THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION: LEGAL AND ETHICAL CONSIDERATIONS

ABSTRACT

International arbitration has become the go-to dispute resolution method for settling cross-border business issues in the complex and interrelated world of global trade. The phenomenon of third-party funding is discussed in this article, with an emphasis on how TPF operates in international arbitration. The article begins with a broad explanation of third-party funding and its operation. A number of legal, ethical and procedural questions are brought up by third-party funding for international arbitration, most notably those pertaining to the conduct of the arbitrators. In TPF, third parties that are not connected to the parties in dispute contribute money to pay the expenses of bringing an arbitration claim. These third-party funders are compensated by receiving a share of any settlement or award that the sponsored party wins. While TPF might provide a lifeline to those without the means to file a strong claim, it also brings up a number of complex legal, moral, and practical issues that need to be carefully considered.

KEYWORDS

International Arbitration, third-party funding (TPF), ethical considerations, funders, arbitrator, arbitral tribunal, cross-border conflicts, award, justice, order.

INTRODUCTION

The legal framework for international ADR processes is outlined in the UN Charter. It states that before turning to any other peaceful methods of resolution, the parties to a dispute must first attempt to resolve it by negotiation, inquiry, mediation, conciliation, arbitration, judicial settlement, or other regional bodies or arrangements. The area of international arbitration is always changing and currently includes a number of new concerns. Third-party funding is one of the major developing themes in international arbitration.

TPF is a relatively recent development in the field of international arbitration. It is a burgeoning sector that is expanding steadily. The growing need for conflict funding in international arbitration is being driven by two key factors. Due to the substantial sums of money at risk in international arbitration, financial institutions are naturally drawn to novel types of investments as a result of the global financial market crisis.

However, due to the extremely high expense of international arbitration, companies that wish to share the risk of arbitration with a third party, maintain a sufficient cash flow to continue operating as usual during the arbitral proceedings, or impoverished claimants are more likely to look for funding to pursue a meritorious claim. In this regard, it should be mentioned that not all parties involved—especially small and medium-sized companies—have the financial means to support such costly processes, even if the majority of cross-border business contracts include an arbitration clause. It is possible that a smaller business has a good case on its merits but lacks the funds to retain first-rate legal counsel, finance the arbitral process, and pursue any further fund enforcement actions.

On the other hand, a larger business with more financial resources might retain the best legal counsel and implement a plan meant to prolong the proceedings. In investor state conflicts, this disparity is even more pronounced, as most single claimants lack the financial wherewithal that the vast majority of governments possess to fund litigation and arbitration.

TPF offers a solution to this issue by levelling the playing field, guaranteeing equal access to arbitration for parties who choose to use it, and therefore eliminating “the risk of a world where only rich claimants are entitled to justice.”

WHAT IS THIRD PARTY FUNDING?

In international arbitration, TPF is not well-defined or widely used. A distinguishing characteristic of the international arbitration scene, third-party funding (TPF) brings a fresh perspective to the settlement of cross-border conflicts. A third party that is not a party to a particular dispute might cover the legal bills or fees of another party or pay an order, award, or judgment imposed against that party, or both, using a financing method called third-party funding, sometimes referred to as litigation funding. In the fields of international arbitration and litigation, third-party funding is an expanding phenomenon that is becoming increasingly commonplace.

The funder, who is a third party, only gets paid if the claim is approved. The funds contributed by outside funders can be utilized to cover the costs as well as legal fees associated with the dispute, including charges for an attorney, the administering institution, experts, investigations, interpretations, travel, hearings, annulments, and implementation, among other things. The funder gets a cut of any settlement or award that is made in exchange.

The funder assumes a significant portion of the financial risk, as its return is contingent on securing a favourable award or settlement. If the claim fails, the funder will not recoup its investment, and Party A will not bear any liability for repayment. Conversely, if the claim is successful, the funder will receive an agreed-upon share of the award or settlement, realizing a return on its investment.

