Worldwide: Disclosing Third-Party Funding In International Arbitration: Where Are We Now?

Various arbitral institutions have started to address when and how a party needs to disclose the existence of a third-party funder. In this article Dalal Alhouti, Knowledge Development Lawyer and Haleema Wahid, Associate consider what third-party funding is, what the current disclosure requirements are and comments on what further developments we can expect in this fast-moving area.

What is Third-Party Funding?

Third-party funding is an arrangement whereby a party that is unconnected to a claim (i.e. nether of the disputing parties) offers to finance all or part of one of the parties' costs, such as the legal fees, expert fees, and/or institutional advances. Such financing can be seen as an investment, with the funder being remunerated by an agreed percentage of the proceeds of the award; a success fee; a combination of the two; or through a more sophisticated financial structure. One of the attractions of third-party funding is that it is flexible and can be tailored to the specific risks of the individual case, with different funders having different risk appetites.

In the event of an unfavourable decision, the funder's investment is lost. Liability for paying the winner's costs is usually insured against, the premium for which may also be paid by the funder depending on the funding agreement. Funders will fund a range of cases in the belief that whilst there will inevitably be surprise losses, these will be outweighed by the recoveries made in respect of the cases which succeed.

Although less common, it can happen that a third-party funder buys the claim entirely, in which case the seller will no longer have any involvement save for a commitment to provide the necessary documentary and/or witness evidence to enable the claim to be proven. If the claim has already crystallised into a final award or judgment, it might be assigned to the funder without requiring the seller to provide the same level of support as when the claim is still at the liability stage. If assignment is not possible the seller will continue to 'front' the enforcement procedures, with the buyer managing the matter in all other respects.

It should be noted that third-party funding can be used by defendants, but this is rare. Often this is when there is a counterclaim that the funder can invest in, but it can happen without a counterclaim. For example, consider a scenario in which a party faces a claim for USD100m but is confident that if it had the money available to defend it the claim would be reduced to USD50m, saving the defendant USD50m. A funder may agree to fund the defence on the basis that if liability is reduced to USD50m, the defendant will pay the funder twice its investment plus 20% of the difference between the claim amount and what is awarded. The funder pays the defence costs of USD1m and the claimant is awarded half its claim (USD50m). The funder is paid twice its investment (i.e. USD2m) and 20% of the saved USD50m (USD12.5m), a combined total of USD14.5m on a USD1m investment; the defendant saves USD35.5m on the claim without having to cashflow the cost of the dispute.

Third-party funding undoubtedly provides for easier access to arbitration for parties with meritorious claims who may not have the funds available to mount a claim. It also assists parties who do have the funds but would prefer to utilise those funds elsewhere in their business rather than having to expend them on running a claim.

Issues When Using Third-Party Funding

Whilst third-party funding has a number of potential benefits, there can be issues when using a funder which should not be overlooked. Firstly, third-party funding will not be suitable for all claims, such as those for declarations, specific performance or other non-monetary awards. There must, in virtually every scenario, be a monetary aspect.

Secondly, there will inevitably be some loss of autonomy since the funder will need some degree of control over its investment, particularly when it comes to any proposed settlement. Whilst interests should be aligned, if they begin to diverge on strategy this can strain the relationship and possibly lead to conflicts of interest.

Thirdly, if the existence of a funder is disclosed to the other side, this may prompt them to make an application for security for costs on the basis that there are issues with the claimant's solvency if it has resorted to a funder to finance the claim, and so it will not be able to pay the defendant's costs if the claim fails. Often it will have been agreed that any security for costs will be paid by the funder. There have been reported cases where applications for security for costs based on the mere existence of a third-party funding arrangements have been rejected, which has gone some way to allay these concerns (see Bay View Group LLC and Another v Republic of Rwanda (ICSID Case No ARB/18/21) (Procedural Order No 6) (28 September 2020) and Progas Energy Ltd and others v The Islamic Republic of Pakistan [2018] EWHC 209 (Comm)). Revealing the existence of a third-party funder may also have positive implications for the claimant as it could influence the tribunal to believe that the claimant has a strong case, since a third-party funder is unlikely to fund a claim unless it is convinced that the claimant will win; an assessment that will be based on external counsel's advice. Fourthly, there can be concerns that documents shared with a funder will not be covered by privilege and will become disclosable to the opponent, revealing candid assessments of the weaknesses of the claim.

