International arbitration: Should you disclose your third party funding arrangements?
24/10/2016
At a glance
The increased availability of third party funding, including for international arbitration, raises a number of important points. One of the key issues is the extent to which parties to arbitration should disclose the fact that they are being funded by third parties.
It is difficult to draw any firm conclusions as to what is meant by third party funding. The traditional model involves a commercial funder agreeing to pay some or all of the claimant’s legal fees and expenses in exchange for a share of any amounts recovered from the other party to the action.
Parties may also derive financial assistance from other arrangements such as damages-based agreements, conditional fee agreements and after the event (ATE) insurance, some or all of which are often used in conjunction with third party funding.
We will focus in this article on the question of whether the existence of a third party funder should be disclosed.
In detail
Why disclose?
There are compelling justifications in favour of disclosure of such arrangements, namely:
a) It may help to avoid conflicts of interest. This is a concern in arbitration where parties can appoint the arbitrator(s), and therefore there is a risk that arbitrators may be swayed by the possibility of future appointments (or lack thereof).
b) It may be relevant for costs. The Court has ordered a third party funder to pay indemnity costs in litigation (see the case of Excalibur Ventures LLC v Texas Keystone Inc and others[1] in which this firm acted). A defendant will want to know of any costs risk as early as possible. However, arbitration is a consensual process and the commonly accepted position, endorsed by the ICCA – Queen Mary Task Force Working Group on Third Party Funding[2] is that the arbitral tribunal lacks any power to order costs against a third party funder who is not party to the arbitration.
c) It is relevant for security for costs applications. In some instances, parties may not be able to fund the claim without third party funding. Disclosure of the fact that a party is being funded by a third party allows defendants to consider whether it is necessary to apply for security for costs, e.g. because the claimant is impecunious and could not satisfy an order requiring it to pay the defendant’s costs if it lost the claim. Security for costs obviously allows the Court to require a claimant, which cannot show it would be able to pay the other side’s legal costs if it lost to order the claimant to provide a bank guarantee or payment of funds into court to cover this eventuality.
d) It may be advantageous. Third party funders will conduct due diligence of cases and will only fund strong claims. Therefore, disclosure of the fact that a case is funded may have tactical advantages. A defendant who becomes aware that a claim has been funded by a third party professional funder will realise that the funder will have evaluated the claim and given it at least a 60% chance of success.
Litigation and arbitration – can disclosure of third party funding be ordered?
The English Court has inherent jurisdiction to order disclosure of the identity of a funder of litigation.[3] Similarly, there are at least three instances where arbitration tribunals have exercised their inherent jurisdiction to order claimants to disclose whether they are funded by a third party. These have all been in the context of an application for security for costs.
In Muhammet Cap and another v Turkmenistan[4]: the tribunal ordered the claimants to confirm whether they had entered into a third party funding arrangement and, if so, to disclose the terms of this. The tribunal said that the order was necessary because: (i) the claimants had not denied their claims were funded by a third party; (ii) it was important for the integrity of proceedings and for conflicts purposes; and (iii) the defendant had indicated that it would be applying for security for costs.
The claimants were also ordered to disclose the identity of the third party funder in EuroGas Inc and Belmont Resources Inc v Slovak Republic[5] and in South American Silver ltd v The Plurinational State of Bolivia[6] where disclosure of the existence (but not the terms) of third party funding was ordered in the interests of transparency.
Conclusion
Third party funding unlocks obvious benefits. It enables access to liquidity and can enable parties to unlock latent value in ongoing disputes. It limits exposure to loss and, in some cases it can help to “level the playing field” where there is disparity of resources.
In our view, for the reasons stated above, in situations where a claimant is funded by a third party, there are good arguments for disclosure of this at an early stage.
Assistance
If you have a follow up query or wish to discuss an arbitration matter, please contact our Dispute Resolution team.
[1] [2014] EWHC 3436 (Comm)
[2] ICCA –QMUL Task Force on Third Party Funding in International Arbitration, Subcommittee on Security for Costs and Costs Draft Report dated 1 November 2015
[3] Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd and others [2003] EWHC 1381 (Comm)
[4] ICSID Case No. ARB/12/6 (Procedural Order No. 3)
[5] ICSID Case No ARB/14/14
[6] PCA Case No 2013-15 (Procedural Order No 10)