REUTERS | Vivek Prakash

Third party funding: opening up the Asian markets

A whole host of legal, practical and ethical issues potentially arise from the funding of arbitration claims. Those that have attracted most discussion so far include disclosure of funding arrangements to the tribunal or counterparties, funders’ potential liability for costs and security for costs, confidentiality issues, conflict of interest as between tribunal and funder, and potential breach of rules relating to champerty and maintenance.

Hardly a surprise, then, that the 2015 QMUL International Arbitration Survey: Improvements and Innovations in International Arbitration identified funding as an area where regulation would be beneficial. This finding was followed by the establishment of the ICCA-QMUL task force on third party funding in international arbitration, whose draft report on costs and security for costs was published earlier this year.

Despite the potential issues, funding has continued to grow apace, perhaps most visibly in the investment treaty context but also, increasingly, in commercial arbitration. The ever-increasing cost of arbitration makes funding an attractive proposition for many commercial parties; there are several sophisticated funding products in the market to choose from. In Giovanni Alemanni and others v Argentina, the tribunal commented that:

“… individual views may differ as to whether third-party funding is or is not desirable or beneficial, either at the national or at the international level, but the practice is by now so well established both within many national jurisdictions and within international investment arbitration that it offers no grounds in itself for objection to the admissibility of a request to arbitrate”.

And a quick glance through the websites of leading funders confirms that arbitration is very much seen as a key strand of the offering. On any view, third party funding of arbitration is here to stay.

Nevertheless, most legal systems (and possibly most lawyers) have not yet caught up with the developing challenges posed by funding. There have been some relatively piecemeal efforts to address discrete issues. For example, some of the more recent free trade agreements (including the Comprehensive Economic and Trade Agreement (CETA) and the Transnational Trade and Investment Partnership (TTIP)) incorporate disclosure obligations. And the arbitration community and institutions have taken some steps to address the potential problems: for example, the 2014 International Bar Association (IBA) Guidelines on Conflict of Interest impose disclosure requirements in relation to funding; the International Chamber of Commerce’s (ICC) Guidance Note for the Disclosure of Conflicts by Arbitrators (issued in 2016) recommends that arbitrators should consider specifically whether third party funding gives rise to any conflict of interest on their part; and the draft SIAC Investment Arbitration Rules 2016 would empower the tribunal to require disclosure of third party funding arrangements and also contemplate that such arrangements could be taken into account when awarding costs. Probably the most developed body of law on funding of arbitration is in the investment treaty context, where there has been a series of cases in which tribunals have considered applications for disclosure, security for costs and costs.

But in terms of national arbitration laws, it appears to be in Asia that the most substantial steps have been taken, with Singapore leading the way. Historically, third party funding breached the rules on maintenance and champerty in Singapore and Hong Kong. Recent months, though, have seen what has been routinely referred to as a “race” to legitimise funding in the region. Earlier this year, the Singapore Ministry of Justice launched a public consultation on proposed legislation to legitimise and regulate the use of funding in arbitrations seated in Singapore. Similarly, in Hong Kong, the Law Commission issued a consultation paper in October 2015 proposing that third party funding should be legitimised. And in May 2016, China International Economic and Trade Arbitration Commission (CIETAC) Hong Kong issued for consultation its draft guidelines on third party funding.

Underlying these initiatives is the recognition that the availability of third party funding is an increasingly desirable feature. Providing parties with the flexibility to fund their arbitrations, and certainty as to any obligations in terms of disclosure and the likely impact on costs and other aspects of the arbitration, is therefore crucial to maintaining an arbitral seat’s competitive edge. Parties are, understandably, reluctant to arbitrate in a seat where their funding arrangements may be open to question, or where any award could be challenged on the basis of the underlying funding arrangements.

According to the 2015 QMUL survey, Singapore and Hong Kong are already the third and fourth most popular seats (behind London and Paris). Predictably, funders have reacted positively to the moves to legitimise funding in Asia.

So where does this leave the UK? Generally, the UK is already perceived as a funding-friendly jurisdiction, though the doctrines of champerty and maintenance are still recognised at common law, and the extent to which a commercial funder’s control over arbitral proceedings could breach those doctrines remains a grey area as a matter of law (though in practice it rarely arises). Furthermore, the Association of Litigation Funders and the voluntary Code of Conduct for Litigation Funders means that, in practice, funding is relatively well-regulated and predictable. However, the Law Commission has identified arbitration as a possible area for inclusion in its 13th Programme of law reform. Perhaps third party funding is a topic that should be considered if the UK’s competitive edge is to be maintained in the face of developments in other seats.

20 Essex Street Karen Maxwell

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