There is also the prospect of being able to recover a funder's success fee as damages in addition to legal costs (which has been seen in some ICC arbitrations). There is a credible argument that the funder's success fee should be recovered as damages due to the claimant's need for the funding. In these circumstances, the claimant would have to disclose the existence and details of the funder.

Finally, conflicts of interest can arise if the funder is funding other claims that an arbitrator has an interest in due to the law firm that the arbitrator works in, which can occur as there are a limited number of funders. Whilst not all arbitrators are lawyers, many are and the concern would be that they would not wish to find against a party funded by the same funder that is backing claims brought by their law firms' clients, as that would financially undermine the funder and its ability to fund other claims. This is one of the reasons that disclosure of such arrangements has become a pressing issue, with some arbitral centres taking steps to address it directly, as we will now consider.

Disclosure Obligations in Third-Party Funding – Institutional Rules

Recent updates to institutional rules reflect the development of disclosure obligations pertaining to third-party funding. Whilst there is still no clear consensus as to whether parties to arbitration must disclose third-party funding, in general the trend is towards mandatory disclosure requirements. Below is a summary of the position in respect to some of the major arbitral institutions.

i International Chamber of Commerce

The International Chamber of Commerce ("ICC") is, according to the 2021 International Arbitration Survey¹, the most preferred arbitral institution globally. It has long favoured the approach that parties should disclosure the existence of third-party funding. In its 2015 report 'Decisions on Costs in International Arbitration' the ICC allowed tribunals discretion on the issue, meaning that a tribunal could order disclosure of funding information if it believed that third-party funding exists. Furthermore, in the context of arbitrator independence and impartiality, the ICC's 2016 'Note to the Parties and Arbitral Tribunals on the Conduct of Arbitration' stated that arbitrators should consider "relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award" when making disclosures, which would include a third-party funder.

In 2021 the ICC issued new arbitration rules which, pursuant to Article 11(7), finally made it mandatory for parties to disclose the existence of third-party funding and the identity of the funder. Article 11(7) states:

"In order to assist prospective arbitrators and arbitrators in complying with their duties under Articles 11(2) and 11(3) [duty to confirm their independence], each party must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration"

Although the disclosure of third-party funders is now mandatory, its scope extends only to "the existence and identity" of any third-party funders and does not require the disclosure of more detailed information (i.e. the funding agreement itself). The ICC also adopts a rather broad definition of third-party funding, referring to it as "an arrangement for the funding of claims or defences and under which [a non-party] has an economic interest in the outcome of the arbitration" without particularising any contingency requirement or conditions of the arrangement. As to what would qualify as an "economic interest", the 2021 ICC Guidance Note clarifies that the following circumstances would not normally fall within the scope of disclosure under Article 11(7):"(i) inter-company funding within a group of companies, (ii) fee arrangements between a party and its counsel, or (iii) an indirect interest, such as that of a bank having granted a loan to the party in the ordinary course of its ongoing activities rather than specifically for the funding of the arbitration".

ii Singapore International Arbitration Centre

Singapore was one of the first jurisdictions in Asia to permit third-party funding in international arbitration and related court proceedings. The 2017 Singapore International Arbitration Centre ("SIAC") Investment Arbitration Rules expressly grant the tribunal the discretionary power to order disclosure of (i) the existence of the third-party funding arrangement; and/or (ii) the identity of the third-party funder; as well as (iii) details of the third-party funder's interest in the outcome of the proceedings (where appropriate); and/or (iv) whether the third-party funder has agreed to be liable for adverse costs. This indicates that the tribunal can take into account third-party funding arrangements when apportioning the costs of the arbitration and in making any applicable costs orders against parties (although it is likely that tribunals would require good grounds (e.g., an application for security for costs)² before directing such additional details to be disclosed).

iii Hong Kong International Arbitration Centre

The Hong Kong International Arbitration Centre ("HKIAC") issued updated rules in 2018 which explicitly deal with third-party funding at Article 44. It states that the funded party must communicate a written notice to all other parties and the tribunal to state that a funding agreement has been made and who the funder is. Article 34.4 states that the arbitral tribunal may take into account any third-party funding arrangement in determining all or part of the costs of the arbitration.

iv Vienna International Arbitration Centre ("VIAC")

The 2021 VIAC Rules of Arbitration and Mediation ("2021 VIAC Rules") adopt a similar position to the 2021 ICC Rules. Article 13(1) states that a party shall disclose:

"the existence of any third-party funding and the identity of the third-party funder in its statement of claim or its answer to the statement of claim, or immediately upon concluding a third-party funding arrangement".

