THIRD PARTY FUNDING IN ARBITRATION CONTINUES TO GROW IN POPULARITY, YET IT FACES WIDESPREAD OPPOSITION. CRITICALLY DISCUSS.- BY Niharika Bodla

INTRODUCTION

Arbitration is one of the popular mechanisms of alternative dispute resolution. It is resolving a legal dispute between two or three parties outside of the court. These days this process has been evolved and grown popularly because of its efficiency. In arbitration, parties are free to choose their own seat of arbitration, there is confidentiality, choice of law is flexible, and even the arbitration procedure and institution are customized according to the discretion of parties. Basically, it is to avoid procedures, formalities, and inflexible approach of court operation. This is an easy and fast process to resolve a dispute, whereas in courts it takes lot of time. As globalization is prevailing in the world, there are intra country trades and investments between the countries. So, when one country participates in international trade or investment, there are chances of commercial disputes which arise between cross borders. This is when international arbitration, investor – state arbitration comes up to resolve the cross – border commercial disputes and to preserve the business relationship between the parties1.

Now, this international arbitration too involves ample number of damages and costs, which are even higher than litigation costs in most of the cases. According to the survey made in “Improvements and Innovation in International Arbitration, Queen Mary University of London, 2014”, it was established that the worst feature of arbitration or arbitral process is cost and speed. International arbitration is highly overpriced, and, in some cases, it is tough for the parties to meet such extravagant expenses and continue with arbitral proceedings. With the increase of such kind of circumstances, the demand for financing either party in the arbitral proceedings has originated and evolved. This funding or financing is generally made by a third-party funder, who provides monetary support for any one of the parties, expecting something in return. Basically, a third party who is nowhere connected to the arbitral proceedings, voluntarily offers to pay some or whole costs of the case and in return acquires certain percentage in the damages awarded. Generally, third party funders investigate the perks and drawbacks of the case before investing in either party (claimant in most cases). But if the funded party loses the case, then funder will not receive any profit2. Third party funding is popularly grown and widely accepted in the most popular seats of arbitration such as London, Paris, Hong Kong, Geneva, Australia, USA etc. Recently Singapore and Hong Kong have legalized third party funding with some requirements like disclosing the third-party funder details etc. and has made laws and Acts related to third party funding accordingly. Third party funding is popularly grown and widely accepted in the most popular seats of arbitration such as London, Paris, Hong Kong, Geneva, Australia, USA etc. Recently Singapore and Hong Kong have legalized third party funding with some requirements like disclosing the third-party funder details etc. and has made laws and Acts related to third party funding accordingly. In India, there is no specific law against third party funding, and it is prevalent but always the question of disclosure arises in most of the cases3.

1 Redfern and Hunter, International Arbitration (Kluwer Law International, 6thedn, OUP 2015)

2 Ridhima Sharma, 'Third Party Funding in International Commercial Arbitration' (2018) 12 NUALS LJ 61

3 A. Wadia and S. Rawat, “Third-Party Funding in Arbitration - India's Readiness in a Global Context” (2018) 15(2) TDM accessed 15 August 2021.

4Aren Goldsmith and Lorenzo Melchionda, 'Third Party Funding in International Arbitration: Everything You Ever Wanted to Know (but Were Afraid to Ask)' (2012) 2012 Int'l Bus LJ 53.

ANALYSIS

HISTORY AND ORIGIN OF THIRD-PARTY FUNDING:

The concept of third-party funding was originated from the common law countries such as Rome and Greece, where powerful nobleman used to provide financial help to the parties in litigation, expecting profit in return, after winning the case. In the olden days, it was known as champerty and maintenance, which is unethical, against public policy and it is even against the statue of law4. This champerty and maintenance was treated as a criminal offence and is declared as unlawful by statute of Westminster, 1275 in England5. However, as the world has been developed and all the countries are moving towards globalization, the governments have realized that funding a party, who is unable to participate in his own case due to lack of money, is fair and justified. Hence many countries obliterated the abolishment on champerty and maintenance to obtain justice for people who cannot afford the costs arising out of legal cases. Lately, the notion of third-party funding is attaining lot of popularity in the field of litigation and arbitration6.

ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY FUNDING IN ARBITRATION:

As every coin has two sides, third- party funding also has advantages and disadvantages.

Advantages:

1. 
   Any party to arbitration can choose third party funding, when they do not have money to pay for all the costs arising out of arbitration because it is a bit expensive. This choice of third-party funding can help the party to proceed further in arbitration and hopefully succeed in the claim7.
2. The parties would also consider third party funding as a strategy of risk management. Some parties even though they have sufficient funds for arbitration, will seek third party funding to put away the risk associated with arbitration. These parties are ready to share their part of recoveries arising out of arbitration in future. Generally, parties to arbitration, use the money they have, to invest in other ventures and earn profit out of it8.

