Eversheds Sutherland assesses the key issues of using third-party funding in international arbitration
The use of third-party funding (TPF) has been a hotly debated topic in the international dispute resolution community for some time, with all signs pointing to its continued growth. The funding market appears to be on a constant expansion trajectory, with the number and geographic diversity of funders increasing, and new funders continuing to enter the market.
While the rising global prominence of dispute funding has led to a rethinking of the status of champerty and maintenance in a number of jurisdictions, an exception is Ireland where the Supreme Court has held that TPF is unlawful on the grounds of champerty. Further, the presence of a third party involved in the arbitration process has raised concerns in relation to issues of confidentiality, privacy, privilege and conflict of interests.
How TPF operates in practice
TPF involves an entity with no prior interest in the legal dispute providing financing to one of the parties, usually the claimant. Historically, TPF was deemed unlawful due to the laws prohibiting maintenance and champerty, but now TPF of arbitration is expressly permissible in numerous jurisdictions, including Australia, England and Wales, various European jurisdictions and the US.
In practice, third-party funders agree to finance all or a portion of a party’s legal costs for an agreed percentage of the amount awarded, or by way of an agreed lump-sum success fee. Should the case fail, the funder generally loses all of its investment and has no recourse to any recovery of the money invested. Litigation funding agreements between a funder and a claimant are individually negotiated after an application process by the claimant and decision by the funder to make an investment.
Arbitral rules governing TPF
The conduct of funders is unregulated at an international level and domestic regulation is largely voluntary or currently being formulated. Current arbitral rules do not sufficiently regulate the independence of arbitrators and, further, there is no provision of the international rules requiring a declaration of the presence of a third-party funder.
Common law jurisdictions approach third-party financing
(i) Singapore
On 1 March 2017, Singapore introduced several amendments to its Civil Law Act to facilitate and regulate TPF of arbitration. The key amendments introduced have involved abolishing the torts of maintenance and champerty, and stipulate the prescribed categories of proceedings in which TPF can be used.
Practitioners must now disclose to the court or tribunal and to every other party to proceedings, the existence of any TPF contract related to the proceedings, and the identity and address of any funder involved at the date of commencement of proceedings or as soon as practicable thereafter. The Singapore International Arbitration Centre has also released draft rules (specific to investment arbitration), which give the tribunal the power to order disclosure by the parties of any TPF arrangements.
(ii) Hong Kong
On 19 October 2015, the Law Reform Commission of Hong Kong (LRCHK) published a consultation paper, with the aim of clarifying whether TPF of arbitration was unlawful under the doctrines of maintenance and champerty. The first recommendation of the LRCHK was that the statute governing arbitrations in Hong Kong be amended to permit TPF of arbitration taking place in Hong Kong, and that Hong Kong lawyers and legal service providers may work for third-party-funded international arbitration proceedings, which are seated outside Hong Kong.
Following government review, the LRCHK’s recommendations were adopted, motivated by a desire to enhance Hong Kong’s position as a global seat for international arbitration.
(iii) England and Wales
Maintenance and champerty in England and Wales have not been deemed a crime or torts since the passing of the Criminal Law Act 1967. This position was re-affirmed recently in the case of Essar Oilfields Services Ltd V Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm), where the Commercial Court held that an arbitrator may award costs incurred by a successful party to an arbitration for engaging a third-party funder.
In terms of regulation, England and Wales are not subject to formal regulation, with self regulation being preferred in the form of a code of practice. The code was first published in 2011 with the formation of the Association of Litigation Funders of England and Wales. The code is binding on all members of the association and regulates the funding of ‘litigation, arbitration or other dispute resolution procedures’.
(iv) Ireland
In contrast to the above, the Irish courts have taken a different approach. The most recent Supreme Court decision on the issue was handed down in 2017, in Persona Digital Telephony Ltd & anor v The Minister for Public Enterprise, Ireland & ors [2017] IESC27. Here, the Court was invited to interpret the rules in light of modern justice systems and permit funding. It was held that TPF of litigation falls under the torts and crimes of maintenance and champerty, and as long as there is a TPF in return for a share of the proceeds, it is automatically unlawful. Consequently, the court declined to allow Persona Digital Telephony to obtain TPF.
Despite the position outlined above, it has been suggested that TPF in international arbitration may in fact be permissible in Ireland with two reasons advanced:
a) Given that arbitration, by definition, is not litigation, the Irish laws of maintenance and champerty may not be ruled as being applicable to arbitration. The court expressed its reluctance to apply the laws of champerty and maintenance to international arbitration, stating: ‘The Court was asked not to be seduced into changing the law in the interests of what the Court may perceive to be just. It may be said that in light of modern issues, such as… issues arising on international arbitrations… it might well be appropriate to have a modern law on champerty… ’
b) International arbitration agreements define the governing law and jurisdiction that they shall be subject to. Even if the Irish courts eventually pronounce TPF in international arbitration to be champertous, they might not refuse to enforce foreign arbitration awards that involve TPF.
While the reasons outlined above may be persuasive, it must be remembered that the Persona decision was clear in its conclusion that a change in the law to welcome TPF was required at government level.
ICCA-Queen Mary Task Force on TPF in international arbitration
The Queen Mary Task Force published a draft report for public comment in September 2017. The aim of the report was to open up discussion on this issue of TPF and in doing so provide guidance, greater consistency and more informed decision making in addressing issues relating to TPF.
The report provides an analysis of the dispute funding environment and the issues currently faced, including some of the key concerns that have arisen in respect of disclosure and conflicts of interest, privilege, and costs and security for costs. The report also provides commentary on principles of best practice in TPF arrangements.
The full report, when published, will aim to encourage the parties to an arbitration to adopt the principles advanced in the report to their proceedings. Further, and perhaps more likely, parties, legal counsel and arbitrators may reference or invoke the principles to address issues that arise in the course of an arbitration, in entering into a funding agreement and in discussions regarding TPF.
Conclusion
A constant issue in the dispute resolution environment is the high cost associated with most forms of dispute resolution and the availability of TPF will potentially address this issue.
However, the use of TPF arrangements holds both benefits and risks for the claimant, funder and respondent, and also adds complexity to progression of a claim, and ultimately the administration of justice.
That said, the appetite for the use TPF in international arbitration across the world has not abated. On the contrary it is only increasing, therefore it is difficult not to accept there is clearly a need for this form of financial assistance to be available, on this basis it is possible that international pressure may eventually bring countries (such as Ireland) into the fold.
Dermot McEvoy (pictured), partner and head of the alternative dispute resolution group, Siobhan Marry, associate and committee member of Young Practitioners Arbitration Ireland, and Emma Trainor, solicitor, Eversheds Sutherland, Dublin