In addition, the 2021 VIAC Rules provide that the tribunal may, if it deems it necessary, order the disclosure of specific details relating to the funding arrangement, the funder's interest in the outcome of the proceedings, and/or whether the funder has committed to bear some or all of any adverse costs liability. Presumably this last requirement is to determine whether the defendant can expect to get its costs paid should the claim be dismissed, and if not, to enable the defendant to seek security for costs so that the claim does not proceed until the claimant has demonstrated an ability to satisfy an adverse costs order.

v The Dubai International Arbitration Centre ("DIAC")

Although the 2007 DIAC Rules were silent on the issue, Article 22 of the 2022 DIAC Arbitration Rules ("2022 DIAC Rules"), which came into effect on 21 March 2022, explicitly provides that parties who enter third-party funding arrangements must promptly disclose this fact to all other parties and DIAC, and must disclose whether or not the funder has committed to bear any adverse costs liability.

vi The International Centre for Settlement of Investment Disputes ("ICSID")

Building on the precedents set by the ICC and VIAC, ICSID's 2022 Arbitration Rules (which came into effect on 1 July 2022) (the "2022 ICSID Arbitration Rules") addressed – for the very first time – the topic of disclosure requirements relating to third-party funding. Rule 14 of the 2022 ICSID Arbitration Rules states that disputing parties have an ongoing obligation to disclose third-party funding (including the name and address of the funder) to avoid conflicts of interest that may arise from such financing arrangements. Parties must disclose this information upon the registration of their Request for Arbitration, or immediately upon concluding a third-party funding arrangement after registration. Furthermore, the tribunal has a broad power to order further disclosure in respect of third-party funders at any stage of the proceedings, which may extend to the funding agreement.

vii The Bahrain Chamber for Dispute Resolution ("BCDR")

BCDR has introduced a new rule in its new set of rules which came into effect on 1st October 2022. Article 21-bis, requires the disclosure of the existence of any third-party funding arrangement entered into at any time before or during the arbitration, and of the identity of the third-party funder. The BCDR have explained that the purpose of this provision is to ensure that arbitrators (or prospective arbitrators) can fully assess the existence of any conflict of interest that may arise from the involvement of a third-party funder in support of one or more of the disputing parties, and that the tribunal may take account of the impact (if any) of a funding arrangement on the costs of the arbitration.

viii Other Institutions

In contrast to the above, the 2020 Rules of the London Court of International Arbitration ("LCIA"), under which a large number of arbitrations seated in England and elsewhere are conducted, remain silent on the topic of disclosure of third-party funding.

Other institutions appear to follow a halfway approach. The 2021 rules of Kuala Lumpur's Asian International Arbitration Centre do not require parties to disclose the existence of third-party funders, but instead give the tribunal the power to make "necessary enquiries on the existence of third-party funding arrangements, including the third-party funder's economic interest in the outcome of the arbitral proceedings" as well as the power to direct "the Parties to disclose the existence of such arrangements, as well as any change in circumstances throughout the course of the arbitral proceedings" (as per Article 13.5(e)).

Finally, it should be noted that whilst not an institution, the International Bar Association has issued Guidelines on Conflicts of Interest in International Arbitration, and these have, since 2014, stated that given their direct economic interest in the final award a third-party funder should, for the purposes of conflict checking, be considered as equivalent to a party in the dispute. Whilst these are non-binding guidelines, they are reflections of good international practice.

Disclosure Obligations in Third-Party Funding – Arbitral Laws

The rules of arbitral institutions are agreed by the parties but will be subject to any mandatory provisions of the arbitration law of the seat. Few laws deal with the disclosure of third-party funding. For example, neither the English nor the French laws on arbitration currently address third-party funding, although there have been cases where the English Courts have upheld arbitral awards ordering respondents to pay the claimant's funding costs, demonstrating support for third-party funding.

In the UAE the position is mixed. The UAE Federal Arbitration Law and the DIFC Arbitration Law are both silent on this issue. However, the DIFC Courts have recognised the existence of third-party funding arrangements, for example in the cases of Rafed Al Khorafi and Others v Bank Sarasin-Alpen (ME) Ltd and Bank Sarasin & Co Ltd (DIFC Courts – 21 August 2014 - CFI 026/2009), and Vannin Capital Pcc Plc v Mr Rafed Abdel Mohsen Bader Al Khorafi and others (DIFC Courts – 18 April 2016 - CFI 036/2014).

