Mealey's International Arbitration Report by Alexandra Dosman and Jose' Antonio Rivas
I. Arbitration Funding in Context
Commercial parties using international arbitration to resolve disputes are increasingly turning to third party funders to help pursue meritorious claims. Instead of bearing the cost of bringing the claim ? and the attendant risk that the claim will fail - parties have the option of partnering with a third party that will finance the legal fees and expenses in return for a share of an eventual damages award. The funding is typically non-recourse: if the client loses the arbitration, it will not have any obligation to repay the outside funder. If the client wins, it will share the resulting damages award with the funder on pre-determined commercial terms.
A party may find using an external funding arrangement attractive for several reasons. First of all, as a business tool, it shifts the financial risk of bringing an arbitration away from the business. There is no chance of wasted money, since the business is not shouldering the legal fees and there is no recourse against the business if the claim fails. Second, legal spend can have a deleterious effect on a company's balance sheet. Third, if a company is not spending money on legal fees, it can allocate money to other projects. Importantly, under the code of conduct of the Association of Litigation Funders of England and Wales (of which Vannin is a member), funders do not seek to control or even influence the conduct of the dispute.
The use of third party funding in international arbitration has evolved to near complete market awareness. In a 2015 study led by Queen Mary University, 91% of respondents reported being familiar with the existence of third party funding in international arbitration; by 2018, the same study reported an increase to 97% market knowledge. Along with increased awareness, third party funding has become more positively viewed in the field. The Queen Mary report notes that: "in the three-year span since our previous survey, perception of third party funding has seen a clear shift from neutral to positive: while around a third of respondents expressed a 'neutral' perception, more than half of the respondent group indicated a 'positive' perception."
Parties and counsel who have actually used third party funding have a more positive view still. According to the authors of the Queen Mary report, "the subgroup of respondents who have actually used third party funding in practice confirms this trend by reflecting an even more positive view: no less than 75% of this subgroup perceives third party funding positively while most of those left in the subgroup take a neutral stance."
II. The Pivotal Role of Arbitration Institutions
Arbitral institutions play a critical role in the arbitration process. In addition to offering assistance in the appointment of arbitrators, institutions publish rules and guidelines that establish the framework of the arbitration. How are arbitral institutions responding to the growth of third party funding in the field?
Some institutions have adopted a "wait and see" approach, whereas others are providing active guidance to parties and tribunals or revising their rules to specifically address third party funding. In the "active guidance" category, institutions including the International Court of Arbitration of the International Chamber of Commerce ("ICC") and the Arbitration and Mediation Center of the Chamber of Commerce Brazil Canada ("CAM-CCBC") have taken a proactive stance on third party funding by issuing guidelines or practice notes.
As early as 2014, the French national committee of the ICC France issued a practice guide setting out an overview of third party funding. The broader ICC later alluded to third party funding in its "Note for the disclosure of conflicts by arbitrators," under which arbitrators should consider relationships with any entity having a "direct economic interest in the dispute or an obligation to indemnify a party for the award" when making disclosures. Similarly, the CAM-CCBC opted to issue guidance by way of an Administrative Resolution (No. 18/2016) rather than with changes to its arbitral rules. The regulation provides a guide to the parties and the arbitrators on how to address the existence of third-party funding within the arbitral procedure under CAM-CCBC rules.
III. Disclosure - What, When, and to Whom?
One of the major issues arising out of the use of third party funding is whether the existence of the arrangement should be disclosed, and if so, how and to whom. The concern is that if the identity of the funder is not disclosed to prospective arbitrators, an inadvertent conflict of interest could arise. In August 2018, ICSID released its Proposals for Amendment to the ICSID Rules ("Proposals").
Proposed ICSID Arbitration Rule 21 and Additional Facility Rule 32 require that the funded party - which could be the investor or the State - disclose that it has TPF and the name of the funder. The scope of disclosure for arbitrators would also be expanded to include the disclosure of "professional, business and other significant relationships, within the past five years" with the parties, the counsel, the other arbitrators, and any disclosed third party funder. As explained by ICSID, the disclosure "relates to the existence of TPF and the identity of the funder. The actual funding agreement need not be disclosed pursuant to this proposed rule, as its intent is to prevent conflicts of interest with potential arbitrators or conciliators."
Several other arbitral institutions have adopted the approach of disclosing the identity of the funder, at least in the context of investor-state arbitrations. For example, in November 2018 the Hong Kong International Arbitration Centre ("HKIAC") issued a new version of its rules containing express provisions on disclosure of the identity of the funder. Similarly, the new 2017 investment arbitration rules of the Singapore International Arbitration Center ("SIAC") expressly reference third party funding.
The 2018 HKIAC rules are unique in that they explicitly reference the confidentiality of documents and information provided to third party funders. The rules first set out the general principle that information relating to the arbitration is confidential, before outlining a list of circumstances in which disclosure is permitted. In addition to permitting the sharing of information with a party' witnesses and experts, disclosure is also permitted "for the purposes of having, or seeking, third party funding of arbitration."
IV. Security for Costs
A controversial question is whether the existence of third party funding has any relevance to a tribunal's consideration of an application for security for costs. Most arbitral institutions' rules leave this question to the tribunal's discretion. The ICSID proposals, for example, focus on the avoidance of potential conflicts of interest and do not purport to regulate the issue of security for costs. A recent practice direction of the Courts of the Dubai International Financial Centre ("DIFC") notes the power of the court to take funding into account when deciding security for costs applications, but expressly provides that the existence of third party funding "shall not by itself be determinative" in whether to order security for costs. Similarly, the HKIAC and CIETAC rule updates simply provide that the tribunal "may" take into account the existence of third party funding when determining issues related to the costs of the arbitration.
Investment arbitration tribunals have consistently ruled that the existence third party funding arrangements does not in and of itself constitute a sufficient justification for an order of security for costs. In EuroGas v. Slovakia, the tribunal denied the request for security for costs, explaining that "financial difficulties and third party-funding . . . do not necessarily constitute per se exceptional circumstances justifying that the Respondent be granted an order of security for costs." Likewise, the tribunal in South American Silver v. Bolivia similarly denied a request for security for costs, reasoning that "[t]he existence of [a] third party funder alone does not evidence the impossibility of payment or insolvency. It is possible to obtain financing for other reasons. The fact of having financing alone does not imply risk of non-payment."
V. Practical Considerations
Arbitral institutions provide the framework for the private resolution of disputes by neutral decision-makers. It makes sense that the rules of leading institutions change are evolving in response to innovations in arbitral practice, including parties' increasing use of third party funding to pursue meritorious claims. As users of international arbitration come to use alternative funding as a tool, rules and guidance notes from arbitral institutions will continue to change to meet users' needs while protecting the integrity of the arbitral process. In every case, parties considering using international arbitration should carefully study arbitral rules and local laws, including with respect to third party funding.