On the 17th April 2018 the ICCA-Queen Mary Task Force released its long-awaited Report on Third-Party Funding in International Arbitration. The Task Force consisted of over 50 leading experts from more than 20 jurisdictions including professionals from every corner of the arbitration community, third party funders and TheJudge’s own James Blick.
The resulting report is intended to be used primarily as a reference manual to “facilitate education and informed dialogue”. The Task Force largely agreed that the community would benefit from a greater understanding of third party funding and the issues it raises in international arbitration as well as consistency and more informed decision making in addressing common issues that may arise. Rather than create a set of prescribed rules, the Task Force considered a statement of best practice and series of principles to be the most useful means of meeting its objectives. The crux of the report focuses on the issues of disclosure and conflicts of interest, privilege and professional secrecy and the allocation of, and security for, costs.
Principles Regarding Disclosure and Conflicts of Interest
The Task Force considered the potential for conflicts of interest as one of the most prominent issues that can arise given the increase in arbitrators holding permanent positions or consulting roles with third party funders and the resulting interest (perceived or otherwise) they may have in the funded party succeeding in their claim.
The Task Force concluded that a funded party should disclose the existence of funding and the identity of the funder as soon as practicable but that they need not provide further details about the financial arrangement or the agreement itself. Whilst some information is necessary in order for arbitrators to assess whether there is a conflict to disclose, the specific details are not usually relevant to the dispute and their disclosure may unfairly advantage or disadvantage one of the parties.
The aim is to strike a balance between disclosing enough information to enable the early identification of a conflict and to avoid potential challenges to the arbitral award without causing delay, unnecessary challenges to arbitrators or applications for disclosure of further information.
Principles Regarding Privilege and Professional Secrecy
When a claimant seeks third party funding, they will be required to disclose to the funder information about their case, which may include privileged information. In sharing this information, there is a risk in certain jurisdictions that privilege could be deemed to have been waived and so the claimant could be ordered to disclose the information in the arbitration proceedings. The Report, therefore, urges the funded party to enter into a robust non-disclosure agreement prior to disclosing information to protect it from future disclosure.
When the Task Force undertook analysis of privilege rules around the world they found that most jurisdictions do not provide a clear answer as to whether information provided to a funder will be fully protected. The Report encourages arbitrators to not order the production of information provided to a third party funder if that information would usually be protected under national law or international arbitration standards and suggests that the claimant seek legal advice regarding the privilege rules under the laws of the jurisdiction in question. If disclosure of the funding agreement or information provided to a third party funder is ordered, the arbitrators should allow the funded party to redact as appropriate and take other measures as necessary to limit the purpose for which the information may be used.
Principles on Costs and Security for Costs
The Report concludes that the successful party should not be denied the recovery of their costs solely on the basis that they were funded by a third party funder. The funded party’s obligation to reimburse the funder in the event of a successful outcome is, in the Task Force’s view, sufficient to meet the requirement that the costs have been “incurred” by the successful party even though they did not pay them on an ongoing basis.
On the flip side, in the UK and the US courts have previously ruled that the funder may be held liable for adverse costs if they have obtained a sufficient degree of economic interest and control in the claim. The Task Force, however, arrived at the view that, in the absence of an express power in the national legislation or procedural rules, a tribunal would lack jurisdiction to issue a costs order against a third party funder.
The Task Force also considered the recoverability of the cost of funding, including the success fee, from the losing party and concluded that this should depend upon the definition of recoverable costs under the applicable legislation and/or procedural rules. However, the Task Force were of the view that any argument for recoverability should be subject to the test of reasonableness and the cost of the funding should be disclosed during the arbitration so that the other party can assess its exposure.
When considering the issue of security for costs, the Task Force concluded that an application for security for costs should be determined without regard to the existence of any funding arrangement. However, the terms of the funding arrangement, including the existence of ATE insurance, may be relevant in establishing that the claimant can meet an award for adverse costs. The requesting party may be liable for the reasonable costs of posting the security in the event the security turns out to have been unnecessary.
The Report goes on to provide a checklist for parties to work through prior to entering into a funding arrangement. Amongst other suggestions, it encourages parties to be mindful of underestimating the budget required and to ensure they have a clear understanding of how the funder’s success fee will be calculated. It also urges them to consider the extent of the funder’s involvement in the proceedings themselves to avoid the funder taking excessive control of the claimant’s decision-making process.
The final chapter of the Report focuses on the funding of investor-state arbitration and raises concerns around whether the existence of third party finding is increasing the number of investment arbitration claims brought against countries. Ultimately, the Task Force recognized that this area is fraught with competing views and suggests further research should be undertaken prior to drawing any conclusions on the use of third party funding in such matters.
As the leading independent broker of third party funding and disputes insurance, we were pleased to have been invited to sit on the Task Force and to write the overview of the funding market that can be found in Chapter 2 of the Report.
The Report provides a thorough and ambitious discussion of third party funding in international arbitration with thoughtful commentary on some of the key issues and helpful guidance on how to tackle some of the challenges that may arise when obtaining funding and during the lifespan of the arbitration. The scale and scope of the report, as well as the number of key members of the arbitration, legal and third-party funding communities that contributed to its creation, are a testament to the importance of third party funding to the arbitration arena.
The Task Force rightly looks beyond the narrow parameters of “traditional” third party funding and acknowledges the increasing sophistication of the structures offered by funders, as well as the growing range of alternative methods of managing the costs incurred in arbitral proceedings, such as litigation insurance. In so doing, the Report illustrates the practical difficulty in establishing clear rules and guidance on third-party funding, which are broad enough to encompass the current market, without unintentionally catching other financial arrangements.
The Report ultimately demonstrates the challenges and pitfalls that exist for lawyers and their clients seeking third party funding to finance arbitration. These are surmountable, but require industry expertise and a considered and strategic approach to the interaction with the market.