The arbitration law in Abu Dhabi Global Markets, the ADGM Arbitration Regulations 2015, was amended in 2020 to include disclosure obligations in respect of third-party funding agreements (section 37). The ADGM courts have also issued robust Litigation Funding Rules in 2019 which set out certain obligations on the funder such as (1) the funder must have qualifying assets of not less than USD5 million or equivalent amount in foreign currency, (2) the funder must take reasonable steps to ensure that the funded party has received independent legal advice in relation to the funding agreement and its terms prior to its execution,³ and (3) the funding agreement must state that the funder submits to the jurisdiction of ADGM Courts for the purposes of disputes relating to costs between the funded party and any other party to the proceedings. These Litigation Funding Rules are the first of their kind in the GCC and serve to provide parties with greater confidence in relation to the enforceability of funding arrangements.

There are developments in other laws too. UNCITRAL's Working Group III is aiming to regulate the funding of Investment-State Dispute Settlement claims. In line with this, the Secretariat has prepared "Draft Provisions on Third-Party Funding" and obtained comments on this from participating States, which are now in the process of being reviewed.

In Singapore, there has been a gradual liberalisation of the regulations pertaining to third-party funding and the Singapore Ministry of Law recently extended the third-party funding regime to include: (i) domestic arbitration and associated court proceedings; (ii) proceedings in the Singapore International Commercial Court ("SICC") and related appeals; and (iii) mediations relating to domestic arbitrations and SICC proceedings. Tied in with this is the requirement for lawyers registered to practise in Singapore to disclose the existence of any third-party funding their client is receiving in an arbitration or SICC proceeding⁴ (although this requirement does not extend to unregistered foreign counsel representing parties in arbitrations seated in Singapore).

Hong Kong made amendments to the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance Order No. 6 of 2017 ("AO") in 2019, which legalised the third-party funding of arbitrations where the place of the arbitration is Hong Kong or, if outside Hong Kong, for funding of services provided in Hong Kong. The funded party is under an obligation to disclose information about third party funding under Sections 98U and 98V of the AO. Specifically, the funded party must give written notice to each party to the arbitration and the arbitration body of the funding agreement together with the name of the third-party funder. Hong Kong has also developed a Code of Practice of Third-Party Funding of Arbitration ("Code"), which sets out the obligations that are required of a funder, including those pertaining to disclosure. The Code (and the operation of the amended AO) is monitored and reviewed by an advisory body appointed by the Secretary for Justice. The Code provides that the funder must remind the funded party of the obligation to disclose. Similarly, if a funding agreement ends, appropriate notice must be given. Although the Code is not formal legislation (and so the failure to comply will not attract any legal consequences), any non-compliance with the Code may be taken into account by the arbitral tribunal in its decision-making process.

Looking to the Future

Recent trends have seen more rules and arbitral laws adopting provisions in relation to the regulation and disclosure of third-party funding. Whilst we will likely see this trend continue, the picture may remain mixed. For example, in England the Law Commission recently published a consultation paper on proposals to revise the 1996 Arbitration Act but declined to propose amending the law to address third-party funding. This was because, in the Commission's view, parties can already choose arbitral rules which contain such provisions if they are important to them, and an arbitrator is already under an obligation to make known any relationship that may lead to the perception that the arbitrator lacks impartiality.

Nonetheless, with cross-border disputes continuing to increase and companies facing greater financial constraints to pursue their claims, the increasing trend towards mandatory disclosure obligations in the context of third-party funding should be welcomed as a natural and progressive evolution of the international arbitral landscape. The adoption of such rules addresses critical issues regarding conflicts of interest and confidentiality, taking a step towards greater transparency between the parties and the tribunal, and we can expect more institutions to revise their rules to include an obligation to disclose. This is a developing area and these issues will become easier to manage in time as tribunals, parties, and funders become more familiar with them.

Footnotes

1 Twelfth empirical study of the School of International Arbitration, Queen Mary University of London, in partnership with White & Case LLP.

2 This was the case in 2018 which saw the second-ever (publicly known) security for costs order in an investment arbitration being granted against a funded claimant in the case of Luis Garcia Armas v Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/16/1).

3 This obligation is satisfied if the funded party confirms in writing to the funder that the funded party has taken such advice (Section 6 of ADGM Litigation Funding Rules 2019).

4 As per the Singapore Legal Profession Rules.