Turkey: Third Party Funders In Arbitration

In General

Third party financing or third party funding may be defined as the financing of arbitration costs of one of the parties by a third person who is not related to the claim[1]. It may also be defined as "any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration."[2]

The methods by which third party funders agree to finance litigation costs of a party vary[3]: The consideration of the third party funder may be the gain of an agreed upon percentage of an awarded proceed, a fixed success fee, or a mechanism combining the two. Funding may result in the issuance of equity or debt instruments, the transfer of a claim to the funder, or the funder gaining control over the party, and, consequently, of the dispute strategy and management. The clients of funders vary: they may be the claimants or the respondents, law firms, individuals, and even states.

Third party financing is relatively new in international arbitration, and its pros and cons are subject to numerous discussions. This article aims to refer to key concerns and touches upon the instruments regulating this funding.

Pros and Cons – Discussions on Third Party Funders

In General

Third party financing enables parties to initiate their meritorious claims without concern over scarcity of their finances. It is argued that third party financing is favorable and beneficial since it promotes access to justice for parties who financially cannot support a dispute, enables them to maintain their cash flows, and pursue their claims.

However, the increase of third party funders' presence in arbitration has resulted in numerous discussions and concerns. The main concerns are governing impartiality and independence of arbitrators, and the necessity of security for costs[4]; which are briefly assessed, below.

Furthermore, it may be argued that the mere existence of financing, or the denial of financing, may result in bias as to whether or not a claim is meritorious. The funders engage in a thorough analysis of a case they are asked to finance; therefore, their choice of whether or not to finance a party may affect how a claim is regarded by third persons (for instance, the arbitrators). On the other hand, a party may also request a case assessment by a potential funder prior to initiating its claim. This way, if rejected by a funder, a party who decides to not initiate its claim may be spared unnecessary legal costs, which is considered practical and/or favorable[5].

Impartiality and Independence of Arbitrators

In international arbitration, the lack of impartiality and independence of an arbitrator may have severe consequences, such as the challenge and/or annulment of an award. Arbitration rules enable and govern procedures for the challenge of an arbitrator. Further, if and once an award is rendered, lack of impartiality or independence may prevent the recognition or enforcement thereof. This is an area of importance while assessing third party financing.

The scenarios where a third party funder may endanger the independence of an arbitrator may vary. When an arbitrator of a dispute, where a third party funder exists, acts as counsel to another party in another dispute funded by the same third party; or when repeated appointments of an arbitrator by parties funded by same third parties are concerned, doubts may arise as to the impartiality of the arbitrator.

These concerns raise questions as to whether an obligation to automatically disclose third party funders should be imposed, and, if yes, what the scope of such disclosure should be. However, it could be stated that there is a general inclination towards accepting a disclosure obligation. The regulations on this disclosure obligation is further assessed below.

Cost Issue

Third party financing also raises the question as to whether the arbitral tribunal may order security for costs against third party funders. This is especially important in the question concerning whether the prevailing party could recover its legal costs from the funder of the other party. These matters result in questioning the jurisdiction of the tribunal.

Unlike the discussions governing disclosure obligations due to impartiality and independence of arbitrators, there isn't a general consensus governing the discussions on costs and security for costs[6].

Need for Regulation

When the present rules, non-binding regulations and other instruments are assessed, it may be observed that third party funding is an area yet to be regulated in international arbitration.

IBA Guidelines on Conflict of Interest[7] ("Guidelines") was issued in 2004. The IBA Arbitration Committee commenced a review process of the Guidelines in 2012, and the revised version was published in 2014. The Guidelines do not provide legal provisions, but aim to act as a guide or indicator to be adopted in commercial and investment arbitration, and is expected to be applied with robust common sense (Introduction, Art. 6).

Pursuant to these Guidelines, both arbitrators and parties are expected to disclose any facts or circumstances that may give rise to doubts as to an arbitrator's impartiality or independence.