5 A. Wadia and S. Rawat, “Third-Party Funding in Arbitration - India's Readiness in a Global Context” (2018) 15(2) TDM accessed 15 August 2021.

6 Tian-Yu DU, “Research on Conflicts of Interest Arising from Third-Party Funding in International Investment Arbitration” (SSCHD 2018) <https://doi.org/10.2991/sschd-18.2019.77> accessed on 17 August 2021.

7Valentina Frignati, “Ethical implications of third-party funding in international arbitration”(2016) 32(3)Arbitration International (502-522) <https://doi.org/10.1093/arbint/aiw011> accessed on 19 August 2021. 8Swargodeep Sarkar, “Third Party Funding in International Arbitration: New Challenges and Global Trends”, (2020) 2 IJLSI 3, 270-281.

9 Ibid

1. Principally, before funding, any third-party funder rigorously investigates into the case and analyse it completely with expert teams in all sectors i.e., financial, legal etc. Once the process of due diligence is completed, it is easy for the funders and funded party to estimate status of the case and act accordingly9.
2.  

Disadvantages:

1. As the name itself makes it clear that there is involvement of third party, which is a violation of the confidentiality clause in arbitration. This may indirectly affect the decisions made by an arbitrator and conflict of interest may arise, which is against the ethical rules of arbitration. When a third party is involved, the authenticity of arbitration is compromised10.
2. Even though third party funders are not supposed to control the funded parties, there will arise numerous chances to outrun the decision made by parties and even sometimes funders are more involved in the case than the actual parties, all the decisions are made by the funders assuming that they have every right in the whole case just because they are funding for the entire case. This is absolutely against the principle of privacy and freedom of the parties to arbitration11.
3. Third party funders are never interested in the crux and justice of case, instead they only focus on acquiring profits out of the case. Hence, even if there is chance of settling the dispute, they suggest the parties to pursue frivolous claims12.

GROWTH OF THIRD – PARTY FUNDING IN ARBITRATION:

Many cases of international arbitration are resolved with the help of third-party funding because it is unduly expensive and not all parties can afford international arbitration. Third party funding has acquired huge marketability because it created equality between both well- funded and poor party. Now, even the poor party will be able to afford expert advocacy for the representation of its case.

10 Jennifer A Trusz, 'Full Disclosure: Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration' (2013) 101 Geo LJ 1649

11 Victoria Shannon Sahani, 'Judging Third-Party Funding' (2016) 63 UCLA L Rev 388

12 A. Wadia and S. Rawat, “Third-Party Funding in Arbitration - India's Readiness in a Global Context” (2018) 15(2) TDM accessed 19 August 2021.

13Sneh         Choudhary,        ‘Third         Party         Funding         in         International        Arbitration’         (2019)

accessed 22 August 2021.

14 Giles v. Thompson [1993] 3 All E.R. 321.

15 Hill v. Archbold [1968] 1 QB 686

As discussed before, litigation funding was well established during the year of 1960 in England. However, due the abuse of power by the feudal lords, the funding for transformed into champerty and maintenance, which was abolished under Sec 13 of Criminal Act, 1967 in UK. But there was also an exception to this abolishment, which states that only in circumstances against the public policy. Hence the rule is not eliminated entirely but maintained the code of conduct13. Earlier in Giless v. Thompson14, court has observed that law of champerty does not apply to the proceedings of arbitration. Whereas in Hill v. Archbold15, it was held that champerty and maintenance are based on public policy, which changes from time to time, and it must be altered accordingly16.

In the year of 2016, ICC has adopted a guidance note related to third party funding, which states that disclosure to be made by the parties regarding their relationship with any entity pertaining to financial interest. Also, in ICC Commission Report and IBA guidelines it was mentioned that, while evaluating the settlement costs, arbitrators should contemplate about the disclosure of any third-party funding arrangements and suggests maintaining transparency in such dealings17. UK is one of the countries in which cases of arbitration has been proliferated. In the case of Essar oilfields services ltd v. Norscot rig management Pvt ltd18, the ICC arbitration seated in London has set an example in the arbitral proceedings regarding the recovery of costs from the losing party on the basis of conduct. The costs of third-party funder were considered as other costs under S.59(1)(c) of The Arbitration Act, 1996. With this judgement it has established that the Act also provides security for costs and arbitrator has the power to demand the disclosure of third-party funder for security of costs.