This arrangement fosters a mutually beneficial partnership between the funded party and the funder, relying on each other’s interests and expertise to navigate the complexities of international arbitration.

HOW TPF OPERATES IN INTERNATIONAL ARBITRATION?

Any potential funder would want to maximize its return on investment if they were an investor. Because of this, the potential funder will typically conduct a thorough and meticulous due diligence investigation of the claim’s merits prior to awarding funds. The following are the main variables that are typically examined:

The claim’s value;
The jurisdiction where the claim will ultimately be heard;
The likelihood of winning the arbitration;
The calibre of the litigant’s legal team
the kind and duration of the arbitration proceedings;
The procedure and reputation of the arbitral institution;
The substantive law of the dispute;
The calibre and quantity of the documentary evidence, as well as of the witness evidence;
The counterparty’s financial situation and its ability to pay; and
The legal basis of the claim and the risks associated with any potential counter claim.

Funders do not fund low value cases, (usually, they fund only those cases whose value is at least $1 million); nor do they fund a claim if the seat of arbitration is clearly unsuitable (either because it is a corrupt jurisdiction, or inhospitable to TPF), or if the jurisdiction where the award is likely to be enforced is unlikely to accept such enforcement. Additionally, funders are reportedly cautious, seldom investing in cases with less than a 70% chance of success and an anticipated length longer than 2.5 years.

Lastly, it is said that funders would not support a lawsuit if they disagreed with the party requesting funding’s choice of legal counsel. In conclusion, third-party funders evaluate the investment’s desirability by weighing the claim’s advantages and disadvantages. They only support compelling claims.

THE ETHICAL ASPECTS OF THIRD-PARTY FINANCING IN INTERNATIONAL ARBITRATION

Third-party funding involves a number of ethical considerations that need to be carefully considered in addition to giving parties the chance to pursue claims they might not otherwise be able to afford. Ethical considerations become even more crucial in the situation of international arbitration, because parties from various jurisdictions look for a settlement outside of established legal systems. At the core of arbitration are the concepts of justice, impartiality, and transparency; therefore, every element that could jeopardise these values needs to be closely examined.

The engagement of third-party funders brings with it complications related to control, independence, disclosure, secrecy, conflict of interest, and regulatory supervision. To protect the arbitration process’s integrity, each of these ethical aspects needs to be carefully considered and, when needed, best practices and relevant guidelines should be developed. Attorneys have an ethical responsibility to be aware of the issues regarding third-party funding, such as maintaining client confidentiality, avoiding conflicts of interest, and acting in the client’s best interest. They have to make sure that they always fulfil their professional responsibilities.

Confidentiality: To safeguard the parties’ confidence and promote sincere conversation, arbitration procedures frequently depend on stringent confidentiality. To evaluate whether to support a case, third-party funders, however, might need access to sensitive data, while other funders strive to avoid receiving privileged information and written legal analysis from the claimant’s attorney. A major ethical difficulty is striking a balance between the requirement for anonymity and the necessity for transparency. There may be major “confidentiality” concerns if specific privileged information or documents are revealed to a potential funder during the due diligence phase that comes before a funding agreement is signed. It is preferable that the attorney get the client’s informed consent prior to revealing privileged information and documents in order to minimize the possibility of the information and documents being discovered. It is important to remember that each country has its unique laws pertaining to the privilege and confidentiality obligations of attorneys. As a result, every secrecy concern needs to be customized for every situation and nation.
Conflict of Interest: Funded parties, funders, arbitrators, and other stakeholders may have conflicting interests as a result of third-party funding arrangements. In arbitration processes concerning TPF, conflicts of interest may emerge if the funder meddles in the lawyer-client relationship. The attorney’s strategic choices regarding case management may be influenced by the funder’s financial stake in the arbitration’s result. This is crucial to keep in mind while negotiating a settlement agreement since the legal representative of the financed party can choose one over arbitration. The plaintiff and its counsel should make this important decision, even though the funder might also wish to be included in the arbitrator selection process. All of the attorney’s strategic decisions might potentially involve conflicts, thus it is the attorney’s responsibility to remain unbiased and independent even while they are receiving funding from a third party.
Independence and Impartiality: Two fundamental tenets of arbitration are the independence and impartiality of arbitrators. Arbitral rules mandate arbitrators to be impartial and independent from the time of appointment and throughout the arbitration process. They must disclose any potential conflicts of interest and, in severe cases, decline or refuse an appointment. Conflicts of interest can disrupt proceedings or annul the final award, forcing parties to start the proceedings again. The perceived impartiality of arbitrators may be jeopardised by the presence of third-party sponsors who have a stake in the resolution of the case. An example is when an attorney acts as counsel in a funded case and as an arbitrator in another case funded by the same funder. To allay these worries, strong conflict-of-interest policies and openness about financing arrangements are crucial.

THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION: LEGAL AND REGULATORY FRAMEWORK

Third-party funding (TPF) in the context of international arbitration is governed by a complex legal and regulatory structure that is always changing and diverse in nature. This varied range of legal ideas, resembling a colourful mosaic, has notable differences. The entwined legal sources that add to these complications may be reduced to a three-part hierarchy that consists of three main elements:

National Laws:

Due to varying legal traditions and policy concerns, country approaches to third-party funding (TPF) in international arbitration show significant variance among jurisdictions. This difference shows itself through the distinct legal and judicial systems that a variety of jurisdictions have adopted.

For example, Singapore has passed the Civil Law (Third-Party Funding) Regulations 2017 as a special piece of law to handle TPF in Asia. This law provides a thorough legal framework for TPF in arbitration and associated actions, elucidating TPF’s admissibility and outlining specific obligations for third-party funding sources, such as upholding sufficient financial resources.
On the other hand, TPF arrangements are mostly governed by normal contract law, tort law, and procedural norms in European countries like England and Wales. The common law principles of maintenance and champerty in these nations, which historically restricted TPF, have been much eased. This change in approach is best shown by the English case of Arkin v. Borchard Lines Ltd[1], in which the Court of Appeal upheld a kind of TPF called the “Arkin cap,” which restricts a funder’s liability for adverse expenses to the amount of its financing.

2. International convention:

Even while international treaties may not specifically address the subject, it is nonetheless important to consider their impact on the TPF environment in international arbitration. A prime example is the New York Convention of 1958 on the Recognition and Implementation of Foreign Arbitral Awards. The Convention’s position on enforceability and public policy can become especially relevant in some circumstances involving sponsored parties, even if TPF is not specifically referenced in its provisions.

Imagine the following situation: a party argues that the presence of a third-party funder undermines the public policy of the jurisdiction that is implementing the arbitral ruling and, thus, the award should not be implemented. Even while this line of reasoning makes sense, it hasn’t always been successful in international tribunals.

The High Court of England dismissed arguments to the implementation of an arbitral decision on public policy grounds, predicated on the involvement of a third-party funder, in the matter of AmTrust Europe Ltd v Trust Risk Group SpA[2]. The court decided that the involvement of a funder did not violate moral or legal standards to the point where the New York Convention’s Article V(2)(b)[3] may be refused to be implemented.

3. Institutional Regulations:

Reputable arbitration organizations, such the London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC), have issued regulations that directly discuss the TPF’s disclosure rules and conflicts of interest.

For example, any relationship between an arbitrator and a third-party funder must be disclosed in accordance with the ICC Guidelines on Conflicts of Interest in International Arbitration. Similarly, the LCIA Rules require arbitrators to disclose any information that might raise reasonable doubts about their independence or impartiality, such as relationships with outside funders.

