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Third party funding and the pitfalls of privilege


Since first emerging in its modern form in Australia about 20 years ago, third party funding has become widespread, first in investment arbitration, later expanding to international commercial arbitration in the common law world, as well as in a number of civil law jurisdictions. Recent changes in the law in both Hong Kong and Singapore permitting third party funding in international arbitration provide a clear indication that it is here to stay. However, the increased use of third party funding in international arbitration has raised a number of legal issues, one of which is how privilege and confidentiality can be protected when communicating with and providing documents to the third party funder.

This blog looks at the main heads of privilege that may be relevant in the context of third party funding in international arbitration. It also considers what can be done to protect privilege when communicating with third party funders.

Disclosure to third party funders

A party seeking third party funding will need to exchange information and documents with a potential funder at various stages of an arbitration. Initially, a funder will need information about the case and the prospects of success in order to decide whether and on what basis to provide funding. Once funding is secure, a funder will want to be kept updated about the progress of the arbitration.

The problem is that providing information and documents to funders could result in a potential waiver of privilege and confidentiality with the result that the information could become the subject of disclosure requests by the other side in the arbitration. Protecting privilege and confidentiality is an important issue. It is not one that is easy to resolve in the context of an international arbitration for a number of reasons:

  • The doctrines governing privilege and confidentiality vary by jurisdiction.
  • A variety of different laws and rules may be relevant to determine issues of privilege (including, for example, the law of the jurisdiction(s) where counsel for the parties practise or where each party resides) and arbitral tribunals may need to conduct a conflict of laws analysis to determine the existence and scope of any claim to privilege.
  • Third party funding is still developing and there is limited guidance or case law on how issues of privilege will be determined.

Issues of privilege in international arbitration

The protections that are afforded to information and documents passing between legal counsel and client vary from jurisdiction to jurisdiction.

In civil law jurisdictions, the approach is based on the doctrine of professional secrecy, which is an ethical obligation whereby information exchanged between legal counsel and client cannot be revealed. The risk in providing information to third party funders is that the secrecy in the information may be considered waived.

In common law jurisdictions, the concept of privilege is generally divided into two heads: legal advice privilege (attorney-client) and litigation (attorney work product) privilege.

Legal advice privilege generally protects communications between legal counsel and a client made for the purpose of seeking and receiving legal advice.

Litigation privilege generally protects communications where the dominant purpose of the communication is for conducting or aiding in the conduct of litigation.

There is also the concept of common interest (generally viewed as an exception to the rule that disclosure of privileged documents to a third party constitutes a waiver of privilege), which protects documents disclosed to a third party who has a common interest.

It could be argued that communications with third party funders could be covered by both litigation privilege (on the basis that the information is provided to secure funding to allow the arbitration to proceed) and by the concept of common interest (on the basis that the funder has a common interest with the funded party). However, there is limited case law on the application of either doctrine in the context of third party funding.

In England, guidance as to when common interest privilege will apply in the context of an insured providing documents to an insurer was given in the case of Winterthur Swiss Insurance Company & another v AG (Manchester) Ltd & others, where it was confirmed that there are no prescriptive situations where there would definitely be a common interest; rather, each situation would have to be judged on its own facts.

It is arguable that, by analogy with an insurer, a third party funder may be deemed to share a common interest in the confidentiality of communications with the party’s lawyer, as it has the common interest in pursuing litigation or arbitration in much the same way an insurer does, once a funding agreement is in place.

In the US, in the case of Miller UK Ltd v Caterpillar Inc, the District Court for the Northern District of Illinois found that documents provided to potential third party funders were not protected by the common interest doctrine because the plaintiff and the potential funders did not share a sufficient interest in the successful outcome of the case. However, the court did find that some of the documents were protected by attorney work product (litigation) privilege because they were prepared in the context of the prospect of litigation and the client did not waive the privilege because the documents were provided to potential funders pursuant to a confidentiality agreement.

In civil law jurisdictions, the common law concept of privilege against disclosure is almost non-existent. By contrast, the substance of the lawyer-client relationship is protected by a duty of confidentiality based on the statutory obligations applicable to lawyers, for example in Germany and France. As a result, any information received from the client must be kept confidential by the lawyer. However, the information provided to others, such as a third party funder, is not part of that confidentiality and is open to scrutiny by the courts.

Protecting privilege

So what can be done to preserve privilege when communicating with third party funders?

Consider restricting the type of information that is shared with third party funders. It may be that a potential funder’s due diligence requirements can be met by informing a funder about the prospects of a case without sharing any privileged or confidential information.

If this is not possible, make sure that there is a robust confidentiality agreement or non-disclosure agreement in place with each potential funder before any information is shared.

Article 7 of the Code of Conduct for Litigation Funders expressly provides that funders will observe the confidentiality of all information and documentation relating to the dispute to the extent the law permits and subject to the terms of any confidentiality or non-disclosure agreement agreed between the funder and the funded party.

It’s important that the terms of the confidentiality/non-disclosure agreement reflect the rules governing privilege or professional secrecy in the relevant jurisdiction(s). You may need to seek local law advice if multiple jurisdictions are involved.

The agreement should include the following terms:

  • An assertion of the relevant privilege.
  • An agreement to keep all information received confidential and not to share the information with any other party.
  • Provisions dealing with the consequences of any unauthorised disclosure of information by the funder.
  • Provisions for the return of information.

Third party funding is an increasingly important part of the landscape of international commercial arbitration. The cost and uncertainty of the arbitration process means that clients are actively exploring alternative methods of financing claims. There is no doubt that third party funding can provide significant benefits to clients, but it’s also important that those seeking funding are aware of the potential risks so that they can take steps to avoid them.

Berwin Leighton Paisner Nadia Hubbuck

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