We were delighted to co-host a breakfast seminar on Wednesday 9 March with Mishcon de Reya on one of the hot topics of the moment: third party funding (TPF) in arbitration.
We welcomed a prestigious panel of speakers comprising Karel Daele, Head of Arbitration at Mishcon de Reya, Susan Dunn, co-founder and Head of Litigation at Harbour Litigation Funding, and Professor Stavros Brekoulakis, Professor of International Arbitration and Commercial Law at Queen Mary University of London, and co-chair of the ICCA-Queen Mary Task Force on Third-Party Funding. The seminar was chaired by James Libson, Head of Mishcon Private and Executive Partner of Mishcon de Reya.
To kick off the proceedings Susan Dunn gave a funder’s perspective. She noted that funders are likely to take on claims involving monetary sums, such as shareholder class actions, breach of contract claims, and fraud related claims. However, as a general rule they are unlikely to fund family law disputes, personal injury claims or defamation cases (these topics tend not to be arbitrable in any event). There are a variety of different types of funding arrangements available in addition to conventional single case funding, such as portfolio funding, damages based agreements, conditional fee agreements, taking an equity share in a business and fee capping for corporates. She noted that just because a party seeks funding does not mean they are impecunious; parties may seek funding because they wish to use their available funds in other ways.
In terms of regulation of TPF, Susan pointed to the existing Code of Conduct (optional to funders) and the Association of Litigation Funders, as well as recommendations for regulation in other jurisdictions such as Singapore and Hong Kong and the IBA Guidelines on conflicts. However, in her view, there are some simple questions parties should ask of funders which are often overlooked, including:
- Does the funder have sufficient funds to fund the dispute?
- How is the funder’s money being used at present?
- Does the funder ring fence money for each case or use the same “pot” for several cases?
Finally, Susan turned to some key issues parties should consider when drafting a funding agreement such as:
- Pricing terms: what will the funding cover and how will the funder charge?
- Scope of the funding: does it exclude appeals or certain claims?
- How should “proceeds” and “success” be defined?
- How is budgeting managed? Parties should prepare realistic budgets and always allow for the unexpected.
- How is settlement defined?
- What happens if there has been a material change in the case?
- How should the parties deal with common interest privilege and confidentiality issues?
Professor Stavros Brekoulakis considered the issues of conflicts of interest and allocation of costs. He noted that approximately 40% of current investment arbitration claims have either secured or explored TPF. The TPF market is largely unregulated, relying on either self-regulation, or to a degree the IBA 2014 guidelines, and therefore presents many challenges for the conduct of international arbitration.
Professor Brekoulakis discussed in brief the ICCA-Queen Mary Task Force on Third Party Funding which was founded to create a forum of discussion and debate of TPF issues, noting that it is hoped that the findings will be published in September 2016.
Turning to the issue of conflicts of interest, Professor Brekoulakis noted that the 2014 version of the IBA Rules provides a broader approach to disclosure than that in the earlier rules. Standard 7(a) provides:
“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. The party shall do so on its own initiative at the earliest opportunity” (emphasis added).
The rules raise four important issues:
- What is the meaning of “direct economic interest”? This may capture shareholders and the provision does not set out a minimum threshold of the economic interest required.
- What kind of “relationships” must be disclosed?
- What is the appropriate scope of disclosure: identity of the funder or terms of funding too?
- Is it reasonable to place the obligation for disclosure upon the funded party?
In terms of allocation of costs, Professor Brekoulakis noted that many institutional rules provide that costs should follow the event. The preliminary view of the Task Force is that the presence of TPF should not influence the applicable method of costs allocation and the funded party should be able to recover “reasonable“ costs from the other party. The Task Force’s preliminary view is that additional funding costs do not qualify as legal costs and cannot be recovered as such. Also (and whilst not the view held in Excalibur Ventures LLC v Texas Keystone Inc) given that the third party funder is not a party to the arbitration agreement, the tribunal should not make an order for costs against them.
Karel Daele spoke on the subject of security for costs in TPF, having represented RSM in the well known case of RSM v St Lucia.
He began by reviewing a number of cases since 1999, all of which adopted the “traditional approach” of rejecting security for costs both in circumstances where funding related arguments were made and those where no such arguments were put forward. However, in contrast, in RSM v St Lucia the tribunal considered that there were exceptional circumstances present justifying the payment of security for costs.
Having reviewed subsequent cases, such as BSG Resources v Guinea, South America Silver v Bolivia and Muhammet v Turkmenistan, Karel concluded that there is still a high threshold before a tribunal will order security. The mere existence of funding is not sufficient by itself, but it is a factor that the tribunal will take into account when deciding whether to order security. Karel concluded by drawing the distinction between commercial arbitration and investment arbitration. In commercial arbitration the respondent knows whom he will be facing, having entered into contractual relations with that party, making it difficult to obtain an order for security for costs. However, in investment treaty arbitration there is no consent to arbitrate with a potentially impecunious claimant.
As the speakers demonstrated, there is still no uniform approach to TPF in arbitration. It is hoped that with the advent of the ICCA-Queen Mary Task Force results and some general international consensus on issues such as security for costs and disclosure, more parties will feel able to arbitrate disputes previously closed to them through lack of funding and more parties may use third party funding as part of their financial planning.