As other countries, third party funding was prohibited in Singapore and Hong Kong on the grounds of maintenance and champerty. But in this modern world, arbitration has evolved and Singapore being one of the leading arbitration hubs in the world, it has recently legalised the laws of third-party funding and enacted Civil Law (third party funding) regulations, 2016. Even though it has legalised third party funding, there are certain prerequisites i.e., the third- party funder should have a commercial interest in the arbitral proceedings, and it should not be against the public policy. The high court of Singapore in the case of Otech Pakistan Pvt ltd

v. Clough engineering ltd., held that Principles of maintenance and champerty are applicable to all kinds of disputes including commercial arbitration20.

17 Ridhima Sharma, 'Third Party Funding in International Commercial Arbitration' (2018) 12 NUALS LJ 61

18 Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm)

19 Ridhima Sharma, 'Third Party Funding in International Commercial Arbitration' (2018) 12 NUALS LJ 61

20 Oliver Gayner and Susanna Khouri, 'Singapore and Hong Kong: International Arbitration Meets Third Party Funding' (2017) 40 Fordham Int'l LJ 1033.

21 A. Wadia and S. Rawat, “Third-Party Funding in Arbitration - India's Readiness in a Global Context” (2018)

15(2) TDM accessed 21 August 2021.

22Swargodeep Sarkar, “Third Party Funding in International Arbitration: New Challenges and Global Trends”, (2020) 2 IJLSI 3, 270-281.

Hong Kong has shared similar interests as Singapore and recently encouraged the concept of third-party funding by introducing, Arbitration and mediation legislation (third party funding) (Amendment) Act, 2017. This act provides third party funding in both domestic and international arbitration and has an authorizing body to monitor the third-party funding agreements. The conditions to meet are the third-party funder must show legitimate interest in the case and when a party approached the court in seek of help from a third-party funder, it must grant on the basis of access to justice. Hong Kong international arbitration centre (HIAC) has taken this step to legalise third party funding to strengthen its position with other international arbitration seats21.

Third party funding in litigation is legal in India and courts too have encouraged it in several cases and is also considered as rule of civil procedure. Yet it doesn’t consider its applicability to arbitration cases. There is no law or section in Arbitration and Conciliation Act, 1996 explicitly stating the legality of third-party funding. As India is a developing country and paving its way towards arbitration, there are chances that it might approve third-party funding in arbitration22.

CHALLENGES INVOLVED IN THIRD-PARTY FUNDING IN ARBITRATION:

Even though third-party funding has encouraged and grown popularly in numerous countries, it is facing an abundance of resistance and disapproval due to various complications involved with it. Some issues are discussed below:

Foremost concern is there may arise conflict of interest. These differences will arise between the funder, funded party, and attorney of funded party; as they all expect different outcome from the case. Funded party and its attorney hope to win the case and make appropriate payment for attorney’s efforts. On the other hand, funder expects great returns from the investment and is not at all concerned about the fate of case23. Conflict of interest may also arise with respect to the arbitrator24. The involvement of third-party funding will question the independence and impartiality of an arbitrator. With the industrialization of third party funding many companies or organisations are focused on third party financing and these institutions maintain relations with arbitrators, lawyers, law firms etc. As it is a small circle, there are chances that third party funders and the arbitrators and lawyers may know each other beforehand and this pre-existed relation will affect the award passed by an arbitrator because he may be biased towards the third-party funder as there existed a prior relationship25.

23 Tian-Yu DU, “Research on Conflicts of Interest Arising from Third-Party Funding in International Investment Arbitration” (SSCHD 2018) <https://doi.org/10.2991/sschd-18.2019.77>accessed on 21 August 2021.

24 William Park & Catherine Rogers, Third-Party Funding in International Arbitration: The ICCA Queen-Mary Task Force, PENN STATE LAW, 14-67 (2016).

25 Jennifer A Trusz, 'Full Disclosure: Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration' (2013) 101 Geo LJ 1649

Hence there will be a violation of ethical rule of impartiality and independence of an arbitrator and his/her integrity will be questioned resulting in the withdrawal of arbitrator and the award passed by that arbitrator26.

So, we need a disclosure mechanism to eradicate such problems faced by parties, arbitrators, and third-party funders. Mostly the funder and funded party are negligent towards the disclosure of the details of third-party funder and unfortunately there hasn’t been any law stating mandatory disclosure of third-party funder and third-party agreement is needed. Because there is no disclosure, the other party to the dispute or an arbitrator will never know the existence of third-party funder in the case. As arbitration itself stands on the principle of confidentiality in the procedure, there should not be an involvement of third party and even if there is, it must be disclosed to the opposite party and arbitrators. If it’s not disclosed and opposite party somehow finds there is an existence of third-party funder in the case and is even remotely related to the arbitrator of the case, then obviously there will arise question regarding the impartiality and independency of the arbitrator27.

