REUTERS | Yuya Shino

Third party funding in arbitration: indirect reforms in Nigeria

Followers of this blog will be aware that third party funding (TPF), by which a commercial fund finances the costs of proceedings in return for a share of any damages awarded, is increasingly widespread with a number of jurisdictions taking the necessary steps to introduce it into their law as they look to increase their attractiveness as arbitral venues. Nigeria is no exception and proposed amendments to its law would see Nigeria join this global trend.

Global trend of legalising TPF

In a number of common law jurisdictions, the old doctrines of champerty and maintenance potentially criminalise the involvement of a third party funder, effectively preventing TPF. With TPF now such a widely established part of the arbitration market, such a prohibition is perceived as a demerit for the jurisdiction in question and a competitive advantage to rival jurisdictions which embrace TPF. It is therefore no coincidence that several common law jurisdictions (for example, Hong Kong and Singapore), eager to strengthen their standing as arbitral hubs, have recently legalised TPF in international arbitration. These jurisdictions appear in general to have taken a systematic approach to reviewing their laws and a self-regulating approach to legalise TPF. Nigeria is now looking at joining the global trend by allowing TPF, but it is going about matters in a different way.

Indirect reform in Nigeria

Nigeria will amend its current legislation, the Nigerian Arbitration and Conciliation Act, via an amendment bill (the Bill). The Bill, which has passed through the final stages of the Nigerian legislative process (it has yet to be passed by the House of Representatives and receive the President’s assent), effectively legalises TPF in arbitration (but not litigation) in an indirect fashion. It does so by including the costs of obtaining TPF as part of costs of arbitration. In other words, the Bill does not expressly state that TPF will be legal, but the consequence of including it as part of costs of arbitration logically means that the Bill has tacitly permitted TPF.

Since the Bill does not expressly state that TPF is allowed, it is unsurprising that it does not contain specific regulation dealing with concerns that can arise under TPF arrangements, for example, confidentiality and conflicts issues. The Bill in Nigeria is therefore likely more of a gradual first step towards legalising TPF, with more specific regulation to follow in order to address these concerns. How funding issues will be tackled in practice after the Bill has been passed remains to be seen. It is expected that market practice will gradually crystallise informally as funders engage with claimants in the market. Potentially, once a market practice has been established or court decisions made, specific legislation will likely be passed to enshrine it.

Potential issues arising out of the indirect reform and lack of regulation

Since the Bill does not contain any specific regulations of TPF, there will likely be a gap between its enactment and the point in time where a market practice has crystallised. The application of TPF will likely be, at least initially, uncertain. We identify two possible issues to future proceedings financed through TPF in Nigeria arising from this gap and the uncertainty:

  • While the Bill should be understood implicitly to mean that parties may obtain TPF, it may be argued that it is not clear enough (since it does not explicitly state that TPF is legalised) to properly amend the federal law. According to the Nigerian Interpretation Act, English common law is applicable in Nigeria subject to a contrary provision by any federal law. Questions may arise as to whether the Bill does enough to overcome the rules against champerty and maintenance. It is unclear if the Bill in its current state reaches this threshold. On this basis, a party facing a funded opponent may seek to challenge the validity of the funding or even possibly any award obtained via a funded party.
  • By leaving a number of issues unresolved or subject to dispute, there is a risk of more satellite disputes emerging. Unfortunately, the Nigerian courts are busy with long waiting lists and the prospect of getting drawn into disputes in the domestic courts over funding may undo a great deal of the benefit of permitting TPF.

It will be interesting to see how Nigeria will seek to address issues like these (and more traditional issues connected to TPF such as confidentiality and conflicts) after the Bill has been passed.

Small first step but part of a larger trend

Although Nigeria’s approach to legalising TPF is different to that of other common law jurisdictions and raises a number of potential issues, Nigeria’s planned reforms still form part of the same larger trend of common law jurisdictions legalising TPF. Statistics from the ICC have shown a growing activity in arbitration in Nigeria recently. If TPF were legalised, the arbitration activity would likely increase even more, as it is expected to do in other jurisdictions.

Following the ratification of the Bill, parties, practitioners and funders will certainly be watching the developments as the market will react to the indirect legalisation of TPF in Nigeria.

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