge when it comes to third-party Funding. It becomes the essence when the party has to disclose all the information to the funder before the agreement is made. Most of the times, crucial information is not been disclosed which creates chaos in the enforcement of the Agreement. There are situations where the funder uses his power showing him in a dominant position using unfair terms and conditions so that he can get control over the claim. This is because the funder’s motive is profit. Peaceful settlement becomes a secondary aspect. There can be an increase in unmeritorious claims, before determining whether to make a funding bid, they perform due diligence in each case, weighing the merits of the parties' arguments and the possibility of recovery. Parties can even learn from this in-depth examination of their case's merits.


Conclusion:

The outbreak of Covid – 19 has resulted in an on-going economic recession and businesses are struggling to sustain their cash flow. It is exceedingly difficult for companies and businesses to muster the confidence to enter into, or even continue, ongoing arbitration proceedings in such a situation. The idea of third-party funding appears to be extremely important in today’s world. Further, allowing third-party funding of arbitration proceedings is the best step to assist businesses that are experiencing financial hardships as a result of the pandemic or otherwise and are unable to enforce their legitimate claims. This will also ensure the best legal advice and effective dispute resolution can also be ensured by the third – party funding. As a result, third-party funding of arbitration proceedings should be actively recognized and the government should regulate it to meet the market demands which further entice commercial parties to choose Indian law as the seat of arbitration. Moreover, to overcome all these challenges it is essential for the countries to make strict laws that put a mandate/burden on the parties to abide by. This can include proper due diligence by the parties and also eliminate the unfair practices used by the funders.


References:

[1] The ICCA Reports No.4, Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, April 2018

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