A mandatory disclosure system is necessary in third party funding. This disclosure structure is necessary for many reasons such as transparency, conflict of interest, independence, and impartiality of arbitrator. Sometimes the funded party may sign a non-disclosure agreement with the funder, where you cannot disclose any details of the third-party funder. Normally funders are not in favour of disclosing their involvement in the arbitration case. Two questions may arise regarding the disclosure i.e., whether the parties have to disclose the existence of TPF agreement or terms of TPF agreement. These questions remain unrefined28. London Pipeline & Storage Ltd v. Total UK Ltd29, in this case the court could not permit the disclosure because of lack of jurisdiction related to the mandatory disclosure of third-party funder30. According to the recent developments in IBA guidelines, it has included provisions relating to the conflict of interest which indirectly covers the topic of disclosure in third- party funding but still the arbitral tribunal cannot request for mandatory disclosure31. However, recent award made in the case of Muhammet Çap & Sehil Inaat Endustri Ve Ticaret Ltd. Sti. v. Turkmenistan32 has stated that the request of disclosure of sponsor made by applicant was denied at first but after the 2014 IBA Guidelines, the same request was again made before the arbitral tribunal, and it approved33. Although there is no law, these awards made in the cases can become the first step to prepare a mandatory disclosure system related to third party funding. Oxus Gold PLC v Republic of Uzbekistan, in this case the claimant themselves made a public disclosure regarding the pre- existence of a funding agreement in arbitration34.

26Aren Goldsmith and Lorenzo Melchionda, 'Third Party Funding in International Arbitration: Everything You Ever Wanted to Know (but Were Afraid to Ask)' (2012) 2012 Int'l Bus LJ 5332MuhammetÇap&SehilInaatEndustriveTicaret Ltd. Sti. v. Turkmenistan, ICSID Case No. ARB/12/6, Procedural Order No. 3 of 12 June 2015.

33Aren GOLDSMITH and Lorenzo MELCHIONDA, ‘Third-Party Funding: Toward the Development of an Incremental                                 Methodology            for            Disclosure’             (2016)            accessed on 21 August 2021.

CONCLUSION

Third party funding in arbitration is flourishing all over the world by functioning as financial aid to the parties who cannot afford their own case. Though it possesses certain benefits, there are numerous problems associated with it. Third party funding is nothing but a commercial business. Any third-party funder will not invest in a case unless it is sure that ample amount of money is received in return. There are few third-party funders who actually care about the funded party and their case. Legal profession is not a business, but when a third-party funder is investing in a case and expecting great returns from such investment, it ultimately becomes business. In the case of Ram Coomar Coondoo v. Chunder Canto Mukherjee37, court held that it is considered as gambling in litigation and is done to oppress the other party. Because funders can push themselves to any stage until they win the case and receive sufficient amount out of it. Apart from this it also waives the principle of confidentiality, attorney- client privilege is compromised, conflicts of interest arise between funder, funded party and their attorney and there will arise questions about the credibility of arbitrator on the basis of independence and impartiality towards the case. Also, we cannot deny that there will not be any domination from the third-party funder. Third party funders will take over the case at some point or the other by saying that they have all the right to do so because of their significant economic interest in the case. This eventually leads to the violation of freedom and privacy of funded party and its attorney. Because of all these problems and most importantly legal profession is not business, third party funding in arbitration or litigation must not be encouraged. Unless, there is specific regime to resolve above discussed challenges. This paper suggests that the arbitration institutions and centres must draft and enact clear set of rules of regulations related to third party funding i.e., mainly disclosure mechanisms. There are general disclosure rules and guidelines but there is no rule specifically implying the mandatory disclosure of third-party funding or third-party funding agreement. Such disclosed information can be kept in confidential by the arbitral tribunal. Also, third party funder has to be genuinely interested in the justice for the funded party and his case, and not only on the returns for investment funder has made. By implementing certain mandatory rules and regulations, third party funding in arbitration can be considered because the enacted rules will minimize abusing the power of third-party funder, legal profession, and ethical rules of arbitration.

34Valentina Frignati, “Ethical implications of third-party funding in international arbitration”(2016) 32(3)Arbitration International (502-522) <https://doi.org/10.1093/arbint/aiw011> accessed on 19 August 2021. 35Aren Goldsmith and Lorenzo Melchionda, 'Third Party Funding in International Arbitration: Everything You Ever Wanted to Know (but Were Afraid to Ask)' (2012) 2012 Int'l Bus LJ 53

36Valentina Frignati, “Ethical implications of third-party funding in international arbitration”(2016) 32(3)Arbitration International (502-522) <https://doi.org/10.1093/arbint/aiw011> accessed on 21 August 2021.

37Ram CoomarCoondoo v. Chunder Canto Mukherjee, (1876) L.R. 4 I.A. 23