Third-Party Funding in International Arbitration: The ICCA-QMUL report

​A comprehensive report into third-party funding of arbitration has been published, identifying issues to be considered by parties and tribunals.

On 17 April 2018, the joint task force convened between the International Council for Commercial Arbitration (ICCA) and Queen Mary, University of London (QMUL) published its long-awaited report on third-party funding in arbitration.

The task force comprised more than 50 members from over 20 jurisdictions, and included arbitrators, lawyers, academics and third-party funders. It set out to identify the issues that arise in relation to third-party funding in international arbitration and to determine how those issues should be addressed.

Structure and purpose of the report

After providing an overview of funding in arbitration, the report establishes a working definition of a “third-party funder” as any non-party to the proceedings that enters into an arrangement to finance all or part of the cost of proceedings in return for a sum that is wholly or partially dependent upon the outcome of the case. Notably this definition therefore includes ATE insurers and lawyers acting on a contingency or conditional basis, though not all its recommendations apply to all categories of third party funding. Marine disputes are excluded from the scope of the reports, thereby excluding issues relating to P&I clubs.

The report then discusses three substantive issues which, according to the task force, directly affect international arbitration proceedings and are capable of being addressed at an international level: conflicts of interest (Chapter 4), privilege (Chapter 5) and costs and security for costs (Chapter 6). The report also includes a discussion of third-party funding in investment arbitration (Chapter 8). The task force’s work is intended to promote a greater understanding of these issues, and to facilitate greater consistency and more informed decision-making in addressing them.

The task force’s “output” is presented through: “principles” and “best practice guidance” and includes various checklists of points for funders and funded parties to consider before entering into a funding agreement. The guidance is likely to be used by parties, counsel and arbitrators to address the issues identified.

Conflicts of interest

The report articulates the following key principles:

  • parties and their representatives should, on their own initiative, disclose the existence of a third-party funding arrangement and the identity of the funder, and
  • in light of this disclosure, arbitrators and arbitral institutions should consider whether any conflict of interest exists and take appropriate action in accordance with applicable rules and guidelines.

It is notable that the task force’s recommends more than merely empowering the tribunal to order disclosure of any third-party funding arrangement. It advocates systemic disclosure by the parties to ensure that any possible conflicts are uncovered as early as possible in the process.

The report contains a useful analysis of the IBA Guidelines on Conflicts of Interest in International Arbitration. In particular, it notes that, whilst these Guidelines may require disclosure of third-party funding, they may not apply to all types of funding arrangements. The task force’s detailed analysis may well provide a useful roadmap to allow the IB Guidelines to be updated in due course to deal with all types of funding.

More generally, we expect that the task force’s analysis will assist the development of national legislation (as has recently occurred in Hong Kong and Singapore) and/or institutional rules to deal with conflicts of interest in relation to third-party funding.

The report does not go so far as to suggest how any conflicts of interest should be analysed and resolved in practice. The task force takes the view that these are both matters better left to the IBA Guidelines, institutional rules and national legislation.

Privilege

The report articulates the following key principles:

  • whilst the existence of third-party funding and the identity of the funder are not legally privileged, some information in the funding agreement is likely to be legally privileged and the production of such information should not ordinarily be ordered
  • tribunals should not treat any privilege as having been waived solely because it was provided to a third-party funder for the purposes of the funding relationship, and
  • tribunals should permit to be redacted the funding agreement or other information provided to a funder which is otherwise disclosable.

Privilege in international arbitration is a complex issue. Its complexity stems from the broad discretion afforded to tribunals to determine evidential matters of their own accord, the lack of any substantive privilege rules in any institutional rules or arbitration legislation, and the considerable legal and conceptual differences in privilege (or ‘professional secrecy’) rules across jurisdictions.

It is admirable, then, that the task force has attempted to grapple with the issue of privilege in the context of third-party funding, and the discussion in this chapter is a useful overview of how privilege rules vary across jurisdictions. Based on its research, the task force concludes, perhaps unsurprisingly, that there is no clear answer in most jurisdictions - particularly civil law jurisdictions - as to whether documents and information provided to a funder will be protected from disclosure.

Ultimately, questions as to the availability of privilege, the waiver of any privilege and the redaction of privileged material, will be a matter for the tribunal to determine having regard to the national rules which it deems to be applicable to the enquiry. An added complexity is that there is no established consensus on how to determine which national rules should apply; tribunals often determine this through a complex conflict of laws analysis or by applying the “closest connection” test or by applying a “most favoured nation” approach. The substantive principles proposed in the report may therefore be of limited value, although practitioners are likely to welcome the task force’s endorsement of legal privilege more generally.

Costs and security for costs

The report articulates the following key principles:

  • a party’s costs should be recoverable notwithstanding that that party has had third-party funding
  • where recovery of costs is limited to “incurred” costs, the obligation on the funded party to reimburse the funder in the event of a successful outcome is sufficient for a tribunal to find that the party’s costs fall within that limitation
  • whether the costs of funding (for example, the funder’s return) are recoverable will depend on national legislation and procedural rules, but should be subject to a test of reasonableness (as long as they are disclosed to the other side), and
  • as to security for costs, the terms of any funding arrangement may be relevant to establish a party’s ability to meet any adverse costs award.

The report emphasises that the principles in relation to costs are not normative and are, instead, intended to describe the current state of the law. However, we think the industry would welcome any legal developments in this area which accord with the task force’s views.

The task force sensibly concludes that any legal costs that the funded party is contractually obliged to repay to the third-party funder should be considered as legal costs incurred by the funded party. The issue of whether the costs of the funder’s return should be recoverable is trickier. On the one hand, why should a losing party be obliged to bear the risk of the funded party’s decision to use third-party funding to fund its claim? On the other hand, it may be reasonable for the losing party to bear this risk in circumstances where it has caused the impecuniosity of the claimant, thereby forcing the claimant to rely on funding in order to bring its claim.

The task force suggests that the recoverability of additional costs, such as the funder’s success fee, should be subject to a test of reasonableness. The Essar Oilfields decision by the English High Court suggests that, at least for English-seated arbitrations, the tribunal will in principle be able to order the payment of such costs. The report supports this view, though it is one that may not be shared in other jurisdictions.

Finally, as to security for costs, the report acknowledges that, whilst this concept originates in English litigation practice, tribunals do now have the power to order security for costs, although it is exercised only rarely. The report suggests two key points in relation to the impact of third-party funding arrangements on security for costs: (i) that the existence of a third-party funding arrangement should not in itself suggest that the funded party is impecunious, and (ii) that a party against whom a security for costs application is made should be able to adduce evidence of its third-party funding arrangements as evidence that it will be able to satisfy any adverse costs order.

Investment arbitration

The report recognises that investment arbitration attracts a different set of issues to commercial arbitration, given the wider political context in which it operates. The report does not articulate any specific principles in relation to third-party funding in investment arbitration but, instead, seeks to “identify future considerations for future inquiry and research”. These include the impact of third party funding on the number of claims and their validity, and the relationship between investment arbitration and political risk insurance.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.