Arbitration in 2017: Third party funding

Update

Please see our update on these developments

Permissibility of funding

Third party funding is nothing new in international arbitration, as it has a longer track record in certain jurisdictions than it does in England and Wales, notably in Australia. Nonetheless, attitudes to third party funding vary between jurisdictions. Whilst case law and English judicial attitudes provide some certainty as to how funding issues are likely to be determined in English court litigation, international attitudes to third party funding in an arbitral context may be more difficult to predict. The Irish High Court ruled in 2016 that third party funding remains unlawful in Irish litigation, though that decision is under appeal.

Most jurisdictions accept third party funding in arbitration, but of the major arbitral centres, Singapore and Hong Kong have both retained strict laws against champerty that have effectively made third party funding agreements illegal. Both jurisdictions are in the process of reconsidering their position in relation to international arbitration, though not litigation, primarily because a bar on third party funding may limit their competitiveness as global arbitral centres.

2017 is likely to see new laws both in Hong Kong and Singapore that will permit third party funding agreements, though it is likely that restrictions on the form of such agreements will be imposed in both jurisdictions to guard against abuses of process. Hong Kong consulted on allowing third party funding in arbitration in October 2015, while Singapore conducted a short consultation on the issue in June 2016.

Recovering funding costs

The November 2015 report of the ICCA-QMUL Task Force on Third Party Funding concluded that the fact that a party has been funded by a third party should not act as a bar to the recoverability of its costs in the event that it wins its case, provided that the funding agreement provides for the party to repay the funder in these circumstances. The Task Force also concluded that it is not appropriate for tribunals to award funding costs, as they are not procedural costs for the purposes of the arbitration. While a party can recover the costs of fighting its case, the additional amount payable to a funder in the event of the claim succeeding is, in reality, the cost of the party borrowing and using the proceeds of the claim as security.

However, the Task Force’s recommendation was notably not followed in the case of Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd, where the sole arbitrator awarded the winning party its costs of funding. The funding agreement provided for a return for the funder of 300% of the amount advanced, or 35% of the damages recovered, whichever was the greater. The arbitrator’s award of these funding costs was appealed, but was upheld by the High Court in England as being consistent with section 59(1)(c) of the Arbitration Act 1996.

It is unlikely that many tribunals will feel comfortable making similar awards and it should be noted that the arbitrator in the case found Essar to have “set out to cripple Norscot financially”, forcing them to enter into the funding agreement in order to assert their rights. However, with the precedent established, we expect to see more parties applying for such costs in London seated arbitrations. The amounts involved will often be very significant and many claimants will see the defendant’s behaviour as the cause of them incurring the costs of funding.

The conflicts issue

As funding continues to grow, many arbitrators may find they have some form of link to a funder, particularly arbitrators from firms of lawyers where that funder may be backing a client of the firm. This raises the possibility of a conflict of interest argument related to the funder of a party. In its revised Guidelines on Conflicts published in 2014 the IBA stated: “A party shall inform an arbitrator, the Arbitral Tribunal, the other parties and the arbitration institution or other appointing authority (if any) of any relationship, direct or indirect, between the arbitrator and the party …… or between the arbitrator and any person or entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration.” Third party funders are expressly recognised as parties with a direct economic interest in the award.

On 22 September 2016, the ICC International Court of Arbitration published a Guidance Note requiring arbitrators to disclose connections with parties and their affiliates and expressly extended this to parties with an economic interest in the outcome, again including funders. The arbitrator is only expected to make enquiries from reasonably available material, which would rarely include details of the funding agreement any party might have. As the duty is a continuing one, however, it is possible that an arbitrator might disclose a connection to a funder if at some point in the proceedings the existence of a funding agreement and the identity of the funder in question became known. The first conflicts dispute arising from a funding agreement may also be seen in 2017.