Third party funders constitute a novelty in the Guidelines as they are included among the persons considered to bear the identity of the party they are funding. As revised in 2014, this disclosure requirement also concerns third party funders, as follows: The Guidelines state in Art. 6(b) that a person may be considered bearing the identity of another party, if such person has a controlling influence over a party, or a direct economic interest in, or a duty to indemnify a party for the award to be rendered in the arbitration. The explanations state that third party funders may be considered to be the equivalent of the party.

This relationship needs to be taken into consideration when assessing an arbitrator's disclosure duty. The Guidelines also charge the parties with the duty to inform the arbitrator, the tribunal and the other party of any relationship between the arbitrator and such party or an entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered.

Accordingly this duty of disclosure by the arbitrator and by the parties comprises of any relationship between a third party funder and an arbitrator.

While the Guidelines provide insight to the disclosure obligations aiming to solve any conflict of interest due to funding, its non-binding nature should be taken into consideration.

In UK, the Association of Litigation Funders (ALF) provides a code of conduct whereby its members are expected to abide in relation to the funding of disputes within England and Wales[8]. This Code of Conduct for Litigation Funders[9] obliges the funders to refrain from steps that do or may cause the solicitor or barrister to act in breach of their professional duties. However, this code is also criticized for not having a binding nature. Further, its scope is limited to disputes in a certain region, only.

The arbitration rules, in general, do not regulate the funding of arbitration by third parties. The disclosure requirements and the rules of conduct constitute areas that are open to further legislation.

Bearing in mind the fact that third party funding is a new concept, it is quite heterogeneous, where both the funders, the funding method, and the funding agreements widely vary, and it may be expected that rules or guidelines for funding in international arbitrations are established in the near future.

Conclusion

Third party financing is new, vibrant in international arbitration, both appealing to arbitrators and parties, and also raises concerns among the practitioners. While it promotes access to parties with weak financial conditions, it raises questions and concerns governing impartiality and independence of arbitrators. However, the arbitration costs remain an unresolved issue when third party financing is concerned.

While the Guidelines of the IBA provide useful insight on how to avoid or solve certain effects of third party financing on the healthy functioning of arbitration, this remains an area to be regulated and clarified. Beyond any doubt, third party financing will continue to stir debates among scholars and practitioners in the near future.

Footnotes

[1] See Burcu Osmanoğlu, Third Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest, (2015) 32 J. Int. Arb. 3, Kluwer Law International, p. 325; as defined by Yves Derains.

This article provides useful insight and detailed explanations on the forms of third party funding, and focuses on its assessment from a conflict of interest point of view.

[2] See IBA Guidelines on Conflict of Interest, Explanation to General Standard 6, para. (b), p. 14, 15.

[3] Osmanoğlu, p. 330, 331.

[4]For further information please see Carlos González-Bueno and Laura Lozano, Third Party Funding Again Under the Spotlight http://kluwerarbitrationblog.com/blog/2014/10/08/third-party-funding-again-under-the-spotlight/ (accessed on 18 September 2015).

[5] For further assessment on the impact of third party funders on the parties whose financing requests have been denied, please see Victoria A. Shannon, The Impact of Third-Party Funders on the Parties They Decline to Finance, http://kluwerarbitrationblog.com/blog/2015/07/06/the-impact-of-third-party-funders-on-the-parties-they-decline-to-finance/ (accessed on 22 September 2015).

[6] For further information on this discussion and relevant jurisprudence, please see González-Bueno and Lozano; and Paula Gibbs, Chapman Tripp, Third party funding in international arbitration – lessons from litigation? http://kluwerarbitrationblog.com/blog/2014/12/15/third-party-funding-in-international-arbitration-lessons-from-litigation/ (accessed on 22 September 2015).

[7] These guidelines may be downloaded from http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx (accessed on 18 September 2015).

[8] See http://associationoflitigationfunders.com/wp-content/uploads/2014/03/ALF-info-for-solicitors.pdf (accessed on 18 September 2015).

[9] January 2014, accessible on http://associationoflitigationfunders.com/wp-content/uploads/2014/02/Code-of-conduct-Jan-2014-Final-PDFv2-2.pdf (accessed on 18 September 2015).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions