Arbitration Speedread: The rise and rise of third party funding in arbitration



Third party funding in the context of international arbitration remains a highly relevant issue which is worth re-examining in light of recent changes which have impacted both on the permissibility and recoverability of third party funding and will no doubt increase an already voracious appetite for it amongst parties to arbitral proceedings. 

In short, third party funding is an alternative method of funding legal proceedings whereby a third party with no prior connection to the dispute agrees to finance all or part of the costs of proceedings in return for a fee payable if the funded party is ultimately successful. Parties opt to use third party funding for a number of reasons, including to regulate cash flow, share risk and, more traditionally, because they would not otherwise have the funds to pursue or defend proceedings.  

In September 2016, the English Court in the landmark decision in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm) ("Essar") held that an arbitrator in an ICC arbitration seated in London did not err in finding that a successful party could recover its costs of third party funding. The Court held that such costs fell within the meaning of "other costs" under section 59(1)(c) of the Arbitration Act 1996. 

It is tempting to dismiss the Essar decision as being confined to the particular facts of that case, whereby the conduct of the unsuccessful party was particularly egregious both in its performance of the contract and its conduct in the arbitral proceedings. However, the point of principle it established is likely to make third party funding more appealing than ever to commercial parties. 

The Essar decision is highly significant for parties as one of the primary drawbacks of obtaining third party funding is the cost to the funded party of such funding (which can include an ATE premium, conditional fee and/or an uplift or success fee charged by the funder). Such costs can now, in principle, be recovered in full from the unsuccessful party, rather than having to be paid out by the successful party from the damages it receives.

What is already apparent is that perception of third party funding has undergone a seismic change in recent years. It is no longer viewed as the preserve of smaller, cash-strapped companies in "David and Goliath" disputes. Increasingly, large and well-resourced commercial entities are opting to fund arbitral proceedings through third parties as a "tool of choice" to smooth their cash flow, to offset the cost and risk of the proceedings and as a means of obtaining an additional layer of due diligence on the merits of their case.1  

These changes have been reflected in an increasingly sophisticated third party funding market which has broadened and diversified considerably in recent years, with many funders now offering complex and innovative funding products. With a third party funder set to receive a significant windfall in a recent high-profile c.$1.4 billion ICSID award made to a funded claimant, we anticipate that funding options to parties will only increase.2  

Shifting attitudes towards third party funding can be seen on the global stage and a recent ICC Commission Report found in its survey of 41 jurisdictions that most were broadly accepting of third party funding arrangements.3 These changes have been particularly marked in certain jurisdictions which have, until recently, prohibited its use based on the common law doctrines of maintenance and champerty. On 10 January 2017, Singapore signed into law the Civil Law (Amendment) Bill 2016 and on 14 June 2017 Hong Kong passed the Arbitration and Mediation Legislation (Third Party Funding) Amendment Bill 2016 which both expressly permit third party funding of arbitration proceedings. However, this trend is not universal. The Irish High Court recently ruled in Persona Digital Telephony Ltd & Ors v The Minister for Public Enterprise & Ors [2017] IESC 27 that third party funding arrangements remained unlawful as a matter of Irish law in the context of litigation proceedings. 

In parallel with the growth in third party funding seen in recent years there has been a push for increased regulation in terms of the funding arrangements. In particular, emphasis has been placed on the need for funded parties to disclose the existence of the funding arrangement and the identity of the funder to the Tribunal. The 2015 Queen Mary School of International Arbitration Survey indicated that 76% of its respondents thought it should be mandatory to disclose the use of third party funding.4

As matters stand and unlike in Singapore and Hong Kong, in England and Wales the disclosure of third party funding arrangements to the Tribunal and other parties to the proceedings is not mandatory. The IBA Guidelines on Conflicts of Interest 2014 recommend that parties should disclose any relationship between the arbitrator and a person or entity having a direct economic interest in the award.5

One of the clear benefits of early disclosure of funding arrangements is that it reduces the risk of challenges to awards at the enforcement stage on the basis that there was an undisclosed conflict of interest between the funder and the Tribunal. On the other side of the coin, the obvious risk to the funded party is that disclosure of a funding arrangement may trigger an application for security for costs from the opposing party. Notably, this was the case in RSM Production Corporation v Saint Lucia (ICSID Case No. ARB/12/10) whereby the Tribunal relied in part on the existence of third party funding to justify awarding security against the Claimant.6 In this regard, parties' concerns should be somewhat assuaged by the more recent recommendations provided in the draft ICCA-QMUL Task Force Report of 2016 which states that the presence of third party funding should not on its own be used as an indication that the party in question is impecunious.7

The growth in third party funding in arbitration has been rapid and is likely to continue in that trajectory. It is clear that continuing discussion is necessary in order to determine the best way to accommodate the issues raised by third party funding within the international arbitration framework.     

Part of Bird & Bird's series of Arbitration SpeedReads aimed at providing busy practitioners and in-house counsel with easy to read updates on topical Arbitration issues.

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1  Christopher P. Bogart "Third-party financing of international arbitration", The European Arbitration Review 2017 (14 October 2016),10.
2  Crystallex International Corporation v Bolivarian Republic of Venezuela (ICSID Case No. ARB (AF/11/2)). 
3  ICC Commission Report 'Decision on costs in international arbitration' ICC Dispute Resolution Bulletin, 2015, Issue 2. 
4  Queen Mary University of London 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration. 
5  IBA Guidelines on Conflicts of Interest in International Arbitration (adopted on 23 October 2014). 
6  RSM Production Corporation v Saint Lucia (ICSID Case No. ARB/12/10).
7  ICCA-QMUL Task Force on TPF in International Arbitration Subcommittee on Security for Costs and Costs, Draft Report, 1 November 2015.