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ICCA-Queen Mary Taskforce: draft report on third party funding in international arbitration

On 1 September 2017, the joint ICCA-Queen Mary Taskforce issued its draft report on third party funding in international arbitration. The Taskforce was composed of experienced practitioners and academics from over 20 different jurisdictions.

The 172 page draft report sets out a comprehensive description of third party funding and dispute funding in general. In particular, it provides a detailed discussion about the definition of the notion of third party funding, distinguishing it from other forms of dispute funding, such as insurance or corporate funding. The draft report further provides principles of best practice in third party funding arrangements.

The report’s stated objectives are, first, to promote a greater understanding about third party funding and, second, to encourage greater consistency and more informed decision-making in addressing issues relating to third party funding.

However, because of diverging views among Taskforce members, it is unclear what weight should be given to the principles of best practice contained in the draft report. Indeed, some members were opposed to the perceived rise of standardisation in international arbitration through soft law instruments. These members were opposed to the Taskforce issuing any prescriptive guidance. By contrast, others advocate the publication of a code of conduct for third party funders.

Having said that, it is fair to assume that the principles articulated in the report, based on detailed research and drafted by prominent scholars and practitioners, will necessarily have a normative effect, whether it contains prescriptive provisions or not.

The main bone of contention (and undeniably the trickiest issue) addressed in the draft report is the issue of disclosure and conflicts of interest. There appears to have been disagreement, inter alia, about:

  • What should qualify as third party funding for the purpose of assessing conflicts of interest.
  • Whether the existence of a third party funder should be systematically disclosed by the parties or, on the contrary, only occur upon request by the arbitral tribunal.

Regarding the first difference of opinions, two propositions have been articulated. The first proposition qualifies as third party funders or insurers any natural or legal person:

  • Who is not a party to the dispute.
  • Who, in order to finance part or all of the cost of the proceedings, enters into an agreement either:
    • with a disputing party;
    • an affiliate of that party;
    • a law firm representing that party; or
    • individually or as part of a selected range of cases.
  • Where such financing is provided either through a donation or grant, or in return for remuneration dependent on the outcome of the dispute.

The second proposition only differs inasmuch as it expressly excludes insurers from this definition.

This second proposition was based on the view that:

“… exclusion of insurers [when assessing conflicts of interest] was a structural feature of dispute settlement that should not be tampered with and could be maintained as separate from the issue of third-party funding”.

However, this generalised exclusion of insurers for the purpose of assessing conflicts of interest seems hard to justify; as rightly pointed out in the report:

“… it would be difficult to articulate a rationale for why a conflict may exist if a third-party funder was involved in multiple cases in which the same arbitrator was appointed, but the same activity by an insurer would not similarly constitute a conflict.”

Insurance is a rather common source of dispute funding. As underscored in the draft report, depending on the terms of the relevant insurance contract, the insurer can exert various levels of influence on the dispute. Depending on the influence the insurer can potentially exert on the arbitral proceedings on the one hand, and the influence the outcome of the dispute can have for the insurer on the other, there is no doubt that there are cases where the insurance contract can – at least theoretically – be the source of potential conflicts of interest.

The main point of dissension, however, appears to be the issue of when and by whom disclosure should be made. The first alternative articulated in the draft report provides as follows:

“A party should, on its own initiative, disclose the existence of a third-party funding arrangement and the identity of the funder to the arbitrators and an arbitral institution or appointing authority (if any), either as part of its first appearance or submission, or as soon as practicable after funding is provided or an arrangement to provide funding for the arbitration is entered into.”

By contrast, the second alternative reads as follows:

“Arbitrators and arbitral institutions have the authority to, during the selection and appointment process, expressly request that the parties disclose whether they are receiving support from a third-party funder and, if so, the identity of the funder.”

In short, whilst the first view advocates a general presumption of disclosure by the parties of third party funders, the second one merely confirms an arbitral tribunal’s or an arbitral institution’s authority to request disclosure of such information. The rationale is that disclosure is more likely to happen if it is based on a mandatory order by an arbitral tribunal rather than on non-binding soft-law instruments, especially in light of the confidentiality provisions contained in the funding agreement. Nevertheless, the first alternative seems preferable for the following reasons.

As a preliminary matter, the draft report makes it clear that it is now undisputed that third party funding can be the source of conflicts of interest. Accordingly, the existence of a funding agreement and the identity of the funder represent information which should be made available to the arbitrators in order to ensure the integrity of the future award. It follows that, regardless of who is responsible for either providing or requesting this information, the said information must be disclosed during the proceedings.

In light of this, cautious arbitrators would be well advised to request that parties disclose whether they have concluded a third party funding agreement and, if so, disclose the identity of the funder. On the other hand, funders should also be aware that their identity and the existence of the funding agreement will be disclosed. Accordingly, when negotiating a third party funding agreement, both parties should be clear that confidentiality provisions cannot cover the identity of the party or the existence of the agreement in the context of arbitral proceedings. Given that funders generally have an interest in the outcome of the arbitral proceedings, they have a strong incentive to ensure that the award cannot be set aside due to the existence of a conflict of interest.

In light of this, it seems best to leave the initiative to disclose the identity of the funder and the existence of a funding agreement to those who are best placed to provide that information (that is, the party receiving the funding), rather than leaving the issue to the arbitrators, who would be facing the following alternatives:

  • Not request disclosure of any third party funding agreement and take the risk of jeopardising the award.
  • Systematically ask the parties whether they have entered into a third party funding agreement, thus leading to a more standardised approach of the issue and to unnecessary requests in the absence of a third party funder.

Based on the 2015 Queen Mary School of International Arbitration survey (quoted by the draft report), it seems that the mandatory disclosure of the existence of third party funding by the funded party represents the majority view. However, it will be interesting to see whether academics and practitioners commenting on the draft report will confirm or invalidate this finding.

Schellenberg Wittmer Sebastiano Nessi Simon Demaurex

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