An Opportunity to Review Third Party Funding and its Recent Developments in International Arbitration

By Lena Lindinger*

With the Australian Law Reform Commission expected to publish a discussion paper on third party funding in litigation, we want to take a look at where third party funding in international arbitration stands today in Australia and the rest of the world.

Third Party Funding in International Arbitration

Third Party Funding (TPF) arises when investors finance a legal claim in exchange for influence over case management and a part in the damages recoverable from the case.¹ Many European countries have been applying the concept of TPF for both international commercial and investment arbitration for many years. Back in 2012, European funders have reported a 50/50 split between court litigation and international arbitration, which included arbitration under institutions such as the International Chamber of Commerce (ICC).²

With the jurisdictions of Singapore and Hong Kong permitting third party funding in international arbitration very recently, i.e. Singapore from 10 January 2017 and Hong Kong from 1 February 2019, we want to expand upon the those amendments and analyse the insight they provide as to where TPF in Australia might be heading.

Amendments in Singapore and Hong Kong

Singapore prohibited TPF for international arbitration until early 2017, when the Singapore Parliament passed the Civil Law (Amendment) Act (Bill No. 38/2016).³ The Act amended to permit third-party funding for international arbitration and related court proceedings under a number of conditions and also prescribed specific eligibility requirements for funders.⁴

Similarly, in Hong Kong, a code of practice on third party arbitration funding (G.N. 9048) was issued on 7 December 2018, setting out the practices and standards third party funders will be expected to comply with. The code will be permitted and come into force on 1 February 2019.⁵

What is special about these two jurisdictions permitting TPF in international arbitration is that they are the first countries to explicitly regulate TPF in international arbitration on a state level. The new laws oblige mandatory disclosure, including the identity of the funder involved. Such regulations on a national level are entirely new in the world of arbitration.⁶

Issues to Consider regarding Third Party Funding in Arbitration

The 2018 ICCA-QM Report on Third Party Funding identifies three principles that require close attention before entering into a funding agreement: Disclosure, Privilege and Confidentiality, and Allocation of and Security for costs. Discussion of each principle follow respectively.⁷

Disclosure of Funding Arrangements

This principle requires the funded party to reveal the facts of its funding arrangement and at the same time provide their funders with transparency.

The following statement from an Ashurst article explained the increasing demand of transparency in TPF via the following terms:

The nature or international arbitration, and in particular the mechanism for the appointment of arbitrators, raises several issues surrounding the use of third party funding. In arbitration, where the arbitrators are often selected by the parties, this gives rise to potential conflicts of interest where an arbitrator, or their colleagues or firm, have a relationship with a funder involved in the case.⁸

The recent developments in Singapore and Hong Kong echo the above remarks. Both new regulatory frameworks deal with the issue of disclosure and provide for mandatory disclosure with respect to the identity of the funder involved.⁹

We can also reflect on the positives of disclosure for a funded party: an openly funded claim demonstrates that an independent third party has faith in the merits of the claim. Moreover, disclosure at an early stage prevents the other party from raising conflict arguments should the funded party prove successful.¹⁰

Privilege and Confidentiality

Privilege and confidentiality refers to the obligation to provide the funder with confidential information that can occur as early as the preliminary stage. This involves sending privileged documents and legal advice to third party funders. Whether sending these confidential documents constitutes a waiver of privilege depends on the rules of privilege in the relevant jurisdiction, which should always be checked.¹¹ Some argue that privilege and confidentiality ties closely with the aspect of disclosure and can therefore be contributed with similar benefits.

Allocation of Costs and Security for Costs

Views differ on allocation of costs. Some hold that TPF should not make a difference on how costs should be allocated on the outcome of the arbitration. Others argue that since the funder exercises great control over the claimant’s behaviour in the arbitration proceedings, often directing the course of the proceedings, the adverse costs awarded have an effect on the funder.¹²

Concerning security for costs, a key consideration is the financial situation of the party against which security is requested. The 2018 ICCA-QM Report on Third Party Funding suggests the following to eliminate the remaining concerns about the security for costs: An application for security costs should be determined on the basis of the applicable test, without regard to the existence of any funding arrangement.¹³

Where Australia Fits in

Although the principles discussed have initially been presented as challenges, in fact they signal potential opportunities and benefits. Given Australia’s unique capabilities, it seems like nothing should stand in the way of a thriving TPF practice in arbitration in Australia. That is, if Australia manages to establish such regulations since it is a country with a historical success rate of implementing regulations.¹⁴

Currently, there is no regulation for capital adequacy of TPF in Australia. The reason being the courts’ highly valued separation between arbitral and litigation proceedings. Beyond that, another factor causing the current situation, according to recent observations by Ashurst, is that:

The law exempts litigation funders from being regulated managed investment schemes on the condition that the funding arrangement maintains adequate practices for managing any conflicts of interest that may arise and that those practices are documented, implemented, monitored and managed by senior management of the funder in accordance with the regulator’s specifications.¹⁵

In simple terms, third party funders in Australia currently rely on the trust that the above classified principles will be pursued. They have no legal regulations that ensure a secure arrangement between funders and funded parties. However, if Australia follows the examples of Hong Kong and Singapore, such regulations could help unify the practises nationwide, enhance the use of third party funding and subsequently encourage transparency in international arbitration.

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* Lena Lindinger is an ADC intern currently studying Law at the Johannes Kepler University in Austria. She previously worked as a paralegal at Schoenherr Attorneys at Law.

1 Maya Steinitz, Whose Claim Is This Anyway? Third Party Litigation Funding, 95 Minn. L. Rev. 1268, 2011.

2 Maxi Scherer, Third Party Funding in International Arbitration in Europe, Queen Mary University of London, 2012.

3 Nicholas Turner, Hong Kong to allow third party arbitration funding from 1 February, Out-Law.com, 2019.

4 Krestin and Mulder, Third-Party Funding In International Arbitration: To Regulate Or Not To Regulate?, Kluwer Arbitration Blog, 2017.

5 Turner, above n 3.

6 Krestin and Mulder, above n 4.

7 The ICCA Reports No.4 – ICCA Queen Mary Task Force Report on Third Party Funding in International Arbitration, ICCA, 2018.

8 Tom Cummins et al, Third Party Funding in International Arbitration, Ashurst, 2018.

9 Horodyski and Kierska, Third Party Funding in International Arbitration – Legal problems and Global Trends with a Focus on Disclosure Requirements, 2017.

10 Cummins et al, above n 8.

11 Ibid.

12 International Arbitration 2019: What to look out for, Clyde & Co LLP, 2019.

13 Tom Cummins et al, Third Party Funding in International Arbitration, Ashurst, 2018.

14 The Hon. Michael Ronaldson, Fighting Australia’s Over-regulation, 2015.

15 Cummins et al, above n 13.