The Hong Kong International Arbitration Centre (HKIAC) has included TPF-related clauses in its Administered Arbitration Rules for the Asia-Pacific area. These rules require the disclosure of a financing agreement’s existence as well as the name of
the outside sponsor. The purpose of the disclosure is to reduce any potential conflicts of interest that could exist between the arbitrators and the outside financiers.
Due to the complexity of the legal framework controlling TPF in international arbitration, a careful and scientific analysis of its evolution across several institutions, continents, and legislative settings is necessary. Evaluation of case studies like Essar Oilfields and ICC[4] and an examination of institutional regulations provide light on the worldwide trend towards a more unified and all-encompassing approach to TPF regulation.

RELEVANT CASES

An example of caution is provided by the case of Excalibur Ventures LLC v. Texas Keystone Inc. and others[5]. Here, an audacious claim supported by third-party funding turned out to be baseless. In the English Court of Appeal case, Excalibur Ventures faced potential dangers as it was pursuing a claim in excess of $1 billion, supported by third party funding. The lawsuit was completely dismissed when the English Court of Appeal determined that it was founded on an incorrect reading of the relevant agreements. This case demonstrates how TPF tends to encourage and support the pursuit of baseless claims, compromising the fairness of the court system.
The tribunal excluded an arbitrator in Hrvatska Elektroprivreda d.d. v. Republic of Slovenia[6]because of their previous connections with the claimant’s attorney. This case highlights the significance of upholding impartiality and independence inside the arbitral tribunal, even though it is not directly connected to TPF. Applying this rule to TPF cases, it is essential to maintain the integrity of the processes by funders and arbitrators being open and honest about any prior associations. The legal community can only protect the integrity of arbitration proceedings against these obstacles by guaranteeing openness, objectivity, and respect to ethical principles.
In the Muhammet Çapa v. Turkmenistan case[7], the arbitration procedure advanced and a tribunal was established thanks to the claimant’s capacity to get funds from a third party. TPF proponents contend that this democratizes access to unbiased and knowledgeable arbitrators, especially for financially disadvantaged litigants. On the other hand, critics argue that outside sponsors can have an excessive impact on the selection of arbitrators, jeopardizing the fairness and objectivity of the arbitration process.

CONCLUSION

A crucial idea in international arbitration is third party funding. It’s a good thing that can allow more people to get justice. In international arbitration, third party funding is also linked to improved risk management. The possibility of a conflict of interest is one of the main difficulties connected to third party funding in international arbitration. Additionally, it may lead to higher expenses and the disappearance of several essential aspects of arbitration, most notably party autonomy. Due to the rising expenses and complexity of dispute resolution, third party funding in international arbitration is expected to expand despite some obstacles. Therefore, improving the acceptability of third party funding in international arbitration requires addressing the underlying issues. This necessitates accepting disclosure and openness in third-party funding as well as the requirement that party representatives, such as attorneys, build their expertise on key issues pertaining to third-party funding, such as investment requirements set by third-party funders, advantages and disadvantages of third-party funding, and funding agreement negotiation. Considering the aforementioned, it is evident that TPF in international arbitration is a good thing as it draws investments and increases access to the legal system. The concept of third party funding in international arbitration is quite welcome. It must be welcomed in order to promote the expansion of international arbitration and improve the availability of justice.

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[1] Arkin v. Borchard Lines Ltd (Nos. 2 and 3) [2005] EWCA Civ 655

[2] AmTrust Europe Ltd v Trust Risk Group SpA, 2015, EWHC 1927 (Comm).

[3] New York Convention, Article V(2)(b), 10^th June,1958

[4] Essar Oilfields and ICC, Case No. 7929 of 1990

[5] Excalibur Ventures LLC v. Texas Keystone Inc. and others, 2016, EWCA Civ 1144

[6] Hrvatska Elektroprivreda d.d. v. Republic of Slovenia, ICSID Case No. ARB/05/24

[7] Muhammet Çapa v. Turkmenistan case (ICSID Case No. ARB/12/6)

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